FIRST DIVISION

[G.R. No. 23769. September 16, 1925. ]

SONG FO & COMPANY, Plaintiff-Appellee, v. HAWAIIAN PHILIPPINE

CO., Defendant-Appellant.

Hilado & Hilado, Ross, Lawrence & Selph and Antonio T. Carrascoso,
Jr., for Appellant.

Arroyo, Gurrea & Muller for Appellee.

SYLLABUS

1. CONTRACTS; SALES; INSTANT CASE. — The written contract examined

and found to provide for the delivery by the Hawaiian-Philippine Co. to Song
Fo & Company of 300,000 gallons of molasses.

2. ID.; ID,.; ID.; PAYMENT. — The terms of payment fixed by the parties are
controlling. The time of payment stipulated for in the contract should be
treated as of the essence of the contract.

3. ID.; ID.; ID.; ID.; RESCISSION. — The general rule is that rescission will
not be permitted for a slight or casual breach of the contract, but only for
such breaches as are so substantial and fundamental as to defeat the object
of the parties in making the agreement.

4. ID.; ID.; ID.; ID.; ID. — A delay in payment for a small quantity of
molasses for some twenty days is not such a violation of an essential
condition of the contract as warrants rescission for non-performance.

5. ID.; ID.; ID.; MEASURE OF DAMAGES FOR BREACH OF CONTRACT. — The

facts examined and Song Fo & Company allowed P3,000 on account of the
greater expense to which it was put in being compelled to secure molasses
in the open market.

6. ID.; ID.; ID. — The facts examined and Song Fo & Company allowed
nothing for lost profits on account of the breach of the contract, because of
failure of proof.

DECISION
 MALCOLM, J. :

In the Court of First Instance of Iloilo, Song Fo & Company, plaintiff,

presented a complaint with two causes of action for breach of contract
against the Hawaiian-Philippine Co., defendant, in which judgment was
asked for P70,369.50, with legal interest, and costs. In an amended answer
and cross-complaint, the defendant set up the special defense that since the
plaintiff had defaulted in the payment for the molasses delivered to it by the
defendant under the contract between the parties, the latter was compelled
to cancel and rescind the said contract. The case was submitted for decision
on a stipulation of facts and the exhibits therein mentioned. The judgment of
the trial court condemned the defendant to pay for the plaintiff a total of
P35,317.93, with legal interest from the date of the presentation of the
complaint, and with costs.

From the judgment of the Court of First Instance the defendant only has
appealed. In this court it has made the following assignment of errors: "I.
The lower court erred in finding that the appellant had agreed to sell to the
appellee 400,000, and not only 300,000, gallons of molasses. II. The lower
court erred in finding that the appellant rescinded without sufficient cause
the contract for the sale of molasses executed by it and the appellee. III.
The lower court erred in rendering judgment in favor of the appellee and not
in favor of the appellant in accordance with the prayer of its answer and
cross-complaint. IV. The lower court erred in denying appellant’s motion for
a new trial." The specified errors raise three questions which we will consider
in the order suggested by the Appellant.

1. Did the defendant agree to sell to the plaintiff 400,000 gallons of

molasses or 300,000 gallons of molasses? The trial court found the former
amount to be correct. The appellant contends that the smaller amount was
the basis of the agreement.

The contract of the parties is in writing. It is found principally in the

documents, Exhibits F and G. The first mentioned exhibit is a letter
addressed by the administrator of the Hawaiian-Philippine Co. to Song Fo &
Company on December 13, 1922. It reads:jgc:chanrobles.com.ph

"SILAY, OCC. NEGROS, P. I.

"December 13, 1922.

"MESSRS. SONG FO AND CO.

"Iloilo, Iloilo.

"DEAR SIRS: Confirming our conversation we had today with your Mr. Song
Fo, who visited this Central, we wish to state as
follows:jgc:chanrobles.com.ph

"He agreed to the delivery of 300,000 gallons of molasses at the same price
as last year under the same condition, and the same to start after the
completion of our grinding season. He requested if possible to let you have
molasses during January, February and March or in other words, while we
are grinding, and we agreed with him that we would to the best of our
ability, altho we are somewhat handicapped. But we believe we can let you
have 25,000 gallons during each of the milling months, altho it interfere with
the shipping of our own and planters sugars to Iloilo. Mr. Song Fo also asked
if we could supply him with another 100,000 gallons of molasses, and we
stated we believe that this is possible and will do our best to let you have
these extra 100,000 gallons during the next year the same to be taken by
you before November 1st, 1923, along with the 300,000, making 400,000
gallons in all.

"Regarding the payment for our molasses, Mr. Song Fo gave us to

understand that you would pay us at the end of each month for molasses
delivered to you.

"Hoping that this is satisfactorily and awaiting your answer regarding this
matter, we remain.

"Yours very truly,

"HAWAIIAN-PHILIPPINE COMPANY

"By: R.C. PITCAIRN

"Administrator."cralaw virtua1aw library

Exhibit G is the answer of the manager of Song Fo & Company to the

Hawaiian-Philippine Co. on December 16, 1922. This letter
reads:jgc:chanrobles.com.ph

"December 16th, 1922.

"MESSRS. HAWAIIAN-PHILIPPINE CO.,

"Silay, Neg. Occ., P. I.

"DEAR SIRS: We are in receipt of your favors dated the 9th and the 13th
inst. and understood all their contents.

"In connection to yours of the 13th inst, we regret to hear that you
mentioned Mr. Song Fo the one who visited your Central, but it was not for
he was Mr. Song Heng, the representative and the manager of Messrs. Song
Fo & Co.

"With reference to the contents of your letter dated the 13th inst. we
confirm all the arrangements you have stated and in order to make the
contract clear, we hereby quote below our old contract as amended, as per
our new arrangements.

"(a) Price, at 2 cents per gallon delivered at the central.

"(b) All handling charges and expenses at the central and at the dock at
Mambaguid for our account.

"(c) For services of one locomotive and flat cars necessary for our six tanks
at the rate of P48 for the round trip dock to central and central to dock. This
service to be restricted to one trip for the six tanks.

"Yours very truly,

"SONG FO & COMPANY

"By__________________

"Manager."cralaw virtua1aw library

We agree with appellant that the above quoted correspondence is

susceptible of but one interpretation. The Hawaiian-Philippine Co. agreed to
deliver to Song Fo & Company 300,000 gallons of molasses. The Hawaiian-
Philippine Co. also believed it possible to accommodate Song Fo & Company
by supplying the latter company with an extra 100,000 gallons. But the
language used with reference to the additional 100,000 gallons was not a
definite promise. Still less did it constitute an obligation.

If Exhibit T relied upon by the trial court shows anything, it is simply that the
defendant did not consider itself obliged to deliver to the plaintiff molasses in
any amount. On the other hand, Exhibit A, a letter written by the manager
of Song Fo & Company on October 17, 1922, expressly mentions an
understanding between the parties of a contract for 300,000 gallons of
molasses.

We sustain appellant’s point of view on the first question and rule that the
contract between the parties provided for the delivery by the Hawaiian-
Philippine Co. to Song Fo & Company of 300,000 gallons of molasses.

2. Had the Hawaiian-Philippine Co. the right to rescind the contract of sale
made with Song Fo & Company? The trial judge answers No, the appellant
Yes.

Turning to Exhibit F, we note this sentence: "Regarding the payment for our
molasses, Mr. Song Fo (Mr. Song Heng) gave us to understand that you
would pay us at the end of each month for molasses delivered to you." In
Exhibit G, we find Song Fo & Company stating that they understand the
contents of Exhibit F, and that they "confirm all the arrangements you have
stated, and in order to make the contract clear, we hereby quote below our
old contract as amended, as per our new arrangements. (a) Price, at 2 cents
per gallon delivered at the central." In connection with the portion of the
contract having reference to the payment for the molasses, the parties have
agreed on a table showing the date of delivery of the molasses, the account
and date thereof, the date of receipt of account by plaintiff, and date of
payment. The table mentioned is as follows:chanrob1es virtual 1aw library

Date of receipt

Date of delivery Account and date of account by Date of payment

thereof plaintiff

1922 1923 1923

Dec. 18 P206.16 Dec. 26/22 Jan. 5 Feb. 20

Dec. 29 206.16 Jan. 3/23 do Do.

1923

Jan. 5 206.16 Jan. 9/23 Mar. 7 or 8 Mar. 31

Feb. 12 206.16 Mar. 12/23 do Do.

Feb. 27 206.16 do do Do.

Mar. 5 206.16 do do Do.

Mar. 16 206.16 Mar. 20/23 Apr. 2/23 Apr. 19

Mar. 24 206.16 Mar. 31/23 do Do.

Mar. 29 206.16 do do Do.

Some doubt has risen as to when Song Fo & Company was expected to
make payments for the molasses delivered. Exhibit F speaks of payments "at
the end of each month." Exhibit G is silent on the point. Exhibit M, a letter of
March 28, 1923, from Warner, Barnes & Co., Ltd., the agent of the
Hawaiian-Philippine Co. to Song Fo & Company, mentions "payment on
presentation of bills for each delivery." Exhibit O, another letter from
Warner, Barnes & Co., Ltd. to Song Fo & Company dated April 2, 1923, is of
a similar tenor. Exhibit P, a communication sent direct by the Hawaiian-
Philippine Co. to Song Fo & Company on April 2, 1923, by which the
Hawaiian-Philippine Co. gave notice of the termination of the contract, gave
as the reason for the rescission, the breach of Song Fo & Company of this
condition: "You will recall that under the arrangements made for taking our
molasses, you were to meet our accounts upon presentation and at each
delivery." Not far removed from this statement, is the allegation of plaintiff
in its complaint that "plaintiff agreed to pay defendant, at the end of each
month upon presentation of accounts."cralaw virtua1aw library

Resolving such ambiguity as exists and having in mind ordinary business

practice, a reasonable deduction is that Song Fo & Company was to pay the
Hawaiian-Philippine Co. upon presentation of accounts at the end of each
month. Under this hypothesis, Song Fo & Company should have paid for the
molasses delivered in December, 1922, and for which accounts were
received by it on January 5, 1923, not later than January 31 of that year.
Instead, payment was not made until February 20, 1923. All the rest of the
molasses was paid for either on time or ahead of time.

The terms of payment fixed by the parties are controlling. The time of
payment stipulated for in the contract should be treated as of the essence of
the contract. Theoretically, agreeable to certain conditions which could easily
be imagined, the Hawaiian-Philippine Co. would have had the right to rescind
the contract because of the breach of Song Fo & Company. But actually,
there is her present no outstanding fact which would legally sanction the
rescission of the contract by the Hawaiian-Philippine Co.

The general rule is that rescission will not be permitted for a slight or casual
breach of the contract, but only for such breaches as are so substantial and
fundamental as to defeat the object of the parties in making the agreement.
A delay in payment for a small quantity of molasses for some twenty days is
not such a violation of an essential condition of the contract as warrants
rescission for non-performance. Not only this, but the Hawaiian-Philippine
Co. waived this condition when it arose by accepting payment of the overdue
accounts and continuing with the contract. Thereafter, Song Fo & Company
was not in default in payment so that the Hawaiian-Philippine Co. had in
reality no excuse for writing its letter of April 2, 1923, cancelling the
contract. (Warner, Barnes & Co. v. Inza [1922], 43 Phil., 505.)

We rule that the appellant had no legal right to rescind the contract of sale
because of the failure of Song Fo & Company to pay for the molasses within
the time agreed upon by the parties. We sustain the finding of the trial judge
in this respect.

3. On the basis first, of a contract for 300,000 gallons of molasses, and

second, of a contract imprudently breached by the Hawaiian-Philippine Co.,
what is the measure of damages? We again turn to the facts as agreed upon
by the parties.

The first cause of action of the plaintiff is based on the greater expense to
which it was put in being compelled to secure molasses from other sources.
Three hundred thousand gallons of molasses was the total of the agreement,
as we have seen. As conceded by the plaintiff 55,006 gallons of molasses
were delivered by the defendant to the plaintiff before the breach. This
leaves 244,994 gallons of molasses undelivered which the plaintiff had to
purchase in the open market. As expressly conceded by the plaintiff at page
25 of its brief 100,000 gallons of molasses were secured from the Central
North Negros Sugar Co., Inc., at two centavos a gallon. As this is the same
price specified in the contract between the plaintiff and the defendant, the
plaintiff accordingly suffered no material loss in having to make this
purchase. So 244,994 gallons minus the 100,000 gallons just mentioned
leaves as a result 144,994 gallons. As to this amount, the plaintiff admits
that it could have secured it and more than the Central Victorias Milling
Company one and one-half centavos per gallon. In other words, the plaintiff
had to pay the Central Victorias Milling Company one and one-half centavos
a gallon more for the molasses than it would have had to pay the Hawaiian-
Philippine Co. Translated into pesos and centavos, this meant a loss to the
plaintiff of approximately P2,174.91. As the conditions existing at the central
of the Hawaiian-Philippine Co. may have been different than those found at
the Central North Negros Sugar Co., Inc., and the Central Victorias Milling
Company, and as not alone through the delay but through expenses of
transportation and incidental expenses, the plaintiff may have been put to
greater cost in making the purchase of the molasses in the open market, we
would concede under the first cause of action in round figures P3,000.
The second cause of action relates to lost profits on account of the breach of
the contract. The only evidence in the record on this question is the
stipulation of counsel to the effect that had Mr. Song Heng, the manager of
Song Fo & Company, been called as a witness, he would have testified that
the plaintiff would have realized a profit of P14,948.43, if the contract of
December 13, 1922, had been fulfilled by the defendant. Indisputably, this
statement falls far short of presenting proof on which to make a finding as to
damages.

In the first place, the testimony which Mr. Song Heng would have given
undoubtedly would follow the same line of thought as found in the decision
of the trial court, which we have found to be unsustainable. In the second
place, had Mr. Song Heng taken the witness-stand and made the statement
attributed to him, it would have been insufficient proof of the allegations of
the complaint, and the fact that it is a part of the stipulation by counsel does
not change this result. And lastly, the testimony of the witness Song Heng, if
we may dignify it as such, is a mere conclusion, not a proven fact. As to
what items make up the more than P14,000 of alleged lost profits, whether
loss of sales or loss of customers, or what not, we have no means of
knowing.

We rule that the plaintiff is entitled to recover damages from the defendant
for breach of contract on the first cause of action in the amount of P3,000
and on the second cause of action in no amount. Appellant’s assignments of
error are accordingly found to be well in taken in part and not well taken in
part.

Agreeable to the foregoing, the judgment appealed from shall be modified

and the plaintiff shall have and recover from the defendant the sum of
P3,000, with legal interest from October 2, 1923, until payment. Without
special finding as to costs in either instance, it is ordered.

Avanceña, C.J., Johnson, Street, Villamor, Ostrand, Johns, Romualdez, and

Villa-Real, JJ., concur.
 THIRD DIVISION

[G.R. No. 108346. July 11, 2001]

Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE, petitioners, vs. COURT

OF APPEALS, DAVID A. RAYMUNDO and GEORGE RAYMUNDO, respondents.

DECISION
PANGANIBAN, J.:

A substantial breach of a reciprocal obligation, like failure to pay the price in the manner
prescribed by the contract, entitles the injured party to rescind the obligation. Rescission abrogates
the contract from its inception and requires a mutual restitution of benefits received.

The Case

Before us is a Petition for Review on Certiorari[1] questioning the Decision[2] of the Court of
Appeals (CA) in CA-GR CV No. 32991 dated October 9, 1992, as well as its Resolution [3]dated
December 29, 1992 denying petitioners motion for reconsideration.[4]
The dispositive portion of the assailed Decision reads:

WHEREFORE, the Order dated May 15, 1991 is hereby ANNULLED and SET ASIDE and the
Decision dated November 14, 1990 dismissing the [C]omplaint is REINSTATED. The bonds
posted by plaintiffs-appellees and defendants-appellants are hereby RELEASED.[5]

The Facts

The factual antecedents of the case, as found by the CA, are as follows:

x x x. David Raymundo [herein private respondent] is the absolute and registered owner of a
parcel of land, together with the house and other improvements thereon, located at 1918 Kamias
St., Dasmarias Village, Makati and covered by TCT No. 142177. Defendant George Raymundo
[herein private respondent] is Davids father who negotiated with plaintiffs Avelina and Mariano
Velarde [herein petitioners] for the sale of said property, which was, however, under lease (Exh.
6, p. 232, Record of Civil Case No. 15952).

On August 8, 1986, a Deed of Sale with Assumption of Mortgage (Exh. A; Exh. 1, pp. 11-12,
Record) was executed by defendant David Raymundo, as vendor, in favor of plaintiff Avelina
Velarde, as vendee, with the following terms and conditions:
 xxxxxxxxx

That for and in consideration of the amount of EIGHT HUNDRED THOUSAND PESOS
(P800,000.00), Philippine currency, receipt of which in full is hereby acknowledged by the
VENDOR from the VENDEE, to his entire and complete satisfaction, by these presents the
VENDOR hereby SELLS, CEDES, TRANSFERS, CONVEYS AND DELIVERS, freely and
voluntarily, with full warranty of a legal and valid title as provided by law, unto the VENDEE,
her heirs, successors and assigns, the parcel of land mentioned and described above, together
with the house and other improvements thereon.

That the aforesaid parcel of land, together with the house and other improvements thereon, were
mortgaged by the VENDOR to the BANK OF THE PHILIPPINE ISLANDS, Makati, Metro
Manila, to secure the payment of a loan of ONE MILLION EIGHT HUNDRED THOUSAND
PESOS (P1,800,000.00), Philippine currency, as evidenced by a Real Estate Mortgage signed
and executed by the VENDOR in favor of the said Bank of the Philippine Islands, on______ and
which Real Estate Mortgage was ratified before Notary Public for Makati, _______, as Doc. No.
____, Page No. ___, Book No. ___, Series of 1986 of his Notarial Register.

That as part of the consideration of this sale, the VENDEE hereby assumes to pay the mortgage
obligations on the property herein sold in the amount of ONE MILLION EIGHT HUNDRED
THOUSAND PESOS (P1,800,000.00), Philippine currency, in favor of Bank of the Philippine
Islands, in the name of the VENDOR, and further agrees to strictly and faithfully comply with all
the terms and conditions appearing in the Real Estate Mortgage signed and executed by the
VENDOR in favor of BPI, including interests and other charges for late payment levied by the
Bank, as if the same were originally signed and executed by the VENDEE.

It is further agreed and understood by the parties herein that the capital gains tax and
documentary stamps on the sale shall be for the account of the VENDOR; whereas, the
registration fees and transfer tax thereon shall be for the account of the VENDEE. (Exh. A, pp.
11-12, Record).

On the same date, and as part of the above-document, plaintiff Avelina Velarde, with the consent
of her husband, Mariano, executed an Undertaking (Exh. C, pp. 13-14, Record), the pertinent
portions of which read, as follows:

xxxxxxxxx

Whereas, as per Deed of Sale with Assumption of Mortgage, I paid Mr. David A. Raymundo the
sum of EIGHT HUNDRED THOUSAND PESOS (P800,000.00), Philippine currency, and
assume the mortgage obligations on the property with the Bank of the Philippine Islands in the
amount of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00),
Philippine currency, in accordance with the terms and conditions of the Deed of Real Estate
Mortgage dated _________, signed and executed by Mr. David A. Raymundo with the said
Bank, acknowledged before Notary Public for Makati, _____, as Doc. No. ___, Page No. ___,
Book No. __, Series of 1986 of his Notarial Register.
WHEREAS, while my application for the assumption of the mortgage obligations on the
property is not yet approved by the mortgagee Bank, I have agreed to pay the mortgage
obligations on the property with the Bank in the name of Mr. David A. Raymundo, in accordance
with the terms and conditions of the said Deed of Real Estate Mortgage, including all interests
and other charges for late payment.

WHEREAS, this undertaking is being executed in favor of Mr. David A. Raymundo, for
purposes of attesting and confirming our private understanding concerning the said mortgage
obligations to be assumed.

NOW, THEREFORE, for and in consideration of the foregoing premises, and the assumption of
the mortgage obligations of ONE MILLION EIGHT HUNDRED THOUSAND PESOS
(P1,800,000.00), Philippine currency, with the Bank of the Philippine islands, I, Mrs. Avelina D.
Velarde, with the consent of my husband, Mariano Z. Velarde, do hereby bind and obligate
myself, my heirs, successors and assigns, to strictly and faithfully comply with the following
terms and conditions:

1. That until such time as my assumption of the mortgage obligations on the property purchased
is approved by the mortgagee bank, the Bank of the Philippine Islands, I shall continue to pay the
said loan in accordance with the terms and conditions of the Deed of Real Estate Mortgage in the
name of Mr. David A. Raymundo, the original Mortgagor.

2. That, in the event I violate any of the terms and conditions of the said Deed of Real Estate
Mortgage, I hereby agree that my downpayment of P800,000.00, plus all payments made with
the Bank of the Philippine Islands on the mortgage loan, shall be forfeited in favor of Mr. David
A. Raymundo, as and by way of liquidated damages, without necessity of notice or any judicial
declaration to that effect, and Mr. David A Raymundo shall resume total and complete
ownership and possession of the property sold by way of Deed of Sale with Assumption of
Mortgage, and the same shall be deemed automatically cancelled and be of no further force or
effect, in the same manner as if (the) same had never been executed or entered into.

3. That I am executing this Undertaking for purposes of binding myself, my heirs, successors and
assigns, to strictly and faithfully comply with the terms and conditions of the mortgage
obligations with the Bank of the Philippine Islands, and the covenants, stipulations and
provisions of this Undertaking.

That, David A. Raymundo, the vendor of the property mentioned and identified above, [does]
hereby confirm and agree to the undertakings of the Vendee pertinent to the assumption of the
mortgage obligations by the Vendee with the Bank of the Philippine Islands. (Exh. C, pp. 13-14,
Record).

This undertaking was signed by Avelina and Mariano Velarde and David Raymundo.

It appears that the negotiated terms for the payment of the balance of P1.8 million was from the
proceeds of a loan that plaintiffs were to secure from a bank with defendants help. Defendants
had a standing approved credit line with the Bank of the Philippine Islands (BPI). The parties
agreed to avail of this, subject to BPIs approval of an application for assumption of mortgage by
plaintiffs. Pending BPIs approval o[f] the application, plaintiffs were to continue paying the
monthly interests of the loan secured by a real estate mortgage.

Pursuant to said agreements, plaintiffs paid BPI the monthly interest on the loan secured by the
aforementioned mortgage for three (3) months as follows: September 19, 1986 at P27,225.00;
October 20, 1986 at P23,000.00; and November 19, 1986 at P23,925.00 (Exh. E, H & J, pp. 15,
17 and 18, Record).

On December 15, 1986, plaintiffs were advised that the Application for Assumption of Mortgage
with BPI was not approved (Exh. J, p. 133, Record). This prompted plaintiffs not to make any
further payment.

On January 5, 1987, defendants, thru counsel, wrote plaintiffs informing the latter that their non-
payment to the mortgage bank constitute[d] non-performance of their obligation (Exh. 3, p. 220,
Record).

In a Letter dated January 7, 1987, plaintiffs, thru counsel, responded, as follows:

This is to advise you, therefore, that our client is willing to pay the balance in cash not later than
January 21, 1987 provided: (a) you deliver actual possession of the property to her not later than
January 15, 1987 for her immediate occupancy; (b) you cause the release of title and mortgage
from the Bank of P.I. and make the title available and free from any liens and encumbrances; and
(c) you execute an absolute deed of sale in her favor free from any liens or encumbrances not
later than January 21, 1987. (Exhs. K, 4, p. 223, Record).

On January 8, 1987, defendants sent plaintiffs a notarial notice of cancellation/rescission of the

intended sale of the subject property allegedly due to the latters failure to comply with the terms
and conditions of the Deed of Sale with Assumption of Mortgage and the Undertaking (Exh. 5,
pp. 225-226, Record).[6]

Consequently, petitioners filed on February 9, 1987 a Complaint against private respondents

for specific performance, nullity of cancellation, writ of possession and damages. This was
docketed as Civil Case No. 15952 at the Regional Trial Court of Makati, Branch 149. The case
was tried and heard by then Judge Consuelo Ynares-Santiago (now an associate justice of this
Court), who dismissed the Complaint in a Decision dated November 14, 1990.[7] Thereafter,
petitioners filed a Motion for Reconsideration.[8]
Meanwhile, then Judge Ynares-Santiago was promoted to the Court of Appeals and Judge
Salvador S. A. Abad Santos was assigned to the sala she vacated. In an Order dated May 15,
1991,[9] Judge Abad Santos granted petitioners Motion for Reconsideration and directed the parties
to proceed with the sale. He instructed petitioners to pay the balance of P1.8 million to private
respondents who, in turn, were ordered to execute a deed of absolute sale and to surrender
possession of the disputed property to petitioners.
Private respondents appealed to the CA.
 Ruling of the Court of Appeals

The CA set aside the Order of Judge Abad Santos and reinstated then Judge Ynares-Santiagos
earlier Decision dismissing petitioners Complaint. Upholding the validity of the rescission made
by private respondents, the CA explained its ruling in this wise:

In the Deed of Sale with Assumption of Mortgage, it was stipulated that as part of the
consideration of this sale, the VENDEE (Velarde) would assume to pay the mortgage obligation
on the subject property in the amount of P1.8 million in favor of BPI in the name of the Vendor
(Raymundo). Since the price to be paid by the Vendee Velarde includes the downpayment
of P800,000.00 and the balance of P1.8 million, and the balance of P1.8 million cannot be paid in
cash, Vendee Velarde, as part of the consideration of the sale, had to assume the mortgage
obligation on the subject property. In other words, the assumption of the mortgage obligation is
part of the obligation of Velarde, as vendee, under the contract. Velarde further agreed to strictly
and faithfully comply with all the terms and conditions appearing in the Real Estate Mortgage
signed and executed by the VENDOR in favor of BPI x x x as if the same were originally signed
and executed by the Vendee. (p.2, thereof, p.12, Record). This was reiterated by Velarde in the
document entitled Undertaking wherein the latter agreed to continue paying said loan in
accordance with the terms and conditions of the Deed of Real Estate Mortgage in the name of
Raymundo. Moreover, it was stipulated that in the event of violation by Velarde of any terms and
conditions of said deed of real estate mortgage, the downpayment of P800,000.00 plus all
payments made with BPI or the mortgage loan would be forfeited and the [D]eed of [S]ale with
[A]ssumption of [M]ortgage would thereby be cancelled automatically and of no force and effect
(pars. 2 & 3, thereof, pp. 13-14, Record).

From these 2 documents, it is therefore clear that part of the consideration of the sale was the
assumption by Velarde of the mortgage obligation of Raymundo in the amount of P1.8
million. This would mean that Velarde had to make payments to BPI under the [D]eed of [R]eal
[E]state [M]ortgage in the name of Raymundo. The application with BPI for the approval of the
assumption of mortgage would mean that, in case of approval, payment of the mortgage
obligation will now be in the name of Velarde. And in the event said application is disapproved,
Velarde had to pay in full. This is alleged and admitted in Paragraph 5 of the
Complaint. Mariano Velarde likewise admitted this fact during the hearing on September 15,
1997 (p. 47, t.s.n., September 15, 1987; see also pp. 16-26, t.s.n., October 8, 1989). This being
the case, the non-payment of the mortgage obligation would result in a violation of the
contract. And, upon Velardes failure to pay the agreed price, the[n] Raymundo may choose
either of two (2) actions - (1) demand fulfillment of the contract, or (2) demand its rescission
(Article 1191, Civil Code).

The disapproval by BPI of the application for assumption of mortgage cannot be used as an
excuse for Velardes non-payment of the balance of the purchase price. As borne out by the
evidence, Velarde had to pay in full in case of BPIs disapproval of the application for assumption
of mortgage. What Velarde should have done was to pay the balance of P1.8 million. Instead,
Velarde sent Raymundo a letter dated January 7, 1987 (Exh. K, 4) which was strongly given
weight by the lower court in reversing the decision rendered by then Judge Ynares-Santiago. In
said letter, Velarde registered their willingness to pay the balance in cash but enumerated 3 new
conditions which, to the mind of this Court, would constitute a new undertaking or new
agreement which is subject to the consent or approval of Raymundo. These 3 conditions were not
among those previously agreed upon by Velarde and Raymundo. These are mere offers or, at
most, an attempt to novate. But then again, there can be no novation because there was no
agreement of all the parties to the new contract (Garcia, Jr. vs. Court of Appeals, 191 SCRA
493).

It was likewise agreed that in case of violation of the mortgage obligation, the Deed of Sale with
Assumption of Mortgage would be deemed automatically cancelled and of no further force and
effect, as if the same had never been executed or entered into. While it is true that even if the
contract expressly provided for automatic rescission upon failure to pay the price, the vendee
may still pay, he may do so only for as long as no demand for rescission of the contract has been
made upon him either judicially or by a notarial act (Article 1592, Civil Code). In the case at bar,
Raymundo sent Velarde a notarial notice dated January 8, 1987 of cancellation/rescission of the
contract due to the latters failure to comply with their obligation. The rescission was justified in
view of Velardes failure to pay the price (balance) which is substantial and fundamental as to
defeat the object of the parties in making the agreement. As adverted to above, the agreement of
the parties involved a reciprocal obligation wherein the obligation of one is a resolutory
condition of the obligation of the other, the non-fulfillment of which entitles the other party to
rescind the contract (Songcuan vs. IAC, 191 SCRA 28). Thus, the non-payment of the mortgage
obligation by appellees Velarde would create a right to demand payment or to rescind the
contract, or to criminal prosecution (Edca Publishing & Distribution Corporation vs. Santos, 184
SCRA 614). Upon appellees failure, therefore, to pay the balance, the contract was properly
rescinded (Ruiz vs. IAC, 184 SCRA 720). Consequently, appellees Velarde having violated the
contract, they have lost their right to its enforcement and hence, cannot avail of the action for
specific performance (Voysaw vs. Interphil Promotions, Inc., 148 SCRA 635).[10]

Hence, this appeal.[11]

The Issues

Petitioners, in their Memorandum,[12] interpose the following assignment of errors:

I.

The Court of Appeals erred in holding that the non-payment of the mortgage obligation
resulted in a breach of the contract.

II.

The Court of Appeals erred in holding that the rescission (resolution) of the contract by
private respondents was justified.

III.
 The Court of Appeals erred in holding that petitioners January 7, 1987 letter gave three new
conditions constituting mere offers or an attempt to novate necessitating a new agreement
between the parties.

The Courts Ruling

The Petition is partially meritorious.

First Issue:
Breach of Contract

Petitioners aver that their nonpayment of private respondents mortgage obligation did not
constitute a breach of contract, considering that their request to assume the obligation had been
disapproved by the mortgagee bank. Accordingly, payment of the monthly amortizations ceased
to be their obligation and, instead, it devolved upon private respondents again.
However, petitioners did not merely stop paying the mortgage obligations; they also failed to
pay the balance of the purchase price. As admitted by both parties, their agreement mandated that
petitioners should pay the purchase price balance of P1.8 million to private respondents in case the
request to assume the mortgage would be disapproved. Thus, on December 15, 1986, when
petitioners received notice of the banks disapproval of their application to assume respondents
mortgage, they should have paid the balance of the P1.8 million loan.
Instead of doing so, petitioners sent a letter to private respondents offering to make such
payment only upon the fulfillment of certain conditions not originally agreed upon in the contract
of sale. Such conditional offer to pay cannot take the place of actual payment as would discharge
the obligation of a buyer under a contract of sale.
In a contract of sale, the seller obligates itself to transfer the ownership of and deliver a
determinate thing, and the buyer to pay therefor a price certain in money or its
equivalent.[13] Private respondents had already performed their obligation through the execution of
the Deed of Sale, which effectively transferred ownership of the property to petitioner through
constructive delivery.Prior physical delivery or possession is not legally required, and the
execution of the Deed of Sale is deemed equivalent to delivery.[14]
Petitioners, on the other hand, did not perform their correlative obligation of paying the
contract price in the manner agreed upon. Worse, they wanted private respondents to perform
obligations beyond those stipulated in the contract before fulfilling their own obligation to pay the
full purchase price.

Second Issue
Validity of the Rescission
 Petitioners likewise claim that the rescission of the contract by private respondents was not
justified, inasmuch as the former had signified their willingness to pay the balance of the purchase
price only a little over a month from the time they were notified of the disapproval of their
application for assumption of mortgage. Petitioners also aver that the breach of the contract was
not substantial as would warrant a rescission. They cite several cases[15] in which this Court
declared that rescission of a contract would not be permitted for a slight or casual breach. Finally,
they argue that they have substantially performed their obligation in good faith, considering that
they have already made the initial payment of P800,000 and three (3) monthly mortgage payments.
As pointed out earlier, the breach committed by petitioners was not so much their nonpayment
of the mortgage obligations, as their nonperformance of their reciprocal obligation to pay the
purchase price under the contract of sale. Private respondents right to rescind the contract finds
basis in Article 1191 of the Civil Code, which explicitly provides as follows:

Art. 1191. -- The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.

The injured party may choose between fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission even after he has chosen
fulfillment, if the latter should become impossible.

The right of rescission of a party to an obligation under Article 1191 of the Civil Code is
predicated on a breach of faith by the other party who violates the reciprocity between them.[16] The
breach contemplated in the said provision is the obligors failure to comply with an existing
obligation.[17] When the obligor cannot comply with what is incumbent upon it, the obligee may
seek rescission and, in the absence of any just cause for the court to determine the period of
compliance, the court shall decree the rescission.[18]
In the present case, private respondents validly exercised their right to rescind the contract,
because of the failure of petitioners to comply with their obligation to pay the balance of the
purchase price. Indubitably, the latter violated the very essence of reciprocity in the contract of
sale, a violation that consequently gave rise to private respondents right to rescind the same in
accordance with law.
True, petitioners expressed their willingness to pay the balance of the purchase price one
month after it became due; however, this was not equivalent to actual payment as would constitute
a faithful compliance of their reciprocal obligation. Moreover, the offer to pay was conditioned on
the performance by private respondents of additional burdens that had not been agreed upon in the
original contract. Thus, it cannot be said that the breach committed by petitioners was merely slight
or casual as would preclude the exercise of the right to rescind.
Misplaced is petitioners reliance on the cases[19] they cited because the factual circumstances
in those cases are not analogous to those in the present one. In Song Fo there was, on the part of
the buyer, only a delay of twenty (20) days to pay for the goods delivered. Moreover, the buyers
offer to pay was unconditional and was accepted by the seller. In Zepeda, the breach involved a
mere one-week delay in paying the balance of P1,000, which was actually paid. In Tan, the alleged
breach was private respondents delay of only a few days, which was for the purpose of clearing
the title to the property; there was no reference whatsoever to the nonpayment of the contract price.
 In the instant case, the breach committed did not merely consist of a slight delay in payment
or an irregularity; such breach would not normally defeat the intention of the parties to the
contract. Here, petitioners not only failed to pay the P1.8 million balance, but they also imposed
upon private respondents new obligations as preconditions to the performance of their own
obligation. In effect, the qualified offer to pay was a repudiation of an existing obligation, which
was legally due and demandable under the contract of sale. Hence, private respondents were left
with the legal option of seeking rescission to protect their own interest.

Mutual Restitution
Required in Rescission

As discussed earlier, the breach committed by petitioners was the nonperformance of a

reciprocal obligation, not a violation of the terms and conditions of the mortgage
contract. Therefore, the automatic rescission and forfeiture of payment clauses stipulated in the
contract does not apply. Instead, Civil Code provisions shall govern and regulate the resolution of
this controversy.
Considering that the rescission of the contract is based on Article 1191 of the Civil Code,
mutual restitution is required to bring back the parties to their original situation prior to the
inception of the contract. Accordingly, the initial payment of P800,000 and the corresponding
mortgage payments in the amounts of P27,225, P23,000 and P23,925 (totaling P874,150.00)
advanced by petitioners should be returned by private respondents, lest the latter unjustly enrich
themselves at the expense of the former.
Rescission creates the obligation to return the object of the contract. It can be carried out only
when the one who demands rescission can return whatever he may be obliged to restore.[20] To
rescind is to declare a contract void at its inception and to put an end to it as though it never was. It
is not merely to terminate it and release the parties from further obligations to each other, but to
abrogate it from the beginning and restore the parties to their relative positions as if no contract
has been made.[21]

Third Issue
Attempt to Novate

In view of the foregoing discussion, the Court finds it no longer necessary to discuss the third
issue raised by petitioners. Suffice it to say that the three conditions appearing on the January 7,
1987 letter of petitioners to private respondents were not part of the original contract. By that time,
it was already incumbent upon the former to pay the balance of the sale price. They had no right
to demand preconditions to the fulfillment of their obligation, which had become due.
WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that
private respondents are ordered to return to petitioners the amount of P874,150, which the latter
paid as a consequence of the rescinded contract, with legal interest thereon from January 8, 1987,
the date of rescission. No pronouncement as to costs.
SO ORDERED.
Melo, (Chairman), Vitug, and Sandoval-Gutierrez, JJ., concur.
Gonzaga-Reyes, J., on leave.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-4811 July 31, 1953

CHARLES F. WOODHOUSE, plaintiff-appellant,

vs.
FORTUNATO F. HALILI, defendant-appellant.

Tañada, Pelaez & Teehankee for defendant and appellant.

Gibbs, Gibbs, Chuidian & Quasha for plaintiff and appellant.

LABRADOR, J.:

On November 29, 1947, the plaintiff entered on a written agreement, Exhibit A, with the defendant,
the most important provisions of which are (1) that they shall organize a partnership for the bottling
and distribution of Mision soft drinks, plaintiff to act as industrial partner or manager, and the
defendant as a capitalist, furnishing the capital necessary therefor; (2) that the defendant was to
decide matters of general policy regarding the business, while the plaintiff was to attend to the
operation and development of the bottling plant; (3) that the plaintiff was to secure the Mission Soft
Drinks franchise for and in behalf of the proposed partnership; and (4) that the plaintiff was to
receive 30 per cent of the net profits of the business. The above agreement was arrived at after
various conferences and consultations by and between them, with the assistance of their respective
attorneys. Prior to entering into this agreement, plaintiff had informed the Mission Dry Corporation of
Los Angeles, California, U.S.A., manufacturers of the bases and ingridients of the beverages bearing
its name, that he had interested a prominent financier (defendant herein) in the business, who was
willing to invest half a million dollars in the bottling and distribution of the said beverages, and
requested, in order that he may close the deal with him, that the right to bottle and distribute be
granted him for a limited time under the condition that it will finally be transferred to the corporation
(Exhibit H). Pursuant for this request, plaintiff was given "a thirty-days" option on exclusive bottling
and distribution rights for the Philippines" (Exhibit J). Formal negotiations between plaintiff and
defendant began at a meeting on November 27, 1947, at the Manila Hotel, with their lawyers
attending. Before this meeting plaintiff's lawyer had prepared the draft of the agreement, Exhibit II or
OO, but this was not satisfactory because a partnership, instead of a corporation, was desired.
Defendant's lawyer prepared after the meeting his own draft, Exhibit HH. This last draft appears to
be the main basis of the agreement, Exhibit A.

The contract was finally signed by plaintiff on December 3, 1947. Plaintiff did not like to go to the
United States without the agreement being not first signed. On that day plaintiff and defendant went
to the United States, and on December 10, 1947, a franchise agreement (Exhibit V) was entered into
the Mission Dry Corporation and Fortunato F. Halili and/or Charles F. Woodhouse, granted
defendant the exclusive right, license, and authority to produce, bottle, distribute, and sell Mision
beverages in the Philippines. The plaintiff and the defendant thereafter returned to the Philippines.
Plaintiff reported for duty in January, 1948, but operations were not begun until the first week of
February, 1948. In January plaintiff was given as advance, on account of profits, the sum of P2,000,
besides the use of a car; in February, 1948, also P2,000, and in March only P1,000. The car was
withdrawn from plaintiff on March 9, 1948.
When the bottling plant was already on operation, plaintiff demanded of defendant that the
partnership papers be executed. At first defendant executed himself, saying there was no hurry.
Then he promised to do so after the sales of the product had been increased to P50,000. As nothing
definite was forthcoming, after this condition was attained, and as defendant refused to give further
allowances to plaintiff, the latter caused his attorneys to take up the matter with the defendant with a
view to a possible settlement. as none could be arrived at, the present action was instituted.

In his complaint plaintiff asks for the execution of the contract of partnership, an accounting of the
profits, and a share thereof of 30 per cent, as well as damages in the amount of P200,000. In his
answer defendant alleges by way of defense (1) that defendant's consent to the agreement, Exhibit
A, was secured by the representation of plaintiff that he was the owner, or was about to become
owner of an exclusive bottling franchise, which representation was false, and plaintiff did not secure
the franchise, but was given to defendant himself; (2) that defendant did not fail to carry out his
undertakings, but that it was plaintiff who failed; (3) that plaintiff agreed to contribute the exclusive
franchise to the partnership, but plaintiff failed to do so. He also presented a counter-claim for
P200,000 as damages. On these issues the parties went to trial, and thereafter the Court of First
Instance rendered judgment ordering defendant to render an accounting of the profits of the bottling
and distribution business, subject of the action, and to pay plaintiff 15 percent thereof. it held that the
execution of the contract of partnership could not be enforced upon the parties, but it also held that
the defense of fraud was not proved. Against this judgment both parties have appealed.

The most important question of fact to be determined is whether defendant had falsely represented
that he had an exclusive franchise to bottle Mission beverages, and whether this false representation
or fraud, if it existed, annuls the agreement to form the partnership. The trial court found that it is
improbable that defendant was never shown the letter, Exhibit J, granting plaintiff had; that the drafts
of the contract prior to the final one can not be considered for the purpose of determining the issue,
as they are presumed to have been already integrated into the final agreement; that fraud is never
presumed and must be proved; that the parties were represented by attorneys, and that if any party
thereto got the worse part of the bargain, this fact alone would not invalidate the agreement. On this
appeal the defendant, as appellant, insists that plaintiff did represent to the defendant that he had an
exclusive franchise, when as a matter of fact, at the time of its execution, he no longer had it as the
same had expired, and that, therefore, the consent of the defendant to the contract was vitiated by
fraud and it is, consequently, null and void.

Our study of the record and a consideration of all the surrounding circumstances lead us to believe
that defendant's contention is not without merit. Plaintiff's attorney, Mr. Laurea, testified that
Woodhouse presented himself as being the exclusive grantee of a franchise, thus:

A. I don't recall any discussion about that matter. I took along with me the file of the office
with regards to this matter. I notice from the first draft of the document which I prepared
which calls for the organization of a corporation, that the manager, that is, Mr. Woodhouse, is
represented as being the exclusive grantee of a franchise from the Mission Dry Corporation.
. . . (t.s.n., p.518)

As a matter of fact, the first draft that Mr. Laurea prepared, which was made before the Manila Hotel
conference on November 27th, expressly states that plaintiff had the exclusive franchise. Thus, the
first paragraph states:

Whereas, the manager is the exclusive grantee of a franchise from the Mission Dry
Corporation San Francisco, California, for the bottling of Mission products and their sale to
the public throughout the Philippines; . . . .
 3. The manager, upon the organization of the said corporation, shall forthwith transfer to the
said corporation his exclusive right to bottle Mission products and to sell them throughout the
Philippines. . . . .

(Exhibit II; emphasis ours)

The trial court did not consider this draft on the principle of integration of jural acts. We find that the
principle invoked is inapplicable, since the purpose of considering the prior draft is not to vary, alter,
or modify the agreement, but to discover the intent of the parties thereto and the circumstances
surrounding the execution of the contract. The issue of fact is: Did plaintiff represent to defendant
that he had an exclusive franchise? Certainly, his acts or statements prior to the agreement are
essential and relevant to the determination of said issue. The act or statement of the plaintiff was not
sought to be introduced to change or alter the terms of the agreement, but to prove how he induced
the defendant to enter into it — to prove the representations or inducements, or fraud, with which or
by which he secured the other party's consent thereto. These are expressly excluded from the parol
evidence rule. (Bough and Bough vs. Cantiveros and Hanopol, 40 Phil., 209; port Banga Lumber
Co. vs. Export & Import Lumber Co., 26 Phil., 602; III Moran 221,1952 rev. ed.) Fraud and false
representation are an incident to the creation of a jural act, not to its integration, and are not
governed by the rules on integration. Were parties prohibited from proving said representations or
inducements, on the ground that the agreement had already been entered into, it would be
impossible to prove misrepresentation or fraud. Furthermore, the parol evidence rule expressly
allows the evidence to be introduced when the validity of an instrument is put in issue by the
pleadings (section 22, par. (a), Rule 123, Rules of Court),as in this case.

That plaintiff did make the representation can also be easily gleaned from his own letters and his
own testimony. In his letter to Mission Dry Corporation, Exhibit H, he said:.

. . . He told me to come back to him when I was able to speak with authority so that we could
come to terms as far as he and I were concerned. That is the reason why the cable was
sent. Without this authority, I am in a poor bargaining position. . .

I would propose that you grant me the exclusive bottling and distributing rights for a limited
period of time, during which I may consummate my plants. . . .

By virtue of this letter the option on exclusive bottling was given to the plaintiff on October 14, 1947.
(See Exhibit J.) If this option for an exclusive franchise was intended by plaintiff as an instrument
with which to bargain with defendant and close the deal with him, he must have used his said option
for the above-indicated purpose, especially as it appears that he was able to secure, through its use,
what he wanted.

Plaintiff's own version of the preliminary conversation he had with defendant is to the effect that
when plaintiff called on the latter, the latter answered, "Well, come back to me when you have the
authority to operate. I am definitely interested in the bottling business." (t. s. n., pp. 60-61.) When
after the elections of 1949 plaintiff went to see the defendant (and at that time he had already the
option), he must have exultantly told defendant that he had the authority already. It is improbable
and incredible for him to have disclosed the fact that he had only an option to the exclusive
franchise, which was to last thirty days only, and still more improbable for him to have disclosed that,
at the time of the signing of the formal agreement, his option had already expired. Had he done so,
he would have destroyed all his bargaining power and authority, and in all probability lost the deal
itself.
The trial court reasoned, and the plaintiff on this appeal argues, that plaintiff only undertook in the
agreement "to secure the Mission Dry franchise for and in behalf of the proposed partnership." The
existence of this provision in the final agreement does not militate against plaintiff having
represented that he had the exclusive franchise; it rather strengthens belief that he did actually make
the representation. How could plaintiff assure defendant that he would get the franchise for the latter
if he had not actually obtained it for himself? Defendant would not have gone into the business
unless the franchise was raised in his name, or at least in the name of the partnership. Plaintiff
assured defendant he could get the franchise. Thus, in the draft prepared by defendant's attorney,
Exhibit HH, the above provision is inserted, with the difference that instead of securing the franchise
for the defendant, plaintiff was to secure it for the partnership. To show that the insertion of the
above provision does not eliminate the probability of plaintiff representing himself as the exclusive
grantee of the franchise, the final agreement contains in its third paragraph the following:

. . . and the manager is ready and willing to allow the capitalists to use the exclusive
franchise . . .

and in paragraph 11 it also expressly states:

1. In the event of the dissolution or termination of the partnership, . . . the franchise from
Mission Dry Corporation shall be reassigned to the manager.

These statements confirm the conclusion that defendant believed, or was made to believe, that
plaintiff was the grantee of an exclusive franchise. Thus it is that it was also agreed upon that the
franchise was to be transferred to the name of the partnership, and that, upon its dissolution or
termination, the same shall be reassigned to the plaintiff.

Again, the immediate reaction of defendant, when in California he learned that plaintiff did not have
the exclusive franchise, was to reduce, as he himself testified, plaintiff's participation in the net profits
to one half of that agreed upon. He could not have had such a feeling had not plaintiff actually made
him believe that he (plaintiff) was the exclusive grantee of the franchise.

The learned trial judge reasons in his decision that the assistance of counsel in the making of the
contract made fraud improbable. Not necessarily, because the alleged representation took place
before the conferences were had, in other words, plaintiff had already represented to defendant, and
the latter had already believed in, the existence of plaintiff's exclusive franchise before the formal
negotiations, and they were assisted by their lawyers only when said formal negotiations actually
took place. Furthermore, plaintiff's attorney testified that plaintiff had said that he had the exclusive
franchise; and defendant's lawyer testified that plaintiff explained to him, upon being asked for the
franchise, that he had left the papers evidencing it.(t.s.n., p. 266.)

We conclude from all the foregoing that plaintiff did actually represent to defendant that he was the
holder of the exclusive franchise. The defendant was made to believe, and he actually believed, that
plaintiff had the exclusive franchise. Defendant would not perhaps have gone to California and
incurred expenses for the trip, unless he believed that plaintiff did have that exclusive privilege, and
that the latter would be able to get the same from the Mission Dry Corporation itself. Plaintiff knew
what defendant believed about his (plaintiff's) exclusive franchise, as he induced him to that belief,
and he may not be allowed to deny that defendant was induced by that belief. (IX Wigmore, sec.
2423; Sec. 65, Rule 123, Rules of Court.)

We now come to the legal aspect of the false representation. Does it amount to a fraud that would
vitiate the contract? It must be noted that fraud is manifested in illimitable number of degrees or
gradations, from the innocent praises of a salesman about the excellence of his wares to those
malicious machinations and representations that the law punishes as a crime. In consequence,
article 1270 of the Spanish Civil Code distinguishes two kinds of (civil) fraud, the causal fraud, which
may be a ground for the annulment of a contract, and the incidental deceit, which only renders the
party who employs it liable for damages. This Court had held that in order that fraud may vitiate
consent, it must be the causal (dolo causante), not merely the incidental (dolo causante),
inducement to the making of the contract. (Article 1270, Spanish Civil Code; Hill vs. Veloso, 31 Phil.
160.) The record abounds with circumstances indicative that the fact that the principal consideration,
the main cause that induced defendant to enter into the partnership agreement with plaintiff, was the
ability of plaintiff to get the exclusive franchise to bottle and distribute for the defendant or for the
partnership. The original draft prepared by defendant's counsel was to the effect that plaintiff
obligated himself to secure a franchise for the defendant. Correction appears in this same original
draft, but the change is made not as to the said obligation but as to the grantee. In the corrected
draft the word "capitalist"(grantee) is changed to "partnership." The contract in its final form retains
the substituted term "partnership." The defendant was, therefore, led to the belief that plaintiff had
the exclusive franchise, but that the same was to be secured for or transferred to the partnership.
The plaintiff no longer had the exclusive franchise, or the option thereto, at the time the contract was
perfected. But while he had already lost his option thereto (when the contract was entered into), the
principal obligation that he assumed or undertook was to secure said franchise for the partnership,
as the bottler and distributor for the Mission Dry Corporation. We declare, therefore, that if he was
guilty of a false representation, this was not the causal consideration, or the principal inducement,
that led plaintiff to enter into the partnership agreement.

But, on the other hand, this supposed ownership of an exclusive franchise was actually the
consideration or price plaintiff gave in exchange for the share of 30 percent granted him in the net
profits of the partnership business. Defendant agreed to give plaintiff 30 per cent share in the net
profits because he was transferring his exclusive franchise to the partnership. Thus, in the draft
prepared by plaintiff's lawyer, Exhibit II, the following provision exists:

3. That the MANAGER, upon the organization of the said corporation, shall
forthwith transfer to the said corporation his exclusive right to bottle Mission products and to
sell them throughout the Philippines. As a consideration for such transfer, the CAPITALIST
shall transfer to the Manager fully paid non assessable shares of the said corporation . . .
twenty-five per centum of the capital stock of the said corporation. (Par. 3, Exhibit II;
emphasis ours.)

Plaintiff had never been a bottler or a chemist; he never had experience in the production or
distribution of beverages. As a matter of fact, when the bottling plant being built, all that he
suggested was about the toilet facilities for the laborers.

We conclude from the above that while the representation that plaintiff had the exclusive franchise
did not vitiate defendant's consent to the contract, it was used by plaintiff to get from defendant a
share of 30 per cent of the net profits; in other words, by pretending that he had the exclusive
franchise and promising to transfer it to defendant, he obtained the consent of the latter to give him
(plaintiff) a big slice in the net profits. This is the dolo incidente defined in article 1270 of the Spanish
Civil Code, because it was used to get the other party's consent to a big share in the profits, an
incidental matter in the agreement.

El dolo incidental no es el que puede producirse en el cumplimiento del contrato sino que
significa aqui, el que concurriendoen el consentimiento, o precediendolo, no influyo para
arrancar porsi solo el consentimiento ni en la totalidad de la obligacion, sinoen algun
extremo o accidente de esta, dando lugar tan solo a una accion para reclamar
indemnizacion de perjuicios. (8 Manresa 602.)
Having arrived at the conclusion that the agreement may not be declared null and void, the question
that next comes before us is, May the agreement be carried out or executed? We find no merit in the
claim of plaintiff that the partnership was already a fait accompli from the time of the operation of the
plant, as it is evident from the very language of the agreement that the parties intended that the
execution of the agreement to form a partnership was to be carried out at a later date. They
expressly agreed that they shall form a partnership. (Par. No. 1, Exhibit A.) As a matter of fact, from
the time that the franchise from the Mission Dry Corporation was obtained in California, plaintiff
himself had been demanding that defendant comply with the agreement. And plaintiff's present
action seeks the enforcement of this agreement. Plaintiff's claim, therefore, is both inconsistent with
their intention and incompatible with his own conduct and suit.

As the trial court correctly concluded, the defendant may not be compelled against his will to carry
out the agreement nor execute the partnership papers. Under the Spanish Civil Code, the defendant
has an obligation to do, not to give. The law recognizes the individual's freedom or liberty to do an
act he has promised to do, or not to do it, as he pleases. It falls within what Spanish commentators
call a very personal act (acto personalismo), of which courts may not compel compliance, as it is
considered an act of violence to do so.

Efectos de las obligaciones consistentes en hechos personalismo.—Tratamos de la

ejecucion de las obligaciones de hacer en el solocaso de su incumplimiento por parte del
deudor, ya sean los hechos personalisimos, ya se hallen en la facultad de un tercero; porque
el complimiento espontaneo de las mismas esta regido por los preceptos relativos al pago, y
en nada les afectan las disposiciones del art. 1.098.

Esto supuesto, la primera dificultad del asunto consiste en resolver si el deudor puede ser
precisado a realizar el hecho y porque medios.

Se tiene por corriente entre los autores, y se traslada generalmente sin observacion el
principio romano nemo potest precise cogi ad factum. Nadie puede ser obligado
violentamente a haceruna cosa. Los que perciben la posibilidad de la destruccion deeste
principio, añaden que, aun cuando se pudiera obligar al deudor, no deberia hacerse, porque
esto constituiria una violencia, y noes la violenciamodo propio de cumplir las obligaciones
(Bigot, Rolland, etc.). El maestro Antonio Gomez opinaba lo mismo cuandodecia que obligar
por la violencia seria infrigir la libertad eimponer una especie de esclavitud.

xxx xxx xxx

En efecto; las obligaciones contractuales no se acomodan biencon el empleo de la fuerza

fisica, no ya precisamente porque seconstituya de este modo una especie de esclavitud,
segun el dichode Antonio Gomez, sino porque se supone que el acreedor tuvo encuenta el
caracter personalisimo del hecho ofrecido, y calculo sobre laposibilidad de que por alguna
razon no se realizase. Repugna,ademas, a la conciencia social el empleo de la fuerza
publica, mediante coaccion sobre las personas, en las relaciones puramente particulares;
porque la evolucion de las ideas ha ido poniendo masde relieve cada dia el respeto a la
personalidad humana, y nose admite bien la violencia sobre el individuo la cual tiene
caracter visiblemente penal, sino por motivos que interesen a la colectividad de ciudadanos.
Es, pues, posible y licita esta violencia cuando setrata de las obligaciones que hemos
llamado ex lege, que afectanal orden social y a la entidad de Estado, y aparecen impuestas
sinconsideracion a las conveniencias particulares, y sin que por estemotivo puedan tampoco
ser modificadas; pero no debe serlo cuandola obligacion reviste un interes puramente
particular, como sucedeen las contractuales, y cuando, por consecuencia, paraceria
 salirseel Estado de su esfera propia, entrado a dirimir, con apoyo dela fuerza colectiva, las
diferencias producidas entre los ciudadanos. (19 Scaevola 428, 431-432.)

The last question for us to decide is that of damages,damages that plaintiff is entitled to receive
because of defendant's refusal to form the partnership, and damages that defendant is also entitled
to collect because of the falsity of plaintiff's representation. (Article 1101, Spanish Civil Code.) Under
article 1106 of the Spanish Civil Code the measure of damages is the actual loss suffered and the
profits reasonably expected to be received, embraced in the terms daño emergente and lucro
cesante. Plaintiff is entitled under the terms of the agreement to 30 per cent of the net profits of the
business. Against this amount of damages, we must set off the damage defendant suffered by
plaintiff's misrepresentation that he had obtained a very high percentage of share in the profits. We
can do no better than follow the appraisal that the parties themselves had adopted.

When defendant learned in Los Angeles that plaintiff did not have the exclusive franchise which he
pretended he had and which he had agreed to transfer to the partnership, his spontaneous reaction
was to reduce plaintiff's share form 30 per cent to 15 per cent only, to which reduction defendant
appears to have readily given his assent. It was under this understanding, which amounts to a virtual
modification of the contract, that the bottling plant was established and plaintiff worked as Manager
for the first three months. If the contract may not be considered modified as to plaintiff's share in the
profits, by the decision of defendant to reduce the same to one-half and the assent thereto of
plaintiff, then we may consider the said amount as a fair estimate of the damages plaintiff is entitled
to under the principle enunciated in the case of Varadero de Manila vs. Insular Lumber Co., 46 Phil.
176. Defendant's decision to reduce plaintiff's share and plaintiff's consent thereto amount to an
admission on the part of each of the reasonableness of this amount as plaintiff's share. This same
amount was fixed by the trial court. The agreement contains the stipulation that upon the termination
of the partnership, defendant was to convey the franchise back to plaintiff (Par. 11, Exhibit A). The
judgment of the trial court does not fix the period within which these damages shall be paid to
plaintiff. In view of paragraph 11 of Exhibit A, we declare that plaintiff's share of 15 per cent of the
net profits shall continue to be paid while defendant uses the franchise from the Mission Dry
Corporation.

With the modification above indicated, the judgment appealed from is hereby affirmed. Without
costs.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 108253 February 23, 1994

LYDIA L. GERALDEZ, petitioner,

vs.
HON. COURT OF APPEALS and KENSTAR TRAVEL CORPORATION, respondents.

Natividad T. Perez for petitioner.

Bito, Lozada, Ortega & Castillo for private respondent.

REGALADO, J.:

Our tourism industry is not only big business; it is a revenue support of the nation's economy. It has
become a matter of public interest as to call for its promotion and regulation on a cabinet level. We
have special laws and policies for visiting tourists, but such protective concern has not been equally
extended to Filipino tourists going abroad. Thus, with the limited judicial relief available within the
ambit of present laws, our tourists often prefer who fail to deliver on their undertakings. This case
illustrates the recourse of one such tourist who refused to forget.

An action for damages by reason of contractual breach was filed by petitioner Lydia L. Geraldez
against private respondent Kenstar Travel Corporation, docketed as Civil Case No. Q-90-4649 of the
Regional Trial Court of Quezon City, Branch 80.1 After the parties failed to arrive at an amicable
settlement, trial on the merits ensued.

Culling from the records thereof, we find that sometime in October, 1989, Petitioner came to know
about private respondent from numerous advertisements in newspapers of general circulation
regarding tours in Europe. She then contacted private respondent by phone and the latter sent its
representative, Alberto Vito Cruz, who gave her the brochure for the tour and later discussed its
highlights. The European tours offered were classified into four, and petitioner chose the
classification denominated as "VOLARE 3" covering a 22-day tour of Europe for $2,990.00. She paid
the total equivalent amount of P190,000.00 charged by private respondent for her and her sister,
Dolores.

Petitioner claimed that, during the tour, she was very uneasy and disappointed when it turned out
that, contrary to what was stated in the brochure, there was no European tour manager for their
group of tourists, the hotels in which she and the group were bullited were not first-class, the UGC
Leather Factory which was specifically added as a highlight of the tour was not visited, and the
Filipino lady tour guide by private respondent was a first timer, that is, she was performing her duties
and responsibilities as such for the first time.2
In said action before the Regional Trial Court of Quezon City, petitioner likewise moved for the
issuance of a writ of preliminary attachment against private respondent on the ground that it
committed fraud in contracting an obligation, as contemplated in Section 1(d), Rule 57 of the Rules
of Court, to which no opposition by the latter appears on the record. This was granted by the court a
quo3 but the preliminary attachment was subsequently lifted upon the filing by private respondent of
a counterbond amounting to P990,000.00.4

During the pendency of said civil case for damages, petitioner also filed other complaints before the
Department of Tourism in DOT Case No. 90-121 and the Securities and Exchange Commission in
PED Case No. 90-3738,5wherein, according to petitioner, herein private respondent was meted out a
fine of P10,000.00 by the Commission and P5,000.00 by the Department,6 which facts are not
disputed by private respondent in its comment on the present petition.

On July 9, 1991, the court a quo rendered its decision7 ordering private respondent to pay petitioner
P500.000.00 as moral damages, P200,000.00 as nominal damages, P300,000.00 as exemplary
damages, P50,000.00 as and for attorney's fees, and the costs of the suit.8 On appeal, respondent
court9 deleted the award for moral and exemplary damages, and reduced the awards for nominal
damages and attorney's fees to P30,000.00 and P10,000.00, respectively. 10

Hence, the instant petition from which, after sifting through the blades of contentions alternately
thrust and parried in the exchanges of the parties, the pivotal issue that emerges is whether or not
private respondent acted in bad faith or with gross negligence in discharging its obligations under the
contract.

Both the respondent court and the court a quo agree that private respondent failed to comply
faithfully with its commitments under the Volare 3 tour program, more particularly in not providing the
members of the tour group with a European tour manger whose duty, inter alia, was to explain the
points of interest of and familiarize the tour group with the places they would visit in Europe, and in
assigning instead a first timer Filipino tour guide, in the person of Rowena Zapanta, 11 to perform that
role which definitely requires experience and knowledge of such places. It is likewise undisputed that
while the group was able to pay a visit to the site of the UGC Leather Factory, they were brought
there at a very late hour such that the factory was already closed and they were unable to make
purchases at supposedly discounted prices. 12 As to the first-class hotels, however, while the court a
quo found that the hotels were not fist-class, respondent court believed otherwise, or that, at least,
there was substantial compliance with such a representation.

While clearly there was therefore a violation of the rights of petitioner under the aforementioned
circumstances, respondent court, contrary to the findings of the trial court, ruled that no malice or
bad faith could be imputed to private respondent, hence there is no justification for the award of
moral and exemplary damages. Furthermore, it held that while petitioner is entitled to nominal
damages, the amount awarded by the trial court was unconscionable since petitioner did not suffer
actual or substantial damage from the breach of contract, 13 hence its reduction of such award as
hereinbefore stated.

After thorough and painstaking scrutiny of the case records of both the trial and appellate courts, we
are satisfactorily convinced, and so hold, that private respondent did commit fraudulent
misrepresentations amounting to bad faith, to the prejudice of petitioner and the members of the tour
group.

By providing the Volare 3 tourist group, of which petitioner was a member, with an inexperienced
and a first timer tour escort, private respondent manifested its indifference to the convenience,
satisfaction and peace of mind of its clients during the trip, despite its express commitment to
provide such facilities under the Volare 3 Tour Program which had the grandiose slogan "Let your
heart sing. 14

Evidently, an inexperienced tour escort, who admittedly had not even theretofore been to
Europe, 15 cannot effectively acquaint the tourists with the interesting areas in the cities and places
included in the program, or to promptly render necessary assistance, especially where the latter are
complete strangers thereto, like witnesses Luz Sui Haw and her husband who went to Europe for
their honeymoon. 16

We agree with petitioner that the selection of Zapanta as the group's tour guide was deliberate and
conscious choice on the part of private respondent in order to afford her an on-the-job training and
equip her with the proper opportunities so as to later qualify her as an "experienced" tour guide and
eventually be an asset of respondent corporation. 17 Unfortunately, this resulted in a virtual project
experimentation with petitioner and the members of the tour as the unwitting participants.

We are, therefore, one with respondent court in faulting private respondent's choice of Zapanta as a
qualified tour guide for the Volare 3 tour package. It brooks no argument that to be true to its
undertakings, private respondent should have selected an experienced European tour guide, or it
could have allowed Zapanta to go merely as an understudy under the guidance, control and
supervision of an experienced and competent European or Filipino tour guide, 18 who could give her
the desired training.

Moreover, a tour guide is supposed to attend to the routinary needs of the tourists, not only when the
latter ask for assistance but at the moment such need becomes apparent. In other words, the tour
guide, especially by reason of her experience in previous tours, must be able to anticipate the
possible needs and problems of the tourists instead of waiting for them to bring it to her attention.
While this is stating the obvious, it is her duty to see to it that basic personal necessities such as
soap, towels and other daily amenities are provided by the hotels. It is also expected of her to see to
it that the tourists are provided with sanitary surroundings and to actively arrange for medical
attention in case of accidents, as what befell petitioner's sister and wherein the siblings had to
practically fend for themselves since, after merely calling for an ambulance, Zapanta left with the
other tour participants. 19

Zapanta fell far short of the performance expected by the tour group, her testimony in open court
being revelatory of her inexperience even on the basic function of a tour guide, to wit:

Q Now, are you aware that there were times that the tourists under
the "Volare 3" were not provided with soap and towels?

A They did not tell me that but I was able to ask them later on but
then nobody is complaining. 20 . . . .

The inability of the group to visit the leather factory is likewise reflective of the neglect and ineptness
of Zapanta in attentively following the itinerary of the day. This incompetence must necessarily be
traced to the lack of due diligence on the part of private respondent in the selection of its employees.
It is true that among the thirty-two destinations, which included twenty-three cities and special visits
to nine tourist spots, this was the only place that was not visited. 21 It must be noted, however, that
the visit to the UGC Leather Factory was one of the highlights 22 of the Volare 3 program which even
had to be specifically inserted in the itinerary, hence it was incumbent upon the organizers of the
tour to take special efforts to ensure the same. Besides, petitioner did expect much from the visit to
that factory since it was represented by private respondent that quality leather goods could be
bought there at lower prices. 23
Private respondent represents Zapanta's act of making daily overseas calls to Manila as an exercise
of prudence and diligence on the latter's part as a tour guide. 24 It further claims that these calls were
needed so that it could monitor the progress of the tour and respond to any problem
immediately. 25 We are not persuaded. The truth of the matter is that Zapanta, as an inexperienced
trainee-on-the-job, was required to make these calls to private respondent for the latter to gauge her
ability in coping with her first assignment and to provide instructions to her. 26

Clearly, therefore, private respondent's choice of Zapanta as the tour guide is a manifest disregard
of its specific assurances to the tour group, resulting in agitation and anxiety on their part, and which
deliberate omission is contrary to the elementary rules of good faith and fair play. It is extremely
doubtful if any group of Filipino tourists would knowingly agree to be used in effect as guinea pigs in
an employees' training program of a travel agency, to be conducted in unfamiliar European countries
with their diverse cultures, lifestyles and languages.

On the matter of the European tour manager, private respondent's advertisement in its tour contract
declares and represents as follows:

FILIPINO TOUR ESCORT!

He will accompany you throughout Europe. He speaks your language, shares your
culture and feels your excitement.

He won't be alone because you will also be accompanied by a . . .

EUROPEAN TOUR MANAGER!

You get the best of both worlds. Having done so may tours in the past with people
like you, he knows your sentiments, too. So knowledgeable about Europe, there is
hardly a question he can't answer. 27

Private respondent contends that the term "European Tour Manager" does not refer to an individual
but to an organization, allegedly the Kuoni Travel of Switzerland which supposedly prepared the
itinerary for its "Volare Europe Tour," negotiated with all the hotels in Europe, selected tourist spots
and historical places to visit, and appointed experienced local tour guides for the tour group. 28

We regret this unseemly quibbling which perforce cannot be allowed to pass judicial muster.

A cursory reading of said advertisement will readily reveal the express representation that the
contemplated European tour manager is a natural person, and not a juridical one as private
respondent asserts. A corporate entity could not possibly accompany the members of the tour group
to places in Europe; neither can it answer questions from the tourists during the tour. Of course, it is
absurd that if a tourist would want to know how he could possibly go to the nearest store or
supermarket, he would still have to call Kuoni Travel of Switzerland.

Furthermore, both lower courts observed, and we uphold their observations, that indeed private
respondent had the obligation to provide the tour group not only with a European tour manger, but
also with local European tour guides. The latter, parenthetically, were likewise never made
available. 29 Zapanta claims that she was accompanied by a European local tour guide in most of the
major cities in Europe. We entertain serious doubts on, and accordingly reject, this pretension for
she could not even remember the name of said European tour guide. 30 If such a guide really existed,
it is incredible why she could not even identify the former when she testified a year later, despite the
length of their sojourn and the duration of their association.

As to why the word "he" was used in the aforequoted advertisement, private respondent maintains
that the pronoun "he" also includes the word "it," as where it is used as a "nominative case form in
general statements (as in statutes) to include females, fictitious persons (as corporations)." 31 We are
constrained to reject this submission as patently strained and untenable. As already demonstrated, it
is incredible that the word "he" was used by private respondent to denote an artificial or corporate
being. From its advertisement, it is beyond cavil that the import of the word "he" is a natural and not
a juridical person. There is no need for further interpretation when the wordings are clear. The
meaning that will determine the legal effect of a contract is that which is arrived at by objective
standards; one is bound, not by what he subjectively intends, but by what he leads others
reasonably to think he intends. 32

In an obvious but hopeless attempt to arrive at a possible justification, private respondent further
contends that it explained the concept of a European tour manager to its clients at the pre-departure
briefing, which petitioner did not attend. 33 Significantly, however, private respondent failed to present
even one member of the tour group to substantiate its claim. It is a basic rule of evidence that a party
must prove his own affirmative allegations. 34Besides, if it was really its intention to provide a juridical
European tour manager, it could not have kept on promising its tourists during the tour that a
European tour manager would come, 35 supposedly to join and assist them.

Veering to another line of defense, private respondent seeks sanctuary in the delimitation of its
responsibility as printed on the face of its brochure on the Volare 3 program, to wit:

RESPONSIBILITIES: KENSTAR TRAVEL CORPORATION, YOUR TRAVEL

AGENT, THEIR EMPLOYEES OR SUB-AGENTS SHALL BE RESPONSIBLE ONLY
FOR BOOKING AND MAKING ARRANGEMENTS AS YOUR AGENTS. Kenstar
Travel Corporation, your travel Agent, their employees or sub-agents assume no
responsibility or liability arising out of or in connection with the services or lack of
services, of any train, vessel, other conveyance or station whatsoever in the
performance of their duty to the passengers or guests, neither will they be
responsible for any act, error or omission, or of any damages, injury, loss, accident,
delay or irregularity which may be occasioned by reason (of) or any defect in . .
. lodging place or any facilities . . . . (Emphasis by private respondent.) 36

While, generally, the terms of a contract result from the mutual formulation thereof by the parties
thereto, it is of common knowledge that there are certain contracts almost all the provisions of which
have been drafted by only one party, usually a corporation. Such contracts are called contracts of
adhesion, because the only participation of the party is the affixing of his signature or his "adhesion"
thereto. 37 In situations like these, when a party imposes upon another a ready-made form of
contract, 38 and the other is reduced to the alternative of taking it or leaving it, giving no room for
negotiation and depriving the latter of the opportunity to bargain on equal footing, a contract of
adhesion results. While it is true that an adhesion contract is not necessarily void, it must
nevertheless be construed strictly against the one who drafted the same. 39 This is especially true
where the stipulations are printed in fine letters and are hardly legible as is the case of the tour
contract 40 involved in the present controversy.

Yet, even assuming arguendo that the contractual limitation aforequoted is enforceable, private
respondent still cannot be exculpated for the reason that responsibility arising from fraudulent acts,
as in the instant case, cannot be stipulated against by reason of public policy. Consequently, for the
foregoing reasons, private respondent cannot rely on its defense of "substantial compliance" with the
contract.

Private respondent submits likewise that the tour was satisfactory, considering that only petitioner,
out of eighteen participants in the Volare 3 Tour Program, actually complained. 41 We cannot accept
this argument. Section 28, Rule 130 of the Rules of Court declares that the rights of a party cannot
be prejudiced by an act, declaration, or omissionof another, a statutory adaptation of the first branch
of the hornbook rule of res inter alios acta 42 which we do not have to belabor here.

Besides, it is a commonly known fact that there are tourists who, although the tour was far from what
the tour operator undertook under the contract, choose to remain silent and forego recourse to a suit
just to avoid the expenses, hassle and rancor of litigation, and not because the tour was in accord
with was promised. One does not relish adding to the bitter memory of a misadventure the
unpleasantness of another extended confrontation. Furthermore, contrary to private respondent's
assertion, not only petitioner but two other members of the tour group, Luz Sui Haw and Ercilla
Ampil, confirmed petitioner's complaints when they testified as witnesses for her as plaintiff in the
court below. 43

Private respondent likewise committed a grave misrepresentation when it assured in its Volare 3 tour
package that the hotels it had chosen would provide the tourists complete amenities and were
conveniently located along the way for the daily itineraries. 44 It turned out that some of the hotels
were not sufficiently equipped with even the basic facilities and were at a distance from the cities
covered by the projected tour. Petitioner testified on her disgust with the conditions and locations of
the hotels, thus:

Q And that these bathrooms ha(ve) bath tub(s) and hot and cold
shower(s)?

A Not all, sir.

Q Did they also provide soap and towels?

A Not all, sir, some (had) no toilet paper. 45

Q Which one?

A The 2 stars, the 3 stars and some 4 stars (sic) hotels.

Q What I am saying . . .

A You are asking a question? I am answering you. 2 stars, 3 stars

and some 4 stars (sic) hotels, no soap, toilet paper and (the) bowl
stinks. . . .

xxx xxx xxx

Q And that except for the fact that some of these four star hotels were
outside the city they provided you with the comfort?

A Not all, sir.

 Q Can you mention some which did not provide you that comfort?

A For example, if Ramada Hotel Venezia is in Quezon City, our hotel

is in Meycauayan. And if Florence or Ferenze is in manila, our hotel is
in Muntinlupa. 46

xxx xxx xxx

A One more hotel, sir, in Barcelona, Hotel Saint Jacques is also

outside the city. Suppose Barcelona is in Quezon City, our hotel is in
Marilao. We looked for this hotel inside the city of Barcelona for three
(3) hours. We wasted our time looking for almost all the hotels and
places where to eat. That is the kind of tour that you have. 47

Luz Sui Haw, who availed of the Volare 3 tour package with her husband for their honeymoon,
shared the sentiments of petitioner and testified as follows:

Q . . . Will you kindly tell us why the hotels where you stayed are not
considered first class hotels?

A Because the hotels where we went, sir, (are) far from the City and
the materials used are not first class and at times there were no
towels and soap. And the two (2) hotels in Nevers and Florence the
conditions (are) very worse (sic). 48

Q Considering that you are honeymooners together with your

husband, what (were) your feelings when you found out that the
condition were not fulfilled by the defendant?

A I would like to be very honest. I got sick when I reached Florence

and half of my body got itch (sic). I think for a honeymooner I would
like to emphasize that we should enjoy that day of our life and it
seems my feet kept on itching because of the condition of the hotel.
And I was so dissatisfied because the European Tour Manager was
not around there (were) beautiful promises. They kept on telling us
that a European Tour Manager will come over; until our Paris tour
was ended there was no European tour manager. 49

xxx xxx xxx

Q You will file an action against the defendant because there was a
disruption of your happiness, in your honeymoon, is that correct?

A That is one of my causes of (sic) coming up here. Secondly, i was

very dissatisfied (with) the condition. Thirdly, that Volare 89 it says it
will let your heart sing. That is not true. There was no European tour
(manager) and the highlights of the tour (were) very poor. The hotels
were worse (sic) hotels. 50

Q All the conditions of the hotels as you . . .

A Not all but as stated in the brochure that it is first class hotel. The
first class hotels state that all things are beautiful and it is neat and
clean with complete amenities and I encountered the Luxembourg
hotel which is quite very dilapidated because of the flooring when you
step on the side "kumikiring" and the cabinets (are) antiques and as
honeymooners we don't want to be disturbed or seen. 51

xxx xxx xxx

Q None of these are first class hotels?

A Yes, sir.

Q So, for example Ramada Hotel Venezia which according to Miss

Geraldez is first class hotel is not first class hotel?

A Yes, sir.

Q You share the opinion of Miss Geraldez?

A Yes, sir.

Q The same is true with Grand Hotel Palatino which is not a first
class hotel?

A Yes, sir.

Q And Hotel Delta Florence is not first class hotel?

A That is how I got my itch, sir. Seven (7) days of itch.

Q How about Hotel Saint-Jacquez, Paris?

A It is far from the city. It is not first class hotel.

Q So with Hotel Le Prieure Du Coeur de Jesus neither a first class

hotel?

A Yes, sir.

Q Hotel De Nevers is not a first class hotel?

A Yes, sir.

Q Hotel Roc Blanc Andorra is not a first class hotel?

A Yes, sir.

Q Saint Just Hotel, Barcelona is not a first class hotel?

 A Yes, sir.

Q Hotel Pullman Nice neither is not a first class hotel?

A Yes, sir.

Q Hotel Prinz Eugen and Austrotel are not first class hotels?

A Yes, sir. 52

Private respondent cannot escape responsibility by seeking refuge under the listing of first-class
hotels in publications like the "Official Hotel and Resort Guide" and Worldwide Hotel Guide." 53 Kuoni
Travel, its tour operator, 54 which prepared the hotel listings, is a European-based travel
agency 55 and, as such, could have easily verified the matter of first-class accommodations. Nor can
it logically claim that the first-class hotels in Europe may not necessarily be the first-class hotels here
in the Philippines. 56 It is reasonable for petitioner to assume that the promised first-class hotels are
equivalent to what are considered first-class hotels in Manila. Even assuming arguendo that there is
indeed a difference in classifications, it cannot be gainsaid that a first-class hotel could at the very
least provide basic necessities and sanitary accommodations. We are accordingly not at all
impressed by private respondent's attempts to trivialize the complaints thereon by petitioner and her
companions.

In a last ditch effort to justify its choice of the hotels, private respondent contends that it merely
provided such "first class" hotels which are commensurate to the tourists budget, or which were,
under the given circumstances, the "best for their money." It postulated that it could not have offered
better hostelry when the consideration paid for hotel accommodations by the tour participants was
only so much,57 and the tour price of $2,990.00 covers a European tour for 22 days inclusive of lower
room rates and meals. 58 this is implausible, self-serving and borders on sophistry.

The fact that the tourists were to pay a supposedly lower amount, such that private respondent
allegedly retained hardly enough as reasonable profit, 59 does not justify a substandard form of
service in return. It was private respondent, in the first place, which fixed the charges for the
package tour and determined the services that could be availed of corresponding to such price.
Hence, it cannot now be heard to complain that it only made a putative marginal profit out of the
transaction. if it could not provide the tour participants with first-class lodgings on the basis of the
amount that they paid, it could and should have instead increased the price to enable it to arrange
for the promised first-class accommodations.

On the foregoing considerations, respondent court erred in deleting the award for moral and
exemplary damages. Moral damages may be awarded in breaches of contract where the obligor
acted fraudulently or in bad faith. 60 From the facts earlier narrated, private respondent can be faulted
with fraud in the inducement, which is employed by a party to a contract in securing the consent of
the other.

This fraud or dolo which is present or employed at the time of birth or perfection of a contract may
either be dolocausante or dolo incidente. The first, or causal fraud referred to in Article 1338, are
those deceptions or misrepresentations of a serious character employed by one party and without
which the other party would not have entered into the contract. Dolo incidente, or incidental fraud
which is referred to in Article 1344, are those which are not serious in character and without which
the other party would still have entered into the contract. 61 Dolo causantedetermines or is the
essential cause of the consent, while dolo incidente refers only to some particular or accident of the
obligations. 62 The effects of dolo causante are the nullity of the contract and the indemnification of
damages, 63 and dolo incidente also obliges the person employing it to pay damages. 64

In either case, whether private respondent has committed dolo causante or dolo incidente by making
misrepresentations in its contracts with petitioner and other members of the tour group, which
deceptions became patent in the light of after-events when, contrary to its representations, it
employed an inexperienced tour guide, housed the tourist group in substandard hotels, and reneged
on its promise of a European tour manager and the visit to the leather factory, it is indubitably liable
for damages to petitioner.

In the belief that an experienced tour escort and a European tour manager would accompany them,
with the concomitant reassuring and comforting thought of having security and assistance readily at
hand, petitioner was induced to join the Volare 3 tourists, instead of travelling alone 65 She likewise
suffered serious anxiety and distress when the group was unable to visit the leather factory and
when she did not receive first-class accommodations in their lodgings which were misrepresented as
first-class hotels. These, to our mind, justify the award for moral damages, which are in the category
of an award designed to compensate the claimant for that injury which she had suffered, and not as
a penalty on the wrongdoer, 66 we believe that an award of P100,000.00 is sufficient and reasonable.

When moral damages are awarded, especially for fraudulent conduct, exemplary damages may also
be decreed. Exemplary damages are imposed by way of example or correction for the public good,
in addition to moral, temperate, liquidated or compensatory damages. According to the code
Commission, exemplary damages are required by public policy, for wanton acts must be
suppressed. 67 An award, therefore, of P50,000.00 is called for to deter travel agencies from resorting
to advertisements and enticements with the intention of realizing considerable profit at the expense
of the public, without ensuring compliance with their express commitments. While, under the present
state of the law, extraordinary diligence is not required in travel or tour contracts, such as that in the
case at bar, the travel agency acting as tour operator must nevertheless be held to strict accounting
for contracted services, considering the public interest in tourism, whether in the local or in the
international scene. Consequently, we have to likewise reject the theory of private respondent that
the promise it made in the tour brochure may be regarded only as "commendatory trade talk." 68

With regard to the honorarium for counsel as an item of damages, since we are awarding moral and
exemplary damages, 69 and considering the legal importance of the instant litigation and the efforts of
counsel evident from the records of three levels of the judicial hierarchy, we favorably consider the
amount of P20,000.00 therefor.

WHEREFORE, premises considered, the decision of respondent Court of Appeals is hereby SET
ASIDE, and another one rendered, ordering private respondent Kenstar Travel Corporation to pay
petitioner Lydia L. Geraldez the sums of P100,000.00 by way of moral damages, P50,000.00 as
exemplary damages, and P20,000.00 as and for attorney's fees, with costs against private
respondent. The award for nominal damages is hereby deleted.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. 34840 September 23, 1931

NARCISO GUTIERREZ, plaintiff-appellee,

vs.
BONIFACIO GUTIERREZ, MARIA V. DE GUTIERREZ, MANUEL GUTIERREZ, ABELARDO
VELASCO, and SATURNINO CORTEZ, defendants-appellants.

L.D. Lockwood for appellants Velasco and Cortez.

San Agustin and Roxas for other appellants.
Ramon Diokno for appellee.

MALCOLM, J.:

This is an action brought by the plaintiff in the Court of First Instance of Manila against the five
defendants, to recover damages in the amount of P10,000, for physical injuries suffered as a result
of an automobile accident. On judgment being rendered as prayed for by the plaintiff, both sets of
defendants appealed.

On February 2, 1930, a passenger truck and an automobile of private ownership collided while
attempting to pass each other on the Talon bridge on the Manila South Road in the municipality of
Las Piñas, Province of Rizal. The truck was driven by the chauffeur Abelardo Velasco, and was
owned by Saturnino Cortez. The automobile was being operated by Bonifacio Gutierrez, a lad 18
years of age, and was owned by Bonifacio's father and mother, Mr. and Mrs. Manuel Gutierrez. At
the time of the collision, the father was not in the car, but the mother, together will several other
members of the Gutierrez family, seven in all, were accommodated therein. A passenger in the
autobus, by the name of Narciso Gutierrez, was en route from San Pablo, Laguna, to Manila. The
collision between the bus and the automobile resulted in Narciso Gutierrez suffering a fracture right
leg which required medical attendance for a considerable period of time, and which even at the date
of the trial appears not to have healed properly.

It is conceded that the collision was caused by negligence pure and simple. The difference between
the parties is that, while the plaintiff blames both sets of defendants, the owner of the passenger
truck blames the automobile, and the owner of the automobile, in turn, blames the truck. We have
given close attention to these highly debatable points, and having done so, a majority of the court
are of the opinion that the findings of the trial judge on all controversial questions of fact find
sufficient support in the record, and so should be maintained. With this general statement set down,
we turn to consider the respective legal obligations of the defendants.

In amplification of so much of the above pronouncement as concerns the Gutierrez family, it may be
explained that the youth Bonifacio was in incompetent chauffeur, that he was driving at an excessive
rate of speed, and that, on approaching the bridge and the truck, he lost his head and so contributed
by his negligence to the accident. The guaranty given by the father at the time the son was granted a
license to operate motor vehicles made the father responsible for the acts of his son. Based on
these facts, pursuant to the provisions of article 1903 of the Civil Code, the father alone and not the
minor or the mother, would be liable for the damages caused by the minor.
We are dealing with the civil law liability of parties for obligations which arise from fault or
negligence. At the same time, we believe that, as has been done in other cases, we can take
cognizance of the common law rule on the same subject. In the United States, it is uniformly held
that the head of a house, the owner of an automobile, who maintains it for the general use of his
family is liable for its negligent operation by one of his children, whom he designates or permits to
run it, where the car is occupied and being used at the time of the injury for the pleasure of other
members of the owner's family than the child driving it. The theory of the law is that the running of
the machine by a child to carry other members of the family is within the scope of the owner's
business, so that he is liable for the negligence of the child because of the relationship of master and
servant. (Huddy On Automobiles, 6th ed., sec. 660; Missell vs. Hayes [1914], 91 Atl., 322.) The
liability of Saturnino Cortez, the owner of the truck, and of his chauffeur Abelardo Velasco rests on a
different basis, namely, that of contract which, we think, has been sufficiently demonstrated by the
allegations of the complaint, not controverted, and the evidence. The reason for this conclusion
reaches to the findings of the trial court concerning the position of the truck on the bridge, the speed
in operating the machine, and the lack of care employed by the chauffeur. While these facts are not
as clearly evidenced as are those which convict the other defendant, we nevertheless hesitate to
disregard the points emphasized by the trial judge. In its broader aspects, the case is one of two
drivers approaching a narrow bridge from opposite directions, with neither being willing to slow up
and give the right of way to the other, with the inevitable result of a collision and an accident.

The defendants Velasco and Cortez further contend that there existed contributory negligence on
the part of the plaintiff, consisting principally of his keeping his foot outside the truck, which
occasioned his injury. In this connection, it is sufficient to state that, aside from the fact that the
defense of contributory negligence was not pleaded, the evidence bearing out this theory of the case
is contradictory in the extreme and leads us far afield into speculative matters.

The last subject for consideration relates to the amount of the award. The appellee suggests that the
amount could justly be raised to P16,517, but naturally is not serious in asking for this sum, since no
appeal was taken by him from the judgment. The other parties unite in challenging the award of
P10,000, as excessive. All facts considered, including actual expenditures and damages for the
injury to the leg of the plaintiff, which may cause him permanent lameness, in connection with other
adjudications of this court, lead us to conclude that a total sum for the plaintiff of P5,000 would be
fair and reasonable. The difficulty in approximating the damages by monetary compensation is well
elucidated by the divergence of opinion among the members of the court, three of whom have
inclined to the view that P3,000 would be amply sufficient, while a fourth member has argued that
P7,500 would be none too much.

In consonance with the foregoing rulings, the judgment appealed from will be modified, and the
plaintiff will have judgment in his favor against the defendants Manuel Gutierrez, Abelardo Velasco,
and Saturnino Cortez, jointly and severally, for the sum of P5,000, and the costs of both instances.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-48930 February 23, 1944

ANTONIO VAZQUEZ, petitioner,

vs.
FRANCISCO DE BORJA, respondent.

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

G.R. No. L-48931 February 23, 1944

FRANCISCO DE BORJA, petitioner,

vs.
ANTONIO VAZQUEZ, respondent.

OZAETA, J.:

This action was commenced in the Court of First Instance of Manila by Francisco de Borja against
Antonio Vazquez and Fernando Busuego to recover from them jointly and severally the total sum of
P4,702.70 upon three alleged causes of action, to wit: First, that in or about the month of January,
1932, the defendants jointly and severally obligated themselves to sell to the plaintiff 4,000 cavans of
palay at P2.10 per cavan, to be delivered during the month of February, 1932, the said defendants
having subsequently received from the plaintiff in virtue of said agreement the sum of P8,400; that
the defendants delivered to the plaintiff during the months of February, March, and April, 1932, only
2,488 cavans of palay of the value of P5,224.80 and refused to deliver the balance of 1,512 cavans
of the value of P3,175.20 notwithstanding repeated demands. Second, that because of defendants'
refusal to deliver to the plaintiff the said 1,512 cavans of palay within the period above mentioned,
the plaintiff suffered damages in the sum of P1,000. And, third, that on account of the agreement
above mentioned the plaintiff delivered to the defendants 4,000 empty sacks, of which they returned
to the plaintiff only 2,490 and refused to deliver to the plaintiff the balance of 1,510 sacks or to pay
their value amounting to P377.50; and that on account of such refusal the plaintiff suffered damages
in the sum of P150.

The defendant Antonio Vazquez answered the complaint, denying having entered into the contract
mentioned in the first cause of action in his own individual and personal capacity, either solely or
together with his codefendant Fernando Busuego, and alleging that the agreement for the purchase
of 4,000 cavans of palay and the payment of the price of P8,400 were made by the plaintiff with and
to the Natividad-Vasquez Sabani Development Co., Inc., a corporation organized and existing under
the laws of the Philippines, of which the defendant Antonio Vazquez was the acting manager at the
time the transaction took place. By way of counterclaim, the said defendant alleged that he suffered
damages in the sum of P1,000 on account of the filing of this action against him by the plaintiff with
full knowledge that the said defendant had nothing to do whatever with any and all of the
transactions mentioned in the complaint in his own individual and personal capacity.

The trial court rendered judgment ordering the defendant Antonio Vazquez to pay to the plaintiff the
sum of P3,175.20 plus the sum of P377.50, with legal interest on both sums, and absolving the
defendant Fernando Busuego (treasurer of the corporation) from the complaint and the plaintiff from
the defendant Antonio Vazquez' counterclaim. Upon appeal to the Court of Appeals, the latter
modified that judgment by reducing it to the total sum of P3,314.78, with legal interest thereon and
the costs. But by a subsequent resolution upon the defendant's motion for reconsideration, the Court
of Appeals set aside its judgment and ordered that the case be remanded to the court of origin for
further proceedings. The defendant Vazquez, not being agreeable to that result, filed the present
petition for certiorari (G.R. No. 48930) to review and reverse the judgment of the Court of Appeals;
and the plaintiff Francisco de Borja, excepting to the resolution of the Court of Appeals whereby its
original judgment was set aside and the case was ordered remanded to the court of origin for further
proceedings, filed a cross-petition for certiorari (G.R. No. 48931) to maintain the original judgment of
the Court of Appeals.

The original decision of the Court of Appeals and its subsequent resolutions on reconsideration read
as follows:

Es hecho no controvertido que el 25 de Febrero de 1932, el demandado-apelante vendio al

demandante 4,000 cavanes de palay al precio de P2.10 el cavan, de los cuales, dicho
demandante solamente recibio 2,583 cavanes; y que asimismo recibio para su envase 4,000
sacos vacios. Esta provbado que de dichos 4,000 sacos vacios solamente se entregaron,
2,583 quedando en poder del demandado el resto, y cuyo valor es el de P0.24 cada uno.
Presentada la demanda contra los demandados Antonio Vazquez y Fernando Busuego para
el pago de la cantidad de P4,702.70, con sus intereses legales desde el 1.o de marzo de
1932 hasta su completo pago y las costas, el Juzgado de Primera Instancia de Manila el
asunto condenando a Antonio Vazquez a pagar al demandante la cantidad de P3,175.20,
mas la cantidad de P377.50, con sus intereses legales, absolviendo al demandado
Fernando Busuego de la demanda y al demandante de la reconvencion de los demandados,
sin especial pronunciamiento en cuanto a las costas. De dicha decision apelo el demandado
Antonio Vazquez, apuntado como principal error el de que el habia sido condenado
personalmente, y no la corporacion por el representada.

Segun la preponderancia de las pruebas, la venta hecha por Antonio Vazquez a favor de
Francisco de Borja de los 4,000 cavanes de palay fue en su capacidad de Presidente
interino y Manager de la corporacion Natividad-Vazquez Sabani Development Co., Inc. Asi
resulta del Exh. 1, que es la copia al carbon del recibo otorgado por el demandado Vazquez,
y cuyo original lo habia perdido el demandante, segun el. Asi tambien consta en los libros de
la corporacion arriba mencionada, puesto que en los mismos se ha asentado tanto la
entrada de los P8,400, precio del palay, como su envio al gobierno en pago de los alquileres
de la Hacienda Sabani. Asi mismo lo admitio Francisco de Borja al abogado Sr. Jacinto
Tomacruz, posterior presidente de la corporacion sucesora en el arrendamiento de la Sabani
Estate, cuando el solicito sus buenos oficios para el cobro del precio del palay no entregado.
Asi igualmente lo declaro el que hizo entrega de parte del palay a Borja, Felipe Veneracion,
cuyo testimonio no ha sido refutado. Y asi se deduce de la misma demanda, cuando se
incluyo en ella a Fernando Busuego, tesorero de la Natividad-Vazquez Sabani Development
Co., Inc.

Siendo esto asi, la principal responsable debe ser la Natividad-Vazquez Sabani

Development Co., Inc., que quedo insolvente y dejo de existir. El Juez sentenciador declaro,
sin embargo, al demandado Vazquez responsable del pago de la cantidad reclamada por su
negligencia al vender los referidos 4,000 cavanes de palay sin averiguar antes si o no dicha
cantidad existia en las bodegas de la corporacion.

Resulta del Exh. 8 que despues de la venta de los 4,000 cavanes de palay a Francisco de
Borja, el mismo demandado vendio a Kwong Ah Phoy 1,500 cavanes al precio de P2.00 el
 cavan, y decimos 'despues' porque esta ultima venta aparece asentada despues de la
primera. Segun esto, el apelante no solamente obro con negligencia, sino interviniendo
culpa de su parte, por lo que de acuerdo con los arts. 1102, 1103 y 1902 del Codigo Civil, el
debe ser responsable subsidiariamente del pago de la cantidad objecto de la demanda.

En meritos de todo lo expuesto, se confirma la decision apelada con la modificacion de que

el apelante debe pagar al apelado la suma de P2,295.70 como valor de los 1,417 cavanes
de palay que dejo de entregar al demandante, mas la suma de P339.08 como importe de los
1,417 sacos vacios, que dejo de devolver, a razon de P0.24 el saco, total P3,314.78, con
sus intereses legales desde la interposicion de la demanda y las costas de ambas
instancias.

Vista la mocion de reconsideracion de nuestra decision de fecha 13 de Octubre de 1942, y

alegandose en la misma que cuando el apelante vendio los 1,500 cavanes de palay a Ah
Phoy, la corporacion todavia tenia bastante existencia de dicho grano, y no estando dicho
extremo suficientemente discutido y probado, y pudiendo variar el resultado del asunto,
dejamos sin efecto nuestra citada decision, y ordenamos la devolucion de la causa al
Juzgado de origen para que reciba pruebas al efecto y dicte despues la decision
correspondiente.

Upon consideration of the motion of the attorney for the plaintiff-appellee in case CA-G.R.
No. 8676, Francisco de Borja vs. Antonio Vasquez et al., praying, for the reasons therein
given, that the resolution of December 22, 1942, be reconsidered: Considering that said
resolution remanding the case to the lower court is for the benefit of the plaintiff-appellee to
afford him opportunity to refute the contention of the defendant-appellant Antonio Vazquez,
motion denied.

The action is on a contract, and the only issue pleaded and tried is whether the plaintiff entered into
the contract with the defendant Antonio Vazquez in his personal capacity or as manager of the
Natividad-Vazquez Sabani Development Co., Inc. The Court of Appeals found that according to the
preponderance of the evidence "the sale made by Antonio Vazquez in favor of Francisco de Borja of
4,000 cavans of palay was in his capacity as acting president and manager of the corporation
Natividad-Vazquez Sabani Development Co., Inc." That finding of fact is final and, it resolving the
only issue involved, should be determinative of the result.

The Court of Appeals doubly erred in ordering that the cause be remanded to the court of origin for
further trial to determine whether the corporation had sufficient stock of palay at the time appellant
sold, 1500 cavans of palay to Kwong Ah Phoy. First, if that point was material to the issue, it should
have been proven during the trial; and the statement of the court that it had not been sufficiently
discussed and proven was no justification for ordering a new trial, which, by the way, neither party
had solicited but against which, on the contrary, both parties now vehemently protest. Second, the
point is, in any event, beside the issue, and this we shall now discuss in connection with the original
judgment of the Court of Appeals which the plaintiff cross-petitioner seeks to maintain.

The action being on a contract, and it appearing from the preponderance of the evidence that the
party liable on the contract is the Natividad-Vazquez Sabani Development Co., Inc. which is not a
party herein, the complaint should have been dismissed. Counsel for the plaintiff, in his brief as
respondent, argues that altho by the preponderance of the evidence the trial court and the Court of
Appeals found that Vazquez celebrated the contract in his capacity as acting president of the
corporation and altho it was the latter, thru Vazquez, with which the plaintiff had contracted and
which, thru Vazquez, had received the sum of P8,400 from Borja, and altho that was true from the
point of view of a legal fiction, "ello no impede que tambien sea verdad lo alegado en la demanda de
que la misma persona de Vasquez fue la que contrato con Borja y que la misma persona de
Vasquez fue quien recibio la suma de P8,400." But such argument is invalid and insufficient to show
that the president of the corporation is personally liable on the contract duly and lawfully entered into
by him in its behalf.

It is well known that a corporation is an artificial being invested by law with a personality of its own,
separate and distinct from that of its stockholders and from that of its officers who manage and run
its affairs. The mere fact that its personality is owing to a legal fiction and that it necessarily has to
act thru its agents, does not make the latter personally liable on a contract duly entered into, or for
an act lawfully performed, by them for an in its behalf. The legal fiction by which the personality of a
corporation is created is a practical reality and necessity. Without it no corporate entities may exists
and no corporate business may be transacted. Such legal fiction may be disregarded only when an
attempt is made to use it as a cloak to hide an unlawful or fraudulent purpose. No such thing has
been alleged or proven in this case. It has not been alleged nor even intimated that Vazquez
personally benefited by the contract of sale in question and that he is merely invoking the legal
fiction to avoid personal liability. Neither is it contended that he entered into said contract for the
corporation in bad faith and with intent to defraud the plaintiff. We find no legal and factual basis
upon which to hold him liable on the contract either principally or subsidiarily.

The trial court found him guilty of negligence in the performance of the contract and held him
personally liable on that account. On the other hand, the Court of Appeals found that he "no
solamente obro con negligencia, sino interveniendo culpa de su parte, por lo que de acuerdo con los
arts. 1102, 1103 y 1902 del Codigo Civil, el debe ser responsable subsidiariamente del pago de la
cantidad objeto de la demanda." We think both the trial court and the Court of Appeals erred in law
in so holding. They have manifestly failed to distinguish a contractual from an extracontractual
obligation, or an obligation arising from contract from an obligation arising from culpa aquiliana. The
fault and negligence referred to in articles 1101-1104 of the Civil Code are those incidental to the
fulfillment or nonfullfillment of a contractual obligation; while the fault or negligence referred to in
article 1902 is the culpa aquiliana of the civil law, homologous but not identical to tort of the common
law, which gives rise to an obligation independently of any contract. (Cf. Manila R.R. Co. vs. Cia.
Trasatlantica, 38 Phil., 875, 887-890; Cangco vs. Manila R.R. Co., 38 Phil. 768.) The fact that the
corporation, acting thru Vazquez as its manager, was guilty of negligence in the fulfillment of the
contract, did not make Vazquez principally or even subsidiarily liable for such negligence. Since it
was the corporation's contract, its nonfulfillment, whether due to negligence or fault or to any other
cause, made the corporation and not its agent liable.

On the other hand if independently of the contract Vazquez by his fault or negligence cause
damaged to the plaintiff, he would be liable to the latter under article 1902 of the Civil Code. But then
the plaintiff's cause of action should be based on culpa aquiliana and not on the contract alleged in
his complaint herein; and Vazquez' liability would be principal and not merely subsidiary, as the
Court of Appeals has erroneously held. No such cause of action was alleged in the complaint or tried
by express or implied consent of the parties by virtue of section 4 of Rule 17. Hence the trial court
had no jurisdiction over the issue and could not adjudicate upon it (Reyes vs. Diaz, G.R. No. 48754.)
Consequently it was error for the Court of Appeals to remand the case to the trial court to try and
decide such issue.

It only remains for us to consider petitioner's second assignment of error referring to the lower courts'
refusal to entertain his counterclaim for damages against the respondent Borja arising from the
bringing of this action. The lower courts having sustained plaintiff's action. The finding of the Court of
Appeals that according to the preponderance of the evidence the defendant Vazquez celebrated the
contract not in his personal capacity but as acting president and manager of the corporation, does
not warrant his contention that the suit against him is malicious and tortious; and since we have to
decide defendant's counterclaim upon the facts found by the Court of Appeals, we find no sufficient
basis upon which to sustain said counterclaim. Indeed, we feel that a a matter of moral justice we
ought to state here that the indignant attitude adopted by the defendant towards the plaintiff for
having brought this action against him is in our estimation not wholly right. Altho from the legal point
of view he was not personally liable for the fulfillment of the contract entered into by him on behalf of
the corporation of which he was the acting president and manager, we think it was his moral duty
towards the party with whom he contracted in said capacity to see to it that the corporation
represented by him fulfilled the contract by delivering the palay it had sold, the price of which it had
already received. Recreant to such duty as a moral person, he has no legitimate cause for
indignation. We feel that under the circumstances he not only has no cause of action against the
plaintiff for damages but is not even entitled to costs.

The judgment of the Court of Appeals is reversed, and the complaint is hereby dismissed, without
any finding as to costs.

Yulo, C.J., Moran, Horrilleno and Bocobo, JJ., concur.

Separate Opinions

PARAS, J., dissenting:

Upon the facts of this case as expressly or impliedly admitted in the majority opinion, the plaintiff is
entitled to a judgment against the defendant. The latter, as acting president and manager of
Natividad-Vazquez Sabani Development Co., Inc., and with full knowledge of the then insolvent
status of his company, agreed to sell to the plaintiff 4,000 cavans of palay. Notwithstanding the
receipt from the plaintiff of the full purchase price, the defendant delivered only 2,488 cavans and
failed and refused to deliver the remaining 1,512 cavans and failed and refused to deliver the
remaining 1,512 cavans and a quantity of empty sacks, or their value. Such failure resulted,
according to the Court of First Instance of Manila and the Court of Appeals, from his fault or
negligence.

It is true that the cause of action made out by the complaint is technically based on a contract
between the plaintiff and Natividad-Vazquez Sabani Development Co., Inc. which is not a party to
this case. Nevertheless, inasmuch as it was proven at the trial that the defendant was guilty of fault
in that he prevented the performance of the plaintiff's contract and also of negligence bordering on
fraud which cause damage to the plaintiff, the error of procedure should not be a hindrance to the
rendition of a decision in accordance with the evidence actually introduced by the parties, especially
when in such a situation we may order the necessary amendment of the pleadings, or even consider
them correspondingly amended.

As already stated, the corporation of which the defendant was acting president and manager was, at
the time he made the sale of the plaintiff, known to him to be insolvent. As a matter of fact, said
corporation was soon thereafter dissolved. There is admitted damage on the part of the plaintiff,
proven to have been inflicted by reason of the fault or negligence of the defendant. In the interest of
simple justice and to avoid multiplicity of suits I am therefore impelled to consider the present action
as one based on fault or negligence and to sentence the defendant accordingly. Otherwise, he
would be allowed to profit by his own wrong under the protective cover of the corporate existence of
the company he represented. It cannot be pretended that any advantage under the sale inured to the
benefit of Natividad-Vazquez Sabani Development Co., Inc. and not of the defendant personally,
since the latter undoubtedly owned a considerable part of its capital.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-14335 January 28, 1920

MANUEL DE GUIA, plaintiff-appellant,

vs.
THE MANILA ELECTRIC RAILROAD & LIGHT COMPANY, defendant-appellant.

Sumulong and Estrada, Crossfield and O'Brien and Francisco A. Delgado for
plaintiff-appellant.
Lawrence and Ross for defendant-appellant.

STREET, J.:

This is an appeal prosecuted both by the plaintiff and the defendant from a judgment of the Court of
First Instance of the City of Manila, whereby the plaintiff was awarded the sum of P6,100, with
interest and costs, as damages incurred by him in consequence of physical injuries sustained while
riding on one of the defendant's car.

The accident which gave rise to the litigation occurred on September 4, 1915, near the end of the
street-car line in Caloocan, Rizal, a northern suburb of the city of Manila. It appears that, at about 8
o'clock p.m., of the date mentioned, the plaintiff Manuel de Guia, a physician residing in Caloocan,
boarded a car at the end of the line with the intention of coming to the city. At about 30 meters from
the starting point the car entered a switch, the plaintiff remaining on the back platform holding the
handle of the right-hand door. Upon coming out of the switch, the small wheels of the rear truck left
the track, ran for a short distance along the macadam filling, which was flush with the rails, and
struck a concrete post at the left of the tract. The post was shattered; and as the car stopped the
plaintiff was thrown against the door with some violence, receiving bruises and possibly certain
internal injuries, the extent of which is a subject of dispute.

The trial court found that the motorman of the derailed car was negligent in having maintained too
rapid a speed. This inference appears to be based chiefly upon the results of the shock, involving
the shattering of the post and the bending of the kingpost of the car. It is insisted for the defendant
company that the derailment was due to the presence of a stone, somewhat larger than a goose
egg, which had become accidentally lodged between the rails at the juncture of the switch and which
was unobserved by the motorman. In this view the derailment of the car is supposed to be due
to casus fortuitos and not chargeable to the negligence of the motorman.

Even supposing that the derailment of the car was due to the accidental presence of such a stone as
suggested, we do not think that the existence of negligence is disproved. The motorman says that
upon approaching the switch he reduced the electrical energy to the point that the car barely entered
the switch under its own momentum, and this operation was repeated as he passed out. Upon
getting again on the straight tract he put the control successively at points one, two, three and lastly
at point four. At the moment when the control was placed at point four he perceived that the rear
wheels were derailed and applied the brake; but at the same instant the car struck the post, some 40
meters distant from the exit of the switch. One of the defendant's witnesses stated in court that the
rate of a car propelled by electricity with the control at point "four" should be about five or 6 miles per
hour. There was some other evidence to the effect that the car was behind schedule time and that it
was being driven after leaving the switch, at a higher rate than would ordinarily be indicated by the
control at point four. This inference is rendered more tenable by the circumstance that the car was
practically empty. On the whole, we are of the opinion that the finding of negligence in the operation
of the car must be sustained, as not being clearly contrary to the evidence; not so much because of
excessive speed as because of the distance which the car was allowed to run with the front wheels
of the rear truck derailed. It seems to us than an experienced and attentive motorman should have
discovered that something was wrong and would have stopped before he had driven the car over the
entire distance from the point where the wheels left the track to the place where the post was struck.

The conclusion being accepted that there was negligence on the part of the motorman in driving the
car, it results that the company is liable for the damage resulting to the plaintiff as a consequence of
that negligence. The plaintiff had boarded the car as a passenger for the city of Manila and the
company undertook to convey him for hire. The relation between the parties was, therefore, of a
contractual nature, and the duty of the carrier is to be determined with reference to the principles of
contract law, that is, the company was bound to convey and deliver the plaintiff safely and securely
with reference to the degree of care which, under the circumstances, is required by law and custom
applicable to the case (art. 1258, Civil Code). Upon failure to comply with that obligation the
company incurred the liability defined in articles 1103-1107 of the Civil Code. (Cangco vs. Manila
Railroad Company, 38 Phil. Rep., 768; Manila Railroad Company vs. Compañia Transatlantica, and
Atlantic, Gulf & Pacific Co., 38 Phil. Rep., 875.)

From the nature of the liability thus incurred, it is clear that the defendant company can not avail
itself of the last paragraph of article 1903 of the Civil Code, since that provision has reference to
liability incurred by negligence in the absence of contractual relation, that is, to the culpa aquiliana of
the civil law. It was therefore irrelevant for the defendant company to prove, as it did, that the
company had exercised due care in the selection and instruction of the motorman who was in
charge of its car and that he was in fact an experienced and reliable servant.

At this point, however, it should be observed that although in case like this the defendant must
answer for the consequences of the negligence of its employee, the court has the power to
moderate liability according to the circumstances of the case (art. 1103, Civ. Code): Furthermore, we
think it obvious that an employer who has in fact displayed due diligence in choosing and instructing
his servants is entitled to be considered a debtor in good faith, within the meaning of article 1107 of
the same Code. Construing these two provisions together, applying them to the facts of this case, it
results that the defendant's liability is limited to such damages as might, at the time of the accident,
have been reasonably foreseen as a probable consequence of the physical injuries inflicted upon the
plaintiff and which were in fact a necessary result of those injuries. There is nothing novel in this
proposition, since both the civil and the common law are agreed upon the point that the damages
ordinarily recoverable for the breach of a contractual obligation, against a person who has acted in
good faith, are such as can reasonably be foreseen at the time the obligation is contracted.
In Daywalt vs. Corporacion de PP. Agustinos Recoletos (39 Phil., 587), we said: "The extent of the
liability for the breach of a contract must be determined in the light of the situation in existence at the
time the contract is made; and the damages ordinarily recoverable are in all events limited to such
as might be reasonably foreseen in the light of the facts then known to the contracting parties."

This brings us to consider the amount which may be awarded to the plaintiff as damages. Upon this
point the trial judge found that, as a result of the physical and nervous derangement resulting from
the accident, Dr. De Guia was unable properly to attend to his professional labors for three months
and suspended his practice for that period. It was also proved by the testimony of the plaintiff that his
customary income, as a physician, was about P300 per month. The trial judge accordingly allowed
P900, as damages for loss of professional earnings. This allowance is attacked upon appeal by the
defendant as excessive both as to the period and rate of allowance. Upon examining the evidence
we fell disinclined to disturb this part of the judgment, though it must be conceded that the estimate
of the trial judge on this point was liberal enough to the plaintiff.

Another item allowed by the trial judge consists of P3,900, which the plaintiff is supposed to have
lost by reason of his inability to accept a position as district health officer in Occidental Negros. It
appears in this connection that Mr. Alunan, representative from Occidental Negros, had asked Dr.
Montinola, who supposedly had the authority to make the appointment, to nominate the plaintiff to
such position. The job was supposed to be good for two years, with a salary of P1,600 per annum,
and possibility of outside practice worth P350. Accepting these suggestions as true, it is evident that
the damages thus incurred are too speculative to be the basis of recovery in a civil action. This
element of damages must therefore be eliminated. It goes without saying that damage of this
character could not, at the time of the accident, have been foreseen by the delinquent party as a
probable consequence of the injury inflicted — a circumstance which makes applicable article 1107
of the Civil Code, as already expounded.

The last element of damages to be considered is the item of the plaintiff's doctor's bills, a subject
which we momentarily pass for discussion further on, since the controversy on this point can be
more readily understood in connection with the question raised by the plaintiff's appeal.

The plaintiff alleges in the complaint that the damages incurred by him as a result of the injuries in
question ascend to the amount of P40,000. Of this amount the sum of P10,000 is supposed to
represent the cost of medical treatment and other expenses incident to the plaintiff's cure, while the
remainder (P30,000) represents the damage resulting from the character of his injuries, which are
supposedly such as to incapacitate him for the exercise of the medical profession in the future. In
support of these claims the plaintiff introduced evidence, consisting of his own testimony and that of
numerous medical experts, tending to show that as a result of the injuries in question he had
developed infarct of the liver and traumatic neurosis, accompanied by nervousness, vertigo, and
other disturbing symptoms of a serious and permanent character, it being claimed that these
manifestations of disorder rendered him liable to a host of other dangerous diseases, such as
pleuresy, tuberculosis, pneumonia, and pulmonary gangrene, and that restoration to health could
only be accomplished, if at all, after long years of complete repose. The trial judge did not take these
pretensions very seriously, and, as already stated, limited the damages to the three items of
professional earnings, expenses of medical treatment, and the loss of the appointment as medical
treatment, and the loss of the appointment as medical inspector in Occidental Negros. As the appeal
of the plaintiff opens the whole case upon the question of damages, it is desirable to present a
somewhat fuller statement than that already given with respect to extent and character of the injuries
in question.

The plaintiff testified that, at the time the car struck against the concrete post, he was standing on
the rear platform, grasping the handle of the right-hand door. The shock of the impact threw him
forward, and the left part of his chest struck against the door causing him to fall. In falling, the plaintiff
says, his head struck one of the seats and he became unconscious. He was presently taken to his
home which was only a short distance away, where he was seen at about 10 o'clock p. m., by a
physician in the employment of the defendant company. This physician says that the plaintiff was
then walking about and apparently suffering somewhat from bruises on his chest. He said nothing
about his head being injured and refused to go to a hospital. Later, during the same night Dr.
Carmelo Basa was called in to see the plaintiff. This physician says that he found Doctor De Guia
lying in bed and complaining of a severe pain in the side. During the visit of Doctor Basa the plaintiff
several times spit up blood, a manifestation no doubt due to the effects of the bruises received in his
side. The next day Doctor De Guia went into Manila to consult another physician, Doctor Miciano,
and during the course of a few weeks he called into consultation other doctors who were introduced
as witnesses in his behalf at the trial of this case. According to the testimony of these witnesses, as
well as that of the plaintiff himself, the symptoms of physical and nervous derangement in the
plaintiff speedily developed in portentous degree.

Other experts were introduced by the defendant whose testimony tended to show that the plaintiff's
injuries, considered in their physical effects, were trivial and that the attendant nervous
derangement, with its complicated train of ailments, was merely simulated.

Upon this question the opposing medical experts ventilated a considerable mass of professional
learning with reference to the nature and effects of the baffling disease known as traumatic neurosis,
or traumatic hysteria — a topic which has been the occasion of much controversy in actions of this
character in the tribunals of Europe and America. The subject is one of considerable interest from a
medico-legal point of view, but we deem it unnecessary in this opinion to enter upon a discussion of
its voluminous literature. It is enough to say that in our opinion the plaintiff's case for large damages
in respect to his supposed incapacitation for future professional practice is not made out. Of course
in this jurisdiction damages can not be assessed in favor of the plaintiff as compensation for the
physical or mental pain which he may have endured (Marcelo vs. Velasco, 11 Phil. Rep. 287); and
the evidence relating to the injuries, both external and internal, received by him must be examined
chiefly in its bearing upon his material welfare, that is, in its results upon his earning capacity and the
expenses incurred in restoration to the usual condition of health.

The evidence before us shows that immediately after the accident in question Doctor De Guia,
sensing in the situation a possibility of profit, devoted himself with great assiduity to the promotion of
this litigation; and with the aid of his own professional knowledge, supplemented by suggestions
obtained from his professional friends and associates, he enveloped himself more or less
unconsciously in an atmosphere of delusion which rendered him incapable of appreciating at their
true value the symptoms of disorder which he developed. The trial court was in our opinion fully
justified in rejecting the exaggerated estimate of damages thus created.

We now pass to the consideration of the amount allowed to the plaintiff by the trial judge as the
expense incurred for medical service. In this connection Doctor Montes testified that he was first
called to see the plaintiff upon September 14, 1915, when he found him suffering from traumatic
neurosis. Three months later he was called upon to treat the same patient for an acute catarrhal
condition, involving disturbance in the pulmonary region. The treatment for this malady was
successful after two months, but at the end of six months the same trouble recurred and required
further treatment. In October of the year 1916, or more than a year after the accident in question
occurred, Doctor Montes was called in consultation with Doctor Guerrero to make an examination of
the plaintiff. Doctor Montes says that his charges altogether for services rendered to the plaintiff
amount to P350, of which the sum of P200 had been paid by the plaintiff upon bills rendered from
time to time. This physician speaks in the most general terms with respect to the times and extent of
the services rendered; and it is by no means clear that those services which were rendered many
months, or year, after the accident had in fact any necessary or legitimate relation to the injuries
received by the plaintiff. In view of the vagueness and uncertainty of the testimony relating to Doctor
Montes' services, we are of the opinion that the sum of P200, or the amount actually paid to him by
the plaintiff, represents the extent of the plaintiff's obligation with respect to treatment for said
injuries.

With regard to the obligation supposedly incurred by the plaintiff to three other physicians, we are of
the opinion that they are not a proper subject of recovery in this action; and this for more than one
reason. In the first place, it does not appear that said physicians have in fact made charges for those
services with the intention of imposing obligations on the plaintiff to pay for them. On the contrary it
would seem that said services were gratuitously rendered out of courtesy to the plaintiff as a
member of the medical profession. The suggestions made on the stand by these physicians to the
effect that their services were worth the amounts stated by them are not sufficient to proved that the
plaintiff had incurred the obligation to pay those amounts. In the second place, we are convinced
that in employing so many physicians the plaintiff must have had in view of the successful promotion
of the issue of this lawsuit rather than the bona fide purpose of effecting the cure of his injuries. In
order to constitute a proper element of recovery in an action of this character, the medical service for
which reimbursement is claimed should not only be such as to have created a legal obligation upon
the plaintiff but such as was reasonably necessary in view of his actual condition. It can not be
permitted that a litigant should retain an unusual and unnecessary number of professional experts
with a view to the successful promotion of a lawsuit and expect to recover against his adversary the
entire expense thus incurred. His claim for medical services must be limited to such expenditures as
were reasonably suited to the case.

The second error assigned in the brief of the defendant company presents a question of practice
which, though not vital to the solution of this case, is of sufficient general importance to merit notice.
It appears that four of the physicians examined as witnesses for the plaintiff had made written
statements at various dates certifying the results of their respective examinations into the condition
of the plaintiff. When these witnesses were examined in court the identified their respective
signatures to these certificates and the trial judge, over the defendant's objection, admitted the
documents as primary evidence in the case. This was undoubtedly erroneous. A document of this
character is not primary evidence in any sense, since it is fundamentally of a hearsay nature; and
the only legitimate use to which one of these certificates could be put, as evidence for the plaintiff,
was to allow the physician who issued it to refer thereto to refresh his memory upon details which he
might have forgotten. In Zwangizer vs. Newman (83 N. Y. Supp., 1071) which was also an action to
recover damages for personal injury, it appeared that a physician, who had been sent by one of the
parties to examine the plaintiff, had made at the time a written memorandum of the results of the
examination; and it was proposed to introduce this document in evidence at the trial. It was excluded
by the trial judge, and it was held upon appeal that this was proper. Said the court: "There was no
failure or exhaustion of the memory, and no impeachment of the memorandum on cross-
examination; and the document was clearly incompetent as evidence in chief."

It results from the foregoing that the judgment appealed from must be modified by reducing the
amount of the recovery to eleven hundred pesos (1,100), with legal interest from November 8, 1916.
As thus modified the judgment is affirmed, without any special pronouncement as to costs of this
instance. So ordered.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-7567 November 12, 1912

THE UNITED STATES, plaintiff-appellee,

vs.
SEGUNDO BARIAS, defendant-appellant.

Bruce, Lawrence, Ross and Block for appellant.

Office of the Solicitor-General Harvey, for appellee.

CARSON, J.:

This is an appeal from a sentence imposed by the Honorable A. S. Crossfield, judge of the Court of
First Instance of Manila, for homicide resulting from reckless negligence. The information charges:

That on or about November 2, 1911, in the city of Manila, Philippine Islands, the said
Segundo Barias was a motorman on street car No. 9, run 7 of the Pasay-Cervantes lines of
the Manila Electric Railroad and Light Company, a corporation duly organized and doing
business in the city of Manila, Philippine Islands; as a such motorman he was controlling and
operating said street car along Rizal Avenue, formerly Calle Cervantes, of this city, and as
such motorman of the said street car he was under obligation to run the same with due care
and diligence to avoid any accident that might occur to vehicles and pedestrians who were
travelling on said Rizal Avenue; said accused, at said time and place, did willfully, with
reckless imprudence and inexcusable negligence and in violation of the regulations
promulgated to that effect, control and operate said street car, without heeding the
pedestrians crossing Rizal Avenue from one side to the other, thus knocking down and
causing by his carelessness and imprudent negligence that said street car No. 9, operated
and controlled by said accused, as hereinbefore stated, should knock down and pass over
the body and head of one Fermina Jose, a girl 2 years old, who at said time and place was
crossing the said Rizal Avenue, the body of said girl being dragged along street-car on said
Rizal Avenue for a long distance, thus crushing and destroying her head and causing her
sudden death as a result of the injury received; that if the acts executed by the accused had
been done with malice, he would be guilty of the serious crime of homicide.

The defendant was a motorman for the Manila Electric Railroad and Light Company. At about 6
o'clock on the morning of November 2, 1911, he was driving his car along Rizal avenue and stopped
it near the intersection of that street with Calle Requesen to take on some passengers. When the car
stopped, the defendant looked backward, presumably to note whether all the passengers were
aboard, and then started his car. At that moment Fermina Jose, a child about 3 years old, walked or
ran in front of he car. She was knocked down and dragged some little distance underneath the car,
and was left dead upon the track. The motorman proceeded with his car to the end of the track,
some distance from the place of the accident, and apparently knew nothing of it until his return,
when he was informed of what happened.
There is no substantial dispute as to the facts. It is true that one witness testified that the defendant
started the car without turning his head, and while he was still looking backwards and that this
testimony was directly contradicted by that of another witness. But we do not deem it necessary to
make an express finding as to the precise direction in which the defendant's head was turned at the
moment when he started his car. It is sufficient for the purpose of our decision to hold, as we do, that
the evidence clearly discloses that he started his car from a standstill without looking over the track
immediately in front of the car to satisfy himself that it was clear. he did not see the child until after
he had run his car over it, and after he had return to the place where it was found dead, and we think
we are justified in saying that whenever he was looking at the moment when he started his car, he
was not looking at the track immediately in front of the car, and that he had not satisfied himself that
this portion of the tract was clear immediately before putting the car in the motion.

The trial court found the defendant guilty of imprudencia temeraria (reckless negligence) as charged
in the information, and sentenced him to over one year and one month of imprisonment in the Bilibid
Prison, and to pay the cause of the action.

The sole question raised by this appeal is whether the evidence shows such carelessness or want of
ordinary care on the part of the defendant as to amount to reckless negligence (imprudencia
temeraria).

Judge Cooley in his work on Torts (3d ed., 1324) defines negligence to be: "The failure to observe,
for the protection of the interests of another person, that degree of care, precaution and vigilance
which the circumstances justly demand, whereby such other persons suffers injury."

In the case of U. S. vs. Nava, (1 Phil. Rep., 580), we held that: "Reckless negligence consists of the
failure to take such precautions or advance measures in the performance of an act as the most
prudence would suggest whereby injury is caused to persons or to property."

Silvela says in his "Derecho Penal," in speaking of reckless imprudence (imprudencia temeraria):

The word "negligencia" used in the code, and the term "imprudencia" with which this
punishable act is defined, express this idea in such a clear manner that it is not necessary to
enlarge upon it. He who has done everything on his part to prevent his actions from causing
damage to another, although he has not succeeded in doing so, notwithstanding his efforts,
is the victim of an accident and can not be considered responsible for the same. (Vol. 2, p.
127 [153].)

Temerario is, in our opinion, one who omits, with regard to this actions, which are liable to
cause injury to another, that care and diligence, that attention, which can be required of the
least careful, attentive, or diligent. If a moment's attention and reflection would have shown a
person that the act which he was about to perform was liable to have the harmful
consequence which it had, such person acted with temerity and may be guilty of
"imprudencia temeraria." It may be that in practice this idea has been given a greater scope
and the acts of imprudence which did not show carelessness as carried to such high degree,
might have been punished as "imprudencia temeraria;" but in our opinion, the proper
meaning of the word does not authorize another interpretation. (Id., p. 133 [161].)

Groizard, commenting upon "imprudencia temeraria," on page 389, volume 8, of his work on the
Penal Code, says:

Prudence is that cardinal virtue which teaches us to discern and distinguish the good from
bad, in order to adopt or flee from it. It also means good judgment, temperance, and
 moderation in one's actions. `Temerario is one who exposes himself to danger or rushes into
it without reflection and without examining the same. Consequently, he who from lack of
good judgment, temperance, or moderation in his actions, exposes himself without reflection
and examination to the danger of committing a crime, must be held responsible under the
provision of law aforementioned.

Negligence is want of the care required by the circumstances. It is a relative or comparative, not an
absolute, term and its application depends upon the situation of the parties and the degree of care
and vigilance which the circumstances reasonably require. Where the danger is great, a high degree
of care is necessary, and the failure to observe it is a want of ordinary care under the circumstances.
(Ahern vs. Oregon Telephone Co., 24 Oreg., 276, 294; 35 Pac., 549.)

Ordinary care, if the danger is great, may arise to the grade of a very exact and unchangeable
attention. (Parry Mfg. Co. vs. Eaton, 41 Ind. App., 81, 1908; 83 N. E., 510.)

In the case of U. S. vs. Reyes (1 Phil. Rep., 375-377), we held that: "The diligence with which the
law requires the individual at all the time to govern his conduct varies with the nature of the situation
in which he is placed and with the importance of the act which he is to perform. lawph!l .net

The question to be determined then, is whether, under all the circumstances, and having in mind the
situation of the defendant when he put his car in motion and ran it over the child, he was guilty of a
failure to take such precautions or advance measures as common prudence would suggest.

The evidence shows that the thoroughfare on which the incident occurred was a public street in a
densely populated section of the city. The hour was six in the morning, or about the time when the
residents of such streets begin to move about. Under such conditions a motorman of an electric
street car was clearly charged with a high degree of diligence in the performance of his duties. He
was bound to know and to recognize that any negligence on his part in observing the track over
which he was running his car might result in fatal accidents. He had no right to assume that the track
before his car was clear. It was his duty to satisfy himself of that fact by keeping a sharp lookout, and
to do everything in his power to avoid the danger which is necessarily incident to the operation of
heavy street cars on public thoroughfares in populous sections of the city.

Did he exercise the degree of diligence required of him? We think this question must be answered in
the negative. We do not go so far as to say that having brought his car to a standstill it was his
bounden duty to keep his eyes directed to the front. Indeed, in the absence of some regulation of his
employers, we can well understand that, at times, it might be highly proper and prudent for him to
glance back before again setting his car in motion, to satisfy himself that he understood correctly a
signal to go forward or that all the passengers had safely alighted or gotten on board. But we do
insist that before setting his car again in motion, it was his duty to satisfy himself that the track was
clear, and, for that purpose, to look and to see the track just in front of his car. This the defendant did
not do, and the result of his negligence was the death of the child.

In the case of Smith vs. St. Paul City Ry. Co., (32 Minn., p. 1), the supreme court of Minnesota, in
discussing the diligence required of street railway companies in the conduct of their business
observed that: "The defendant was a carrier of passengers for hire, owing and controlling the tracks
and cars operated thereon. It is therefore subject to the rules applicable to passenger carriers.
(Thompson's Carriers, 442; Barrett vs. Third Ave. R. Co., 1 Sweeny, 568; 8 Abb. Pr. (N.S.), 205.) As
respects hazards and dangers incident to the business or employment, the law enjoins upon such
carrier the highest degree of care consistent with its undertaking, and it is responsible for the
slightest negligence. (Wilson vs. Northern Pacific R. Co., 26 Minn., 278; Warren vs. Fitchburg R.
Co., 8 Allen, 233; 43 Am. Dec. 354, 356, notes and cases.) . . . The severe ruled which enjoins upon
the carrier such extraordinary care and diligence, is intended, for reasons of public policy, to secure
the safe carriage of passengers, in so far as human skill and foresight can affect such result." The
case just cited was a civil case, and the doctrine therein announced had special reference to the
care which should be exercised in securing the safety of passengers. But we hold that the reasons
of public policy which impose upon street car companies and their employees the duty of exercising
the utmost degree of diligence in securing the safety of passengers, apply with equal force to the
duty of avoiding the infliction of injuries upon pedestrians and others on the public streets and
thoroughfares over which these companies are authorized to run their cars. And while, in a criminal
case, the courts will require proof of the guilt of the company or its employees beyond a reasonable
doubt, nevertheless the care or diligence required of the company and its employees is the same in
both cases, and the only question to be determined is whether the proofs shows beyond a
reasonable doubt that the failure to exercise such care or diligence was the cause of the accident,
and that the defendant was guilty thereof.

Counsel for the defendant insist that the accident might have happened despite the exercise of the
utmost care by the defendant, and they have introduced photographs into the record for the purpose
of proving that while the motorman was standing in his proper place on the front platform of the car,
a child might have walked up immediately in front of he car without coming within the line of his
vision. Examining the photographs, we think that this contention may have some foundation in fact;
but only to this extent, that standing erect, at the position he would ordinarily assume while the car is
in motion, the eye of the average motorman might just miss seeing the top of the head of a child,
about three years old, standing or walking close up to the front of the car. But it is also very evident
that by inclining the head and shoulders forward very slightly, and glancing in front of the car, a
person in the position of a motorman could not fail to see a child on the track immediately in front of
his car; and we hold that it is the manifest duty of a motorman, who is about to start his car on a
public thoroughfare in a thickly-settled district, to satisfy himself that the track is clear immediately in
front of his car, and to incline his body slightly forward, if that be necessary, in order to bring the
whole track within his line of vision. Of course, this may not be, and usually is not necessary when
the car is in motion, but we think that it is required by the dictates of the most ordinary prudence in
starting from a standstill.

We are not unmindful of our remarks in the case of U. S. vs. Bacho (10 Phil. Rep., 577), to which our
attention is directed by counsel for appellant. In that case we said that:

. . . In the general experience of mankind, accidents apparently avoidable and often

inexplicable are unfortunately too frequent to permit us to conclude that some one must be
criminally liable for negligence in every case where an accident occurs. It is the duty of the
prosecution in each case to prove by competent evidence not only the existence of criminal
negligence, but that the accused was guilty thereof.

Nor do we overlook the ruling in the case of U. S. vs. Barnes (12 Phil. Rep., 93), to which our
attention is also invited, wherein we held that the defendant was not guilty of reckless negligence,
where it appeared that he killed another by the discharge of his gun under such circumstances that
he might have been held guilty of criminally reckless negligence had he had knowledge at that
moment that another person was in such position as to be in danger if the gun should be discharged.
In this latter case the defendant had no reason to anticipate that the person who was injured was in
the line of fire, or that there was any probability that he or anyone else would place himself in the line
of fire. In the case at bar, however, it was, as we have seen, the manifest duty of the motorman to
take reasonable precautions in starting his car to see that in doing so he was not endangering the
life of any pedestrian, old or young; and to this end it was further his duty to guard against the
reasonable possibility that some one might be on the track immediately in front of the car. We think
that the evidence showing, as it does, that the child was killed at the moment when the car was set
in motion, we are justified in holding that, had the motorman seen the child, he could have avoided
the accident; the accident was not, therefore, "unavailable or inexplicable," and it appearing that the
motorman, by the exercise of ordinary diligence, might have seen the child before he set the car in
motion, his failure to satisfy himself that the track was clear before doing so was reckless
negligence, of which he was properly convicted in the court below.

We think, however, that the penalty should be reduced to that of six months and one day of prision
correccional. Modified by substituting for so much thereof as imposes the penalty of one year and
one month of imprisonment, the penalty of six months and one day of prision correccional, the
judgment of the lower court convicting and sentencing the appellant is affirmed, with costs of both
instances against him. So ordered.
 THIRD DIVISION

[G.R. No. 141258. April 9, 2003]

TOMASA SARMIENTO, petitioner, vs. SPS. LUIS & ROSE SUN-

CABRIDO and MARIA LOURDES SUN, respondents.

DECISION
CORONA, J.:

This appeal by certiorari stems from the Decision of respondent Court of

[1]

Appeals promulgated on November 26, 1999 in CA-G.R. SP No. 47431

declaring the private respondents not liable for damages.
Petitioner, Tomasa Sarmiento, states that sometime in April 1994, a friend,
Dra. Virginia Lao, requested her to find somebody to reset a pair of diamond
earrings into two gold rings. Accordingly, petitioner sent a certain Tita Payag
[2]

with the pair of earrings to Dingdings Jewelry Shop, owned and managed by
respondent spouses Luis and Rose Cabrido, which accepted the job order
[3]

for P400. [4]

Petitioner provided 12 grams of gold to be used in crafting the pair of ring

settings. After 3 days, Tita Payag delivered to the jewelry shop one of Dra.
[5]

Laos diamond earrings which was earlier appraised as worth .33 carat and
almost perfect in cut and clarity. Respondent Ma. Lourdes (Marilou) Sun went
[6]

on to dismount the diamond from its original setting. Unsuccessful, she asked
their goldsmith, Zenon Santos, to do it. Santos removed the diamond by twisting
the setting with a pair of pliers, breaking the gem in the process.[7]

Petitioner required the respondents to replace the diamond with the same
size and quality. When they refused, the petitioner was forced to buy a
replacement in the amount of P30,000. [8]

Respondent Rose Cabrido, manager of Dingdings Jewelry Shop, denied

having entered into any transaction with Tita Payag whom she met only after
the latter came to the jewelry shop to seek compensation from Santos for the
broken piece of jewelry. However, it was possible that Payag may have availed
[9]

of their services as she could not have known every customer who came to
their shop. Rose disclosed that she usually arrived at 11:00 a.m. When she was
not around, her mother and sister tended the shop. [10]
 Marilou admitted knowing Payag who came to Dingdings Jewelry Shop to
avail of their services regarding a certain piece of jewelry. After a short
conversation, Payag went inside the shop to see Santos. When the precious
stone was broken by Santos, Payag demanded P15,000 from him. As the latter
had no money, she turned to Marilou for reimbursement apparently thinking that
Marilou was the owner of the shop. [11]

For his part, Santos recalled that Payag requested him to dismount what
appeared to him was a sapphire. While clipping the setting with the use of a
small pair of pliers, the stone accidentally broke. Santos denied being an
employee of Dingdings Jewelry Shop. [12]

Attempts to settle the controversy before the barangay lupon proved

futile. Consequently, petitioner filed a complaint for damages on June 28,
[13]

1994 with the Municipal Trial Court in Cities (MTCC) of Tagbilaran City
docketed as Civil Case No. 2339 which rendered a decision in favor of the
[14]

petitioner, the dispositive portion of which reads:

WHEREFORE, Decision is hereby rendered in favor of plaintiff Tomasa Sarmiento

and against defendants Spouses Luis and Rose Sun-Cabrido, ordering defendants to
pay jointly and severally the amount of Thirty Thousand Pesos (P30,000.00) as actual
or compensatory damages; Three Thousand Pesos (P3,000.00) as moral damages;
Five Thousand Pesos (P5,000.00) as attorneys fees; Two Thousand Pesos (P2,000.00)
as litigation expenses, with legal interest of 6% per annum from the date of this
decision and 12% per annum from the date when this decision becomes final until the
amounts shall have been fully paid and to pay the costs.

This case as against defendant Maria Lourdes Sun as well as defendants counterclaim
are dismissed for lack of merit.

SO ORDERED.

On appeal, the Regional Trial Court (RTC) of Tagbilaran City, Branch 3,

reversed the decision of the MTCC, thus absolving the respondents of any
responsibility arising from breach of contract. Finding no reversible error, the
[15]

Court of Appeals (CA) affirmed the judgment of the RTC in its Decision
promulgated on November 26, 1999. [16]

Unable to accept the decision, the petitioner filed the instant petition for
review with the following assigned errors:
I
THE COURT OF APPEALS ERRED IN MAINTAINING AND SO HOLDING
THAT ZENON SANTOS IS NOT AN EMPLOYEE OF DEFENDANT (herein
respondent) ROSE SUN-CABRIDO, AND IS THEREFORE ANSWERABLE FOR
HIS OWN ACTS OR OMISSIONS

II

THE HONORABLE COURT OF APPEALS ERRED IN SUSTAINING THE

REGIONAL TRIAL COURTS PRONOUNCEMENTS THAT THERE EXISTS NO
AGREEMENT BETWEEN THE PETITIONER AND RESPONDENTS THAT THE
LATTER WOULD ANSWER FOR ANY LIABILITY SHOULD THE DIAMOND
BE DAMAGED IN THE PROCESS OF DISMOUNTING THEM FROM THE
EARRINGS.

Essentially, petitioner claims that the dismounting of the diamond from its
original setting was part of the obligation assumed by the private respondents
under the contract of service. Thus, they should be held liable for damages
arising from its breakage. On the other hand, the version of the private
respondents, upheld by the RTC and the CA, is that their agreement with the
petitioner was for crafting two gold rings mounted with diamonds only and did
not include the dismounting of the said diamonds from their original
setting. Consequently, the crux of the instant controversy is the scope of the
[17]

obligation assumed by the private respondents under the verbal contract of

service with the petitioner.
The Court notes that, during the trial, private respondents vigorously denied
any transaction between Dingdings Jewelry Shop and the petitioner, through
Tita Payag. Rose Cabrido, for instance, denied having ever met Payag before
the latter came to seek reimbursement for the value of the broken
diamond. Likewise, while Marilou acknowledged acquaintance with Payag, she
nevertheless denied accepting any job order from her. Debunking their
protestations, however, the MTCC of Tagbilaran City rendered its decision on
November 26, 1999 in favor of herein petitioner.
Apparently realizing the weakness and futility of their position, private
respondents conceded, on appeal, the existence of an agreement with the
petitioner for crafting a pair of gold rings mounted with diamonds. This apparent
concession by the private respondents, however, was really nothing but an
ingenious maneuver, designed to preclude, just the same, any recovery for
damages by the petitioner. Thus, while ostensibly admitting the existence of the
said agreement, private respondents, nonetheless denied assuming any
obligation to dismount the diamonds from their original settings.[18]
 The inconsistent position of the private respondents impugns their
credibility. They cannot be permitted to adopt a certain stance, only to vacillate
later to suit their interest. We are therefore inclined to agree with the MTCC in
giving credence to the version of the petitioner. The MTCC had the unique
opportunity to actually observe the behavior and demeanor of the witnesses as
they testified during the trial.
[19]

At any rate, the contemporaneous and subsequent acts of the

parties support the version of the petitioner. Thus, when Tita Payag asked
[20]

Marilou of Dingdings Jewelry Shop to reset a pair of diamond earrings, she

brought with her the said pieces of jewelry so that the diamonds which were still
mounted could be measured and the new ring settings crafted accordingly. On
the said occasion, Marilou expressed no reservation regarding the dismounting
of the diamonds which, after all, was an integral part of petitioners job order.
She should have instructed Payag to have them dismounted first if Marilou had
actually intended to spare the jewelry shop of the task but she did not.Instead,
petitioner was charged P400 for the job order which was readily
accepted. Thus, a perfected contract to reset the pair of diamond earrings arose
between the petitioner, through Payag, and Dingdings Jewelry Shop, through
Marilou.
Marilous subsequent actuations were even more revealing as regards the
scope of obligation assumed by the jewelry shop. After the new settings were
completed in 3days, she called up the petitioner to bring the diamond earrings
to be reset. Having initially examined one of them, Marilou went on to
[21]

dismount the diamond from its original setting. Unsuccessful, she then
delegated the task to their goldsmith, Zenon Santos. Having acted the way she
did, Marilou cannot now deny the shops obligation to reset the pair of earrings.
Obligations arising from contracts have the force of law between the
contracting parties. Corollarily, those who in the performance of their
[22]

obligations are guilty of fraud, negligence or delay and those who in any manner
contravene the tenor thereof, are liable for damages. The fault or negligence
[23]

of the obligor consists in the omission of that diligence which is required by the
nature of the obligation and corresponds with the circumstances of the persons,
of the time and of the place.[24]

In the case at bar, it is beyond doubt that Santos acted negligently in

dismounting the diamond from its original setting. It appears to be the practice
of the trade to use a miniature wire saw in dismounting precious gems, such as
diamonds, from their original settings. However, Santos employed a pair of
[25]

pliers in clipping the original setting, thus resulting in breakage of the

diamond. The jewelry shop failed to perform its obligation with the ordinary
diligence required by the circumstances. It should be pointed out that Marilou
examined the diamond before dismounting it from the original setting and found
the same to be in order. Its subsequent breakage in the hands of Santos could
only have been caused by his negligence in using the wrong equipment. Res
ipsa loquitur.
Private respondents seek to avoid liability by passing the buck to Santos
who claimed to be an independent worker. They also claim, rather lamely, that
Marilou simply happened to drop by at Dingdings Jewelry Shop when Payag
arrived to place her job order. [26]

We do not think so.

The facts show that Santos had been working at Dingdings Jewelry Shop
as goldsmith for about 6 months accepting job orders through referrals from
private respondents. On the other hand, Payag stated that she had transacted
[27]

with Dingdings Jewelry Shop on at least 10 previews occasions, always through

Marilou. The preponderance of evidence supports the view that Marilou and
[28]

Zenon Santos were employed at Dingdings Jewelry Shop in order to perform

activities which were usually necessary or desirable in its business. [29]

We therefore hold that an obligation to pay actual damages arose in favor

of the petitioner against the respondents spouses who admittedly owned and
managed Dingdings Jewelry Shop. It was proven that petitioner replaced the
damaged jewelry in the amount of P30,000. [30]

The facts of the case also justify the award of moral damages. As a general
rule, moral damages are not recoverable in actions for damages predicated on
a breach of contract for it is not one of the items enumerated under Article 2219
of the Civil Code. Moral damages may be awarded in a breach of contract only
[31]

when there is proof that defendant acted in bad faith, or was guilty of gross
negligence amounting to bad faith, or in wanton disregard of his contractual
obligation. Santos was a goldsmith for more than 40 years. Given his long
[32] [33]

experience in the trade, he should have known that using a pair of pliers instead
of a miniature wire saw in dismounting a precious stone like a diamond would
have entailed an unnecessary risk of breakage. He went on with it
anyway. Hence, respondent spouses are liable for P10,000 as moral damages
due to the gross negligence of their employee.
However, private respondents refusal to pay the value of the damaged
jewelry emanated from an honest belief that they were not responsible therefor,
hence, negating any basis for the award of attorneys fees. [34]

WHEREFORE, the instant petition is GRANTED and the assailed decision

of the Court of Appeals dated November 26, 1999 is hereby reversed and set
aside. Private respondents Luis Cabrido and Rose Sun-Cabrido are hereby
ordered to pay, jointly and severally, the amount of P30,000 as actual damages
and P10,000 as moral damages in favor of the petitioner.
No costs.
SO ORDERED.
 FIRST DIVISION

[G.R. No. 138334. August 25, 2003]

ESTELA L. CRISOSTOMO, petitioner, vs. THE COURT OF

APPEALS and CARAVAN TRAVEL & TOURS INTERNATIONAL,
INC., respondents.

DECISION
YNARES-SANTIAGO, J.:

In May 1991, petitioner Estela L. Crisostomo contracted the services of respondent

Caravan Travel and Tours International, Inc. to arrange and facilitate her booking,
ticketing and accommodation in a tour dubbed Jewels of Europe. The package tour
included the countries of England, Holland, Germany, Austria, Liechstenstein,
Switzerland and France at a total cost of P74,322.70. Petitioner was given a 5% discount
on the amount, which included airfare, and the booking fee was also waived because
petitioners niece, Meriam Menor, was respondent companys ticketing manager.
Pursuant to said contract, Menor went to her aunts residence on June 12, 1991 a
Wednesday to deliver petitioners travel documents and plane tickets. Petitioner, in turn,
gave Menor the full payment for the package tour. Menor then told her to be at the Ninoy
Aquino International Airport (NAIA) on Saturday, two hours before her flight on board
British Airways.
Without checking her travel documents, petitioner went to NAIA on Saturday, June
15, 1991, to take the flight for the first leg of her journey from Manila to Hongkong. To
petitioners dismay, she discovered that the flight she was supposed to take had already
departed the previous day. She learned that her plane ticket was for the flight scheduled
on June 14, 1991. She thus called up Menor to complain.
Subsequently, Menor prevailed upon petitioner to take another tour the British
Pageant which included England, Scotland and Wales in its itinerary. For this tour
package, petitioner was asked anew to pay US$785.00 or P20,881.00 (at the then
prevailing exchange rate of P26.60). She gave respondent US$300 or P7,980.00 as
partial payment and commenced the trip in July 1991.
Upon petitioners return from Europe, she demanded from respondent the
reimbursement of P61,421.70, representing the difference between the sum she paid for
Jewels of Europe and the amount she owed respondent for the British Pageant tour.
Despite several demands, respondent company refused to reimburse the amount,
contending that the same was non-refundable.[1] Petitioner was thus constrained to file a
complaint against respondent for breach of contract of carriage and damages, which was
docketed as Civil Case No. 92-133 and raffled to Branch 59 of the Regional Trial Court
of Makati City.
In her complaint,[2] petitioner alleged that her failure to join Jewels of Europe was due
to respondents fault since it did not clearly indicate the departure date on the plane
ticket. Respondent was also negligent in informing her of the wrong flight schedule
through its employee Menor. She insisted that the British Pageant was merely a substitute
for the Jewels of Europe tour, such that the cost of the former should be properly set-off
against the sum paid for the latter.
For its part, respondent company, through its Operations Manager, Concepcion
Chipeco, denied responsibility for petitioners failure to join the first tour. Chipeco insisted
that petitioner was informed of the correct departure date, which was clearly and legibly
printed on the plane ticket. The travel documents were given to petitioner two days ahead
of the scheduled trip. Petitioner had only herself to blame for missing the flight, as she did
not bother to read or confirm her flight schedule as printed on the ticket.
Respondent explained that it can no longer reimburse the amount paid for Jewels of
Europe, considering that the same had already been remitted to its principal in Singapore,
Lotus Travel Ltd., which had already billed the same even if petitioner did not join the
tour. Lotus European tour organizer, Insight International Tours Ltd., determines the cost
of a package tour based on a minimum number of projected participants. For this reason,
it is accepted industry practice to disallow refund for individuals who failed to take a
booked tour.[3]
Lastly, respondent maintained that the British Pageant was not a substitute for the
package tour that petitioner missed. This tour was independently procured by petitioner
after realizing that she made a mistake in missing her flight for Jewels of Europe.
Petitioner was allowed to make a partial payment of only US$300.00 for the second tour
because her niece was then an employee of the travel agency. Consequently, respondent
prayed that petitioner be ordered to pay the balance of P12,901.00 for the British Pageant
package tour.
After due proceedings, the trial court rendered a decision,[4] the dispositive part of
which reads:

WHEREFORE, premises considered, judgment is hereby rendered as follows:

1. Ordering the defendant to return and/or refund to the plaintiff the amount of
Fifty Three Thousand Nine Hundred Eighty Nine Pesos and Forty Three
Centavos (P53,989.43) with legal interest thereon at the rate of twelve
percent (12%) per annum starting January 16, 1992, the date when the
complaint was filed;

2. Ordering the defendant to pay the plaintiff the amount of Five Thousand
(P5,000.00) Pesos as and for reasonable attorneys fees;

3. Dismissing the defendants counterclaim, for lack of merit; and

 4. With costs against the defendant.

SO ORDERED. [5]

The trial court held that respondent was negligent in erroneously advising petitioner
of her departure date through its employee, Menor, who was not presented as witness to
rebut petitioners testimony. However, petitioner should have verified the exact date and
time of departure by looking at her ticket and should have simply not relied on Menors
verbal representation. The trial court thus declared that petitioner was guilty of
contributory negligence and accordingly, deducted 10% from the amount being claimed
as refund.
Respondent appealed to the Court of Appeals, which likewise found both parties to
be at fault. However, the appellate court held that petitioner is more negligent than
respondent because as a lawyer and well-traveled person, she should have known better
than to simply rely on what was told to her. This being so, she is not entitled to any form
of damages. Petitioner also forfeited her right to the Jewels of Europe tour and must
therefore pay respondent the balance of the price for the British Pageant tour. The
dispositive portion of the judgment appealed from reads as follows:

WHEREFORE, premises considered, the decision of the Regional Trial Court dated
October 26, 1995 is hereby REVERSED and SET ASIDE. A new judgment is hereby
ENTERED requiring the plaintiff-appellee to pay to the defendant-appellant the
amount of P12,901.00, representing the balance of the price of the British Pageant
Package Tour, the same to earn legal interest at the rate of SIX PERCENT (6%) per
annum, to be computed from the time the counterclaim was filed until the finality of
this decision. After this decision becomes final and executory, the rate of TWELVE
PERCENT (12%) interest per annum shall be additionally imposed on the total
obligation until payment thereof is satisfied. The award of attorneys fees is
DELETED. Costs against the plaintiff-appellee.

SO ORDERED. [6]

Upon denial of her motion for reconsideration,[7] petitioner filed the instant petition
under Rule 45 on the following grounds:
I

It is respectfully submitted that the Honorable Court of Appeals committed a

reversible error in reversing and setting aside the decision of the trial court by ruling
that the petitioner is not entitled to a refund of the cost of unavailed Jewels of Europe
tour she being equally, if not more, negligent than the private respondent, for in the
contract of carriage the common carrier is obliged to observe utmost care and extra-
ordinary diligence which is higher in degree than the ordinary diligence required of
the passenger. Thus, even if the petitioner and private respondent were both negligent,
the petitioner cannot be considered to be equally, or worse, more guilty than the
private respondent. At best, petitioners negligence is only contributory while the
private respondent [is guilty] of gross negligence making the principle of pari delicto
inapplicable in the case;

II

The Honorable Court of Appeals also erred in not ruling that the Jewels of Europe
tour was not indivisible and the amount paid therefor refundable;

III

The Honorable Court erred in not granting to the petitioner the consequential damages
due her as a result of breach of contract of carriage. [8]

Petitioner contends that respondent did not observe the standard of care required of
a common carrier when it informed her wrongly of the flight schedule. She could not be
deemed more negligent than respondent since the latter is required by law to exercise
extraordinary diligence in the fulfillment of its obligation. If she were negligent at all, the
same is merely contributory and not the proximate cause of the damage she suffered.
Her loss could only be attributed to respondent as it was the direct consequence of its
employees gross negligence.
Petitioners contention has no merit.
By definition, a contract of carriage or transportation is one whereby a certain person
or association of persons obligate themselves to transport persons, things, or news from
one place to another for a fixed price.[9] Such person or association of persons are
regarded as carriers and are classified as private or special carriers and common or public
carriers.[10] A common carrier is defined under Article 1732 of the Civil Code as persons,
corporations, firms or associations engaged in the business of carrying or transporting
passengers or goods or both, by land, water or air, for compensation, offering their
services to the public.
It is obvious from the above definition that respondent is not an entity engaged in the
business of transporting either passengers or goods and is therefore, neither a private
nor a common carrier. Respondent did not undertake to transport petitioner from one
place to another since its covenant with its customers is simply to make travel
arrangements in their behalf. Respondents services as a travel agency include procuring
tickets and facilitating travel permits or visas as well as booking customers for tours.
While petitioner concededly bought her plane ticket through the efforts of respondent
company, this does not mean that the latter ipso facto is a common carrier. At most,
respondent acted merely as an agent of the airline, with whom petitioner ultimately
contracted for her carriage to Europe. Respondents obligation to petitioner in this regard
was simply to see to it that petitioner was properly booked with the airline for the appointed
date and time. Her transport to the place of destination, meanwhile, pertained directly to
the airline.
The object of petitioners contractual relation with respondent is the latters service
of arranging and facilitating petitioners booking, ticketing and accommodation in the
package tour. In contrast, the object of a contract of carriage is the transportation of
passengers or goods. It is in this sense that the contract between the parties in this case
was an ordinary one for services and not one of carriage. Petitioners submission is
premised on a wrong assumption.
The nature of the contractual relation between petitioner and respondent is
determinative of the degree of care required in the performance of the latters obligation
under the contract. For reasons of public policy, a common carrier in a contract of carriage
is bound by law to carry passengers as far as human care and foresight can provide using
the utmost diligence of very cautious persons and with due regard for all the
circumstances.[11] As earlier stated, however, respondent is not a common carrier but a
travel agency. It is thus not bound under the law to observe extraordinary diligence in the
performance of its obligation, as petitioner claims.
Since the contract between the parties is an ordinary one for services, the standard
of care required of respondent is that of a good father of a family under Article 1173 of
the Civil Code.[12] This connotes reasonable care consistent with that which an ordinarily
prudent person would have observed when confronted with a similar situation. The test
to determine whether negligence attended the performance of an obligation is: did the
defendant in doing the alleged negligent act use that reasonable care and caution which
an ordinarily prudent person would have used in the same situation? If not, then he is
guilty of negligence.[13]
In the case at bar, the lower court found Menor negligent when she allegedly informed
petitioner of the wrong day of departure. Petitioners testimony was accepted as
indubitable evidence of Menors alleged negligent act since respondent did not call Menor
to the witness stand to refute the allegation. The lower court applied the presumption
under Rule 131, Section 3 (e)[14] of the Rules of Court that evidence willfully suppressed
would be adverse if produced and thus considered petitioners uncontradicted testimony
to be sufficient proof of her claim.
On the other hand, respondent has consistently denied that Menor was negligent and
maintains that petitioners assertion is belied by the evidence on record. The date and
time of departure was legibly written on the plane ticket and the travel papers were
delivered two days in advance precisely so that petitioner could prepare for the trip. It
performed all its obligations to enable petitioner to join the tour and exercised due
diligence in its dealings with the latter.
We agree with respondent.
Respondents failure to present Menor as witness to rebut petitioners testimony could
not give rise to an inference unfavorable to the former. Menor was already working in
France at the time of the filing of the complaint,[15] thereby making it physically impossible
for respondent to present her as a witness. Then too, even if it were possible for
respondent to secure Menors testimony, the presumption under Rule 131, Section 3(e)
would still not apply. The opportunity and possibility for obtaining Menors testimony
belonged to both parties, considering that Menor was not just respondents employee, but
also petitioners niece. It was thus error for the lower court to invoke the presumption that
respondent willfully suppressed evidence under Rule 131, Section 3(e). Said presumption
would logically be inoperative if the evidence is not intentionally omitted but is simply
unavailable, or when the same could have been obtained by both parties. [16]
In sum, we do not agree with the finding of the lower court that Menors negligence
concurred with the negligence of petitioner and resultantly caused damage to the
latter.Menors negligence was not sufficiently proved, considering that the only evidence
presented on this score was petitioners uncorroborated narration of the events. It is well-
settled that the party alleging a fact has the burden of proving it and a mere allegation
cannot take the place of evidence.[17] If the plaintiff, upon whom rests the burden of proving
his cause of action, fails to show in a satisfactory manner facts upon which he bases his
claim, the defendant is under no obligation to prove his exception or defense.[18]
Contrary to petitioners claim, the evidence on record shows that respondent
exercised due diligence in performing its obligations under the contract and followed
standard procedure in rendering its services to petitioner. As correctly observed by the
lower court, the plane ticket[19] issued to petitioner clearly reflected the departure date and
time, contrary to petitioners contention. The travel documents, consisting of the tour
itinerary, vouchers and instructions, were likewise delivered to petitioner two days prior
to the trip. Respondent also properly booked petitioner for the tour, prepared the
necessary documents and procured the plane tickets. It arranged petitioners hotel
accommodation as well as food, land transfers and sightseeing excursions, in accordance
with its avowed undertaking.
Therefore, it is clear that respondent performed its prestation under the contract as
well as everything else that was essential to book petitioner for the tour. Had petitioner
exercised due diligence in the conduct of her affairs, there would have been no reason
for her to miss the flight. Needless to say, after the travel papers were delivered to
petitioner, it became incumbent upon her to take ordinary care of her concerns. This
undoubtedly would require that she at least read the documents in order to assure herself
of the important details regarding the trip.
The negligence of the obligor in the performance of the obligation renders him liable
for damages for the resulting loss suffered by the obligee. Fault or negligence of the
obligor consists in his failure to exercise due care and prudence in the performance of the
obligation as the nature of the obligation so demands. [20] There is no fixed standard of
diligence applicable to each and every contractual obligation and each case must be
determined upon its particular facts. The degree of diligence required depends on the
circumstances of the specific obligation and whether one has been negligent is a question
of fact that is to be determined after taking into account the particulars of each case. [21]
The lower court declared that respondents employee was negligent. This factual
finding, however, is not supported by the evidence on record. While factual findings below
are generally conclusive upon this court, the rule is subject to certain exceptions, as when
the trial court overlooked, misunderstood, or misapplied some facts or circumstances of
weight and substance which will affect the result of the case.[22]
 In the case at bar, the evidence on record shows that respondent company performed
its duty diligently and did not commit any contractual breach. Hence, petitioner cannot
recover and must bear her own damage.
WHEREFORE, the instant petition is DENIED for lack of merit. The decision of the
Court of Appeals in CA-G.R. CV No. 51932 is AFFIRMED. Accordingly, petitioner is
ordered to pay respondent the amount of P12,901.00 representing the balance of the
price of the British Pageant Package Tour, with legal interest thereon at the rate of 6%
per annum, to be computed from the time the counterclaim was filed until the finality of
this Decision. After this Decision becomes final and executory, the rate of 12% per annum
shall be imposed until the obligation is fully settled, this interim period being deemed to
be by then an equivalent to a forbearance of credit.[23]
SO ORDERED.
Davide, Jr., C.J., (Chairman), Vitug, Carpio, and Azcuna, JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 77648 August 7, 1989

CETUS DEVELOPMENT, INC., petitioner,

vs.
COURT OF APPEALS and ONG TENG, respondents.

G.R. No. 77647 August 7, 1989

CETUS DEVELOPMENT, INC., petitioner,

vs.
COURT OF APPEALS and EDERLINA NAVALTA, respondents.

G.R. No. 77649 August 7, 1989

CETUS DEVELOPMENT, INC., petitioner,

vs.
COURT OF APPEALS and JOSE LIWANAG, respondents.

G.R. No. 77650 August 7, 1989

CETUS DEVELOPMENT, INC., petitioner,

vs.
COURT OF APPEALS and LEANDRO CANLAS, respondents.

G.R. No. 77651 August 7, 1989

CETUS DEVELOPMENT, INC., petitioner,

vs.
COURT OF APPEALS and VICTORIA SUDARIO respondents.

G.R. No.77652 August 7, 1989

CETUS DEVELOPMENT, INC., petitioner,

vs.
COURT OF APPEALS and FLORA NAGBUYA respondents.

MEDIALDEA, J.:

This is a petition for review on certiorari of the decision dated January 30, 1987 of the Court of
Appeals in CA-GR Nos. SP-07945-50 entitled, "Cetus Development, Inc., Petitioner vs. Hon.
Conrado T. Limcaoco, Presiding Judge, Regional Trial Court of Manila, Branch Ederlina Navalta, et.
al., respondents.
The following facts appear in the records:

The private respondents, Ederlina Navalta, Ong Teng, Jose Liwanag, Leandro Canlas, Victoria
Sudario, and Flora Nagbuya were the lessees of the premises located at No. 512 Quezon
Boulevard, Quiapo, Manila, originally owned by the Susana Realty. These individual verbal leases
were on a month-to month basis at the following rates: Ederlina Navalta at the rate of P80.50; Ong
Teng at the rate of P96.10; Jose Liwanag at the rate of P40.35; Leandro Canlas at the rate of
P80.55; Victoria Sudario at the rate of P50.45 and Flora Nagbuya at the rate of P80.55. The
payments of the rentals were paid by the lessees to a collector of the Susana Realty who went to the
premises monthly.

Sometime in March, 1984, the Susana Realty sold the leased premises to the petitioner, Cetus
Development, Inc., a corporation duly organized and existing under the laws of the Philippines. From
April to June, 1984, the private respondents continued to pay their monthly rentals to a collector sent
by the petitioner. In the succeeding months of July, August and September 1984, the respondents
failed to pay their monthly individual rentals as no collector came.

On October 9, 1984, the petitioner sent a letter to each of the private respondents demanding that
they vacate the subject premises and to pay the back rentals for the months of July, August and
September, 1984, within fifteen (15) days from the receipt thereof. Immediately upon the receipt of
the said demand letters on October 10, 1984, the private respondents paid their respective
arrearages in rent which were accepted by the petitioner subject to the unilateral condition that the
acceptance was without prejudice to the filing of an ejectment suit. Subsequent monthly rental
payments were likewise accepted by the petitioner under the same condition.

For failure of the private respondents to vacate the premises as demanded in the letter dated
October 9, 1984, the petitioner filed with the Metropolitan Trial Court of Manila complaints for
ejectment against the manner, as follows: (1) 105972-CV, against Ederlina Navalta (2) 105973-CV,
against Jose Liwanag; (3) 105974-CV, against Flora Nagbuya; (4) 105975-CV, against Leandro
Canlas; (5) 105976-CV, against Victoria Sudario and (6) 105977-CV, against Ong Teng.

In their respective answers, the six (6) private respondents interposed a common defense. They
claimed that since the occupancy of the premises they paid their monthly rental regularly through a
collector of the lessor; that their non-payment of the rentals for the months of July, August and
September, 1984, was due to the failure of the petitioner (as the new owner) to send its collector;
that they were at a loss as to where they should pay their rentals; that sometime later, one of the
respondents called the office of the petitioner to inquire as to where they would make such payments
and he was told that a collector would be sent to receive the same; that no collector was ever sent
by the petitioner; and that instead they received a uniform demand letter dated October 9, 1984.

The private respondents, thru counsel, later filed a motion for consolidation of the six cases and as a
result thereof, the said cases were consolidated in the Metropolitan Trial Court of Manila, Branch XII,
presided over by Judge Eduardo S. Quintos, Jr. On June 4, 1985, the trial court rendered its
decision dismissing the six cases, a pertinent portion of which reads, as follows:

The records of this case show that at the time of the filing of this complaint, the
rentals had all been paid. Hence, the plaintiff cannot eject the defendants from the
leased premises, because at the time these cases were instituted, there are no
rentals in arrears.

The acceptance of the back rental by the plaintiff before the filing of the complaint, as
in these case, the alleged rental arrearages were paid immediately after receipt of
 the demand letter, removes its cause of action in an unlawful detainer case, even if
the acceptance was without prejudice.

x x x.

Furthermore, the court has observed that the account involved which constitutes the
rentals of the tenants are relatively small to which the ejectment may not lie on
grounds of equity and for humanitarian reasons.

Defendants' counterclaim for litigation expenses has no legal and factual basis for
assessing the same against plaintiff.

WHEREFORE, judgment is hereby rendered dismissing these cases, without

pronouncement as to costs.

Defendants' counterclaim is likewise dismissed.

SO ORDERED. (pp. 32-33, Rollo, G.R. No. 77647)

Not satisfied with the decision of the Metropolitan Trial Court, the petitioner appealed to the Regional
Trial Court of Manila and the same was assigned to Branch IX thereof presided over by Judge
Conrado T. Limcaoco (now Associate Justice of the Court of Appeals). In its decision dated
lâwphî1.ñèt

November 19, 1985, the Regional Trial Court dismissed the appeal for lack of merit.

In due time, a petition for review of the decision of the Regional Trial Court was filed by the petitioner
with the Court of Appeals. Said petition was dismissed on January 30, 1987, for lack of merit.

Aggrieved by the decision of the Court of Appeals, petitioner now comes to Us in this petition,
assigning the following errors:

ASSIGNMENT OF ERRORS

RESPONDENT COURT OF APPEALS COMMITTED A GRAVE ABUSE OF

DISCRETION, AMOUNTING TO LACK OF JURISDICTION, WHEN IT ERRED IN
HOLDING THAT THE CAUSE OF ACTION FOR UNLAWFUL DETAINER IN THESE
CASES DID NOT EXIST WHEN THE COMPLAINTS WERE FILED BECAUSE
PRIVATE RESPONDENTS TENDERED, AND PETITIONER ACCEPTED, THE
PAYMENT OF THE THREE (3) MONTHS RENTAL IN ARREARS WITHIN THE
FIFTEEN (15) DAY PERIOD FROM PRIVATE RESPONDENTS' RECEIPT OF
PETITIONER'S DEMAND LETTERS TO VACATE THE SUBJECT PREMISES AND
TO PAY THE RENTALS IN ARREARS.

II

RESPONDENT COURT OF APPEALS COMMITTED A GRAVEABUSE OF

DISCRETION, AMOUNTING TO LACK OF JURISDICTION COMMITTED A GRAVE
WHEN IT ERRED IN AFFIRMING THE DISMISSAL OF THE COMPLAINTS IN
THESE CASES NOTWITHSTANDING THE EXISTENCE OF VALID GROUNDS
FOR THE JUDICIAL EJECTMENT OF PRIVATE RESPONDENT.
 III

RESPONDENT COURT OF APPEALS COMMITTED A GRAVE ABUSE OF

DISCRETION, AMOUNTING TO LACK OF JURISDICTION, WHEN IT ERRED IN
HOLDING THAT THESE CASES ARE CLASSIC EXAMPLES TO CIRCUMVENT
THE RENT CONTROL LAW. (pp. 164-165, Rollo, G.R. No. 77647)

The Court of Appeals defined the basic issue in this case as follows: whether or not there exists a
cause of action when the complaints for unlawful detainer were filed considering the fact that upon
demand by petitioner from private respondents for payment of their back rentals, the latter
immediately tendered payment which was accepted by petitioner.

In holding that there was no cause of action, the respondent Court relied on Section 2, Rule 70 of
the Rules of Court, which provides:

Sec. 2. Landlord to proceed against tenant only after demand. — No landlord or his
legal representative or assign, shall be such action against a tenant for failure to pay
rent due or to comply with the conditions of his lease, unless the tenant shall have
failed to pay such rent or comply with such conditions for a period of fifteen (15) days
or five (5) days in case of building, after demand therefor, made upon qqqm
personally, or by serving written notice of such demand upon the person found on
the premises, or by posting such notice on the premises if no persons be found
thereon.

It interpreted the said provision as follows:

.....the right to bring an action of ejectment or unlawful detainer must be counted from
the time the defendants failed to pay rent after the demand therefor. It is not the
failure per se to pay rent as agreed in the contract, but the failure to pay the rent after
a demand therefor is made, that entitles the lessor to bring an action for unlawful
detainer. In other words, the demand contemplated by the above-quoted provision is
not a demand to vacate, but a demand made by the landlord upon his tenant for the
latter to pay the rent due if the tenant fails to comply with the said demand with the
period provided, his possession becomes unlawful and the landlord may then bring
the action for ejectment. (p. 28, , G.R. No. 77647)

We hold that the demand required and contemplated in Section 2, aforequoted, is a jurisdictional
requirement for the purpose of bringing an unlawful detainer suit for failure to pay rent or comply with
the conditions of lease. It partakes of an extrajudicial remedy that must be pursued before resorting
for judicial action so much so that when there is full compliance with the demand, there arises no
necessity for court action.

As to whether this demand is merely a demand to pay rent or comply with the conditions of the lease
or also a demand to vacate, the answer can be gleaned from said Section 2. This section
presupposes the existence of a cause of action for unlawful detainer as it speaks of "failure to pay
rent due or comply with the conditions of the lease." The existence of said cause of action gives the
lessor the right under Article 1659 of the New Civil Code to ask for the rescission of the contract of
lease and indemnification for damages, or only the latter, allowing the contract to remain in force.
Accordingly, if the option chosen is for specific performance, then the demand referred to is
obviously to pay rent or to comply with the conditions of the lease violated. However, if rescission is
the option chosen, the demand must be for the lessee to pay rents or to comply with the conditions
of the lease and to vacate. Accordingly, the rule that has been followed in our jurisprudence where
rescission is clearly the option taken, is that both demands to pay rent and to vacate are necessary
to make a lessee a deforciant in order that an ejectment suit may be filed (Casilan et al. vs. Tomassi,
L-16574, February 28,1964, 10 SCRA 261; Rickards vs. Gonzales, 109 Phil. 423, Dikit vs. Icasiano,
89 Phil. 44).lâwphî1.ñèt

Thus, for the purpose of bringing an ejectment suit, two requisites must concur, namely: (1) there
must be failure to pay rent or comply with the conditions of the lease and (2) there must be demand
both to pay or to comply and vacate within the periods specified in Section 2, Rule 70, namely 15
days in case of lands and 5 days in case of buildings. The first requisite refers to the existence of the
cause of action for unlawful detainer while the second refers to the jurisdictional requirement of
demand in order that said cause of action may be pursued.

It is very clear that in the case at bar, no cause of action for ejectment has accrued. There was no
failure yet on the part of private respondents to pay rents for three consecutive months. As the terms
of the individual verbal leases which were on a month-to-month basis were not alleged and proved,
the general rule on necessity of demand applies, to wit: there is default in the fulfillment of an
obligation when the creditor demands payment at the maturity of the obligation or at anytime
thereafter. This is explicit in Article 1169, New Civil Code which provides that "(t)hose obliged to
deliver or to do something incur in delay from the time the obligee judicially or extrajudicially
demands from them the fulfillment of their obligation." Petitioner has not shown that its case falls on
any of the following exceptions where demand is not required: (a) when the obligation or the law so
declares; (b) when from the nature and circumstances of the obligation it can be inferred that time is
of the essence of the contract; and (c) when demand would be useless, as when the obligor has
rendered it beyond his power to perform.

The demand required in Article 1169 of the Civil Code may be in any form, provided that it can be
proved. The proof of this demand lies upon the creditor. Without such demand, oral or written, the
effects of default do not arise. This demand is different from the demand required under Section 2,
Rule 70, which is merely a jurisdictional requirement before an existing cause of action may be
pursued.

The facts on record fail to show proof that petitioner demanded the payment of the rentals when the
obligation matured. Coupled with the fact that no collector was sent as previously done in the past,
the private respondents cannot be held guilty of mora solvendi or delay in the payment of rentals.
Thus, when petitioner first demanded the payment of the 3-month arrearages and private
respondents lost no time in making tender and payment, which petitioner accepted, no cause of
action for ejectment accrued. Hence, its demand to vacate was premature as it was an exercise of a
non-existing right to rescind.

In contradistinction, where the right of rescission exists, payment of the arrearages in rental after the
demand to pay and to vacate under Section 2, Rule 70 does not extinguish the cause of action for
ejectment as the lessor is not only entitled to recover the unpaid rents but also to eject the lessee.

Petitioner correctly argues that acceptance of tendered payment does not constitute a waiver of the
cause of action for ejectment especially when accepted with the written condition that it was "without
prejudice to the filing of an ejectment suit". Indeed, it is illogical or ridiculous not to accept the tender
of payment of rentals merely to preserve the right to file an action for unlawful detainer. However,
this line of argument presupposes that a cause of action for ejectment has already accrued, which is
not true in the instant case.

Petitioner likewise claims that its failure to send a collector to collect the rentals cannot be
considered a valid defense for the reason that sending a collector is not one of the obligations of the
lessor under Article 1654. While it is true that a lessor is not obligated to send a collector, it has been
duly established that it has been customary for private respondents to pay the rentals through a
collector. Besides Article 1257, New Civil Code provides that where no agreement has been
designated for the payment of the rentals, the place of payment is at the domicile of the defendants.
Hence, it could not be said that they were in default in the payment of their rentals as the delay in
paying the same was not imputable to them. Rather, it was attributable to petitioner's omission or
neglect to collect.

Petitioner also argues that neither is its refused to accept the rentals a defense for non-payment as
Article 1256 provides that "[i]f the creditor to whom the tender of payment has been made refuses
without just cause to accept it, the debtor shall be released from responsibility by the consignation of
the thing due." It bears emphasis that in this case there was no unjustified refusal on the part of
petitioner or non-acceptance without reason that would constitute mora accipiendi and warrant
consignation. There was simply lack of demand for payment of the rentals.

In sum, We hold that respondent Court of Appeals did not commit grave abuse of discretion
amounting to lack of jurisdiction in its conclusion affirming the trial court's decision dismissing
petitioner's complaint for lack of cause of action. We do not agree, however, with the reasons relied
upon.

ACCORDINGLY, the petition for review on certiorari is hereby DENIED for lack of merit and the
decision dated January 30, 1987 of respondent Court of Appeals is hereby AFFIRMED.

SO ORDERED.

Narvasa, Cruz, Gancayco and Griñ;o-Aquino JJ., concur.

 FIRST DIVISION

[G.R. No. 153004. November 5, 2004]

SANTOS VENTURA HOCORMA FOUNDATION, INC., petitioner, vs.

ERNESTO V. SANTOS and RIVERLAND, INC., respondents

DECISION
QUISUMBING, J.:

Subject of the present petition for review on certiorari is

the Decision,[1] dated January 30, 2002, as well as the April 12, 2002, Resolution[2] of the
Court of Appeals in CA-G.R. CV No. 55122. The appellate court reversed the
Decision,[3] dated October 4, 1996, of the Regional Trial Court of Makati City, Branch 148,
in Civil Case No. 95-811, and likewise denied petitioners Motion for Reconsideration.
The facts of this case are undisputed.
Ernesto V. Santos and Santos Ventura Hocorma Foundation, Inc. (SVHFI) were the
plaintiff and defendant, respectively, in several civil cases filed in different courts in
the Philippines. On October 26, 1990, the parties executed a Compromise
Agreement[4] which amicably ended all their pending litigations. The pertinent portions of
the Agreement read as follows:
1. Defendant Foundation shall pay Plaintiff Santos P14.5 Million in the following manner:

a. P1.5 Million immediately upon the execution of this agreement;

b. The balance of P13 Million shall be paid, whether in one lump sum
or in installments, at the discretion of the Foundation, within a
period of not more than two (2) years from the execution of this
agreement; provided, however, that in the event that the
Foundation does not pay the whole or any part of such balance, the
same shall be paid with the corresponding portion of the land or real
properties subject of the aforesaid cases and previously covered by
the notices of lis pendens, under such terms and conditions as to
area, valuation, and location mutually acceptable to both
parties; but in no case shall the payment of such balance be later
than two (2) years from the date of this agreement; otherwise,
payment of any unpaid portion shall only be in the form of land
aforesaid;
 2. Immediately upon the execution of this agreement (and [the] receipt of the P1.5
Million), plaintiff Santos shall cause the dismissal with prejudice of Civil Cases
Nos. 88-743, 1413OR, TC-1024, 45366 and 18166 and voluntarily withdraw the
appeals in Civil Cases Nos. 4968 (C.A.-G.R. No. 26598) and 88-45366 (C.A.-G.R.
No. 24304) respectively and for the immediate lifting of the aforesaid various
notices of lis pendens on the real properties aforementioned (by signing herein
attached corresponding documents, for such lifting); provided, however, that in
the event that defendant Foundation shall sell or dispose of any of the lands
previously subject of lis pendens, the proceeds of any such sale, or any part thereof
as may be required, shall be partially devoted to the payment of the Foundations
obligations under this agreement as may still be subsisting and payable at the time of
any such sale or sales;

...

5. Failure of compliance of any of the foregoing terms and conditions by either or both
parties to this agreement shall ipso facto and ipso jure automatically entitle the
aggrieved party to a writ of execution for the enforcement of this
agreement. [Emphasis supplied][5]
In compliance with the Compromise Agreement, respondent Santos moved for the
dismissal of the aforesaid civil cases. He also caused the lifting of the notices of lis
pendens on the real properties involved. For its part, petitioner SVHFI, paid P1.5 million
to respondent Santos, leaving a balance of P13 million.
Subsequently, petitioner SVHFI sold to Development Exchange Livelihood
Corporation two real properties, which were previously subjects of lis
pendens. Discovering the disposition made by the petitioner, respondent Santos sent a
letter to the petitioner demanding the payment of the remaining P13 million, which was
ignored by the latter.Meanwhile, on September 30, 1991,
the Regional Trial Court of Makati City, Branch 62, issued a Decision[6] approving the
compromise agreement.
On October 28, 1992, respondent Santos sent another letter to petitioner inquiring
when it would pay the balance of P13 million. There was no response from
petitioner.Consequently, respondent Santos applied with
the Regional Trial Court of Makati City, Branch 62, for the issuance of a writ of execution
of its compromise judgment dated September 30, 1991. The RTC granted the writ. Thus,
on March 10, 1993, the Sheriff levied on the real properties of petitioner, which were
formerly subjects of the lis pendens.Petitioner, however, filed numerous motions to block
the enforcement of the said writ. The challenge of the execution of the aforesaid
compromise judgment even reached the Supreme Court. All these efforts, however, were
futile.
On November 22, 1994, petitioners real properties located in Mabalacat, Pampanga
were auctioned. In the said auction, Riverland, Inc. was the highest bidder for P12 million
and it was issued a Certificate of Sale covering the real properties subject of the auction
sale. Subsequently, another auction sale was held on February 8, 1995, for the sale of
real properties of petitioner in Bacolod City. Again, Riverland, Inc. was the highest
bidder. The Certificates of Sale issued for both properties provided for the right of
redemption within one year from the date of registration of the said properties.
On June 2, 1995, Santos and Riverland Inc. filed a Complaint for Declaratory Relief
and Damages[7] alleging that there was delay on the part of petitioner in paying the
balance of P13 million. They further alleged that under the Compromise Agreement, the
obligation became due on October 26, 1992, but payment of the remaining P12 million
was effected only on November 22, 1994. Thus, respondents prayed that petitioner be
ordered to pay legal interest on the obligation, penalty, attorneys fees and costs of
litigation. Furthermore, they prayed that the aforesaid sales be declared final and not
subject to legal redemption.
In its Answer,[8] petitioner countered that respondents have no cause of action
against it since it had fully paid its obligation to the latter. It further claimed that the alleged
delay in the payment of the balance was due to its valid exercise of its rights to protect its
interests as provided under the Rules. Petitioner counterclaimed for attorneys fees and
exemplary damages.
On October 4, 1996, the trial court rendered a Decision[9] dismissing herein
respondents complaint and ordering them to pay attorneys fees and exemplary damages
to petitioner. Respondents then appealed to the Court of Appeals. The appellate court
reversed the ruling of the trial court:

WHEREFORE, finding merit in the appeal, the appealed Decision is

hereby REVERSED and judgment is hereby rendered ordering appellee SVHFI to
pay appellants Santos and Riverland, Inc.: (1) legal interest on the principal amount
of P13 million at the rate of 12% per annum from the date of demand on October 28,
1992 up to the date of actual payment of the whole obligation; and (2) P20,000 as
attorneys fees and costs of suit.

SO ORDERED.

Hence this petition for review on certiorari where petitioner assigns the following
issues:
I

WHETHER OR NOT THE COURT OF APPEALS COMMITTED

REVERSIBLE ERROR WHEN IT AWARDED LEGAL INTEREST IN
FAVOR OF THE RESPONDENTS, MR. SANTOS AND RIVERLAND,
INC., NOTWITHSTANDING THE FACT THAT NEITHER IN THE
COMPROMISE AGREEMENT NOR IN THE COMPROMISE
JUDGEMENT OF HON. JUDGE DIOKNO PROVIDES FOR PAYMENT
OF INTEREST TO THE RESPONDENT

II
 WHETHER OF NOT THE COURT OF APPEALS ERRED IN AWARDING
LEGAL IN[T]EREST IN FAVOR OF THE RESPONDENTS, MR.
SANTOS AND RIVERLAND, INC., NOTWITHSTANDING THE FACT
THAT THE OBLIGATION OF THE PETITIONER TO RESPONDENT
SANTOS TO PAY A SUM OF MONEY HAD BEEN CONVERTED TO
AN OBLIGATION TO PAY IN KIND DELIVERY OF REAL
PROPERTIES OWNED BY THE PETITIONER WHICH HAD BEEN
FULLY PERFORMED

III

WHETHER OR NOT RESPONDENTS ARE BARRED FROM

DEMANDING PAYMENT OF INTEREST BY REASON OF THE
WAIVER PROVISION IN THE COMPROMISE AGREEMENT, WHICH
BECAME THE LAW AMONG THE PARTIES [10]

The only issue to be resolved is whether the respondents are entitled to legal interest.
Petitioner SVHFI alleges that where a compromise agreement or compromise
judgment does not provide for the payment of interest, the legal interest by way of penalty
on account of fault or delay shall not be due and payable, considering that the obligation
or loan, on which the payment of legal interest could be based, has been superseded by
the compromise agreement.[11] Furthermore, the petitioner argues that the respondents
are barred by res judicata from seeking legal interest on account of the waiver clause in
the duly approved compromise agreement.[12] Article 4 of the compromise agreement
provides:

Plaintiff Santos waives and renounces any and all other claims that he and his
family may have on the defendant Foundation arising from and in connection
with the aforesaid civil cases, and defendant Foundation, on the other hand, also
waives and renounces any and all claims that it may have against plaintiff Santos in
connection with such cases. [Emphasis supplied.]
[13]

Lastly, petitioner alleges that since the compromise agreement did not provide for a
period within which the obligation will become due and demandable, it is incumbent upon
respondent Santos to ask for judicial intervention for purposes of fixing the period. It is
only when a fixed period exists that the legal interests can be computed.
Respondents profer that their right to damages is based on delay in the payment of
the obligation provided in the Compromise Agreement. The Compromise Agreement
provides that payment must be made within the two-year period from its execution. This
was approved by the trial court and became the law governing their contract.Respondents
posit that petitioners failure to comply entitles them to damages, by way of interest.[14]
The petition lacks merit.
 A compromise is a contract whereby the parties, by making reciprocal concessions,
avoid a litigation or put an end to one already commenced.[15] It is an agreement between
two or more persons, who, for preventing or putting an end to a lawsuit, adjust their
difficulties by mutual consent in the manner which they agree on, and which everyone of
them prefers in the hope of gaining, balanced by the danger of losing. [16]
The general rule is that a compromise has upon the parties the effect and authority
of res judicata, with respect to the matter definitely stated therein, or which by implication
from its terms should be deemed to have been included therein.[17] This holds true even if
the agreement has not been judicially approved.[18]
In the case at bar, the Compromise Agreement was entered into by the parties
on October 26, 1990.[19] It was judicially approved on September 30, 1991.[20] Applying
existing jurisprudence, the compromise agreement as a consensual contract became
binding between the parties upon its execution and not upon its court approval. From the
time a compromise is validly entered into, it becomes the source of the rights and
obligations of the parties thereto. The purpose of the compromise is precisely to replace
and terminate controverted claims.[21]
In accordance with the compromise agreement, the respondents asked for the
dismissal of the pending civil cases. The petitioner, on the other hand, paid the initial P1.5
million upon the execution of the agreement. This act of the petitioner showed that it
acknowledges that the agreement was immediately executory and enforceable upon its
execution.
As to the remaining P13 million, the terms and conditions of the compromise
agreement are clear and unambiguous. It provides:

...

b. The balance of P13 Million shall be paid, whether in one lump sum or in
installments, at the discretion of the Foundation, within a period of not more than
two (2) years from the execution of this agreement [Emphasis supplied.]
[22]

...

The two-year period must be counted from October 26, 1990, the date of execution
of the compromise agreement, and not on the judicial approval of the compromise
agreement on September 30, 1991. When respondents wrote a demand letter to
petitioner on October 28, 1992, the obligation was already due and demandable. When
the petitioner failed to pay its due obligation after the demand was made, it incurred delay.
Article 1169 of the New Civil Code provides:

Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their
obligation. [Emphasis supplied]
 Delay as used in this article is synonymous to default or mora which means delay in
the fulfillment of obligations. It is the non-fulfillment of the obligation with respect to time.[23]
In order for the debtor to be in default, it is necessary that the following requisites be
present: (1) that the obligation be demandable and already liquidated; (2) that the debtor
delays performance; and (3) that the creditor requires the performance judicially or
extrajudicially.[24]
In the case at bar, the obligation was already due and demandable after the lapse of
the two-year period from the execution of the contract. The two-year period ended
on October 26, 1992. When the respondents gave a demand letter on October 28, 1992,
to the petitioner, the obligation was already due and demandable. Furthermore, the
obligation is liquidated because the debtor knows precisely how much he is to pay and
when he is to pay it.
The second requisite is also present. Petitioner delayed in the performance. It was
able to fully settle its outstanding balance only on February 8, 1995, which is more than
two years after the extra-judicial demand. Moreover, it filed several motions and elevated
adverse resolutions to the appellate court to hinder the execution of a final and executory
judgment, and further delay the fulfillment of its obligation.
Third, the demand letter sent to the petitioner on October 28, 1992, was in
accordance with an extra-judicial demand contemplated by law.
Verily, the petitioner is liable for damages for the delay in the performance of its
obligation. This is provided for in Article 1170[25] of the New Civil Code.
When the debtor knows the amount and period when he is to pay, interest as
damages is generally allowed as a matter of right.[26] The complaining party has been
deprived of funds to which he is entitled by virtue of their compromise agreement. The
goal of compensation requires that the complainant be compensated for the loss of use
of those funds. This compensation is in the form of interest.[27] In the absence of
agreement, the legal rate of interest shall prevail.[28] The legal interest for loan as
forbearance of money is 12% per annum[29] to be computed from default, i.e., from judicial
or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.[30]
WHEREFORE, the petition is DENIED for lack of merit. The Decision dated January
30, 2002 of the Court of Appeals and its April 12, 2002 Resolution in CA-G.R. CV No.
55122 are AFFIRMED. Costs against petitioner.
SO ORDERED.
Davide, Jr. C.J. (Chairman), Ynares-Santiago and Carpio, JJ., concur.
Azcuna, J., on leave.
 SECOND DIVISION

[G.R. No. 149734. November 19, 2004]

DR. DANIEL VAZQUEZ and MA. LUIZA M. VAZQUEZ, petitioners

vs. AYALA CORPORATION, respondent.

DECISION
TINGA, J.:

The rise in value of four lots in one of the countrys prime residential developments,
Ayala Alabang Village in Muntinlupa City, over a period of six (6) years only, represents
big money. The huge price difference lies at the heart of the present controversy.
Petitioners insist that the lots should be sold to them at 1984 prices while respondent
maintains that the prevailing market price in 1990 should be the selling price.
Dr. Daniel Vazquez and Ma. Luisa Vazquez[1] filed this Petition for Review on
Certiorari[2] dated October 11, 2001 assailing the Decision[3] of the Court of Appeals dated
September 6, 2001 which reversed the Decision[4] of the Regional Trial Court (RTC) and
dismissed their complaint for specific performance and damages against Ayala
Corporation.
Despite their disparate rulings, the RTC and the appellate court agree on the following
antecedents:[5]

On April 23, 1981, spouses Daniel Vasquez and Ma. Luisa M. Vasquez (hereafter,
Vasquez spouses) entered into a Memorandum of Agreement (MOA) with Ayala
Corporation (hereafter, AYALA) with AYALA buying from the Vazquez spouses, all
of the latters shares of stock in Conduit Development, Inc. (hereafter, Conduit). The
main asset of Conduit was a 49.9 hectare property in Ayala Alabang, Muntinlupa,
which was then being developed by Conduit under a development plan where the land
was divided into Villages 1, 2 and 3 of the Don Vicente Village. The development
was then being undertaken for Conduit by G.P. Construction and Development Corp.
(hereafter, GP Construction).

Under the MOA, Ayala was to develop the entire property, less what was defined as
the Retained Area consisting of 18,736 square meters. This Retained Area was to be
retained by the Vazquez spouses. The area to be developed by Ayala was called the
Remaining Area. In this Remaining Area were 4 lots adjacent to the Retained Area
and Ayala agreed to offer these lots for sale to the Vazquez spouses at the prevailing
price at the time of purchase. The relevant provisions of the MOA on this point are:
5.7. The BUYER hereby commits that it will develop the Remaining Property
into a first class residential subdivision of the same class as its New Alabang
Subdivision, and that it intends to complete the first phase under its amended
development plan within three (3) years from the date of this Agreement. x x x

5.15. The BUYER agrees to give the SELLERS a first option to purchase four
developed lots next to the Retained Area at the prevailing market price at the
time of the purchase.

The parties are agreed that the development plan referred to in paragraph 5.7 is
not Conduits development plan, but Ayalas amended development plan which
was still to be formulated as of the time of the MOA. While in the Conduit plan,
the 4 lots to be offered for sale to the Vasquez Spouses were in the first phase
thereof or Village 1, in the Ayala plan which was formulated a year later, it was
in the third phase, or Phase II-c.

Under the MOA, the Vasquez spouses made several express warranties, as follows:

3.1. The SELLERS shall deliver to the BUYER:

xxx

3.1.2. The true and complete list, certified by the Secretary and Treasurer of the
Company showing:

xxx

D. A list of all persons and/or entities with whom the Company has pending contracts,
if any.

xxx

3.1.5. Audited financial statements of the Company as at Closing date.

4. Conditions Precedent

All obligations of the BUYER under this Agreement are subject to fulfillment prior to
or at the Closing, of the following conditions:

4.1. The representations and warranties by the SELLERS contained in this

Agreement shall be true and correct at the time of Closing as though such
representations and warranties were made at such time; and
 xxx

6. Representation and Warranties by the SELLERS

The SELLERS jointly and severally represent and warrant to the BUYER that at the
time of the execution of this Agreement and at the Closing:

xxx

6.2.3. There are no actions, suits or proceedings pending, or to the knowledge of the
SELLERS, threatened against or affecting the SELLERS with respect to the Shares or
the Property; and

7. Additional Warranties by the SELLERS

7.1. With respect to the Audited Financial Statements required to be submitted at

Closing in accordance with Par. 3.1.5 above, the SELLER jointly and severally
warrant to the BUYER that:

7.1.1 The said Audited Financial Statements shall show that on the day of Closing, the
Company shall own the Remaining Property, free from all liens and encumbrances
and that the Company shall have no obligation to any party except for billings
payable to GP Construction & Development Corporation and advances made by
Daniel Vazquez for which BUYER shall be responsible in accordance with Par. 2
of this Agreement.

7.1.2 Except to the extent reflected or reserved in the Audited Financial

Statements of the Company as of Closing, and those disclosed to BUYER, the
Company as of the date thereof, has no liabilities of any nature whether accrued,
absolute, contingent or otherwise, including, without limitation, tax liabilities due or
to become due and whether incurred in respect of or measured in respect of the
Companys income prior to Closing or arising out of transactions or state of facts
existing prior thereto.

7.2 SELLERS do not know or have no reasonable ground to know of any basis
for any assertion against the Company as at closing or any liability of any nature
and in any amount not fully reflected or reserved against such Audited Financial
Statements referred to above, and those disclosed to BUYER.

xxx xxx xxx

7.6.3 Except as otherwise disclosed to the BUYER in writing on or before the

Closing, the Company is not engaged in or a party to, or to the best of the
knowledge of the SELLERS, threatened with, any legal action or other
proceedings before any court or administrative body, nor do the SELLERS know
or have reasonable grounds to know of any basis for any such action or proceeding or
of any governmental investigation relative to the Company.

7.6.4 To the knowledge of the SELLERS, no default or breach exists in the due
performance and observance by the Company of any term, covenant or condition
of any instrument or agreement to which the company is a party or by which it is
bound, and no condition exists which, with notice or lapse of time or both, will
constitute such default or breach.

After the execution of the MOA, Ayala caused the suspension of work on Village 1 of
the Don Vicente Project. Ayala then received a letter from one Maximo Del Rosario
of Lancer General Builder Corporation informing Ayala that he was claiming the
amount of P1,509,558.80 as the subcontractor of G.P. Construction...

G.P. Construction not being able to reach an amicable settlement with Lancer, on
March 22, 1982, Lancer sued G.P. Construction, Conduit and Ayala in the then Court
of First Instance of Manila in Civil Case No. 82-8598. G.P. Construction in turn filed
a cross-claim against Ayala. G.P. Construction and Lancer both tried to enjoin Ayala
from undertaking the development of the property. The suit was terminated only on
February 19, 1987, when it was dismissed with prejudice after Ayala paid both Lancer
and GP Construction the total of P4,686,113.39.

Taking the position that Ayala was obligated to sell the 4 lots adjacent to the Retained
Area within 3 years from the date of the MOA, the Vasquez spouses sent several
reminder letters of the approaching so-called deadline. However, no demand after
April 23, 1984, was ever made by the Vasquez spouses for Ayala to sell the 4 lots. On
the contrary, one of the letters signed by their authorized agent, Engr. Eduardo Turla,
categorically stated that they expected development of Phase 1 to be completed by
February 19, 1990, three years from the settlement of the legal problems with the
previous contractor.

By early 1990 Ayala finished the development of the vicinity of the 4 lots to be
offered for sale. The four lots were then offered to be sold to the Vasquez spouses at
the prevailing price in 1990. This was rejected by the Vasquez spouses who wanted to
pay at 1984 prices, thereby leading to the suit below.

After trial, the court a quo rendered its decision, the dispositive portion of which
states:
THEREFORE, judgment is hereby rendered in favor of plaintiffs and against
defendant, ordering defendant to sell to plaintiffs the relevant lots described in the
Complaint in the Ayala Alabang Village at the price of P460.00 per square meter
amounting to P1,349,540.00; ordering defendant to reimburse to plaintiffs attorneys
fees in the sum of P200,000.00 and to pay the cost of the suit.

In its decision, the court a quo concluded that the Vasquez spouses were not obligated
to disclose the potential claims of GP Construction, Lancer and Del Rosario; Ayalas
accountants should have opened the records of Conduit to find out all claims; the
warranty against suit is with respect to the shares of the Property and the Lancer suit
does not affect the shares of stock sold to Ayala; Ayala was obligated to develop
within 3 years; to say that Ayala was under no obligation to follow a time frame was
to put the Vasquezes at Ayalas mercy; Ayala did not develop because of a slump in
the real estate market; the MOA was drafted and prepared by the AYALA who should
suffer its ambiguities; the option to purchase the 4 lots is valid because it was
supported by consideration as the option is incorporated in the MOA where the parties
had prestations to each other. [Emphasis supplied]

Ayala Corporation filed an appeal, alleging that the trial court erred in holding that
petitioners did not breach their warranties under the MOA[6] dated April 23, 1981; that it
was obliged to develop the land where the four (4) lots subject of the option to purchase
are located within three (3) years from the date of the MOA; that it was in delay; and that
the option to purchase was valid because it was incorporated in the MOA and the
consideration therefor was the commitment by Ayala Corporation to petitioners embodied
in the MOA.
As previously mentioned, the Court of Appeals reversed the
RTC Decision. According to the appellate court, Ayala Corporation was never informed
beforehand of the existence of the Lancer claim. In fact, Ayala Corporation got a copy of
the Lancer subcontract only on May 29, 1981 from G.P. Constructions lawyers. The Court
of Appeals thus held that petitioners violated their warranties under the MOA when they
failed to disclose Lancers claims. Hence, even conceding that Ayala Corporation was
obliged to develop and sell the four (4) lots in question within three (3) years from the date
of the MOA, the obligation was suspended during the pendency of the case filed by
Lancer.
Interpreting the MOAs paragraph 5.7 above-quoted, the appellate court held that
Ayala Corporation committed to develop the first phase of its own amended development
plan and not Conduits development plan. Nowhere does the MOA provide that Ayala
Corporation shall follow Conduits development plan nor is Ayala Corporation prohibited
from changing the sequence of the phases of the property it will develop.
Anent the question of delay, the Court of Appeals ruled that there was no delay as
petitioners never made a demand for Ayala Corporation to sell the subject lots to them.
According to the appellate court, what petitioners sent were mere reminder letters the last
of which was dated prior to April 23, 1984 when the obligation was not yet demandable.
At any rate, the Court of Appeals found that petitioners in fact waived the three (3)-year
period when they sent a letter through their agent, Engr. Eduardo Turla, stating that they
expect that the development of Phase I will be completed by 19 February 1990, three
years from the settlement of the legal problems with the previous contractor. [7]
The appellate court likewise ruled that paragraph 5.15 above-quoted is not an option
contract but a right of first refusal there being no separate consideration therefor. Since
petitioners refused Ayala Corporations offer to sell the subject lots at the reduced 1990
price of P5,000.00 per square meter, they have effectively waived their right to buy the
same.
In the instant Petition, petitioners allege that the appellate court erred in ruling that
they violated their warranties under the MOA; that Ayala Corporation was not obliged to
develop the Remaining Property within three (3) years from the execution of the MOA;
that Ayala was not in delay; and that paragraph 5.15 of the MOA is a mere right of first
refusal. Additionally, petitioners insist that the Court should review the factual findings of
the Court of Appeals as they are in conflict with those of the trial court.
Ayala Corporation filed a Comment on the Petition[8] dated March 26, 2002,
contending that the petition raises questions of fact and seeks a review of evidence which
is within the domain of the Court of Appeals. Ayala Corporation maintains that the
subcontract between GP Construction, with whom Conduit contracted for the
development of the property under a Construction Contract dated October 10, 1980, and
Lancer was not disclosed by petitioners during the negotiations. Neither was the liability
for Lancers claim included in the Audited Financial Statements submitted by petitioners
after the signing of the MOA. These justify the conclusion that petitioners breached their
warranties under the afore-quoted paragraphs of the MOA. Since the Lancer suit ended
only in February 1989, the three (3)-year period within which Ayala Corporation
committed to develop the property should only be counted thence. Thus, when it offered
the subject lots to petitioners in 1990, Ayala Corporation was not yet in delay.
In response to petitioners contention that there was no action or proceeding against
them at the time of the execution of the MOA on April 23, 1981, Ayala Corporation avers
that the facts and circumstances which gave rise to the Lancer claim were already extant
then. Petitioners warranted that their representations under the MOA shall be true and
correct at the time of Closing which shall take place within four (4) weeks from the signing
of the MOA.[9] Since the MOA was signed on April 23, 1981, Closing was approximately
the third week of May 1981. Hence, Lancers claims, articulated in a letter which Ayala
Corporation received on May 4, 1981, are among the liabilities warranted against under
paragraph 7.1.2 of the MOA.
Moreover, Ayala Corporation asserts that the warranties under the MOA are not just
against suits but against all kinds of liabilities not reflected in the Audited Financial
Statements. It cannot be faulted for relying on the express warranty that except for billings
payable to GP Construction and advances made by petitioner Daniel Vazquez in the
amount of P38,766.04, Conduit has no other liabilities. Hence, petitioners cannot claim
that Ayala Corporation should have examined and investigated the Audited Financial
Statements of Conduit and should now assume all its obligations and liabilities including
the Lancer suit and the cross-claim of GP Construction.
 Furthermore, Ayala Corporation did not make a commitment to complete the
development of the first phase of the property within three (3) years from the execution of
the MOA. The provision refers to a mere declaration of intent to develop the first phase
of its (Ayala Corporations) own development plan and not Conduits. True to its intention,
Ayala Corporation did complete the development of the first phase (Phase II-A) of its
amended development plan within three (3) years from the execution of the MOA.
However, it is not obliged to develop the third phase (Phase II-C) where the subject lots
are located within the same time frame because there is no contractual stipulation in the
MOA therefor. It is free to decide on its own the period for the development of Phase II-
C. If petitioners wanted to impose the same three (3)-year timetable upon the third phase
of the amended development plan, they should have filed a suit to fix the time table in
accordance with Article 1197[10] of the Civil Code. Having failed to do so, Ayala Corporation
cannot be declared to have been in delay.
Ayala Corporation further contends that no demand was made on it for the
performance of its alleged obligation. The letter dated October 4, 1983 sent when
petitioners were already aware of the Lancer suit did not demand the delivery of the
subject lots by April 23, 1984. Instead, it requested Ayala Corporation to keep petitioners
posted on the status of the case. Likewise, the letter dated March 4, 1984 was merely an
inquiry as to the date when the development of Phase 1 will be completed. More
importantly, their letter dated June 27, 1988 through Engr. Eduardo Turla expressed
petitioners expectation that Phase 1 will be completed by February 19, 1990.
Lastly, Ayala Corporation maintains that paragraph 5.15 of the MOA is a right of first
refusal and not an option contract.
Petitioners filed their Reply[11] dated August 15, 2002 reiterating the arguments in
their Petition and contending further that they did not violate their warranties under the
MOA because the case was filed by Lancer only on April 1, 1982, eleven (11) months
and eight (8) days after the signing of the MOA on April 23, 1981. Ayala Corporation
admitted that it received Lancers claim before the Closing date. It therefore had all the
time to rescind the MOA. Not having done so, it can be concluded that Ayala Corporation
itself did not consider the matter a violation of petitioners warranty.
Moreover, petitioners submitted the Audited Financial Statements of Conduit and
allowed an acquisition audit to be conducted by Ayala Corporation. Thus, the latter bought
Conduit with open eyes.
Petitioners also maintain that they had no knowledge of the impending case against
Conduit at the time of the execution of the MOA. Further, the MOA makes Ayala
Corporation liable for the payment of all billings of GP Construction. Since Lancers claim
was actually a claim against GP Construction being its sub-contractor, it is Ayala
Corporation and not petitioners which is liable.
Likewise, petitioners aver that although Ayala Corporation may change the sequence
of its development plan, it is obliged under the MOA to develop the entire area where the
subject lots are located in three (3) years.
They also assert that demand was made on Ayala Corporation to comply with their
obligation under the MOA. Apart from their reminder letters dated January 24, February
18 and March 5, 1984, they also sent a letter dated March 4, 1984 which they claim is a
categorical demand for Ayala Corporation to comply with the provisions of the MOA.
The parties were required to submit their respective memoranda in
the Resolution[12] dated November 18, 2002. In compliance with this directive, petitioners
submitted their Memorandum[13] dated February 14, 2003 on even date, while Ayala
Corporation filed its Memorandum[14] dated February 14, 2003 on February 17, 2003.
We shall first dispose of the procedural question raised by the instant petition.
It is well-settled that the jurisdiction of this Court in cases brought to it from the Court
of Appeals by way of petition for review under Rule 45 is limited to reviewing or revising
errors of law imputed to it, its findings of fact being conclusive on this Court as a matter
of general principle. However, since in the instant case there is a conflict between the
factual findings of the trial court and the appellate court, particularly as regards the issues
of breach of warranty, obligation to develop and incurrence of delay, we have to consider
the evidence on record and resolve such factual issues as an exception to the general
rule.[15] In any event, the submitted issue relating to the categorization of the right to
purchase granted to petitioners under the MOA is legal in character.
The next issue that presents itself is whether petitioners breached their warranties
under the MOA when they failed to disclose the Lancer claim. The trial court declared
they did not; the appellate court found otherwise.
Ayala Corporation summarizes the clauses of the MOA which petitioners allegedly
breached when they failed to disclose the Lancer claim:

a) Clause 7.1.1. that Conduit shall not be obligated to anyone except to GP

Construction for P38,766.04, and for advances made by Daniel Vazquez;

b) Clause 7.1.2. that except as reflected in the audited financial statements Conduit
had no other liabilities whether accrued, absolute, contingent or otherwise;

c) Clause 7.2. that there is no basis for any assertion against Conduit of any liability of
any value not reflected or reserved in the financial statements, and those disclosed to
Ayala;

d) Clause 7.6.3. that Conduit is not threatened with any legal action or other
proceedings; and

e) Clause 7.6.4. that Conduit had not breached any term, condition, or covenant of any
instrument or agreement to which it is a party or by which it is bound. [16]

The Court is convinced that petitioners did not violate the foregoing warranties.
The exchanges of communication between the parties indicate that petitioners
substantially apprised Ayala Corporation of the Lancer claim or the possibility thereof
during the period of negotiations for the sale of Conduit.
 In a letter[17] dated March 5, 1984, petitioner Daniel Vazquez reminded Ayala
Corporations Mr. Adolfo Duarte (Mr. Duarte) that prior to the completion of the sale of
Conduit, Ayala Corporation asked for and was given information that GP Construction
sub-contracted, presumably to Lancer, a greater percentage of the project than it was
allowed. Petitioners gave this information to Ayala Corporation because the latter
intimated a desire to break the contract of Conduit with GP. Ayala Corporation did not
deny this. In fact, Mr. Duartes letter[18] dated March 6, 1984 indicates that Ayala
Corporation had knowledge of the Lancer subcontract prior to its acquisition of Conduit.
Ayala Corporation even admitted that it tried to explorelegal basis to discontinue the
contract of Conduit with GP but found this not feasible when information surfaced about
the tacit consent of Conduit to the sub-contracts of GP with Lancer.
At the latest, Ayala Corporation came to know of the Lancer claim before the date of
Closing of the MOA. Lancers letter[19] dated April 30, 1981 informing Ayala Corporation of
its unsettled claim with GP Construction was received by Ayala Corporation on May 4,
1981, well before the Closing[20] which occurred four (4) weeks after the date of signing of
the MOA on April 23, 1981, or on May 23, 1981.
The full text of the pertinent clauses of the MOA quoted hereunder likewise indicate
that certain matters pertaining to the liabilities of Conduit were disclosed by petitioners to
Ayala Corporation although the specifics thereof were no longer included in the MOA:

7.1.1 The said Audited Financial Statements shall show that on the day of Closing, the
Company shall own the Remaining Property, free from all liens and encumbrances
and that the Company shall have no obligation to any party except for billings payable
to GP Construction & Development Corporation and advances made by Daniel
Vazquez for which BUYER shall be responsible in accordance with Paragraph 2 of
this Agreement.

7.1.2 Except to the extent reflected or reserved in the Audited Financial

Statements of the Company as of Closing, and those disclosed to BUYER, the
Company as of the date hereof, has no liabilities of any nature whether accrued,
absolute, contingent or otherwise, including, without limitation, tax liabilities due or
to become due and whether incurred in respect of or measured in respect of the
Companys income prior to Closing or arising out of transactions or state of facts
existing prior thereto.

7.2 SELLERS do not know or have no reasonable ground to know of any basis for
any assertion against the Company as at Closing of any liability of any nature and in
any amount not fully reflected or reserved against such Audited Financial Statements
referred to above, and those disclosed to BUYER.

xxx xxx xxx

7.6.3 Except as otherwise disclosed to the BUYER in writing on or before the
Closing, the Company is not engaged in or a party to, or to the best of the knowledge
of the SELLERS, threatened with, any legal action or other proceedings before any
court or administrative body, nor do the SELLERS know or have reasonable grounds
to know of any basis for any such action or proceeding or of any governmental
investigation relative to the Company.

7.6.4 To the knowledge of the SELLERS, no default or breach exists in the due
performance and observance by the Company of any term, covenant or condition of
any instrument or agreement to which the Company is a party or by which it is bound,
and no condition exists which, with notice or lapse of time or both, will constitute
such default or breach. [Emphasis supplied]
[21]

Hence, petitioners warranty that Conduit is not engaged in, a party to, or threatened
with any legal action or proceeding is qualified by Ayala Corporations actual knowledge
of the Lancer claim which was disclosed to Ayala Corporation before the Closing.
At any rate, Ayala Corporation bound itself to pay all billings payable to GP
Construction and the advances made by petitioner Daniel Vazquez. Specifically, under
paragraph 2 of the MOA referred to in paragraph 7.1.1, Ayala Corporation undertook
responsibility for the payment of all billings of the contractor GP Construction &
Development Corporation after the first billing and any payments made by the company
and/or SELLERS shall be reimbursed by BUYER on closing which advances to date
is P1,159,012.87.[22]
The billings knowingly assumed by Ayala Corporation necessarily include the Lancer
claim for which GP Construction is liable. Proof of this is Ayala Corporations letter[23] to GP
Construction dated before Closing on May 4, 1981, informing the latter of Ayala
Corporations receipt of the Lancer claim embodied in the letter dated April 30, 1981,
acknowledging that it is taking over the contractual responsibilities of Conduit, and
requesting copies of all sub-contracts affecting the Conduit property. The pertinent
excerpts of the letter read:

In this connection, we wish to inform you that this morning we received a letter from
Mr. Maximo D. Del Rosario, President of Lancer General Builders Corporation
apprising us of the existence of subcontracts that they have with your corporation.
They have also furnished us with a copy of their letter to you dated 30 April 1981.

Since we are taking over the contractual responsibilities of Conduit Development,

Inc., we believe that it is necessary, at this point in time, that you furnish us with
copies of all your subcontracts affecting the property of Conduit, not only with Lancer
General Builders Corporation, but all subcontracts with other parties as well [24]

Quite tellingly, Ayala Corporation even attached to its Pre-Trial Brief[25] dated July 9,
1992 a copy of the letter[26] dated May 28, 1981 of GP Constructions counsel addressed
to Conduit furnishing the latter with copies of all sub-contract agreements entered into by
GP Construction. Since it was addressed to Conduit, it can be presumed that it was the
latter which gave Ayala Corporation a copy of the letter thereby disclosing to the latter the
existence of the Lancer sub-contract.
The ineluctable conclusion is that petitioners did not violate their warranties under the
MOA. The Lancer sub-contract and claim were substantially disclosed to Ayala
Corporation before the Closing date of the MOA. Ayala Corporation cannot disavow
knowledge of the claim.
Moreover, while in its correspondence with petitioners, Ayala Corporation did mention
the filing of the Lancer suit as an obstacle to its development of the property, it never
actually brought up nor sought redress for petitioners alleged breach of warranty for
failure to disclose the Lancer claim until it filed its Answer[27] dated February 17, 1992.
We now come to the correct interpretation of paragraph 5.7 of the MOA. Does this
paragraph express a commitment or a mere intent on the part of Ayala Corporation to
develop the property within three (3) years from date thereof? Paragraph 5.7 provides:

5.7. The BUYER hereby commits that it will develop the Remaining Property into a
first class residential subdivision of the same class as its New Alabang Subdivision,
and that it intends to complete the first phase under its amended development plan
within three (3) years from the date of this Agreement. [28]

Notably, while the first phrase of the paragraph uses the word commits in reference
to the development of the Remaining Property into a first class residential subdivision, the
second phrase uses the word intends in relation to the development of the first phase of
the property within three (3) years from the date of the MOA. The variance in wording is
significant. While commit[29] connotes a pledge to do something, intend[30] merely signifies
a design or proposition.
Atty. Leopoldo Francisco, former Vice President of Ayala Corporations legal division
who assisted in drafting the MOA, testified:
COURT
You only ask what do you mean by that intent. Just answer on that point.
ATTY. BLANCO
Dont talk about standard.
WITNESS
A Well, the word intent here, your Honor, was used to emphasize the tentative
character of the period of development because it will be noted that the sentence
refers to and I quote to complete the first phase under its amended development
plan within three (3) years from the date of this agreement, at the time of the
execution of this agreement, your Honor. That amended development plan was
not yet in existence because the buyer had manifested to the seller that the buyer
could amend the subdivision plan originally belonging to the seller to conform with
its own standard of development and second, your Honor, (interrupted)[31]
 It is thus unmistakable that this paragraph merely expresses an intention on Ayala
Corporations part to complete the first phase under its amended development plan within
three (3) years from the execution of the MOA. Indeed, this paragraph is so plainly worded
that to misunderstand its import is deplorable.
More focal to the resolution of the instant case is paragraph 5.7s clear reference to
the first phase of Ayala Corporations amended development plan as the subject of the
three (3)-year intended timeframe for development. Even petitioner Daniel Vazquez
admitted on cross-examination that the paragraph refers not to Conduits but to Ayala
Corporations development plan which was yet to be formulated when the MOA was
executed:
Q: Now, turning to Section 5.7 of this Memorandum of Agreement, it is stated as
follows: The Buyer hereby commits that to develop the remaining property into a
first class residential subdivision of the same class as New Alabang Subdivision,
and that they intend to complete the first phase under its amended development
plan within three years from the date of this agreement.
Now, my question to you, Dr. Vasquez is that there is no dispute that the amended
development plan here is the amended development plan of Ayala?
A: Yes, sir.
Q: In other words, it is not Exhibit D-5 which is the original plan of Conduit?
A: No, it is not.
Q: This Exhibit D-5 was the plan that was being followed by GP Construction in 1981?
A: Yes, sir.
Q: And point of fact during your direct examination as of the date of the agreement, this
amended development plan was still to be formulated by Ayala?
A: Yes, sir.[32]
As correctly held by the appellate court, this admission is crucial because while the
subject lots to be sold to petitioners were in the first phase of the Conduit development
plan, they were in the third or last phase of the Ayala Corporation development plan.
Hence, even assuming that paragraph 5.7 expresses a commitment on the part of Ayala
Corporation to develop the first phase of its amended development plan within three (3)
years from the execution of the MOA, there was no parallel commitment made as to the
timeframe for the development of the third phase where the subject lots are located.
Lest it be forgotten, the point of this petition is the alleged failure of Ayala Corporation
to offer the subject lots for sale to petitioners within three (3) years from the execution of
the MOA. It is not that Ayala Corporation committed or intended to develop the first phase
of its amended development plan within three (3) years. Whether it did or did not is
actually beside the point since the subject lots are not located in the first phase anyway.
We now come to the issue of default or delay in the fulfillment of the obligation.
Article 1169 of the Civil Code provides:
Art. 1169. Those obliged to deliver or to do something incur in delay from the time
the obligee judicially or extrajudicially demands from them the fulfillment of their
obligation.

However, the demand by the creditor shall not be necessary in order that delay may
exist:

(1) When the obligation or the law expressly so declares; or

(2) When from the nature and the circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered or the service is to be
rendered was a controlling motive for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his
power to perform.

In reciprocal obligations, neither party incurs in delay if the other does not comply or
is not ready to comply in a proper manner with what is incumbent upon him. From the
moment one of the parties fulfills his obligation, delay by the other begins.

In order that the debtor may be in default it is necessary that the following requisites
be present: (1) that the obligation be demandable and already liquidated; (2) that the
debtor delays performance; and (3) that the creditor requires the performance judicially
or extrajudicially.[33]
Under Article 1193 of the Civil Code, obligations for whose fulfillment a day certain
has been fixed shall be demandable only when that day comes. However, no such day
certain was fixed in the MOA. Petitioners, therefore, cannot demand performance after
the three (3) year period fixed by the MOA for the development of the first phase of the
property since this is not the same period contemplated for the development of the subject
lots. Since the MOA does not specify a period for the development of the subject lots,
petitioners should have petitioned the court to fix the period in accordance with Article
1197[34] of the Civil Code. As no such action was filed by petitioners, their complaint for
specific performance was premature, the obligation not being demandable at that point.
Accordingly, Ayala Corporation cannot likewise be said to have delayed performance of
the obligation.
Even assuming that the MOA imposes an obligation on Ayala Corporation to develop
the subject lots within three (3) years from date thereof, Ayala Corporation could still not
be held to have been in delay since no demand was made by petitioners for the
performance of its obligation.
As found by the appellate court, petitioners letters which dealt with the three (3)-year
timetable were all dated prior to April 23, 1984, the date when the period was supposed
to expire. In other words, the letters were sent before the obligation could become legally
demandable. Moreover, the letters were mere reminders and not categorical demands to
perform. More importantly, petitioners waived the three (3)-year period as evidenced by
their agent, Engr. Eduardo Turlas letter to the effect that petitioners agreed that the three
(3)-year period should be counted from the termination of the case filed by Lancer. The
letter reads in part:

I. Completion of Phase I

As per the memorandum of Agreement also dated April 23, 1981, it was undertaken
by your goodselves to complete the development of Phase I within three (3) years. Dr.
& Mrs. Vazquez were made to understand that you were unable to accomplish this
because of legal problems with the previous contractor. These legal problems were
resolved as of February 19, 1987, and Dr. & Mrs. Vazquez therefore expect that the
development of Phase I will be completed by February 19, 1990, three years from the
settlement of the legal problems with the previous contractor. The reason for this is, as
you know, that security-wise, Dr. & Mrs. Vazquez have been advised not to construct
their residence till the surrounding area (which is Phase I) is developed and occupied.
They have been anxious to build their residence for quite some time now, and would
like to receive assurance from your goodselves regarding this, in compliance with the
agreement.

II. Option on the adjoining lots

We have already written your goodselves regarding the intention of Dr. & Mrs.
Vazquez to exercise their option to purchase the two lots on each side (a total of 4
lots) adjacent to their Retained Area. They are concerned that although over a year has
elapsed since the settlement of the legal problems, you have not presented them with
the size, configuration, etc. of these lots. They would appreciate being provided with
these at your earliest convenience. [35]

Manifestly, this letter expresses not only petitioners acknowledgement that the delay
in the development of Phase I was due to the legal problems with GP Construction, but
also their acquiescence to the completion of the development of Phase I at the much later
date of February 19, 1990. More importantly, by no stretch of semantic interpretation can
it be construed as a categorical demand on Ayala Corporation to offer the subject lots for
sale to petitioners as the letter merely articulates petitioners desire to exercise their option
to purchase the subject lots and concern over the fact that they have not been provided
with the specifications of these lots.
The letters of petitioners children, Juan Miguel and Victoria Vazquez, dated January
23, 1984[36] and February 18, 1984[37] can also not be considered categorical demands on
Ayala Corporation to develop the first phase of the property within the three (3)-year
period much less to offer the subject lots for sale to petitioners. The letter dated January
23, 1984 reads in part:
You will understand our interest in the completion of the roads to our property, since
we cannot develop it till you have constructed the same. Allow us to remind you of
our Memorandum of Agreement, as per which you committed to develop the roads to
our property as per the original plans of the company, and that

1. The back portion should have been developed before the front portion which has
not been the case.

2. The whole project front and back portions be completed by 1984. [38]

The letter dated February 18, 1984 is similarly worded. It states:

In this regard, we would like to remind you of Articles 5.7 and 5.9 of our
Memorandum of Agreement which states respectively: [39]

Even petitioner Daniel Vazquez letter[40] dated March 5, 1984 does not make out a
categorical demand for Ayala Corporation to offer the subject lots for sale on or before
April 23, 1984. The letter reads in part:

and that we expect from your goodselves compliance with our Memorandum of
Agreement, and a definite date as to when the road to our property and the
development of Phase I will be completed. [41]

At best, petitioners letters can only be construed as mere reminders which cannot be
considered demands for performance because it must appear that the tolerance or
benevolence of the creditor must have ended.[42]
The petition finally asks us to determine whether paragraph 5.15 of the MOA can
properly be construed as an option contract or a right of first refusal. Paragraph 5.15
states:

5.15 The BUYER agrees to give the SELLERS first option to purchase four
developed lots next to the Retained Area at the prevailing market price at the time of
the purchase. [43]

The Court has clearly distinguished between an option contract and a right of first
refusal. An option is a preparatory contract in which one party grants to another, for a
fixed period and at a determined price, the privilege to buy or sell, or to decide whether
or not to enter into a principal contract. It binds the party who has given the option not to
enter into the principal contract with any other person during the period designated, and
within that period, to enter into such contract with the one to whom the option was granted,
if the latter should decide to use the option. It is a separate and distinct contract from that
which the parties may enter into upon the consummation of the option. It must be
supported by consideration.[44]
 In a right of first refusal, on the other hand, while the object might be made
determinate, the exercise of the right would be dependent not only on the grantors
eventual intention to enter into a binding juridical relation with another but also on terms,
including the price, that are yet to be firmed up.[45]
Applied to the instant case, paragraph 5.15 is obviously a mere right of first refusal
and not an option contract. Although the paragraph has a definite object, i.e., the sale of
subject lots, the period within which they will be offered for sale to petitioners and,
necessarily, the price for which the subject lots will be sold are not specified. The phrase
at the prevailing market price at the time of the purchase connotes that there is no definite
period within which Ayala Corporation is bound to reserve the subject lots for petitioners
to exercise their privilege to purchase. Neither is there a fixed or determinable price at
which the subject lots will be offered for sale. The price is considered certain if it may be
determined with reference to another thing certain or if the determination thereof is left to
the judgment of a specified person or persons.[46]
Further, paragraph 5.15 was inserted into the MOA to give petitioners the first crack
to buy the subject lots at the price which Ayala Corporation would be willing to accept
when it offers the subject lots for sale. It is not supported by an independent consideration.
As such it is not governed by Articles 1324 and 1479 of the Civil Code, viz:

Art. 1324. When the offeror has allowed the offeree a certain period to accept, the
offer may be withdrawn at any time before acceptance by communicating such
withdrawal, except when the option is founded upon a consideration, as something
paid or promised.

Art. 1479. A promise to buy and sell a determinate thing for a price certain is
reciprocally demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a price certain
is binding upon the promissor if the promise is supported by a consideration distinct
from the price.

Consequently, the offer may be withdrawn anytime by communicating the withdrawal to

the other party.[47]
In this case, Ayala Corporation offered the subject lots for sale to petitioners at the
price of P6,500.00/square meter, the prevailing market price for the property when the
offer was made on June 18, 1990.[48] Insisting on paying for the lots at the prevailing market
price in 1984 of P460.00/square meter, petitioners rejected the offer. Ayala Corporation
reduced the price to P5,000.00/square meter but again, petitioners rejected the offer and
instead made a counter-offer in the amount of P2,000.00/square meter.[49]Ayala
Corporation rejected petitioners counter-offer. With this rejection, petitioners lost their
right to purchase the subject lots.
 It cannot, therefore, be said that Ayala Corporation breached petitioners right of first
refusal and should be compelled by an action for specific performance to sell the subject
lots to petitioners at the prevailing market price in 1984.
WHEREFORE, the instant petition is DENIED. No pronouncement as to costs.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.
 SECOND DIVISION

[G.R. No. 32336. December 20, 1930.]

JULIO C. ABELLA, Plaintiff-Appellant, v. GUILLERMO B.

FRANCISCO, Defendant-Appellee.

Antonio T. Carrascoso jr., for Appellant.

Camus & Delgado for Mooney.

SYLLABUS

1. CONTRACT OF SALE; PERIOD FOR PAYMENT OF SELLING PRICE;

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

DECISION

AVANCEÑA, C.J. :

Defendant Guillermo B. Francisco purchased from the Government on

installments, lots 937 to 945 of the Tala Estate in Novaliches, Caloocan,
Rizal. He was in arrears for some of these installments. On the 31st of
October, 1928, he signed the following document:jgc:chanrobles.com.ph

"MANILA, October 31, 1928

"Received from Mr. Julio C. Abella the amount of five hundred pesos (500),
payment on account of lots Nos. 937, 938, 939, 940, 941, 942, 943, 944,
and 945 of the Tala Estate, barrio of Novaliches, Caloocan, Rizal, containing
an area of about 221 hectares, at the rate of one hundred pesos (P100) per
hectare, the balance being due on or before the fifteenth day of December,
1928, extendible fifteen days thereafter. (Sgd.) G. B. FRANCISCO — P500 —
Phone 67125."cralaw virtua1aw library
After having made this agreement, the plaintiff proposed the sale of these
lots at a higher price to George C. Sellner, collecting P10,000 on account
thereof on December 29, 1928.

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

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

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

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

It is to be noted that in the document signed by the defendant, the 15th of

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

In holding that the period was an essential element of the transaction

between plaintiff and defendant, the trial court considered that the contract
in question was an option for the purchase that the contract in question was
an option for the purchase of the lots, and that in an agreement of this
nature the period is deemed essential. The opinion of the court is divided
upon the question of whether the agreement was an option or a sale, but
even supposing it was a sale, the court holds that time was an essential
element in the transaction. The defendant wanted to sell those lots to the
plaintiff in order to pay off certain obligation which fell due in the month of
December, 1928. The time fixed for the payment of the price was therefore
essential for the defendant, and this view in borne out by his letter to his
representative Mabanta instructing him to consider the contract rescinded if
the price was not completed in time. In accordance with article 1124 of the
Civil Code, the defendant is entitled to resolve the contract for failure to pay
the price within the time specified.

The judgment appealed from is affirmed, with costs against the appellant.
So ordered.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-10394 December 13, 1958

CLAUDINA VDA. DE VILLARUEL, ET AL., plaintiffs-appellees,

vs.
MANILA MOTOR CO., INC. and ARTURO COLMENARES, defendants-appellants.

Hilado and Hilado for appellees.

Ozaeta, Gibbs and Ozaeta for appellant company.
Jose L. Gamboa and Napoleon Garcia for appellant Arturo Colmenares.

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

Manila Motor Co., Inc., and Arturo Colmenares interpose this appeal against the decision of the
Court of First Instance of Negros Occidental, in its Civil Case No. 648, ordering the defendant Manila
Motor Co., Inc. to pay to the plaintiffs Villaruel the sum of (a) P11,900 with legal rest from May 18,
1953, on which date, the court below declared invalid the continued operation of the Debt
Moratorium, under the first cause of action; (b) P38,395 with legal interest from the date of filing of
the original complaint on April 26, 1947, on the second cause of action; and against both the Manila
Motor Co., Inc. and its co-defendant, Arturo Colmenares, the sum of P30,000 to be paid, jointly and
severally, with respect to the third cause of action.

On May 31, 1940, the plaintiffs Villaruel and the defendant Manila Motor Co., Inc. entered into a
contract (Exhibit "A") whereby, the former agreed to convey by way of lease to the latter the following
described premises;

(a) Five hundred (500) square meters of floor space of a building of strong materials for
automobile showroom, offices, and store room for automobile spare parts;

(b) Another building of strong materials for automobile repair shop; and

(c) A 5-bedroom house of strong materials for residence of the Bacolod Branch Manager of
the defendant company.

The term of the lease was five (5) years, to commence from the time that the building were delivered
and placed at the disposal of the lessee company, ready for immediate occupancy. The contract was
renewable for an additional period of five (5) years. The Manila Motor Company, in consideration of
the above covenants, agreed to pay to the lessors, or their duly authorized representative, a monthly
rental of Three Hundred (P300) pesos payable in advance before the fifth day of each month, and
for the residential house of its branch manager, a monthly rental not to exceed Fifty (P50) pesos
"payable separately by the Manager".
The leased premises were placed in the possession of the lessee on the 31st day of October, 1940,
from which date, the period of the lease started to run under their agreement.

This situation, the Manila Motor Co., Inc. and its branch manager enjoying the premises, and the
lessors receiving the corresponding rentals as stipulated, continued until the invasion of 1941; and
shortly after the Japanese military occupation of the Provincial Capital of Bacolod the enemy forces
held and used the properties leased as part of their quarters from June 1, 1942 to March 29, 1945,
ousting the lessee therefrom. No payment of rentals were made at any time during the said period.

Immediately upon the liberation of the said city in 1945, the American Forces occupied the same
buildings that were vacated by the Japanese, including those leased by the plaintiffs, until October
31, 1945. Monthly rentals were paid by the said occupants to the owners during the time that they
were in possession, as the same rate that the defendant company used to pay.

Thereafter, when the United States Army finally gave up the occupancy the premises, the Manila
Motor Co., Inc., through their branch manager, Rafael B. Grey, decided to exercise their option to
renew the contract for the additional period of five (5) years, and the parties, agreed that the seven
months occupancy by the U. S. Army would not be counted as part of the new 5-year term.
Simultaneously with such renewal, the company sublet the same buildings, except that used for the
residence of the branch manager, to the other defendant, Arturo Colmenares.

However, before resuming the collection of rentals, Dr. Alfredo Villaruel, who was entrusted with the
same, consulted Atty. Luis Hilado on whether they (the lessors) had the right to collect, from the
defendant company, rentals corresponding to the time during which the Japanese military forces had
control over the leased premises. Upon being advised that they had such a right, Dr. Villaruel
demanded payment thereof, but the defendant company refused to pay. As a result, Dr. Villaruel
gave notice seeking the rescission of the contract of lease and the payment of rentals from June 1,
1942 to March 31, 1945 totalling P11,900. This was also rejected by the defendant company in its
letter to Villaruel, dated July 27, 1946.

Sometime on that same month of July, Rafael B. Grey offered to pay to Dr. Villaruel the sum of
P350, for which, tenderer requested a receipt that would state that it was in full payment for the said
month. The latter expressed willingness to accept the tendered amount provided, however, that his
acceptance should be understood to be without prejudice to their demand for the rescission of the
contract, and for increased rentals until their buildings were returned to them. Later, Dr. Villaruel
indicated his willingness to limit the condition of his acceptance to be that "neither the lessee nor the
lessors admit the contention of the other by the mere fact of payment". As no accord could still be
reached between the parties as to the context of the receipt, no payment was thereafter tendered
until the end of November, 1946. On December 4, 1946 (the day after the defendant company
notified Dr. Villaruel by telegram, that it cancelled the power of attorney given to Grey, and that it
now authorized Arturo Colmenares, instead, to pay the rent of P350 each month), the Manila Motor
Co., Inc. remitted to Dr. Villaruel by letter, the sum of P350.00. For this payment, the latter issued a
receipt stating that it was "without prejudice" to their demand for rents in arrears and for the
rescission of the contract of lease.

After it had become evident that the parties could not settle their case amicably, the lessors
commenced this action on April 26, 1947 with the Court of First Instance of Negros Occidental
against the appellants herein. During the pendency of the case, a fire originating from the projection
room of the City Theatre, into which Arturo Colmenares, (the sublessee) had converted the former
repair shop of the Manila Motor Co. Inc., completely razed the building, engulfing also the main
building where Colmenares had opened a soda fountain and refreshment parlor, and made partitions
for store spaces which he rented to other persons.
Because of the aforesaid occurrence, plaintiffs demanded reimbursement from the defendants, but
having been refused, they filed a supplemental complaint to include as their third cause of action, the
recovery of the value of the burned buildings.

Defendants filed their amended answer and also moved for the dismissal of the plaintiffs' first and
second causes of action invoking the Debt Moratorium that was then in force. The dismissal was
granted by the trial court on February 5, 1951, but hearing was set as regards the third cause of
action.

On August 11, 1952, the defendant company filed a motion for summary judgment dismissing the
plaintiffs, third cause of action, to which plaintiffs registered objection coupled with a petition for
reconsideration of the order of the court dismissing the first and second causes of action. Pending
the resolution of this incident, plaintiffs, on October 2, 1953, called the court's attention to the
decision in the case of Rutter vs. Esteban (93 Phil., 68; 49 Off. Gaz. [5] 1807) invalidating the
continued effectivity of the Moratorium Law (R. A. 342). On November 25, 1953, the trial court
denied the defendant company's motion for summary judgment and set aside its previous order
dismissing the first and second causes of action. The case was accordingly heard and thereafter,
judgment was rendered in plaintiffs' favor in the terms set in the opening paragraph of this decision.
Thereafter, the defendants regularly appealed to this Court.

The defendants-appellants raise a number of procedural points. The first of these relates to their
contention that the supplemental complaint which included a third cause of action, should not have
been admitted, as it brought about a change in the original theory of the case and that it raised new
issues not theretofore considered. This argument cannot be sustained under the circumstances.
This action was inceptionally instituted for the rescission of the contract of lease and for the recovery
of unpaid rentals before and after liberation. When the leased buildings were destroyed, the
plaintiffs-lessors demanded from the defendants-lessees, instead, the value of the burned premises,
basing their right to do so on defendants' alleged default in the payment of post-liberation rentals
(which was also their basis in formerly seeking for rescission). This cannot be considered as already
altering the theory of the case which is merely a change in the relief prayed for, brought about by
circumstances occurring during the pendency of the action, and is not improper. (Southern Pacific
Co. vs. Conway, 115 F. 2d 746; Suburban Improvement Company vs. Scott Lumber Co., 87 A.L.R.
555, 59 F. 2d 711). The filing of the supplements complaint can well be justified also under section 2,
Rule 17 of the Rules of Court (on amendments) "to the end that the real matter in dispute and all
matters in the action in dispute between the parties may, as far as possible be completely
determined in a single proceedings". It is to be noted furthermore, that the admission or rejection of
this kind of pleadings is within the sound discretion of the court that will not be disturbed on appeal in
the absence of abuse thereof (see Sec. 5, Rule 17, Rules of Court), especially so, as in this case,
where no substantial procedural prejudice is caused to the adverse party.

It is urged that the dismissal of the first and second causes of action on February 5, 1951 had the
effect of a dismissal "with prejudice" as the court did not make any qualification in its dismissal order.
Appellants, apparently, lost sight of the fact that the dismissal was premised on the existence of the
"Debt Moratorium" which suspended the enforcement of the obligation up to a certain time. The
reference thereto by the lower court amounted to a dismissal "without prejudice", since in effect it
ruled that the plaintiffs could not, at the time they sought it, enforce their right of action against the
defendants, but plaintiffs must wait until the moratorium was lifted. In this way, the court qualified its
dismissal.

Taking up the case on its merits, it is readily seen that the key to the entire dispute is the question
whether the defendant-appellant Manila Motor Co., Inc. should be held liable for the rentals of the
premises leased corresponding to the lapse of time that they were occupied as quarters or barracks
by the invading Japanese army, and whether said appellant was placed in default by its refusal to
comply with the demand to pay such rents. For if the Motor Company was not so liable, then it never
was in default nor was it chargeable for the accidental lose of the buildings, nor for any damages
except the rental at the contract rate from its reoccupation of the premises leased until the same
were accidentally destroyed by fire on March 2, 1948.

The appellees contended, and the court below has held, that the ouster of the least company by the
Japanese occupation forces from 1942 until liberation, while operating to deprive the lessee of the
enjoyment of the thing leased, was, nevertheless, a mere act of trespass ("perturbacion de mero
hecho") that, under the Spanish Civil Code of 1889 (in force here until 1950), did not exempt the
lessee from the duty to pay rent. We find that contention and ruling erroneous and untenable.

The pertinent articles of the Civil Code of Spain of 1889 provide:

ART. 1554. It shall be the duty of the lessor;

1. To deliver to the lessee the thing which is the subject matter of the contract;

2. To make thereon, during the lease, all repairs necessary in order to keep it in serviceable
condition for the purpose for which it was intended;

3. To maintain the lessee in the peaceful enjoyment of the lease during the entire term of the
contract.

ART. 1560. The lessor shall not be liable for any act of mere disturbance of a third person of
the use of the leased property; but the lessee shall have a direct action against the
trespasser.

It the third person, be it the Government or a private individual, has acted in reliance upon a
right, such action shall not be deemed a mere act of disturbance. (Emphasis supplied)

Under the first paragraph of article 1560 the lessor does not answer for a mere act of trespass
( perturbacion de mero hecho) as distinguished from trespass under color of title ( perturbacion de
derecho). As to what would constitute a mere act of trespass, this Court in the case of Goldstein vs.
Roces (34 Phil. 562), made this pronouncement:

Si el hecho perturbador no va acompañado ni precedido de nada que revele una intencion

propiamentejuridica en el que lo realiza, de tal suerte que el arrendatario solo pueda
apreciar el hecho material desnudo de toda forma o motivacion de derecho, entendemos
que se trata de una perturbacion de mero hecho.

Upon the basis of the distinction thus established between the perturbacion de hecho and
the perturbacion de derecho, it is demonstrable that the ouster of the appellant by the Japanese
occupying forces belongs to the second class of disturbances, de derecho. For under the generally
accepted principles of international law (and it must be remembered that those principles are made
by our Constitution a part of the law of our nation 1) a belligerent occupant (like the Japanese in
1942-1945) may legitimately billet or quarter its troops in privately owned land and buildings for the
duration of its military operations, or as military necessity should demand. The well known writer
Oppenheim, discoursing on the laws of war on land, says upon this topic;
 Immovable private enemy property may under no circumstances or conditions be
appropriated by an invading belligerent. Should he confiscate and sell private land or
buildings, the buyer would acquire no right whatever to the property. Article 46 of the Hague
Regulations expressly enacts that "private property may not be confiscated." But confiscation
differs from the temporary use of private land and building for all kinds of purposes
demanded by the necessities of war. What has been said above with regard to utilization of
public buildings applied equally to private buildings. If necessary, they maybe converted into
hospital barracks, and stables without compensation for the proprietors, and they may also
be converted into fortifications. A humane belligerent will not drive the wretched inhabitants
into the street if he can help it. But under the pressure of necessity he may be obliged to do
this, and he is certainly not prohibited from doing it. (Emphasis supplied) (Oppenheim &
Lauterpach, International Law, Vol. II, p. 312, 1944 Ed.)

The view thus expressed is concurred in by other writers. Hyde (International Law, Vol. 3, p. 1893,
2nd Rev. Ed.) quotes the U. S. War Department 1940 Rules of Land Warfare (Rule No. 324) to the
effect that —

The measure of permissible devastation is found in the strict necessities of war. As an end in
itself, as a separate measure of war, devastation is not sanctioned by the law of war. There
must be some reasonably close connection between the destruction of property and the
overcoming of the enemy's army. Thus the rule requiring respect for private property is not
violated through damage resulting from operations, movements, or combats of the army; that
is, real estate may be utilized for marches, camp sites, construction of trenches,
etc. Buildings may be used for shelter for troops, the sick and wounded, for animals, for
reconnaissance, cover defense, etc. Fence, woods, crops, buildings, etc., may be
demolished, cut down, and removed to clear a field of fire, to construct bridges, to furnish
fuel if imperatively needed for the army. (Emphasis supplied)

Reference may also be made to Rule 336:

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

And Forest and Tucker state:

The billegerent occupant may destroy or appropriate public property which may have a
hostile purpose, as forts, arms, armories, etc. The occupying force may enjoy the income
from the public sources. Strictly private property should be inviolable, except so far as the
necessity of war requires contrary action. (Forest and Tucker, International Law, 9th Ed., p.
277) (Emphasis supplied)

The distinction between confiscation and temporary sequestration of private property by a belligerent
occupant was also passed upon by this Court in Haw Pia vs. China Banking Corporation, 80 Phil.
604, wherein the right of Japan to sequester or take temporary control over enemy private property
in the interest of its military effort was expressly recognized.

We are thus forced to conclude that in evicting the lessee, Manila Motor Co., Inc. from the leased
buildings and occupying the same as quarters for troops, the Japanese authorities acted pursuant to
a right recognized by international and domestic law. Its act of dispossession, therefore, did not
constitute perturbacion de hecho but aperturbacion de derecho for which the lessors Villaruel (and
not the appellants lessees) were liable (Art. 1560, supra) and for the consequences of which said
lessors must respond, since the result of the disturbance was the deprivation of the lessee of the
peaceful use and enjoyment of the property leased. Wherefore, the latter's corresponding obligation
to pay rentals ceased during such deprivation.

The Supreme Court of Spain, in its Sentencia of 6 December 1944, squarely declared the resolutory
effect of the military sequestration of properties under lease upon the lessee's obligation to pay rent
(Jurisprudencia Civil, Segunda Serie, Tomo 8, pp. 583, 608):.

Considerando que para resolver acerca de la procedencia del presente recurso es preciso
partir de las bases de hecho sentadas en la sentencia recurrida, y no impugnadas al amparo
del numero 7. del articulo 1.692 de la Ley de Enjuiciamiento civil, es decir, de que
hallandose vigente el contrato de arrendamiento celebrado entre actor y demandada, en
fecha que no se precisa, entre los dias del 18 al 31 de julio de 1936, los locales objeto de
dicho contrato de arrendamiento, y en los que no funcionaba de tiempo anterior la industria
para cuyo ejercicio se arrendaron, fueron requisados por el Ejercito Nacional, con motivo de
la guerra civil, para que se instalara en los mismos la Junta de Donativos al Ejercito del Sur,
aun cundo en dicha incautacion, que se hizo a la propiedad de la finca, no se observaron las
formalidades legales, a causa de las circunstancias extraordinarias por que a la sazon
atravesaba Sevilla, hecho que no consta se hiciera saber por los arrendatarios demandados
al actor, pero que fue notorio en aquella capital, donde residia el actor, que de el debio tener
conocimiento. Se estima igualmente por la Sala que el hecho de que la industria no
funcionara en el local no tuvo influencia alguna sobre su incautacion por el Ejercito.

Considerando que sobre tales bases de hecho es de desestimar el primer motivo del
recurso: violacion de los articulos 1.254, 1.278 y 1.091 del Codigo civil, que sancionan, en
terminos generales, la eficacia de los contratos, puesto que en el presente caso de los que
se trata en definitiva es de determinar si por virtud de fuerza mayor, la requisa a que se hace
referencia, ajena, por lo tanto, a culpa, asi del arrendatario como del arrendador, se vio
aquel privado del posible disfrute de la finca arrendada, y de si por virtud de esta
circunstancia esta o no exento de la obligacion de abonar la renta pactada durante el tiempo
que subsistio la incautacion; y es indudable la afirmativa en cuanto al primer extremo,
puesto que la sentencia recurrida establece que el hecho de que no funcionase la industria y
estuvieran los locales cerrados no actuo como causa de la requisa de estos por el Ejercito.

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

correspondientes al tiempo que duro la incautacion, lejos de infringir, por aplicacion
indebida, el art. 1.568 del Codigo civil, se ajusta la orientacion marcada en el mismo, puesto
que este precepto legal dispone que el arrendatario tiene accion contra el tercero
perturbador de mero hecho en la posesion de la finca arrendada, pero no contra la
Administracion o contra los que obran en virtud de un derecho que les corresponde; y aqui
la perturbacion que experimento el arrendador en su posesion, como consecuencia de la
requisa, no puede calificarse como de mero hecho, conforme al citado articulo, puesto que
la finca fue requisada por la autoridad militar para fines de guerra, de donde se sigue que el
arrendatario tenia que soportar la privacion de su tenencia material a traves del arrendador,
con quien ha de entenderse la requisa de la cosa arrendada.

In addition, the text of Art. 1560, in its first paragraph ( jam quot.) assumes that in case of mere
disturbance (perturbacion de mero hecho) "the lessee shall have a direct action against the
trespasser." This assumption evidently does not contemplate the case of dispossession of the
lessee by a military occupant, as pointed out by Mr. Chief Justice Paras in his dissenting opinion
in Reyes vs. Caltex (Phil.) Inc., 84 Phil. 669; for the reason that the lessee could not have a direct
action against the military occupant. It would be most unrealistic to expect that the occupation
courts, place under the authority of the occupying belligerent, should entertain at the time a suit for
forcible entry against the Japanese army. The plaintiffs, their lawyers, and in all probability, the
Judge and court personnel, would face "severest penalties" for such defiance of the invader.

The present case is distinguishable from Lo Ching vs. Archbishop of Manila (81 Phil., 601) in that the
act of the Japanese military involved in the latter case clearly went beyond the limits set by the
Hague Conventions, in seizing the property and delivering it to another private party; and
from Reyes vs. Caltex (Phil.) Inc., 84 Phil. 654, in that the rights of the military occupant under
international law were not raised or put in issue in said case; and moreover, the lessee there, by
failing to rescind the lease upon seizure of the premises by the Japanese military, despite the
stipulated power to do so, resumed business and decided to hold unto the long term lease for the
balance of its 20-year period, starting from December 23, 1940. In the case before us, the
occupation of the leased property by the Japanese army covered the major portion of the five-year
contractual period, without any option to rescind by the lessee.

The lessor's position is not improved by regarding the military seizure of the property under lease as
a case of force majeure or fortuitous event. Ordinarily, a party may not be held responsible therefor,
despite the fact that it prevented compliance of its obligations. But lease being a contract that calls
for prestations that are both reciprocal and repetitive (tractum successivum), the obligations of either
party are not discharged at any given moment, but must be fulfilled all throughout the term of the
contract. As a result, any substantial failure by one party to fulfill its commitments at any time during
the contract period gives rise to a failure of consideration (causa) for the obligations of the other
party and excuses the latter from the correlative performance, because the causa in lease must exist
not only at the perfection but throughout the term of the contract. No lessee would agree to pay rent
for premises he could not enjoy. As expressed by Marcel Planiol (quoted in 4 Castan, Derecho Civil,
7th Edition, p. 264) —

Como la obligacion del arrendador es sucesiva y se renueva todos los dias, la subsistencia
del arrendamiento se hace imposible cuando, por cualquier razon, el arrendador no puede
ya procurar al arrendatario el disfrute de la cosa.

This effect of the failure of reciprocity appears whether the failure is due to fault or to fortuitous
event; the only difference being that in case of fault, the other party is entitled to rescind the
contract in toto, and collect damages, while in casual non-performance it becomes entitled only to a
suspension pro tanto of its own commitments. This rule is recognized in par. 2 of Art. 1558,
authorizing the lessee to demand reduction of the rent in case of repairs depriving him of the
possession of part of the property; and in Art. 1575, enabling the lessee of rural property to demand
reduction of the rent if more than one-half of the fruits are lost by extraordinary fortuitous event. Of
course, where it becomes immediately apparent that the loss of possession or enjoyment will be
permanent, as in the case of accidental destruction of a leased building, the lease contract
terminates.

Applying these principles, the Sentencia of December 1944, already adverted to, ruled as follows:

Considerando que privado el arrendador, por tal hecho, del disfrute de esta, es manifiesta la
imposibilidad en que se vio de cumplir la tercera de las obligaciones que el impone el
articulo 1.554 del Codigo Civil, obligacion (la de mantener al arrendatario en el disfrute de la
cosa arrendada) que ha de entenderse reciproca de la de pago de renta pactada, que
impone al arrendatario el numero primero del art. 1.555 de dicho Cuerpo legal, y por ello no
puede ser exigida.
 Considerando que, aunque no sean estrictamente aplicables al caso los articulos 1.124,
1.556 y 1.568, que se citan como infringidos por el recurrente, suponiendo que a ellos ha
entendido referirse la Audiencia (lo que impediria, en todo caso, la estimacion del recurso
por este motivo, ya que dichos articulos no se citan en la sentencia de instancia), es
evidente que ellos proclaman la reciprocidad de las obligaciones entre arrendatario y
arrendador, y en este sentido, tratandose de un incumplimiento inculpable decontrato,
pueden servir, como tambien el 1.558, en cuanto preven la reduccion de rentas o posible
restriccion del contrato cuando el arrendatario se ve privado, por obras realizadas en la finca
arrendada, del disfrute de este, de fundamento, con los demas preceptos invocados, a una
extencion de renta mientras subsiste la imposibilidad de utilizar la cosa arrendada, sobre
todo cuando los articulos 157 y 158 del Reglamento de Requisas de 13 de enero de 1921
estatuyen claramente que las requisas de edificio se hacen a la propiedad, y es el
propietario el que puede pedir indemnization, uno de cuyos elementos es el precio del
alquiler que le sea satisfecho por el inmueble incautado.

We are aware that the rule in the common law is otherwise, due to its regarding a lease as a
conveyance to the lessee of a temporary estate or title to the leased property so that loss of
possession due to war or other fortuitous event leaves the tenant liable for the rent in the absence of
stipulation. The fundamental difference between the common law and the civil law concepts has
been outlined by the United States in Viterbo vs. Friedlander, 30 L. Ed. (U.S.) pp. 776, 778, in this
wise:

But as to the nature and effect of a lease for years, at a certain rent which the lessee agrees
to pay, and containing no express covenant on the part of the lessor, the two systems differ
materially. The common law regards such a lease as the grant of an estate for years, which
the lessee takes a title in, and is bound to pay the stipulated rent for, notwithstanding any
injury by flood, fire or external violence, at least unless the injury is such a destruction of the
land as to amount to an eviction; and by that law the lessor is under no implied covenant to
repair, or even that the premises shall be fit for the purpose for which they are leased. Fowler
vs. Bott, 6 Mass. 63; 3 Kent, Com. 465, 466; Broom, Legal Maxims, 3d ed. 213, 214; Doupe
vs. Genin, 45 N. Y. 119; Kingbury vs. Westfall, 61 N. Y. 356. Naumberg vs. Young, 15
Vroom, 331; Bowe vs. Hunking, 135 Mass. 380; Manchester Warehouse Co. vs. Carr, L.R. 5
C.P.D. 507.

The civil law, on the other hand, regards a lease for years as a mere transfer of the use and
enjoyment of the property; and holds the landlord bound, without any express covenant, to
keep it in repair and otherwise fit for use and enjoyment for the purpose for which it is leased,
even when the need of repair or the unfitness is caused by an inevitable accident, and if he
does not do so, the tenant may have the lease annulled, or the rent abated. Dig. 19, 2, 9, 2;
19, 2, 15, 1, 2; 19, 2, 25, 2; 19, 2, 39; 2 Gomez, Variae Resolutiones c. 3, secs. 1-3, 18, 19:
Gregorio Lopez in 5 Partidas, tit. 8, 11. 8, 22; Domat, Droit Civil, pt. 1, lib. 1, tit. 4, sec. 1, no.
1; sec. 3 nos. 1, 3, 6, Pothier, Contract de Louage, nos. 3, 6, 11, 22, 53, 103, 106, 139-155.

It is accordingly laid down in the Pandects, on the authority of Julian, "If anyone has let an
estate, that, even if anything happens by vis major, he must make it good, he must stand by
his contract," si quis fundum locaverit, ut, etiamsi quid vi majore accidisset, hoc ei
praestaretur, pacto standum esse; Dig. 19, 2, 9, 2; and on the authority of Ulpian, that "A
lease does not change the ownership," non solet locatio dominiun mutare; Dig. 19, 2, 39;
and that the lessee has a right of action, if he cannot enjoy the thing which he has hired, si re
quam conduxit frui non liceat, whether because his possession, either of the whole or of part
of the field, is not made good, or a house, or stable or sheepfold, is not repaired; and the
landlord ought to warrant the tenant, dominum colono praestare debere, against every
irresistible force, omnim vim cui resisti non potest, such as floods, flocks of birds, or any like
 cause, or invasion of enemies; and if the whole crop should be destroyed by a heavy rainfall,
or the olives should be spoiled by blight, or by extraordinary heat of the sun, solis fervore non
assueto, it would be the loss of the landlord, damnum domini futurum; and so if the field falls
in by an earthquake, for there must be made good to the tenant a field that he can
enjoy, oportere enim agrum praestari conductori, ut frui possit; but if any loss arises from
defects in the thing itself, si qua tamen vitia ex ipsa re oriantur, as if wine turns sour, or
standing corn is spoiled by worms or weeds, or if nothing extraordinary happens, si vero nihil
extra consuetudinem acciderit, it is the loss of the tenant, damnum coloni esse. Dig. 19, 2;
15, 1, 2. (Emphasis supplied)

In short, the law applies to leases the rule enunciated by the Canonists and the Bartolist School of
Post glossatorse, that "contractus qui tractum successivum habent et dependentiam de futuro, sub
conditione rebus sic stantibus intelliguntur," they are understood entered subject to the condition that
things will remain as they are, without material change.

It is also worthy of note that the lessors, through Dr. Javier Villaruel, agreed after liberation to a
renewal of the contract of lease for another five years (from June 1, 1946 to May 31 of 1951) without
making any reservation regarding the alleged liability of the lessee company for the rentals
corresponding to the period of occupancy of the premises by the Japanese army, and without
insisting that the non-payment of such rental was a breach of the contract of lease. This passivity of
the lessors strongly supports the claim of the lessees that the rentals in question were verbally
waived. The proffered explanation is that the lessors could not refuse to renew the lease, because
the privilege of renewal had been granted to the lessees in the original contract. Such excuse is
untenable: if the lessors deemed that the contract had been breached by the lessee's non-payment
of the occupation rents how could they admit the lessee's right to renew a contract that the lessee
itself had violated?

But this is not all. The lessors accepted payment of current rentals from October 1945 to June 1946.
It was only in July 1946 that they insisted upon collecting also the 1942-1945 rents, and refused to
accept further payments tendered by the lessee unless their right to collect the occupation rental
was recognized or reserved. After refusing the rents from July to November 1946, unless the lessee
recognized their right to occupation rentals, the appellees (lessors) demanded rescission of the
contract and a rental of P1,740 monthly in lieu of the stipulated P350 per month. (Exhibit "C").

This attitude of the lessors was doubly wrongful: first, because as already shown, the dispossession
by the Japanese army exempted the lessee from his obligation to pay rent for the period of its
ouster; and second, because even if the lessee had been liable for that rent, its collection in 1946
was barred by the moratorium order, Executive Order No. 32, that remained in force until replaced
by Rep. Act 342 in 1948. To apply the current rentals to the occupation obligations would amount to
enforcing them contrary to the moratorium decreed by the government.

Clearly, then, the lessor' insistence upon collecting the occupation rentals for 1942-1945 was
unwarranted in law. Hence, their refusal to accept the current rentals without qualification placed
them in default (mora creditoris or accipiendi) with the result that thereafter, they had to bear all
supervening risks of accidental injury or destruction of the leased premises. While not expressly
declared by the Code of 1889, this result is clearly inferable from the nature and effects of mora, and
from Articles 1185, 1452 [par. 3] and 1589).

ART. 1185. When the obligation to deliver a certain and determinate thing arises from the
commission of a crime or misdemeanor the obligor shall not be exempted from the payment
of its value, whatever the cause of its loss may have been, unless, having offered the thing to
the person entitled to receive it, the latter should have refused without reason to accept it.
 Art. 1452. . . . .

If fungible things should be sold for a price fixed with relation to weight, number, or measure,
they shall not be at the purchaser's risk until they have been weighed, counted, or measured,
unless the purchaser should be in default.

ART. 1589. If the person who contracted to do the work bound himself to furnish the
materials, he shall bear the loss in case of the destruction of the work before it is delivered,
unless its acceptance has been delayed by the default of the other party.

While there is a presumption that the loss of the thing leased is due to the fault of the lessee (Civil
Code of 1889, Art. 1563), it is noteworthy that the lessor have not invoked that presumption either
here or in the court below. On the contrary, the parties and the trial court have all proceeded and
discussed the issues taking for granted that the destruction of the leased buildings was purely
fortuitous. We see no reason for departing from that assumption and further prolonging this
litigation..

That the lessee and sublessee did not consign or deposit in court the rentals tendered to and
improperly rejected by the lessors, did not render the debtor liable for default (mora solvendi) nor
answerable for fortuitous events because, as explained by the Supreme Court of Spain in
its Sentencia of 5 June 1944 —

Al exigir el art. 1176 del Codigo Civil la consignacion para liberar al deudor no quiere decir que
necesariamente haya de practicarse, y no baste el ofrecimiento de pago que de aquella no fuere
seguido, a efectos de exclusion de las consecuencias de la mora solvendi. (8 Manresa,
Comentarios, 5th Ed., Vol. 1, p. 136).

In other words, the only effect of the failure to consign the rentals in court was that the obligation to
pay them subsisted (P.N.B. vs. Relativo, 92 Phil., 203) and the lessee remained liable for the
amount of the unpaid contract rent, corresponding to the period from July to November, 1946; it
being undisputed that, from December 1946 up to March 2, 1948, when the commercial buildings
were burned, the defendants-appellants have paid the contract rentals at the rate of P350 per
month. But the failure to consign did not eradicate the default (mora) of the lessors nor the risk of
loss that lay upon them. (3 Castan, Der. Civ., 8th Ed., p. 145; 4 Puig Peña, Der. Civ., part. 1, p. 234;
Diaz Pairo, Teoria Gen. de las Obligaciones [3rd Ed.], Vol. 1, pp. 192-193).

In view of the foregoing, we hold:lawphil.net

(a) That the dispossession of the lessee from the premises by the Japanese army of occupation was
not an act of mere trespass ( perturbacion de mero hecho) but one de derecho chargeable to the
lessors;

(b) That such dispossession, though not due to fault of lessors or lessee, nevertheless resulted in
the exemption of the lessee from its obligation to pay rent during the period that it was deprived of
the possession and enjoyment of the premises leased;

(c) That the insistence of the lessors to collect such rentals was unwarranted;

(d) That the lessors were not justified in refusing to accept the tender of current rentals unless the
lessee should recognize their right to the rents corresponding to the period that the lessee was not in
possession;
(e) That by their improper refusal to accept the current rents tendered by the lessee, the lessors
incurred in default (mora) and they must shoulder the subsequent accidental loss of the premises
leased;

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

Consequently, it was reversible error to sentence the appellants to pay P2,165 a month as
reasonable value of the occupation of the premises from July 1946, and the value of the destroyed
buildings amounting to P30,000.

Wherefore, the decision appealed from is modified in the sense that the appellant Manila Motor
Company should pay to the appellees Villaruel only the rents for the leased premises corresponding
to the period from July up to November 1946, at the rate of P350 a month, or a total of P1,750.
Costs against appellees in both instances. So ordered.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-49852 October 19, 1989

EMILIA TENGCO, petitioner,

vs.
COURT OF APPEALS and BENJAMIN CIFRA JR., respondents.

De Santos, Balgos & Perez for petitioner.

Teofilo F. Manalo for respondents.

PADILLA, J.:

Review on certiorari of the decision* rendered by the Court of Appeals in CA-G.R. NO. SP-08182,
entitled: "Emilia Tengco, petitioner, versus Court of First Instance of Rizal, etc., et al,
respondents," which dismissed herein petitioner's "Appeal by Way of Certiorari" from the judgment of
the Court of First Instance of Rizal in Civil Case No. C-6625 which affirmed the decision of the
Municipal Court of Navotas, Metro Manila, in Civil Case No. 2092, entitled: "Benjamin Cifra, plaintiff,
versus Emilia Tengco defendant," ordering the herein petitioner (as defendant) to vacate the
premises at No. 164 Int Gov. Pascual St., Navotas, Metro Manila, and to pay the herein private
respondent (as plaintiff) the arrears in rentals and attorney's fees; and the Resolution denying the
herein petitioner's motion for reconsideration of the said Court of Appeals decision.

The record of the case shows that on 16 September 1976, the herein private respondent, Benjamin
Cifra, Jr., claiming to be the owner of the premises at No. 164 Int Gov. Pascual St., Navotas, Metro
Manila, which he had leased to the herein petitioner, Emilia Tengco, filed an action for unlawful
detainer with the Municipal Court of Navotas, Metro Manila, docketed therein as Civil Case No.
2092, to evict the petitioner, Emilia Tengco, from the said premises for her alleged failure to comply
with the terms and conditions of the lease contract by failing and refusing to pay the stipulated
rentals despite repeated demands. After trial judgment was rendered against the petitioner. The
decretal portion of the decision reads, as follows:

WHEREFORE, Judgment is hereby rendered in favor of the plaintiff and against the
defendant, ordering the defendant and any and all persons claiming rights under her
to vacate the premises occupied by her at No. 164 Int Gov. Pascual Street, this town
and to surrender possession thereof to the plaintiff, condemning the defendant to pay
the plaintiff the amount of THREE HUNDRED SEVENTY SIX (P376.00) PESOS, as
rentals in arrears and the sum of TWELVE PESOS (P12.00), a month from October,
1976 until the premises is fully vacated. To pay the plaintiff the sum of TWO
HUNDRED (P200.00) PESOS as and for attorney's fees and costs of suit.

From this judgment, the herein petitioner appealed to the Court of First Instance of Rizal where the
appeal was docketed as Civil Case No. C-6625. On 18 May 1978, the Court of First Instance of Rizal
rendered judgment affirming the decision of the municipal court, the dispositive part of which reads
as follows:

WHEREFORE, premises considered, judgment is hereby rendered affirming in

toto the judgment of the lower court dated September 20, 1 977 without
pronouncement as to costs.

Not satisfied, the herein petitioner filed with the respondent Court of Appeals an "Appeal by Way of
Certiorari" which was docketed as CA-G.R. NO. SP-08182. On 29 August 1978, the respondent
Court of Appeals promulgated a decision, with the following disposition:

WHEREFORE, finding that the Decision of the lower Court is supported by

substantial evidence and that its conclusions are not clearly against the law and
jurisprudence, the instant petition is hereby denied due course and is dismissed
outright.

The petitioner filed a motion for reconsideration of the decision but her motion was denied on 16
January 1979.

Hence, the present recourse.

The petitioner contends that the respondent Court of Appeals erred in sustaining the decisions of the
appellate and trial courts which are allegedly contrary to the evidence and applicable jurisprudence.
The petitioner more particularly claims that (1) the private respondent Benjamin Cifra, Jr. is not the
owner of the leased premises; (2) the lessor was guilty of mora accipiendi; (3) the petitioner's version
of the facts is more credible than private respondent's; (4) laches had deprived the lessor of the right
to eject her; and (5) the private respondent failed to establish a cause of action against the
petitioner.

We find no merit in the petition. The reasons advanced by the petitioner to support her petition are
the same reasons given by her to the Court of Appeals in support of her "Appeal by Way
of Certiorari" and we find no ground to adopt a different course from that of the respondent appellate
court. In disposing of the petitioner's contentions, the Court of Appeals said:

Petitioner claims that private respondent had failed to establish his ownership of the
lot in question for while the Certificate of Title presented by him refers to a parcel of
land situated at Bo. Almacen, Navotas, the premises in question, on the other hand,
is situated in Bo. Sipak Navotas; that it was not with private respondent that she
entered into the lease agreement but with his mother; that her failure to pay the
rentals on the premises was due to the refusal of the collector to accept her tender of
payment; and that laches had deprived private respondent of whatever right he had
against her considering that the Complaint was filed only in September, 1976
whereas his cause of action arose sometime in February, 1974 when she defaulted
in the payment of rentals.

We find this appeal which We consider as a Petition for Review, to be without merit.

It should be noted that petitioner admits that she is a lessee on the premises in
question and that she had been in default in the payment of the rentals thereon since
February, 1974 allegedly because of the refusal of the collector to accept her tender
of payment. However, she claims that the lease agreement was not with private
respondent, but with his mother. The question as to who is the real lessor of the
 premises is one of fact and the findings of the lower court that it was private
respondent is entitled to the highest respect by appellate Courts barring any material
evidence to the contrary. Neither can petitioner question private respondent's claim
of ownership of the leased premises. The tenant is not permitted to deny the title of
his landlord at the time of the commencement of the relation of landlord and tenant
between them.

Petitioner's excuse for her non-payment of the rentals on the premises deserves
scant consideration. If, indeed, her offer to settle her obligation was refused by
private respondent, she should have resorted to the judicial deposit of the amount
due in order to release her from responsibility.

Petitioner's claim that private respondent's cause of' action is barred by laches is
untenable. While it is true that petitioner's arrearages date back to February, 1974,
however, a tenant's mere failure to pay rent does not ipso facto make unlawful his
possession of the leased premises. As held by respondent Court of First Instance, it
is the failure to pay rents after a demand therefor is made that entitles the lessor to
bring an action of Unlawful Detainer. Moreover, the lessor has the privilege to waive
his right to bring an action against his tenant and give the latter credit for the
payment of the rents and allow him to continue indefinitely in the possession of the
premises. During such period, the tenant would not be in illegal possession of the
premises and the landlord can not maintain an action until after he has taken steps to
convert the legal possession into an illegal possession. Thus, in the case at bar, the
demand on petitioner to vacate the premises for failure to pay the rentals thereon
was made by private respondent only on August 23, 1976 and the Complaint against
petitioner was filed on September 16,1976.

Consequently, petitioner's non-payment of the rentals on the premises,

notwithstanding demand made by private respondent, and her failure to avail of the
remedy provided for in Article 1256 of the Civil Code, entitles private respondent to
eject her from the premises.

Indeed, the question of whether or not private respondent is the owner of the leased premises is one
of fact which is within the cognizance of the trial court whose findings thereon will not be disturbed
on appeal unless there is a showing that the trial court had overlooked, misunderstood, or
misapplied some fact or circumstance of weight and substance that would have affected the result of
the case. And since the petitioner has not presented sufficient proof that the leased premises is not
the same lot registered in the name of the private respondent, the findings of the lower courts on the
fact of ownership of the leased premises will not be disturbed.

The maps attached by the petitioner to her Reply to the Comment of the private respondent which
would tend to show that Almacen and Sipac are two (2) different barangays or sitios, cannot offset
the findings of the trial court for lack of proper Identifications; in fact, these maps do not even
indicate where the property at No. 164 Int Gov. Pascual Street is located.

The petitioner's contention that the provisions of Section 1, Commonwealth Act No. 53, should be
applied in this case in determining the credibility of witnesses, is untenable. The said law provides:

Sec. 1. Where a covenant or contract made between the owner of land and a lessee
or tenant on share thereof has not been reduced to writing or has not been set forth
in a document written in a language known to the lessee or tenant, the testimony of
 such lessee or tenant shall be accepted as prima facieevidence on the terms of a
covenant or contract.

As can be seen, the cited law can be invoked only when there is a dispute between the owner of the
land and the lessee or tenant on share tenancy as to the terms of an unwritten contract or where the
contract is written in a language not known to the lessee or tenant. In the instant case, there is no
dispute as to the terms of the contract of lease. Hence, the cited law cannot be invoked to support
the petitioner's claim that the private respondent is not the owner of the leased premises or that the
petitioner's version of the facts of the case is more credible than that of the private respondent.

Besides, the petitioner's contention that the private respondent is not the owner of the leased
premises is inconsistent with her claim that she had tendered payment of the rentals for the month of
January 1976 to the private respondent. 1

There is also no merit in the petitioner's contention that the lessor is guilty of mora accipiendi. The
circumstances surrounding the alleged refusal of the lessor (private respondent) to accept the
proffered rentals, according to petitioner, are as follows:

Sometime in 1942, petitioner entered into a verbal lease agreement with Lutgarda
Cifra over the premises in question which belonged to the latter. Aside from the
amount of rentals, no other condition or term was agreed upon. The rentals were
collected from her residence by the lessor's collector who went to her house to
demand and collect payment from time to time, with no fixed frequency (Cf., t.s.n.
July 28, 1977, pp. 2-6).

Sometime in 1974, the lessor's collector stopped going to the petitioner's residence
to collect her rentals, as she had done in the past. The defendant-appellant waited
for the collector to come but the latter never showed up again in his neighborhood.
Since no demand for payment was made upon her, the petitioner decided to keep
the money until the collector comes again to demand and collect payment.

Sometime in May, 1976, petitioner received a letter (Exh. 1) from Aurora C. Recto,
sister of private respondent, informing the former that the latter, was the owner of the
property in question, was offering the same for sale.

Sometime later, or in August 1977, petitioner received another letter, this time from
the private respondent, demanding the surrender of the possession of the premises
in question, also claiming to be the owner of the property.

Upon receipt of this letter, petitioner forthwith went to the residence of the collector,
another sister of the private respondent to whom she had been paying her rentals,
and there tendered payment but this was refused without any justification (t.s.n. July
26, 1 977, p. 7). 2

Under the circumstances, the refusal to accept the proffered rentals is not without justification. The
ownership of the property had been transferred to the private respondent and the person to whom
payment was offered had no authority to accept payment. It should be noted that the contract of
lease between the petitioner and Lutgarda Cifra, the former owner of the land, was not in writing
and, hence, unrecorded. The Court has held that a contract of lease executed by the vendor, unless
recorded, ceases to have effect when the property is sold, in the absence of a contrary
agreement. 3 The petitioner cannot claim ignorance of the transfer of ownerhip of the property
because, by her own account, Aurora Recto and the private respondent, at various times, had
informed her of their respective claims to ownership of the property occupied by the petitioner. The
petitioner should have tendered payment of the rentals to the private respondent and if that was not
possible, she should have consigned such rentals in court.

Finally, we find no merit in the petitioner's contention that the private respondent is guilty of laches.
As the Court of Appeals had stated, the demand for the petitioner to vacate the premises and to pay
arrears in rentals was made on 23 August 1976 and the complaint seeking her ejectment was filed a
few days thereafter, or on 16 September 1976.

For reasons aforestated, the judgment of the Court of Appeals appears to be in accord with the
evidence and the law.

WHEREFORE, the petition is hereby DENIED. Without pronouncement as to costs. This decision is
immediately executory.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-45710 October 3, 1985

CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF
THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as statutory
receiver of Island Savings Bank, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents.

I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.

Antonio R. Tupaz for private respondent.

MAKASIAR, CJ.:

This is a petition for review on certiorari to set aside as null and void the decision of the Court of
Appeals, in C.A.-G.R. No. 52253-R dated February 11, 1977, modifying the decision dated February
15, 1972 of the Court of First Instance of Agusan, which dismissed the petition of respondent
Sulpicio M. Tolentino for injunction, specific performance or rescission, and damages with
preliminary injunction.

On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department,
approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the
loan, executed on the same day a real estate mortgage over his 100-hectare land located in Cubo,
Las Nieves, Agusan, and covered by TCT No. T-305, and which mortgage was annotated on the
said title the next day. The approved loan application called for a lump sum P80,000.00 loan,
repayable in semi-annual installments for a period of 3 years, with 12% annual interest. It was
required that Sulpicio M. Tolentino shall use the loan proceeds solely as an additional capital to
develop his other property into a subdivision.

On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank;
and Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory note for P17,000.00 at
12% annual interest, payable within 3 years from the date of execution of the contract at semi-
annual installments of P3,459.00 (p. 64, rec.). An advance interest for the P80,000.00 loan covering
a 6-month period amounting to P4,800.00 was deducted from the partial release of P17,000.00. But
this pre-deducted interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being
informed by the Bank that there was no fund yet available for the release of the P63,000.00 balance
(p. 47, rec.). The Bank, thru its vice-president and treasurer, promised repeatedly the release of the
P63,000.00 balance (p. 113, rec.).

On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was
suffering liquidity problems, issued Resolution No. 1049, which provides:

In view of the chronic reserve deficiencies of the Island Savings Bank against its
deposit liabilities, the Board, by unanimous vote, decided as follows:
 1) To prohibit the bank from making new loans and investments [except investments
in government securities] excluding extensions or renewals of already approved
loans, provided that such extensions or renewals shall be subject to review by the
Superintendent of Banks, who may impose such limitations as may be necessary to
insure correction of the bank's deficiency as soon as possible;

xxx xxx xxx

(p. 46, rec.).

On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to put up the
required capital to restore its solvency, issued Resolution No. 967 which prohibited Island Savings
Bank from doing business in the Philippines and instructed the Acting Superintendent of Banks to
take charge of the assets of Island Savings Bank (pp. 48-49, rec).

On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the
promissory note, filed an application for the extra-judicial foreclosure of the real estate mortgage
covering the 100-hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the auction for
January 22, 1969.

On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan
for injunction, specific performance or rescission and damages with preliminary injunction, alleging
that since Island Savings Bank failed to deliver the P63,000.00 balance of the P80,000.00 loan, he is
entitled to specific performance by ordering Island Savings Bank to deliver the P63,000.00 with
interest of 12% per annum from April 28, 1965, and if said balance cannot be delivered, to rescind
the real estate mortgage (pp. 32-43, rec.).

On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary
restraining order enjoining the Island Savings Bank from continuing with the foreclosure of the
mortgage (pp. 86-87, rec.).

On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal of
the petition of Sulpicio M. Tolentino and the setting aside of the restraining order, filed by the Central
Bank and by the Acting Superintendent of Banks (pp. 65-76, rec.).

On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding
unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank the
amount of PI 7 000.00 plus legal interest and legal charges due thereon, and lifting the restraining
order so that the sheriff may proceed with the foreclosure (pp. 135-136. rec.

On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court
of First Instance decision by affirming the dismissal of Sulpicio M. Tolentino's petition for specific
performance, but it ruled that Island Savings Bank can neither foreclose the real estate mortgage nor
collect the P17,000.00 loan pp. 30-:31. rec.).

Hence, this instant petition by the central Bank.

The issues are:

1. Can the action of Sulpicio M. Tolentino for specific performance prosper?

 2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the
promissory note?

3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real
estate mortgage be foreclosed to satisfy said amount?

When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on
April 28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or
promise of each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46
[1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has performed or is
ready and willing to perform his part of the contract, the other party who has not performed or is not
ready and willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M.
Tolentino to pay was the consideration for the obligation of Island Savings Bank to furnish the
P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April 28, 1965, he
signified his willingness to pay the P80,000.00 loan. From such date, the obligation of Island Savings
Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan
started on April 28, 1965, and lasted for a period of 3 years or when the Monetary Board of the
Central Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank
from doing further business. Such prohibition made it legally impossible for Island Savings Bank to
furnish the P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take
over insolvent banks for the protection of the public is recognized by Section 29 of R.A. No. 265,
which took effect on June 15, 1948, the validity of which is not in question.

The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island
Savings Bank in complying with its obligation of releasing the P63,000.00 balance because said
resolution merely prohibited the Bank from making new loans and investments, and nowhere did it
prohibit island Savings Bank from releasing the balance of loan agreements previously contracted.
Besides, the mere pecuniary inability to fulfill an engagement does not discharge the obligation of
the contract, nor does it constitute any defense to a decree of specific performance (Gutierrez
Repide vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is
never an excuse for the non-fulfillment of an obligation but 'instead it is taken as a breach of the
contract by him (vol. 17A, 1974 ed., CJS p. 650)

The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest
amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be
taken as a waiver of his right to collect the P63,000.00 balance. The act of Island Savings Bank, in
asking the advance interest for 6 months on the supposed P80,000.00 loan, was improper
considering that only P17,000.00 out of the P80,000.00 loan was released. A person cannot be
legally charged interest for a non-existing debt. Thus, the receipt by Sulpicio M. 'Tolentino of the pre-
deducted interest was an exercise of his right to it, which right exist independently of his right to
demand the completion of the P80,000.00 loan. The exercise of one right does not affect, much less
neutralize, the exercise of the other.

The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot
exempt it from complying with its reciprocal obligation to furnish the entire P80,000.00 loan. 'This
Court previously ruled that bank officials and employees are expected to exercise caution and
prudence in the discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151
[1981]). It is the obligation of the bank's officials and employees that before they approve the loan
application of their customers, they must investigate the existence and evaluation of the properties
being offered as a loan security. The recent rush of events where collaterals for bank loans turn out
to be non-existent or grossly over-valued underscore the importance of this responsibility. The mere
reliance by bank officials and employees on their customer's representation regarding the loan
collateral being offered as loan security is a patent non-performance of this responsibility. If ever
bank officials and employees totally reIy on the representation of their customers as to the valuation
of the loan collateral, the bank shall bear the risk in case the collateral turn out to be over-valued.
The representation made by the customer is immaterial to the bank's responsibility to conduct its
own investigation. Furthermore, the lower court, on objections of' Sulpicio M. Tolentino, had enjoined
petitioners from presenting proof on the alleged over-valuation because of their failure to raise the
same in their pleadings (pp. 198-199, t.s.n. Sept. 15. 1971). The lower court's action is sanctioned
by the Rules of Court, Section 2, Rule 9, which states that "defenses and objections not pleaded
either in a motion to dismiss or in the answer are deemed waived." Petitioners, thus, cannot raise the
same issue before the Supreme Court.

Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan
agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose between specific
performance or rescission with damages in either case. But since Island Savings Bank is now
prohibited from doing further business by Monetary Board Resolution No. 967, WE cannot grant
specific performance in favor of Sulpicio M, Tolentino.

Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the
P63,000.00 balance of the P80,000.00 loan, because the bank is in default only insofar as such
amount is concerned, as there is no doubt that the bank failed to give the P63,000.00. As far as the
partial release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a promissory note
to cover it, the bank was deemed to have complied with its reciprocal obligation to furnish a
P17,000.00 loan. The promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to
pay the P17,000.00 loan when it falls due. His failure to pay the overdue amortizations under the
promissory note made him a party in default, hence not entitled to rescission (Article 1191 of the
Civil Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved party,
that is, Island Savings Bank. If Tolentino had not signed a promissory note setting the date for
payment of P17,000.00 within 3 years, he would be entitled to ask for rescission of the entire loan
because he cannot possibly be in default as there was no date for him to perform his reciprocal
obligation to pay.

Since both parties were in default in the performance of their respective reciprocal obligations, that
is, Island Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M.
Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3 years as stipulated,
they are both liable for damages.

Article 1192 of the Civil Code provides that in case both parties have committed a breach of their
reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts. WE
rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is offset by
the liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not
paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his PI
7,000.00 debt shall not be included in offsetting the liabilities of both parties. Since Sulpicio M.
Tolentino derived some benefit for his use of the P17,000.00, it is just that he should account for the
interest thereon.

WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely
foreclosed to satisfy his P 17,000.00 debt.

The consideration of the accessory contract of real estate mortgage is the same as that of the
principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the debtor, the
consideration of his obligation to pay is the existence of a debt. Thus, in the accessory contract of
real estate mortgage, the consideration of the debtor in furnishing the mortgage is the existence of a
valid, voidable, or unenforceable debt (Art. 2086, in relation to Art, 2052, of the Civil Code).

The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no consideration was
then in existence, as there was no debt yet because Island Savings Bank had not made any release
on the loan, does not make the real estate mortgage void for lack of consideration. It is not
necessary that any consideration should pass at the time of the execution of the contract of real
mortgage (Bonnevie vs. C.A., 125 SCRA 122 [1983]). lt may either be a prior or subsequent matter.
But when the consideration is subsequent to the mortgage, the mortgage can take effect only when
the debt secured by it is created as a binding contract to pay (Parks vs, Sherman, Vol. 176 N.W. p.
583, cited in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is partial failure of
consideration, the mortgage becomes unenforceable to the extent of such failure (Dow. et al. vs.
Poore, Vol. 172 N.E. p. 82, cited in Vol. 59, 1974 ed. CJS, p. 138). Where the indebtedness actually
owing to the holder of the mortgage is less than the sum named in the mortgage, the mortgage
cannot be enforced for more than the actual sum due (Metropolitan Life Ins. Co. vs. Peterson, Vol.
19, F(2d) p. 88, cited in 5th ed., Wiltsie on Mortgage, Vol. 1, P. 180).

Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan, the real
estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is
78.75% of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to
the extent of 78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a
security for the P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00 debt.

The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is
inapplicable to the facts of this case.

Article 2089 provides:

A pledge or mortgage is indivisible even though the debt may be divided among the
successors in interest of the debtor or creditor.

Therefore, the debtor's heirs who has paid a part of the debt can not ask for the
proportionate extinguishment of the pledge or mortgage as long as the debt is not
completely satisfied.

Neither can the creditor's heir who have received his share of the debt return the
pledge or cancel the mortgage, to the prejudice of other heirs who have not been
paid.

The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes
several heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of
indivisibility of a mortgage cannot apply

WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977 IS
HEREBY MODIFIED, AND

1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN

PETITIONERS THE SUM OF P17.000.00, PLUS P41,210.00 REPRESENTING 12% INTEREST
PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST 22, 1985, AND 12%
INTEREST ON THE TOTAL AMOUNT COUNTED FROM AUGUST 22, 1985 UNTIL PAID;
2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE
COVERING 21.25 HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL
INDEBTEDNESS; AND

3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED

UNEN FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M.
TOLENTINO.

NO COSTS. SO ORDERED.
 EN BANC

FRANCISCO CHAVEZ, G.R. No. 168338

Petitioner,
Present:

PUNO, C.J.,
QUISUMBING,
YNARES-SANTIAGO,
- versus - SANDOVAL-GUTIERREZ,
CARPIO,
AUSTRIA-MARTINEZ,
CORONA,
CARPIO MORALES,
AZCUNA,
TINGA,
CHICO-NAZARIO,
RAUL M. GONZALES, VELASCO, JR.,
in his capacity as the NACHURA,
Secretary of the REYES, and
Department of Justice; LEONARDO-DE CASTRO, JJ.
and NATIONAL
TELECOMMUNICATIONS Promulgated:
COMMISSION (NTC),
Respondents. February 15, 2008

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

DECISION

PUNO, C.J.:

A. Precis
In this jurisdiction, it is established that freedom of the press is crucial and so inextricably woven
into the right to free speech and free expression, that any attempt to restrict it must be met with an
examination so critical that only a danger that is clear and present would be allowed to curtail it.
Indeed, we have not wavered in the duty to uphold this cherished freedom. We have struck
down laws and issuances meant to curtail this right, as in Adiong v. COMELEC,[1] Burgos v. Chief
of Staff,[2] Social Weather Stations v. COMELEC,[3] and Bayan v. Executive Secretary
Ermita.[4] When on its face, it is clear that a governmental act is nothing more than a naked means
to prevent the free exercise of speech, it must be nullified.

B. The Facts

1. The case originates from events that occurred a year after the 2004 national and local
elections. On June 5, 2005, Press Secretary Ignacio Bunye told reporters that the opposition
was planning to destabilize the administration by releasing an audiotape of a mobile phone
conversation allegedly between the President of the Philippines, Gloria Macapagal Arroyo,
and a high-ranking official of the Commission on Elections (COMELEC). The
conversation was audiotaped allegedly through wire-tapping.[5] Later, in
a Malacaang press briefing, Secretary Bunye produced two versions of the tape, one
supposedly the complete version, and the other, a spliced, doctored or altered version,
which would suggest that the President had instructed the COMELEC official to
manipulate the election results in the Presidents favor. [6] It seems that Secretary Bunye
admitted that the voice was that of President Arroyo, but subsequently made a retraction. [7]

2. On June 7, 2005, former counsel of deposed President Joseph Estrada, Atty. Alan Paguia,
subsequently released an alleged authentic tape recording of the wiretap. Included in the
tapes were purported conversations of the President, the First Gentleman Jose Miguel
Arroyo, COMELEC Commissioner Garcillano, and the late Senator Barbers.[8]

3. On June 8, 2005, respondent Department of Justice (DOJ) Secretary Raul Gonzales

warned reporters that those who had copies of the compact disc (CD) and those
broadcasting or publishing its contents could be held liable under the Anti-Wiretapping
Act. These persons included Secretary Bunye and Atty. Paguia. He also stated that persons
possessing or airing said tapes were committing a continuing offense, subject to arrest by
anybody who had personal knowledge if the crime was committed or was being committed
in their presence.[9]
4. On June 9, 2005, in another press briefing, Secretary Gonzales ordered the National
Bureau of Investigation (NBI) to go after media organizations found to have caused the
spread, the playing and the printing of the contents of a tape of an alleged wiretapped
conversation involving the President about fixing votes in the 2004 national
elections. Gonzales said that he was going to start with Inq7.net, a joint venture between
the Philippine Daily Inquirer and GMA7 television network, because by the very nature
of the Internet medium, it was able to disseminate the contents of the tape more widely. He
then expressed his intention of inviting the editors and managers of Inq7.net and GMA7 to
a probe, and supposedly declared, I [have] asked the NBI to conduct a tactical interrogation
of all concerned. [10]
5. On June 11, 2005, the NTC issued this press release: [11]
NTC GIVES FAIR WARNING TO RADIO AND TELEVISION
OWNERS/OPERATORS TO OBSERVE ANTI-WIRETAPPING LAW
AND PERTINENT CIRCULARS ON PROGRAM STANDARDS

xxx xxx xxx

Taking into consideration the countrys unusual situation, and in order not to
unnecessarily aggravate the same, the NTC warns all radio stations and
television network owners/operators that the conditions of the authorization
and permits issued to them by Government like the Provisional Authority
and/or Certificate of Authority explicitly provides that said companies shall
not use [their] stations for the broadcasting or telecasting of false information
or willful misrepresentation. Relative thereto, it has come to the attention of
the [NTC] that certain personalities are in possession of alleged taped
conversations which they claim involve the President of the Philippines and
a Commissioner of the COMELEC regarding supposed violation of election
laws.

These personalities have admitted that the taped conversations are products
of illegal wiretapping operations.

Considering that these taped conversations have not been duly authenticated
nor could it be said at this time that the tapes contain an accurate or truthful
representation of what was recorded therein, it is the position of the [NTC]
that the continuous airing or broadcast of the said taped conversations by
radio and television stations is a continuing violation of the Anti-
Wiretapping Law and the conditions of the Provisional Authority and/or
Certificate of Authority issued to these radio and television stations. It has
been subsequently established that the said tapes are false and/or fraudulent
after a prosecution or appropriate investigation, the concerned radio and
television companies are hereby warned that their broadcast/airing of
 such false information and/or willful misrepresentation shall be just
cause for the suspension, revocation and/or cancellation of the licenses
or authorizations issued to the said companies.

In addition to the above, the [NTC] reiterates the pertinent NTC circulars on
program standards to be observed by radio and television stations. NTC
Memorandum Circular 111-12-85 explicitly states, among others, that all
radio broadcasting and television stations shall, during any broadcast or
telecast, cut off from the air the speech, play, act or scene or other matters
being broadcast or telecast the tendency thereof is to disseminate false
information or such other willful misrepresentation, or to propose and/or
incite treason, rebellion or sedition. The foregoing directive had been
reiterated by NTC Memorandum Circular No. 22-89, which, in addition
thereto, prohibited radio, broadcasting and television stations from using
their stations to broadcast or telecast any speech, language or scene
disseminating false information or willful misrepresentation, or inciting,
encouraging or assisting in subversive or treasonable acts.

The [NTC] will not hesitate, after observing the requirements of due
process, to apply with full force the provisions of said Circulars and
their accompanying sanctions on erring radio and television stations
and their owners/operators.

6. On June 14, 2005, NTC held a dialogue with the Board of Directors of the Kapisanan ng
mga Brodkaster sa Pilipinas (KBP). NTC allegedly assured the KBP that the press release
did not violate the constitutional freedom of speech, of expression, and of the press, and
the right to information. Accordingly, NTC and KBP issued a Joint Press
Statement which states, among others, that: [12]

NTC respects and will not hinder freedom of the press and the right to
information on matters of public concern. KBP & its members have always
been committed to the exercise of press freedom with high sense of
responsibility and discerning judgment of fairness and honesty.

NTC did not issue any MC [Memorandum Circular] or Order constituting a

restraint of press freedom or censorship. The NTC further denies and does
not intend to limit or restrict the interview of members of the opposition or
free expression of views.

What is being asked by NTC is that the exercise of press freedom [be] done
responsibly.

KBP has program standards that KBP members will observe in the treatment
of news and public affairs programs. These include verification of sources,
 non-airing of materials that would constitute inciting to sedition and/or
rebellion.

The KBP Codes also require that no false statement or willful

misrepresentation is made in the treatment of news or commentaries.

The supposed wiretapped tapes should be treated with sensitivity and handled
responsibly giving due consideration to the process being undertaken to
verify and validate the authenticity and actual content of the same.

C. The Petition

Petitioner Chavez filed a petition under Rule 65 of the Rules of Court against respondents
Secretary Gonzales and the NTC, praying for the issuance of the writs of certiorari and
prohibition, as extraordinary legal remedies, to annul void proceedings, and to prevent the
unlawful, unconstitutional and oppressive exercise of authority by the respondents.[13]

Alleging that the acts of respondents are violations of the freedom on expression and of the
press, and the right of the people to information on matters of public concern,[14] petitioner
specifically asked this Court:

[F]or [the] nullification of acts, issuances, and orders of respondents committed or

made since June 6, 2005 until the present that curtail the publics rights to freedom
of expression and of the press, and to information on matters of public concern
specifically in relation to information regarding the controversial taped conversion
of President Arroyo and for prohibition of the further commission of such acts, and
making of such issuances, and orders by respondents. [15]

Respondents[16] denied that the acts transgress the Constitution, and questioned petitioners
legal standing to file the petition. Among the arguments they raised as to the validity of the fair
warning issued by respondent NTC, is that broadcast media enjoy lesser constitutional guarantees
compared to print media, and the warning was issued pursuant to the NTCs mandate to regulate
the telecommunications industry. [17] It was also stressed that most of the [television] and radio
stations continue, even to this date, to air the tapes, but of late within the parameters agreed upon
between the NTC and KBP. [18]

D. THE PROCEDURAL THRESHOLD: LEGAL STANDING

 To be sure, the circumstances of this case make the constitutional challenge peculiar.
Petitioner, who is not a member of the broadcast media, prays that we strike down the acts and
statements made by respondents as violations of the right to free speech, free expression and a free
press. For another, the recipients of the press statements have not come forwardneither intervening
nor joining petitioner in this action. Indeed, as a group, they issued a joint statement with
respondent NTC that does not complain about restraints on freedom of the press.

It would seem, then, that petitioner has not met the requisite legal standing, having failed
to allege such a personal stake in the outcome of the controversy as to assure that concrete
adverseness which sharpens the presentation of issues upon which the Court so largely depends
for illumination of difficult constitutional questions. [19]

But as early as half a century ago, we have already held that where serious constitutional questions
are involved, the transcendental importance to the public of these cases demands that they be
settled promptly and definitely, brushing aside if we must, technicalities of
procedure. [20] Subsequently, this Court has repeatedly and consistently refused to wield
procedural barriers as impediments to its addressing and resolving serious legal questions that
greatly impact on public interest,[21] in keeping with the Court's duty under the 1987 Constitution
to determine whether or not other branches of government have kept themselves within the limits
of the Constitution and the laws and that they have not abused the discretion given to them.

Thus, in line with the liberal policy of this Court on locus standi when a case involves an issue of
overarching significance to our society,[22] we therefore brush aside technicalities of procedure and
take cognizance of this petition,[23] seeing as it involves a challenge to the most exalted of all the
civil rights, the freedom of expression. The petition raises other issues like the extent of the
right to information of the public. It is fundamental, however, that we need not address all
issues but only the most decisive one which in the case at bar is whether the acts of the
respondents abridge freedom of speech and of the press.

But aside from the primordial issue of determining whether free speech and freedom of
the press have been infringed, the case at bar also gives this Court the opportunity: (1) to
distill the essence of freedom of speech and of the press now beclouded by the vagaries of
motherhood statements; (2) to clarify the types of speeches and their differing restraints
allowed by law; (3) to discuss the core concepts of prior restraint, content-neutral and
content-based regulations and their constitutional standard of review; (4) to examine the
historical difference in the treatment of restraints between print and broadcast media and
stress the standard of review governing both; and (5) to call attention to the ongoing blurring
of the lines of distinction between print and broadcast media.

E. RE-EXAMINING THE LAW ON FREEDOM OF SPEECH,

OF EXPRESSION AND OF THE PRESS

No law shall be passed abridging the freedom of speech, of expression, or of the

press, or the right of the people peaceably to assemble and petition the government
for redress of grievances.[24]

Freedom of expression has gained recognition as a fundamental principle of every

democratic government, and given a preferred right that stands on a higher level than substantive
economic freedom or other liberties. The cognate rights codified by Article III, Section 4 of the
Constitution, copied almost verbatim from the First Amendment of the U.S. Bill of Rights,[25] were
considered the necessary consequence of republican institutions and the complement of free
speech.[26] This preferred status of free speech has also been codified at the international level, its
recognition now enshrined in international law as a customary norm that binds all nations.[27]

In the Philippines, the primacy and high esteem accorded freedom of expression is a
fundamental postulate of our constitutional system. [28] This right was elevated to constitutional
status in the 1935, the 1973 and the 1987 Constitutions, reflecting our own lesson of history, both
political and legal, that freedom of speech is an indispensable condition for nearly every other form
of freedom.[29] Moreover, our history shows that the struggle to protect the freedom of speech,
expression and the press was, at bottom, the struggle for the indispensable preconditions for the
exercise of other freedoms.[30] For it is only when the people have unbridled access to information
and the press that they will be capable of rendering enlightened judgments. In the oft-quoted words
of Thomas Jefferson, we cannot both be free and ignorant.

E.1. ABSTRACTION OF FREE SPEECH

Surrounding the freedom of speech clause are various concepts that we have adopted as
part and parcel of our own Bill of Rights provision on this basic freedom.[31] What is embraced
under this provision was discussed exhaustively by the Court in Gonzales v. Commission on
Elections, [32] in which it was held:

At the very least, free speech and free press may be identified with the liberty to
discuss publicly and truthfully any matter of public interest without censorship
 and punishment. There is to be no previous restraint on the communication of
views or subsequent liability whether in libel suits, prosecution for sedition, or
action for damages, or contempt proceedings unless there be a clear and present
danger of substantive evil that Congress has a right to prevent. [33]

Gonzales further explained that the vital need of a constitutional democracy for freedom
of expression is undeniable, whether as a means of assuring individual self-fulfillment; of attaining
the truth; of assuring participation by the people in social, including political, decision-making;
and of maintaining the balance between stability and change.[34] As early as the 1920s, the trend
as reflected in Philippine and American decisions was to recognize the broadest scope and assure
the widest latitude for this constitutional guarantee. The trend represents a profound commitment
to the principle that debate on public issue should be uninhibited, robust, and wide-open. [35]

Freedom of speech and of the press means something more than the right to approve
existing political beliefs or economic arrangements, to lend support to official measures, and to
take refuge in the existing climate of opinion on any matter of public consequence.[36] When
atrophied, the right becomes meaningless.[37]The right belongs as well -- if not more to those who
question, who do not conform, who differ.[38] The ideas that may be expressed under this freedom
are confined not only to those that are conventional or acceptable to the majority. To be truly
meaningful, freedom of speech and of the press should allow and even encourage the articulation
of the unorthodox view, though it be hostile to or derided by others; or though such view induces
a condition of unrest, creates dissatisfaction with conditions as they are, or even stirs people to
anger.[39] To paraphrase Justice Holmes, it is freedom for the thought that we hate, no less than for
the thought that agrees with us. [40]

The scope of freedom of expression is so broad that it extends protection to nearly all forms of
communication. It protects speech, print and assembly regarding secular as well as political causes,
and is not confined to any particular field of human interest. The protection covers myriad matters
of public interest or concern embracing all issues, about which information is needed or
appropriate, so as to enable members of society to cope with the exigencies of their period. The
constitutional protection assures the broadest possible exercise of free speech and free press for
religious, political, economic, scientific, news, or informational ends, inasmuch as the
Constitution's basic guarantee of freedom to advocate ideas is not confined to the expression of
ideas that are conventional or shared by a majority.
 The constitutional protection is not limited to the exposition of ideas. The protection
afforded free speech extends to speech or publications that are entertaining as well as instructive
or informative. Specifically, in Eastern Broadcasting Corporation (DYRE) v. Dans,[41] this Court
stated that all forms of media, whether print or broadcast, are entitled to the broad protection of
the clause on freedom of speech and of expression.

While all forms of communication are entitled to the broad protection of freedom of
expression clause, the freedom of film, television and radio broadcasting is somewhat lesser
in scope than the freedom accorded to newspapers and other print media, as will be
subsequently discussed.

E.2. DIFFERENTIATION: THE LIMITS & RESTRAINTS OF FREE SPEECH

From the language of the specific constitutional provision, it would appear that the right to free
speech and a free press is not susceptible of any limitation. But the realities of life in a complex
society preclude a literal interpretation of the provision prohibiting the passage of a law that would
abridge such freedom. For freedom of expression is not an absolute, [42] nor is it an unbridled
license that gives immunity for every possible use of language and prevents the punishment of
those who abuse this freedom.

Thus, all speech are not treated the same. Some types of speech may be subjected to some
regulation by the State under its pervasive police power, in order that it may not be injurious to the
equal right of others or those of the community or society.[43] The difference in treatment is
expected because the relevant interests of one type of speech, e.g., political speech, may vary from
those of another, e.g., obscene speech. Distinctions have therefore been made in the treatment,
analysis, and evaluation of the permissible scope of restrictions on various categories of
speech. [44] We have ruled, for example, that in our jurisdiction slander or libel, lewd and obscene
speech, as well as fighting words are not entitled to constitutional protection and may be
penalized.[45]
Moreover, the techniques of reviewing alleged restrictions on speech (overbreadth,
vagueness, and so on) have been applied differently to each category, either consciously or
unconsciously. [46] A study of free speech jurisprudencewhether here or abroadwill reveal that
courts have developed different tests as to specific types or categories of speech in
concrete situations; i.e., subversive speech; obscene speech; the speech of the broadcast media and
of the traditional print media; libelous speech; speech affecting associational rights; speech before
hostile audiences; symbolic speech; speech that affects the right to a fair trial; and speech
associated with rights of assembly and petition. [47]
 Generally, restraints on freedom of speech and expression are evaluated by either or a
combination of three tests, i.e., (a) the dangerous tendency doctrinewhich permits limitations on
speech once a rational connection has been established between the speech restrained and the
danger contemplated; [48] (b) the balancing of interests tests, used as a standard when courts need
to balance conflicting social values and individual interests, and requires a conscious and detailed
consideration of the interplay of interests observable in a given situation of type of
situation; [49] and (c) the clear and present danger rule which rests on the premise that speech
may be restrained because there is substantial danger that the speech will likely lead to an evil the
government has a right to prevent. This rule requires that the evil consequences sought to be
prevented must be substantive, extremely serious and the degree of imminence extremely high. [50]

As articulated in our jurisprudence, we have applied either the dangerous tendency

doctrine or clear and present danger test to resolve free speech challenges. More recently, we
have concluded that we have generally adhered to the clear and present danger test. [51]

E.3. IN FOCUS: FREEDOM OF THE PRESS

Much has been written on the philosophical basis of press freedom as part of the larger
right of free discussion and expression. Its practical importance, though, is more easily grasped. It
is the chief source of information on current affairs. It is the most pervasive and perhaps most
powerful vehicle of opinion on public questions. It is the instrument by which citizens keep their
government informed of their needs, their aspirations and their grievances. It is the sharpest
weapon in the fight to keep government responsible and efficient. Without a vigilant press, the
mistakes of every administration would go uncorrected and its abuses unexposed. As Justice
Malcolm wrote in United States v. Bustos:[52]

The interest of society and the maintenance of good government demand a full
discussion of public affairs. Complete liberty to comment on the conduct of
public men is a scalpel in the case of free speech. The sharp incision of its probe
relieves the abscesses of officialdom. Men in public life may suffer under a
hostile and unjust accusation; the wound can be assuaged with the balm of clear
conscience.

Its contribution to the public weal makes freedom of the press deserving of extra protection.
Indeed, the press benefits from certain ancillary rights. The productions of writers are classified as
intellectual and proprietary. Persons who interfere or defeat the freedom to write for the press or
to maintain a periodical publication are liable for damages, be they private individuals or public
officials.

E.4. ANATOMY OF RESTRICTIONS: PRIOR RESTRAINT, CONTENT-NEUTRAL AND

CONTENT-BASED REGULATIONS

Philippine jurisprudence, even as early as the period under the 1935 Constitution, has recognized
four aspects of freedom of the press. These are (1) freedom from prior restraint; (2) freedom from
punishment subsequent to publication; [53] (3) freedom of access to information; [54] and (4)
freedom of circulation.[55]

Considering that petitioner has argued that respondents press statement constitutes a form of
impermissible prior restraint, a closer scrutiny of this principle is in order, as well as its sub-specie
of content-based (as distinguished from content-neutral) regulations.

At this point, it should be noted that respondents in this case deny that their acts constitute
prior restraints. This presents a unique tinge to the present challenge, considering that the cases in
our jurisdiction involving prior restrictions on speech never had any issue of whether the
governmental act or issuance actuallyconstituted prior restraint. Rather, the determinations were
always about whether the restraint was justified by the Constitution.

Be that as it may, the determination in every case of whether there is an impermissible restraint on
the freedom of speech has always been based on the circumstances of each case, including the
nature of the restraint. And in its application in our jurisdiction, the parameters of this
principle have been etched on a case-to-case basis, always tested by scrutinizing the
governmental issuance or act against the circumstances in which they operate, and then
determining the appropriate test with which to evaluate.

Prior restraint refers to official governmental restrictions on the press or other forms of expression
in advance of actual publication or dissemination.[56] Freedom from prior restraint is largely
freedom from government censorship of publications, whatever the form of censorship, and
regardless of whether it is wielded by the executive, legislative or judicial branch of the
government. Thus, it precludes governmental acts that required approval of a proposal to publish;
licensing or permits as prerequisites to publication including the payment of license taxes for the
privilege to publish; and even injunctions against publication. Even the closure of the business and
printing offices of certain newspapers, resulting in the discontinuation of their printing and
publication, are deemed as previous restraint or censorship.[57] Any law or official that requires
some form of permission to be had before publication can be made, commits an infringement of
the constitutional right, and remedy can be had at the courts.

Given that deeply ensconced in our fundamental law is the hostility against all prior restraints on
speech, and any act that restrains speech is presumed invalid,[58] and any act that restrains speech
is hobbled by the presumption of invalidity and should be greeted with furrowed brows, [59] it is
important to stress not all prior restraints on speech are invalid. Certain previous restraints may
be permitted by the Constitution, but determined only upon a careful evaluation of the
challenged act as against the appropriate test by which it should be measured against.

Hence, it is not enough to determine whether the challenged act constitutes some form of restraint
on freedom of speech. A distinction has to be made whether the restraint is (1) a content-
neutral regulation, i.e., merely concerned with the incidents of the speech, or one that merely
controls the time, place or manner, and under well defined standards;[60] or (2) a content-
based restraint or censorship, i.e., the restriction is based on the subject matter of the utterance or
speech. [61] The cast of the restriction determines the test by which the challenged act is assayed
with.

When the speech restraints take the form of a content-neutral regulation, only a substantial
governmental interest is required for its validity.[62] Because regulations of this type are not
designed to suppress any particular message, they are not subject to the strictest form of judicial
scrutiny but an intermediate approachsomewhere between the mere rationality that is required
of any other law and the compelling interest standard applied to content-based
restrictions.[63] The test is called intermediate because the Court will not merely rubberstamp the
validity of a law but also require that the restrictions be narrowly-tailored to promote an important
or significant governmental interest that is unrelated to the suppression of expression. The
intermediate approach has been formulated in this manner:

A governmental regulation is sufficiently justified if it is within the constitutional

power of the Government, if it furthers an important or substantial governmental
interest; if the governmental interest is unrelated to the suppression of free
expression; and if the incident restriction on alleged [freedom of speech &
expression] is no greater than is essential to the furtherance of that interest. [64]

On the other hand, a governmental action that restricts freedom of speech or of the press based on
content is given the strictest scrutiny in light of its inherent and invasive impact. Only when the
challenged act has overcome the clear and present danger rule will it pass constitutional
muster,[65] with the government having the burden of overcoming the presumed
unconstitutionality.

Unless the government can overthrow this presumption, the content-based restraint will be struck
down.[66]
With respect to content-based restrictions, the government must also show the type of harm the
speech sought to be restrained would bring about especially the gravity and the imminence of the
threatened harm otherwise the prior restraint will be invalid. Prior restraint on speech based on its
content cannot be justified by hypothetical fears, but only by showing a substantive and imminent
evil that has taken the life of a reality already on ground.[67] As formulated, the question in every
case is whether the words used are used in such circumstances and are of such a nature as
to create a clear and present danger that they will bring about the substantive evils that Congress
has a right to prevent. It is a question of proximity and degree.[68]

The regulation which restricts the speech content must also serve an important or substantial
government interest, which is unrelated to the suppression of free expression. [69]

Also, the incidental restriction on speech must be no greater than what is essential to the
furtherance of that interest. [70] A restriction that is so broad that it encompasses more than what is
required to satisfy the governmental interest will be invalidated. [71] The regulation, therefore, must
be reasonable and narrowly drawn to fit the regulatory purpose, with the least restrictive means
undertaken. [72]

Thus, when the prior restraint partakes of a content-neutral regulation, it is subjected to an

intermediate review. A content-based regulation,[73] however, bears a heavy presumption of
invalidity and is measured against the clear and present danger rule. The latter will pass
constitutional muster only if justified by a compelling reason, and the restrictions imposed are
neither overbroad nor vague. [74]

Applying the foregoing, it is clear that the challenged acts in the case at bar need to be subjected
to the clear and present danger rule, as they are content-basedrestrictions. The acts of
respondents focused solely on but one objecta specific content fixed as these were on the alleged
taped conversations between the President and a COMELEC official. Undoubtedly these did not
merely provide regulations as to the time, place or manner of the dissemination of speech or
expression.
 E.5. Dichotomy of Free Press: Print v. Broadcast Media

Finally, comes respondents argument that the challenged act is valid on the ground that
broadcast media enjoys free speech rights that are lesser in scope to that of print media. We next
explore and test the validity of this argument, insofar as it has been invoked to validate a content-
based restriction on broadcast media.

The regimes presently in place for each type of media differ from one
other. Contrasted with the regime in respect of books, newspapers, magazines and traditional
printed matter, broadcasting, film and video have been subjected to regulatory schemes.

The dichotomy between print and broadcast media traces its origins in the United States.
There, broadcast radio and television have been held to have limitedFirst Amendment
protection,[75] and U.S. Courts have excluded broadcast media from the application of the strict
scrutiny standard that they would otherwise apply to content-based restrictions.[76] According to
U.S. Courts, the three major reasons why broadcast media stands apart from print media are: (a)
the scarcity of the frequencies by which the medium operates [i.e., airwaves are physically limited
while print medium may be limitless]; [77] (b) its pervasiveness as a medium; and (c) its unique
accessibility to children.[78] Because cases involving broadcast media need not follow precisely the
same approach that [U.S. courts] have applied to other media, nor go so far as to demand that such
regulations serve compelling government interests,[79] they are decided on whether the
governmental restriction is narrowly tailored to further a substantial governmental
interest,[80] or the intermediate test.

As pointed out by respondents, Philippine jurisprudence has also echoed a differentiation

in treatment between broadcast and print media. Nevertheless, a review of Philippine case law
on broadcast media will show thatas we have deviated with the American conception of the
Bill of Rights[81] we likewise did not adopt en masse the U.S. conception of free speech as it
relates to broadcast media, particularly as to which test would govern content-based prior
restraints.

Our cases show two distinct features of this dichotomy. First, the difference in treatment,
in the main, is in the regulatory scheme applied to broadcast media that is not imposed on
traditional print media, and narrowly confined to unprotected speech (e.g., obscenity, pornography,
seditious and inciting speech), or is based on a compelling government interest that also has
constitutional protection, such as national security or the electoral process.
 Second, regardless of the regulatory schemes that broadcast media is subjected to, the
Court has consistently held that the clear and present danger test applies to content-based
restrictions on media, without making a distinction as to traditional print or broadcast media.

The distinction between broadcast and traditional print media was first enunciated in Eastern
Broadcasting Corporation (DYRE) v. Dans,[82] wherein it was held that [a]ll forms of media,
whether print or broadcast, are entitled to the broad protection of the freedom of speech and
expression clause. The test for limitations on freedom of expression continues to be the clear and
present danger rule[83]

Dans was a case filed to compel the reopening of a radio station which had been summarily
closed on grounds of national security. Although the issue had become moot and academic because
the owners were no longer interested to reopen, the Court still proceeded to do an analysis of the
case and made formulations to serve as guidelines for all inferior courts and bodies exercising
quasi-judicial functions. Particularly, the Court made a detailed exposition as to what needs be
considered in cases involving broadcast media. Thus:[84]

xxx xxx xxx

(3) All forms of media, whether print or broadcast, are entitled to the broad
protection of the freedom of speech and expression clause. The test for
limitations on freedom of expression continues to be the clear and
present danger rule, that words are used in such circumstances and are of
such a nature as to create a clear and present danger that they will bring
about the substantive evils that the lawmaker has a right to prevent, In
his Constitution of the Philippines (2nd Edition, pp. 569-570) Chief Justice
Enrique M. Fernando cites at least nine of our decisions which apply the
test. More recently, the clear and present danger test was applied in J.B.L.
Reyes in behalf of the Anti-Bases Coalition v. Bagatsing. (4) The clear and
present danger test, however, does not lend itself to a simplistic and all
embracing interpretation applicable to all utterances in all forums.
Broadcasting has to be licensed. Airwave frequencies have to be allocated
among qualified users. A broadcast corporation cannot simply appropriate
a certain frequency without regard for government regulation or for the
rights of others.
All forms of communication are entitled to the broad protection of the
freedom of expression clause. Necessarily, however, the freedom of
 television and radio broadcasting is somewhat lesser in scope than the
freedom accorded to newspaper and print media.
The American Court in Federal Communications Commission v. Pacifica
Foundation (438 U.S. 726), confronted with a patently offensive and
indecent regular radio program, explained why radio broadcasting, more
than other forms of communications, receives the most limited protection
from the free expression clause. First, broadcast media have established a
uniquely pervasive presence in the lives of all citizens, Material presented
over the airwaves confronts the citizen, not only in public, but in the privacy
of his home. Second, broadcasting is uniquely accessible to children.
Bookstores and motion picture theaters may be prohibited from making
certain material available to children, but the same selectivity cannot be
done in radio or television, where the listener or viewer is constantly tuning
in and out.
Similar considerations apply in the area of national security.
The broadcast media have also established a uniquely pervasive presence
in the lives of all Filipinos. Newspapers and current books are found only
in metropolitan areas and in the poblaciones of municipalities accessible to
fast and regular transportation. Even here, there are low income masses who
find the cost of books, newspapers, and magazines beyond their humble
means. Basic needs like food and shelter perforce enjoy high priorities.
On the other hand, the transistor radio is found everywhere. The television
set is also becoming universal. Their message may be simultaneously
received by a national or regional audience of listeners including the
indifferent or unwilling who happen to be within reach of a blaring radio or
television set. The materials broadcast over the airwaves reach every person
of every age, persons of varying susceptibilities to persuasion, persons of
different I.Q.s and mental capabilities, persons whose reactions to
inflammatory or offensive speech would be difficult to monitor or predict.
The impact of the vibrant speech is forceful and immediate. Unlike readers
of the printed work, the radio audience has lesser opportunity to cogitate
analyze, and reject the utterance.
(5) The clear and present danger test, therefore, must take the particular
circumstances of broadcast media into account. The supervision of radio
stations-whether by government or through self-regulation by the industry
itself calls for thoughtful, intelligent and sophisticated handling.
The government has a right to be protected against broadcasts which incite
the listeners to violently overthrow it. Radio and television may not be used
to organize a rebellion or to signal the start of widespread uprising. At the
same time, the people have a right to be informed. Radio and television
would have little reason for existence if broadcasts are limited to bland,
obsequious, or pleasantly entertaining utterances. Since they are the most
 convenient and popular means of disseminating varying views on public
issues, they also deserve special protection.
(6) The freedom to comment on public affairs is essential to the vitality of a
representative democracy. In the 1918 case of United States v. Bustos (37
Phil. 731) this Court was already stressing that.
The interest of society and the maintenance of good government demand a
full discussion of public affairs. Complete liberty to comment on the
conduct of public men is a scalpel in the case of free speech. The sharp
incision of its probe relieves the abscesses of officialdom. Men in public
life may suffer under a hostile and an unjust accusation; the wound can be
assuaged with the balm of a clear conscience. A public officer must not be
too thin-skinned with reference to comment upon his official acts. Only thus
can the intelligence and dignity of the individual be exalted.
(7) Broadcast stations deserve the special protection given to all forms of media by
the due process and freedom of expression clauses of the Constitution.
[Citations omitted]

It is interesting to note that the Court in Dans adopted the arguments found in U.S. jurisprudence
to justify differentiation of treatment (i.e., the scarcity, pervasiveness and accessibility to
children), but only after categorically declaring that the test for limitations on freedom of
expression continues to be the clear and present danger rule, for all forms of media, whether
print or broadcast. Indeed, a close reading of the above-quoted provisions would show that the
differentiation that the Court in Dans referred to was narrowly restricted to what is otherwise
deemed as unprotected speech (e.g., obscenity, national security, seditious and inciting speech), or
to validate a licensing or regulatory scheme necessary to allocate the limited broadcast frequencies,
which is absent in print media. Thus, when this Court declared in Dans that the freedom given to
broadcast media was somewhat lesser in scope than the freedom accorded to newspaper and print
media, it was not as to what test should be applied, but the context by which requirements of
licensing, allocation of airwaves, and application of norms to unprotected speech. [85]
In the same year that the Dans case was decided, it was reiterated in Gonzales v. Katigbak,[86] that
the test to determine free expression challenges was the clear and present danger, again without
distinguishing the media.[87] Katigbak, strictly speaking, does not treat of broadcast media but
motion pictures. Although the issue involved obscenity standards as applied to movies,[88] the
Court concluded its decision with the following obiter dictum that a less liberal approach would
be used to resolve obscenity issues in television as opposed to motion pictures:
All that remains to be said is that the ruling is to be limited to the concept of
obscenity applicable to motion pictures. It is the consensus of this Court that
where television is concerned, a less liberal approach calls for observance. This
 is so because unlike motion pictures where the patrons have to pay their way,
television reaches every home where there is a set. Children then will likely be
among the avid viewers of the programs therein shown..It cannot be denied
though that the State as parens patriae is called upon to manifest an attitude of
caring for the welfare of the young.

More recently, in resolving a case involving the conduct of exit polls and dissemination of the
results by a broadcast company, we reiterated that the clear and present danger rule is the test we
unquestionably adhere to issues that involve freedoms of speech and of the press.[89]

This is not to suggest, however, that the clear and present danger rule has been applied to all
cases that involve the broadcast media. The rule applies to all media, including broadcast, but
only when the challenged act is a content-based regulation that infringes on free speech, expression
and the press. Indeed, in Osmena v. COMELEC,[90] which also involved broadcast media, the
Court refused to apply the clear and present danger rule to a COMELEC regulation of time and
manner of advertising of political advertisements because the challenged restriction was content-
neutral.[91] And in a case involving due process and equal protection issues, the Court
in Telecommunications and Broadcast Attorneys of the Philippines v. COMELEC[92] treated a
restriction imposed on a broadcast media as a reasonable condition for the grant of the medias
franchise, without going into which test would apply.
That broadcast media is subject to a regulatory regime absent in print media is observed also in
other jurisdictions, where the statutory regimes in place over broadcast media include elements of
licensing, regulation by administrative bodies, and censorship. As explained by a British author:

The reasons behind treating broadcast and films differently from the print media
differ in a number of respects, but have a common historical basis. The stricter
system of controls seems to have been adopted in answer to the view that owing
to their particular impact on audiences, films, videos and broadcasting require
a system of prior restraints, whereas it is now accepted that books and other
printed media do not. These media are viewed as beneficial to the public in a
number of respects, but are also seen as possible sources of harm.[93]

Parenthetically, these justifications are now the subject of debate. Historically, the scarcity of
frequencies was thought to provide a rationale. However, cable and satellite television have
enormously increased the number of actual and potential channels. Digital technology will further
increase the number of channels available. But still, the argument persists that broadcasting is the
most influential means of communication, since it comes into the home, and so much time is spent
watching television. Since it has a unique impact on people and affects children in a way that the
print media normally does not, that regulation is said to be necessary in order to preserve pluralism.
It has been argued further that a significant main threat to free expressionin terms of
diversitycomes not from government, but from private corporate bodies. These developments
show a need for a reexamination of the traditional notions of the scope and extent of broadcast
media regulation. [94]

The emergence of digital technology -- which has led to the convergence of broadcasting,
telecommunications and the computer industry -- has likewise led to the question of whether the
regulatory model for broadcasting will continue to be appropriate in the converged
environment.[95] Internet, for example, remains largely unregulated, yet the Internet and the
broadcast media share similarities, [96] and the rationales used to support broadcast regulation apply
equally to the Internet.[97]Thus, it has been argued that courts, legislative bodies and the
government agencies regulating media must agree to regulate both, regulate neither or develop a
new regulatory framework and rationale to justify the differential treatment. [98]

F. The Case At Bar

Having settled the applicable standard to content-based restrictions on broadcast media, let us go
to its application to the case at bar. To recapitulate, a governmental action that restricts freedom of
speech or of the press based on content is given the strictest
scrutiny, with the government having the burden of overcoming the
presumed unconstitutionality by the clear and present danger rule. This rule applies equally
to all kinds of media, including broadcast media.

This outlines the procedural map to follow in cases like the one at bar as it spells out the
following: (a) the test; (b) the presumption; (c) the burden of proof; (d) the party to discharge the
burden; and (e) the quantum of evidence necessary. On the basis of the records of the case at bar,
respondents who have the burden to show that these acts do not abridge freedom of speech and of
the press failed to hurdle the clear and present danger test. It appears that the great evil which
government wants to prevent is the airing of a tape recording in alleged violation of the anti-
wiretapping law. The records of the case at bar, however, are confused and confusing, and
respondents evidence falls short of satisfying the clear and present danger test. Firstly, the various
statements of the Press Secretary obfuscate the identity of the voices in the tape
recording. Secondly, the integrity of the taped conversation is also suspect. The Press Secretary
showed to the public two versions, one supposed to be a complete version and the other, an altered
version. Thirdly, the evidence of the respondents on the whos and the hows of the wiretapping act
is ambivalent, especially considering the tapes different versions. The identity of the wire-tappers,
the manner of its commission and other related and relevant proofs are some of the invisibles of
this case. Fourthly, given all these unsettled facets of the tape, it is even arguable whether its
airing would violate the anti-wiretapping law.

We rule that not every violation of a law will justify straitjacketing the exercise of freedom of
speech and of the press. Our laws are of different kinds and doubtless, some of them provide
norms of conduct which even if violated have only an adverse effect on a persons private comfort
but does not endanger national security. There are laws of great significance but their violation, by
itself and without more, cannot support suppression of free speech and free press. In
fine, violation of law is just a factor, a vital one to be sure, which should be
weighed in adjudging whether to restrain freedom of speech and of the press. The totality of the
injurious effects of the violation to private and public interest must be calibrated in light of the
preferred status accorded by the Constitution and by related international covenants protecting
freedom of speech and of the press. In calling for a careful and calibrated measurement of the
circumference of all these factors to determine compliance with the clear and present danger
test, the Court should not be misinterpreted as devaluing violations of law. By all
means, violations of law should be vigorously prosecuted by the State for they breed their own
evil consequence. But to repeat, the need to prevent their violation cannot per se trump the
exercise of free speech and free press, a preferred right whose breach can lead to greater
evils. For this failure of the respondents alone to offer proof to satisfy the clear and present danger
test, the Court has no option but to uphold the exercise of free speech and free press. There is no
showing that the feared violation of the anti-wiretapping law clearly endangers the national
security of the State.

This is not all the faultline in the stance of the respondents. We slide to the issue of whether
the mere press statements of the Secretary of Justice and of the NTC in question constitute a form
of content-based prior restraint that has transgressed the Constitution. In resolving this issue, we
hold that it is not decisive that the press statements made by respondents were not reduced
in or followed up with formal orders or circulars. It is sufficient that the press statements
were made by respondents while in the exercise of their official functions. Undoubtedly,
respondent Gonzales made his statements as Secretary of Justice, while the NTC issued its
statement as the regulatory body of media. Any act done, such as a speech uttered, for and on
behalf of the government in an official capacity is covered by the rule on prior restraint. The
concept of an act does not limit itself to acts already converted to a formal order or official
circular. Otherwise, the non formalization of an act into an official order or circular will
result in the easy circumvention of the prohibition on prior restraint. The press statements at
bar are acts that should be struck down as they constitute impermissible forms of prior restraints
on the right to free speech and press.

There is enough evidence of chilling effect of the complained acts on

record. The warnings given to media came from no less the NTC, a regulatory agency that can
cancel the Certificate of Authority of the radio and broadcast media. They also came from the
Secretary of Justice, the alter ego of the Executive, who wields the awesome power to prosecute
those perceived to be violating the laws of the land. After the warnings, the KBP inexplicably
joined the NTC in issuing an ambivalent Joint Press Statement. After the warnings, petitioner
Chavez was left alone to fight this battle for freedom of speech and of the press. This silence on
the sidelines on the part of some media practitioners is too deafening to be the subject of
misinterpretation.

The constitutional imperative for us to strike down unconstitutional acts should always be
exercised with care and in light of the distinct facts of each case. For there are no hard and fast
rules when it comes to slippery constitutional questions, and the limits and construct of relative
freedoms are never set in stone. Issues revolving on their construct must be decided on a case to
case basis, always based on the peculiar shapes and shadows of each case. But in cases where the
challenged acts are patent invasions of a constitutionally protected right, we should be swift in
striking them down as nullities per se. A blow too soon struck for freedom is preferred than a
blow too late.

In VIEW WHEREOF, the petition is GRANTED. The writs of certiorari and prohibition are
hereby issued, nullifying the official statements made by respondents on June 8, and 11, 2005
warning the media on airing the alleged wiretapped conversation between the President and other
personalities, for constituting unconstitutional prior restraint on the exercise of freedom of speech
and of the press

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 73867 February 29, 1988

TELEFAST COMMUNICATIONS/PHILIPPINE WIRELESS, INC., petitioner,

vs.
IGNACIO CASTRO, SR., SOFIA C. CROUCH, IGNACIO CASTRO JR., AURORA CASTRO,
SALVADOR CASTRO, MARIO CASTRO, CONRADO CASTRO, ESMERALDA C. FLORO,
AGERICO CASTRO, ROLANDO CASTRO, VIRGILIO CASTRO AND GLORIA CASTRO, and
HONORABLE INTERMEDIATE APPELLATE COURT, respondents.

PADILLA, J.:

Petition for review on certiorari of the decision * of the Intermediate Appellate Court, dated 11 February 1986, in AC-G.R. No. CV-70245,
entitled "Ignacio Castro, Sr., et al., Plaintiffs-Appellees, versus Telefast Communication/Philippine Wireless, Inc., Defendant-Appellant."

The facts of the case are as follows:

On 2 November 1956, Consolacion Bravo-Castro wife of plaintiff Ignacio Castro, Sr. and mother of
the other plaintiffs, passed away in Lingayen, Pangasinan. On the same day, her daughter Sofia C.
Crouch, who was then vacationing in the Philippines, addressed a telegram to plaintiff Ignacio
Castro, Sr. at 685 Wanda, Scottsburg, Indiana, U.S.A., 47170 announcing Consolacion's death. The
telegram was accepted by the defendant in its Dagupan office, for transmission, after payment of the
required fees or charges.

The telegram never reached its addressee. Consolacion was interred with only her daughter Sofia in
attendance. Neither the husband nor any of the other children of the deceased, then all residing in
the United States, returned for the burial.

When Sofia returned to the United States, she discovered that the wire she had caused the
defendant to send, had not been received. She and the other plaintiffs thereupon brought action for
damages arising from defendant's breach of contract. The case was filed in the Court of First
Instance of Pangasinan and docketed therein as Civil Case No. 15356. The only defense of the
defendant was that it was unable to transmit the telegram because of "technical and atmospheric
factors beyond its control." 1 No evidence appears on record that defendant ever made any attempt
to advise the plaintiff Sofia C. Crouch as to why it could not transmit the telegram.

The Court of First Instance of Pangasinan, after trial, ordered the defendant (now petitioner) to pay
the plaintiffs (now private respondents) damages, as follows, with interest at 6% per annum:

1. Sofia C. Crouch, P31.92 and P16,000.00 as compensatory damages and

P20,000.00 as moral damages.

2. Ignacio Castro Sr., P20,000.00 as moral damages.

3. Ignacio Castro Jr., P20,000.00 as moral damages.

 4. Aurora Castro, P10,000.00 moral damages.

5. Salvador Castro, P10,000.00 moral damages.

6. Mario Castro, P10,000.00 moral damages.

7. Conrado Castro, P10,000 moral damages.

8. Esmeralda C. Floro, P20,000.00 moral damages.

9. Agerico Castro, P10,000.00 moral damages.

10. Rolando Castro, P10,000.00 moral damages.

11. Virgilio Castro, P10,000.00 moral damages.

12. Gloria Castro, P10,000.00 moral damages.

Defendant is also ordered to pay P5,000.00 attorney's fees, exemplary damages in the amount of
P1,000.00 to each of the plaintiffs and costs. 2

On appeal by petitioner, the Intermediate Appellate Court affirmed the trial court's decision but
eliminated the award of P16,000.00 as compensatory damages to Sofia C. Crouch and the award of
P1,000.00 to each of the private respondents as exemplary damages. The award of P20,000.00 as
moral damages to each of Sofia C. Crouch, Ignacio Castro, Jr. and Esmeralda C. Floro was also
reduced to P120,000. 00 for each. 3

Petitioner appeals from the judgment of the appellate court, contending that the award of moral
damages should be eliminated as defendant's negligent act was not motivated by "fraud, malice or
recklessness."

In other words, under petitioner's theory, it can only be held liable for P 31.92, the fee or charges
paid by Sofia C. Crouch for the telegram that was never sent to the addressee thereof.

Petitioner's contention is without merit.

Art. 1170 of the Civil Code provides that "those who in the performance of their obligations are guilty
of fraud, negligence or delay, and those who in any manner contravene the tenor thereof, are liable
for damages." Art. 2176 also provides that "whoever by act or omission causes damage to another,
there being fault or negligence, is obliged to pay for the damage done."

In the case at bar, petitioner and private respondent Sofia C. Crouch entered into a contract
whereby, for a fee, petitioner undertook to send said private respondent's message overseas by
telegram. This, petitioner did not do, despite performance by said private respondent of her
obligation by paying the required charges. Petitioner was therefore guilty of contravening its
obligation to said private respondent and is thus liable for damages.

This liability is not limited to actual or quantified damages. To sustain petitioner's contrary position in
this regard would result in an inequitous situation where petitioner will only be held liable for the
actual cost of a telegram fixed thirty (30) years ago.
We find Art. 2217 of the Civil Code applicable to the case at bar. It states: "Moral damages include
physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation, and similar injury. Though incapable of pecuniary computation,
moral damages may be recovered if they are the proximate results of the defendant's wrongful act or
omission." (Emphasis supplied).

Here, petitioner's act or omission, which amounted to gross negligence, was precisely the cause of
the suffering private respondents had to undergo.

As the appellate court properly observed:

[Who] can seriously dispute the shock, the mental anguish and the sorrow that the
overseas children must have suffered upon learning of the death of their mother after
she had already been interred, without being given the opportunity to even make a
choice on whether they wanted to pay her their last respects? There is no doubt that
these emotional sufferings were proximately caused by appellant's omission and
substantive law provides for the justification for the award of moral damages. 4

We also sustain the trial court's award of P16,000.00 as compensatory damages to Sofia C. Crouch
representing the expenses she incurred when she came to the Philippines from the United States to
testify before the trial court. Had petitioner not been remiss in performing its obligation, there would
have been no need for this suit or for Mrs. Crouch's testimony.

The award of exemplary damages by the trial court is likewise justified and, therefore, sustained in
the amount of P1,000.00 for each of the private respondents, as a warning to all telegram
companies to observe due diligence in transmitting the messages of their customers.

WHEREFORE, the petition is DENIED. The decision appealed from is modified so that petitioner is
held liable to private respondents in the following amounts:

(1) P10,000.00 as moral damages, to each of private respondents;

(2) P1,000.00 as exemplary damages, to each of private respondents;

(3) P16,000.00 as compensatory damages, to private respondent Sofia C. Crouch;

(4) P5,000.00 as attorney's fees; and

(5) Costs of suit.

SO ORDERED.

Yap (Chairman), Paras and Sarmiento, JJ., concur.

Separate Opinions
MELENCIO-HERRERA, J., concurring.

[I] concur.In addition to compensatory and exemplary damages, moral damages are recoverable in
actions for breach of contract, as in this case, where the breach has been wanton and reckless,
tantamount to bad faith.

Separate Opinions

MELENCIO-HERRERA, J., concurring.

[I] concur.In addition to compensatory and exemplary damages, moral damages are recoverable in
actions for breach of contract, as in this case, where the breach has been wanton and reckless,
tantamount to bad faith.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-15645 January 31, 1964

PAZ P. ARRIETA and VITALIADO ARRIETA, plaintiffs-appellees,

vs.
NATIONAL RICE AND CORN CORPORATION, defendant-appellant,
MANILA UNDERWRITERS INSURANCE CO., INC., defendant-appellee.

Teehankee and Carreon for plaintiffs-appellees.

The Government Corporate Counsel for defendant-appellant.
Isidro A. Vera for defendant-appellee.

REGALA, J.:

This is an appeal of the defendant-appellant NARIC from the decision of the trial court dated
February 20, 1958, awarding to the plaintiffs-appellees the amount of $286,000.00 as damages for
breach of contract and dismissing the counterclaim and third party complaint of the defendant-
appellant NARIC.

In accordance with Section 13 of Republic Act No. 3452, "the National Rice and Corn Administration
(NARIC) is hereby abolished and all its assets, liabilities, functions, powers which are not
inconsistent with the provisions of this Act, and all personnel are transferred "to the Rice and Corn
Administration (RCA).

All references, therefore, to the NARIC in this decision must accordingly be adjusted and read as
RCA pursuant to the aforementioned law.

On May 19, 1952, plaintiff-appellee participated in the public bidding called by the NARIC for the
supply of 20,000 metric tons of Burmese rice. As her bid of $203.00 per metric ton was the lowest,
she was awarded the contract for the same. Accordingly, on July 1, 1952, plaintiff-appellee Paz P.
Arrieta and the appellant corporation entered into a Contract of Sale of Rice, under the terms of
which the former obligated herself to deliver to the latter 20,000 metric tons of Burmess Rice at
$203.00 per metric ton, CIF Manila. In turn, the defendant corporation committed itself to pay for the
imported rice "by means of an irrevocable, confirmed and assignable letter of credit in U.S. currency
in favor of the plaintiff-appellee and/or supplier in Burma, immediately." Despite the commitment to
pay immediately "by means of an irrevocable, confirmed and assignable Letter of Credit," however, it
was only on July 30, 1952, or a full month from the execution of the contract, that the defendant
corporation, thru its general manager, took the first to open a letter of credit by forwarding to the
Philippine National Bank its Application for Commercial Letter Credit. The application was
accompanied by a transmittal letter, the relevant paragraphs of which read:

In view of the fact that we do not have sufficient deposit with your institution with which to
cover the amount required to be deposited as a condition for the opening of letters of credit,
we will appreciate it if this application could be considered special case.
 We understand that our supplier, Mrs. Paz P. Arrieta, has a deadline to meet which is August
4, 1952, and in order to comply therewith, it is imperative that the L/C be opened prior to that
date. We would therefore request your full cooperation on this matter.

On the same day, July 30, 1952, Mrs. Paz P. Arrieta thru counsel, advised the appellant corporation
of the extreme necessity for the immediate opening of the letter credit since she had by then made a
tender to her supplier in Rangoon, Burma, "equivalent to 5% of the F.O.B. price of 20,000 tons at
$180.70 and in compliance with the regulations in Rangoon this 5% will be confiscated if the
required letter of credit is not received by them before August 4, 1952."

On August 4, 1952, the Philippine National Bank informed the appellant corporation that its
application, "for a letter of credit for $3,614,000.00 in favor of Thiri Setkya has been approved by the
Board of Directors with the condition that marginal cash deposit be paid and that drafts are to be
paid upon presentment." (Exh. J-pl.; Exh. 10-def., p. 19, Folder of Exhibits). Furthermore, the Bank
represented that it "will hold your application in abeyance pending compliance with the above stated
requirement."

As it turned out, however, the appellant corporation not in any financial position to meet the
condition. As matter of fact, in a letter dated August 2, 1952, the NARIC bluntly confessed to the
appellee its dilemma: "In this connection, please be advised that our application for opening of the
letter of credit has been presented to the bank since July 30th but the latter requires that we first
deposit 50% of the value of the letter amounting to aproximately $3,614,000.00 which we are not in
a position to meet." (Emphasis supplied. Exh. 9-Def.; Exh. 1-Pe., p. 18, Folder of Exhibits)

Consequently, the credit instrument applied for was opened only on September 8, 1952 "in favor of
Thiri Setkya, Rangoon, Burma, and/or assignee for $3,614,000.00," (which is more than two months
from the execution of the contract) the party named by the appellee as beneficiary of the letter of
credit.
1äwphï1.ñët

As a result of the delay, the allocation of appellee's supplier in Rangoon was cancelled and the 5%
deposit, amounting to 524,000 kyats or approximately P200,000.00 was forfeited. In this connection,
it must be made of record that although the Burmese authorities had set August 4, 1952, as the
deadline for the remittance of the required letter of credit, the cancellation of the allocation and the
confiscation of the 5% deposit were not effected until August 20, 1952, or, a full half month after the
expiration of the deadline. And yet, even with the 15-day grace, appellant corporation was unable to
make good its commitment to open the disputed letter of credit.

The appellee endeavored, but failed, to restore the cancelled Burmese rice allocation. When the
futility of reinstating the same became apparent, she offered to substitute Thailand rice instead to the
defendant NARIC, communicating at the same time that the offer was "a solution which should be
beneficial to the NARIC and to us at the same time." (Exh. X-Pe., Exh. 25—Def., p. 38, Folder of
Exhibits). This offer for substitution, however, was rejected by the appellant in a resolution dated
November 15, 1952.

On the foregoing, the appellee sent a letter to the appellant, demanding compensation for the
damages caused her in the sum of $286,000.00, U.S. currency, representing unrealized profit. The
demand having been rejected she instituted this case now on appeal.

At the instance of the NARIC, a counterclaim was filed and the Manila Underwriters Insurance
Company was brought to the suit as a third party defendant to hold it liable on the performance bond
it executed in favor of the plaintiff-appellee.
We find for the appellee.

It is clear upon the records that the sole and principal reason for the cancellation of the allocation
contracted by the appellee herein in Rangoon, Burma, was the failure of the letter of credit to be
opened with the contemplated period. This failure must, therefore, be taken as the immediate cause
for the consequent damage which resulted. As it is then, the disposition of this case depends on a
determination of who was responsible for such failure. Stated differently, the issue is whether
appellant's failure to open immediately the letter of credit in dispute amounted to a breach of the
contract of July 1, 1952 for which it may be held liable in damages.

Appellant corporation disclaims responsibility for the delay in the opening of the letter of credit. On
the contrary, it insists that the fault lies with the appellee. Appellant contends that the disputed
negotiable instrument was not promptly secured because the appellee , failed to seasonably furnish
data necessary and required for opening the same, namely, "(1) the amount of the letter of credit, (2)
the person, company or corporation in whose favor it is to be opened, and (3) the place and bank
where it may be negotiated." Appellant would have this Court believe, therefore, that had these
informations been forthwith furnished it, there would have been no delay in securing the instrument.

Appellant's explanation has neither force nor merit. In the first place, the explanation reaches into an
area of the proceedings into which We are not at liberty to encroach. The explanation refers to a
question of fact. Nothing in the record suggests any arbitrary or abusive conduct on the part of the
trial judge in the formulation of the ruling. His conclusion on the matter is sufficiently borne out by the
evidence presented. We are denied, therefore, the prerogative to disturb that finding, consonant to
the time-honored tradition of this Tribunal to hold trial judges better situated to make conclusions on
questions of fact. For the record, We quote hereunder the lower court's ruling on the point:

The defense that the delay, if any in opening the letter of credit was due to the failure of
plaintiff to name the supplier, the amount and the bank is not tenable. Plaintiff stated in Court
that these facts were known to defendant even before the contract was executed because
these facts were necessarily revealed to the defendant before she could qualify as a bidder.
She stated too that she had given the necessary data immediately after the execution of Exh.
"A" (the contract of July 1, 1952) to Mr. GABRIEL BELMONTE, General Manager of the
NARIC, both orally and in writing and that she also pressed for the opening of the letter of
credit on these occasions. These statements have not been controverted and defendant
NARIC, notwithstanding its previous intention to do so, failed to present Mr. Belmonte to
testify or refute this. ...

Secondly, from the correspondence and communications which form part of the record of this case,
it is clear that what singularly delayed the opening of the stipulated letter of credit and which, in turn,
caused the cancellation of the allocation in Burma, was the inability of the appellant corporation to
meet the condition importation by the Bank for granting the same. We do not think the appellant
corporation can refute the fact that had it been able to put up the 50% marginal cash deposit
demanded by the bank, then the letter of credit would have been approved, opened and released as
early as August 4, 1952. The letter of the Philippine National Bank to the NARIC was plain and
explicit that as of the said date, appellant's "application for a letter of credit ... has been approved by
the Board of Directors with the condition that 50% marginal cash deposit be paid and that drafts are
to be paid upon presentment." (Emphasis supplied)

The liability of the appellant, however, stems not alone from this failure or inability to satisfy the
requirements of the bank. Its culpability arises from its willful and deliberate assumption of
contractual obligations even as it was well aware of its financial incapacity to undertake the
prestation. We base this judgment upon the letter which accompanied the application filed by the
appellant with the bank, a part of which letter was quoted earlier in this decision. In the said
accompanying correspondence, appellant admitted and owned that it did "not have sufficient deposit
with your institution (the PNB) with which to cover the amount required to be deposited as a
condition for the opening of letters of credit. ... .

A number of logical inferences may be drawn from the aforementioned admission. First, that the
appellant knew the bank requirements for opening letters of credit; second, that appellant also knew
it could not meet those requirement. When, therefore, despite this awareness that was financially
incompetent to open a letter of credit immediately, appellant agreed in paragraph 8 of the contract to
pay immediately "by means of an irrevocable, confirm and assignable letter of credit," it must be
similarly held to have bound itself to answer for all and every consequences that would result from
the representation. aptly observed by the trial court:

... Having called for bids for the importation of rice involving millions, $4,260,000.00 to be
exact, it should have a certained its ability and capacity to comply with the inevitably
requirements in cash to pay for such importation. Having announced the bid, it must be
deemed to have impliedly assured suppliers of its capacity and facility to finance the
importation within the required period, especially since it had imposed the supplier the 90-
day period within which the shipment of the rice must be brought into the Philippines. Having
entered in the contract, it should have taken steps immediately to arrange for the letter of
credit for the large amount involved and inquired into the possibility of its issuance.

In relation to the aforequoted observation of the trial court, We would like to make reference also to
Article 11 of the Civil Code which provides:

Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and
those who in any manner contravene the tenor thereof, are liable in damages.

Under this provision, not only debtors guilty of fraud, negligence or default in the performance of
obligations a decreed liable; in general, every debtor who fails in performance of his obligations is
bound to indemnify for the losses and damages caused thereby (De la Cruz Seminary of Manila, 18
Phil. 330; Municipality of Moncada v. Cajuigan, 21 Phil. 184; De la Cavada v. Diaz, 37 Phil. 982;
Maluenda & Co. v. Enriquez, 46 Phil. 916; Pasumil v. Chong, 49 Phil. 1003; Pando v. Gimenez, 54
Phil. 459; Acme Films v. Theaters Supply, 63 Phil. 657). The phrase "any manner contravene the
tenor" of the obligation includes any illicit act which impairs the strict and faithful fulfillment of the
obligation or every kind or defective performance. (IV Tolentino, Civil Code of the Philippines, citing
authorities, p. 103.)

The NARIC would also have this Court hold that the subsequent offer to substitute Thailand rice for
the originally contracted Burmese rice amounted to a waiver by the appellee of whatever rights she
might have derived from the breach of the contract. We disagree. Waivers are not presumed, but
must be clearly and convincingly shown, either by express stipulation or acts admitting no other
reasonable explanation. (Ramirez v. Court of Appeals, 52 O.G. 779.) In the case at bar, no such
intent to waive has been established.

We have carefully examined and studied the oral and documentary evidence presented in this case
and upon which the lower court based its award. Under the contract, the NARIC bound itself to buy
20,000 metric tons of Burmese rice at "$203.00 U.S. Dollars per metric ton, all net shipped weight,
and all in U.S. currency, C.I.F. Manila ..." On the other hand, documentary and other evidence
establish with equal certainty that the plaintiff-appellee was able to secure the contracted commodity
at the cost price of $180.70 per metric ton from her supplier in Burma. Considering freights,
insurance and charges incident to its shipment here and the forfeiture of the 5% deposit, the award
granted by the lower court is fair and equitable. For a clearer view of the equity of the damages
awarded, We reproduce below the testimony of the appellee, adequately supported by the evidence
and record:

Q. Will you please tell the court, how much is the damage you suffered?

A. Because the selling price of my rice is $203.00 per metric ton, and the cost price of my
rice is $180.00 We had to pay also $6.25 for shipping and about $164 for insurance. So
adding the cost of the rice, the freight, the insurance, the total would be about $187.99 that
would be $15.01 gross profit per metric ton, multiply by 20,000 equals $300,200, that is my
supposed profit if I went through the contract.

The above testimony of the plaintiff was a general approximation of the actual figures involved in the
transaction. A precise and more exact demonstration of the equity of the award herein is provided by
Exhibit HH of the plaintiff and Exhibit 34 of the defendant, hereunder quoted so far as germane.

It is equally of record now that as shown in her request dated July 29, 1959, and other
communications subsequent thereto for the opening by your corporation of the required letter
of credit, Mrs. Arrieta was supposed to pay her supplier in Burma at the rate of One Hundred
Eighty Dollars and Seventy Cents ($180.70) in U.S. Currency, per ton plus Eight Dollars
($8.00) in the same currency per ton for shipping and other handling expenses, so that she is
already assured of a net profit of Fourteen Dollars and Thirty Cents ($14.30), U.S., Currency,
per ton or a total of Two Hundred and Eighty Six Thousand Dollars ($286,000.00), U.S.
Currency, in the aforesaid transaction. ...

Lastly, herein appellant filed a counterclaim asserting that it has suffered, likewise by way of
unrealized profit damages in the total sum of $406,000.00 from the failure of the projected contract
to materialize. This counterclaim was supported by a cost study made and submitted by the
appellant itself and wherein it was illustrated how indeed had the importation pushed thru, NARIC
would have realized in profit the amount asserted in the counterclaim. And yet, the said amount of
P406,000.00 was realizable by appellant despite a number of expenses which the appellee under
the contract, did not have to incur. Thus, under the cost study submitted by the appellant, banking
and unloading charges were to be shouldered by it, including an Import License Fee of 2% and
superintendence fee of $0.25 per metric ton. If the NARIC stood to profit over P400 000.00 from the
disputed transaction inspite of the extra expenditures from which the herein appellee was exempt,
we are convicted of the fairness of the judgment presently under appeal.

In the premises, however, a minor modification must be effected in the dispositive portion of the
decision appeal from insofar as it expresses the amount of damages in U.S. currency and not in
Philippine Peso. Republic Act 529 specifically requires the discharge of obligations only "in any coin
or currency which at the time of payment is legal tender for public and private debts." In view of that
law, therefore, the award should be converted into and expressed in Philippine Peso.

This brings us to a consideration of what rate of exchange should apply in the conversion here
decreed. Should it be at the time of the breach, at the time the obligation was incurred or at the rate
of exchange prevailing on the promulgation of this decision.

In the case of Engel v. Velasco & Co., 47 Phil. 115, We ruled that in an action for recovery of
damages for breach of contract, even if the obligation assumed by the defendant was to pay the
plaintiff a sum of money expressed in American currency, the indemnity to be allowed should be
expressed in Philippine currency at the rate of exchange at the time of the judgment rather than at
the rate of exchange prevailing on the date of defendant's breach. This ruling, however, can neither
be applied nor extended to the case at bar for the same was laid down when there was no law
against stipulating foreign currencies in Philippine contracts. But now we have Republic Act No. 529
which expressly declares such stipulations as contrary to public policy, void and of no effect. And, as
We already pronounced in the case of Eastboard Navigation, Ltd. v. Juan Ysmael & Co., Inc., G.R.
No. L-9090, September 10, 1957, if there is any agreement to pay an obligation in a currency other
than Philippine legal tender, the same is null and void as contrary to public policy (Republic Act 529),
and the most that could be demanded is to pay said obligation in Philippine currency "to be
measured in the prevailing rate of exchange at the time the obligation was incurred (Sec. 1, idem)."

UPON ALL THE FOREGOING, the decision appealed from is hereby affirmed, with the sole
modification that the award should be converted into the Philippine peso at the rate of exchange
prevailing at the time the obligation was incurred or on July 1, 1952 when the contract was executed.
The appellee insurance company, in the light of this judgment, is relieved of any liability under this
suit. No pronouncement as to costs.

Bengzon, C.J., Padilla, Concepcion, Paredes, Dizon and Makalintal, JJ., concur.
Barrera, J., took no part.
Reyes, J.B.L., J., reserves his vote.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-37120 April 20, 1983

VICTORINO D. MAGAT, petitioner,

vs.
HON. LEO D. MEDIALDEA and SANTIAGO A. GUERRERO, respondents.

Sinesio S. Vergara for petitioner.

Eladio B. Samson for respondents.

ESCOLIN, J.:

Put to test in this petition for review on certiorari is the sufficiency of the averments contained in the
complaint for alleged breach of contract filed by petitioner Victorino D. Magat against respondent
Santiago A. Guerrero in Civil Case No. 17827 of the Court of First Instance of Rizal, presided by
respondent Judge Leo D. Medialdea, now Deputy Judicial Administrator, which complaint was
dismissed for failure to state a cause of action.

The pertinent allegations in the complaint, subject of inquiry, are as follows: 1

3. That sometime in September 1972, the defendant entered into a contract with the
U.S. Navy Exchange, Subic Bay, Philippines, for the operation of a fleet of taxicabs,
each taxicab to be provided with the necessary taximeter and a radio transceiver for
receiving and sending of messages from mobile taxicab to fixed base stations within
the Naval Base at Subic Bay, Philippines;

4. That Isidro Q. Aligada, acting as agent of the defendant herein conducted the
necessary project studies on how best the defendant may meet the requirements of
his contract with the U.S. Navy Exchange, Subic Bay, Philippines, and because of
the experience of the plaintiff in connection with his various, contracts with the U.S.
Navy, Subic Bay, Philippines, and his goodwill already established with the Naval
personnel of Subic Bay, Philippines, especially in providing the U.S. Navy with
needed materials or goods on time as specified by the U.S. Navy, be they of local
origin or imported either from the United States or from Japan, the said Isidro Q.
Aligada approached the plaintiff herein in behalf of the defendant and proposed to
import from Japan thru the plaintiff herein or thru plaintiff's Japanese business
associates, all taximeters and radio transceivers needed by the defendant in
connection with his contract with the U.S. Navy Exchange, Subic Bay, Philippines;

5. That the defendant herein and his aforesaid agent Isidro Q. Aligada were able to
import from Japan with the assistance of the plaintiff and his Japanese business
associates the necessary taximeters for defendant's taxicabs in partial fulfillment of
defendant's commitments with the U.S. Navy Exchange, Subic Bay, Philippines, the
plaintiff's assistance in this matter having been given to the defendant gratis et
amore;

6. That Isidro Q. Aligada, also acting as agent of the defendant, made

representations with the plaintiff herein to the effect that defendant desired to procure
from Japan thru the plaintiff herein the needed radio transceivers and to this end,
Isidro Q. Aligada secured a firm offer in writing dated September 25, 1972, a copy of
which is hereto attached marked as Annex 'A' and made an integral part of this
complaint, wherein the plaintiff quoted in his offer a total price of $77,620.59 [U.S.
dollars] FOB Yokohama, the goods or articles therein offered for sale by the plaintiff
to the defendant to be delivered sixty to ninety [60-90] days after receipt of advice
from the defendant of the radio frequency assigned to the defendant by the proper
authorities;

7. That the plaintiff received notice of the fact that the defendant accepted plaintiff's
offer to sell to the defendant the items specified in Annex 'A', as well as the terms
and conditions of said offer, as shown by the signed conformity of the defendant
appearing on Annex 'A' which was duly delivered by the defendant's agent to the
plaintiff herein, whereupon all that the plaintiff had to do in the meantime was to await
advice from the defendant as to the radio frequency to be assigned by the proper
authorities to the defendant;

8. That believing that the defendant would faithfully fulfill his contract with the plaintiff
herein, considering his signed conformity appearing in Annex 'A' hereof as well as
the letter dated October 4, 1972, of his agent aforementioned which is attached
hereto and marked as Annex 'B' and made an integral part of this complaint, and in
order that plaintiff's promised delivery would not be delayed, the plaintiff herein took
steps to advise the Japanese entity entrusted with the manufacture of the items listed
in Annex 'A' to the effect that the contract between the defendant herein and the
plaintiff has been perfected and that advice with regards to radio frequency would
follow as soon as same is received by the plaintiff from the defendant;

9. That in his letter dated October 6, 1972, a copy of which is hereto attached
marked as Annex 'C', the defendant advised his aforementioned agent to the effect
that the U.S. Navy provided him with the radio frequency of 34.2 MHZ [Megahertz]
and defendant requested his said agent to proceed with his order placed with the
plaintiff herein, which fact was duly communicated to the plaintiff by the defendant's
aforementioned agent;

10. That by his letter dated October 7, 1972, addressed to the plaintiff by the
defendant's agent, a copy of which is hereto attached and marked as Annex 'D',
defendant's agent qualified defendant's instructions contained in his letter of October
6, 1972 [Annex 'C'] in the sense that plaintiff herein should proceed to fulfill
defendant's order only upon receipt by the plaintiff of the defendant's letter of credit;

11. That it being normal business practice in case of foreign importation that the
buyer opens a letter of credit in favor of the foreign supplier before delivery of the
goods sold, the plaintiff herein awaited the opening of such a letter of credit by the
defendant;

12. That the defendant and his agent have repeatedly assured plaintiff herein of the
defendant's financial capabilities to pay for the goods ordered by him and in fact he
accomplished the necessary application for a letter of credit with his banker, but he
subsequently instructed his banker not to give due course to his application for a
letter of credit and that for reasons only known to the defendant, he fails and refuses
to open the necessary letter of credit to cover payment of the goods ordered by him;

13. That it has come to the knowledge of the plaintiff herein that the defendant has
been operating his taxicabs without the required radio transceivers and when the
U.S. Navy Authorities of Subic Bay, Philippines, were pressing defendant for
compliance with his commitments with respect to the installations of radio
transceivers on his taxicabs, he impliedly laid the blame for the delay upon the
plaintiff herein, thus destroying the reputation of the plaintiff herein with the said
Naval Authorities of Subic Bay, Philippines, with whom plaintiff herein transacts
business;

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

15. That the defendant herein entered into a contract with the plaintiff herein as set
forth in Annex 'A' without the least intention of faithfully complying with his obligation
is thereunder, but he did so only in order to obtain the concession from the U.S. Navy
Exchange, Subic Bay, Philippines, of operating a fleet of taxicabs inside the U.S.
Naval Base to his financial benefit and at the expense and prejudice of third parties
such as the plaintiff herein;

16. That in view of the defendant's failure to fulfill his contractual obligations with the
plaintiff herein, the plaintiff will suffer the following damages:

[a] As the radio transceivers ordered by the defendant are now in the
hands of the plaintiff's Japanese representative, the plaintiff will have
to pay for them, thus he will have to suffer as total loss to him the
amount of P523,938.98 (converting the amount of $77,620.59 to
pesos at the rate of P6.75 to the dollar) as said radio transceivers
were purposely made or manufactured solely for the use of the
defendant herein and cannot possibly be marketed by the plaintiff
herein to the general public;

[b] The amount of P 52,393.89 or 10% of the purchase price by way

of loss of expected profits from the transaction or contract between
plaintiff and the defendant;

[c] Loss of confidence in him and goodwill of the plaintiff which will
result in the impairment of his business dealings with Japanese firms,
thereby resulting also in loss of possible profits in the future which
plaintiff assess at no less than P200,000.00;

[d] That in view of the defendant's bad faith in inducing plaintiff to

enter into the contract with him as set forth hereinabove, defendant
should be assessed by his Honorable Court in favor of the plaintiff the
sum of P200,000.00 as moral and exemplary damages;
 [e] That in view of the defendant's fault and to protect his interests,
plaintiff herein is constrained to retain the services of counsel with
whom he agreed to pay by way of attorney's fees the sum of
P50,000.00".

Respondent Guerrero filed a motion to dismiss said complaint for lack of cause of action, which
ground is propounded by respondent's counsel thus: 2

... it is clear that plaintiff was merely anticipating his loss or damage which might
result from the alleged failure of defendant to comply with the terms of the alleged
contract. Hence, plaintiff's right of recovery under his cause of action is premised not
on any loss or damage actually suffered by him but on a non-existing loss or damage
which he is expecting to incur in the near future. Plaintiff's right therefore under his
cause of action is not yet fixed or vested.

Inasmuch as there is no other allegation in the present Complaint wherein the same
could be maintained against defendant, the present Complaint should be dismissed
for its failure to state a cause of action against defendant.

The respondent judge, over petitioner's opposition, issued a minute order dismissing the complaint
as follows:3

Acting upon the 'Motion to Dismiss' filed by the defendant, through counsel, dated
June 7, 1973, as well as the opposition thereto filed by the plaintiff, through counsel,
dated June 14, 1973, for the reasons therein alleged, this Court hereby grants said
motion and, as prayed for, the complaint in the above-entitled case is dismissed.

SO ORDERED.

Both parties are in accord with the view that when a motion to dismiss is based on the ground of lack
of cause of action, the sufficiency of the case of action can only be determined on the basis of the
facts alleged in the complaint 4 ; that the facts alleged are deemed hypothetically admitted, including
those which are fairly deducible therefrom 5 ; and that, admitting the facts as alleged, whether or not
the Court can render a valid judgment against the defendant upon said facts in accordance with the
prayer in the complaint 6.

After a thorough examination of the complaint at bar, We find the test of legal sufficiency of the
cause of action adequately satisfied. In a methodical and logical sequence, the complaints recites
the circumstances that led to the perfection of the contract entered into by the parties. It further avers
that while petitioner had fulfilled his part of the bargain [paragraph 8 of the Complaint], private
respondent failed to comply with his correlative obligation by refusing to open a letter of credit to
cover payment of the goods ordered by him [paragraphs 11 & 12 of the Complaint], and that
consequently, petitioner suffered not only loss of his expected profits, but moral and exemplary
damages as well. From these allegations, the essential elements of a cause of action are present, to
wit: [1] the existence of a legal right to the plaintiff; [2] a correlative duty of the defendant and [3] an
act or omission of the defendant in violation of the plaintiff's right, with consequent injury or damage
to the latter for which he may maintain an action for recovery of damages or other appropriate
relief. 7

Indisputably, the parties, both businessmen, entered into the aforesaid contract with the evident
intention of deriving some profits therefrom. Upon breach of the contract by either of them, the other
would necessarily suffer loss of his expected profits. Since the loss comes into being at the very
moment of breach, such loss is real, "fixed and vested" and, therefore, recoverable under the law.

Article 1170 of the Civil Code provides:

Those who in the performance of their obligation are guilty of fraud, negligence, or
delay, and those who in any manner contravene the tenor thereof are liable for
damages.

The phrase "in any manner contravene the tenor" of the obligation includes any ilicit act or omission
which impairs the strict and faithful fulfillment of the obligation and every kind of defective
performance. 8

The damages which the obligor is liable for includes not only the value of the loss suffered by the
obligee [daño emergente] but also the profits which the latter failed to obtain [lucro cesante] 9. If the
obligor acted in good faith, he shall be liable for those damages that are the natural and probable
consequences of the breach of the obligation and which the parties have foreseen or could have
reasonably foreseen at the time the obligation was constituted; and in case of fraud, bad faith,
malice or wanton attitude, he shall be liable for all damages which may be reasonably attributed to
the non-performance of the obligation 10.

The same is true with respect to moral and exemplary damages. The applicable legal provisions on
the matter, Articles 2220 and 2232 of the Civil Code, allow the award of such damages in breaches
of contract where the defendant acted in bad faith. To Our mind, the complaint sufficiently alleges
bad faith on the part of the defendant.

In fine, We hold that on the basis of the facts alleged in the complaint, the court could render a valid
judgment in accordance with the prayer thereof.

ACCORDINGLY, the questioned order of dismissal is hereby set aside and the case ordered
remanded to the court of origin for further proceedings. No costs.

SO ORDERED.
 FIRST DIVISION

[G.R. No. 117190. January 2, 1997]

JACINTO TANGUILIG doing business under the name and style J.M.T.
ENGINEERING AND GENERAL
MERCHANDISING, petitioner, vs. COURT OF APPEALS and
VICENTE HERCE JR., respondents.

DECISION
BELLOSILLO, J.:

This case involves the proper interpretation of the contract entered into between the
parties.
Sometime in April 1987 petitioner Jacinto M. Tanguilig doing business under the
name and style J. M. T. Engineering and General Merchandising proposed to respondent
Vicente Herce Jr. to construct a windmill system for him. After some negotiations they
agreed on the construction of the windmill for a consideration of P60,000.00 with a one-
year guaranty from the date of completion and acceptance by respondent Herce Jr. of the
project. Pursuant to the agreement respondent paid petitioner a down payment
of P30,000.00 and an installment payment of P15,000.00, leaving a balance
of P15,000.00.
On 14 March 1988, due to the refusal and failure of respondent to pay the balance,
petitioner filed a complaint to collect the amount. In his Answer before the trial court
respondent denied the claim saying that he had already paid this amount to the San Pedro
General Merchandising Inc. (SPGMI) which constructed the deep well to which the
windmill system was to be connected. According to respondent, since the deep well
formed part of the system the payment he tendered to SPGMI should be credited to his
account by petitioner. Moreover, assuming that he owed petitioner a balance
of P15,000.00, this should be offset by the defects in the windmill system which caused
the structure to collapse after a strong wind hit their place.[1]
Petitioner denied that the construction of a deep well was included in the agreement
to build the windmill system, for the contract price of P60,000.00 was solely for the
windmill assembly and its installation, exclusive of other incidental materials needed for
the project. He also disowned any obligation to repair or reconstruct the system and
insisted that he delivered it in good and working condition to respondent who accepted
the same without protest. Besides, its collapse was attributable to a typhoon,
a forcemajeure, which relieved him of any liability.
In finding for plaintiff, the trial court held that the construction of the
deep well was not part of the windmill project as evidenced clearly by the letter proposals
submitted by petitioner to respondent.[2] It noted that "[i]f the intention of the parties is to
include the construction of the deep well in the project, the same should be stated in the
proposals. In the absence of such an agreement, it could be safely concluded that the
construction of the deep well is not a part of the project undertaken by the plaintiff."[3] With
respect to the repair of the windmill, the trial court found that "there is no clear and
convincing proof that the windmill system fell down due to the defect of the construction." [4]
The Court of Appeals reversed the trial court. It ruled that the construction of the deep
well was included in the agreement of the parties because the term "deep well" was
mentioned in both proposals. It also gave credence to the testimony of respondent's
witness Guillermo Pili, the proprietor of SPGMI which installed the deep well, that
petitioner Tanguilig told him that the cost of constructing the deep well would be deducted
from the contract price of P60,000.00. Upon these premises the appellate court
concluded that respondent's payment of P15,000.00 to SPGMI should be applied to his
remaining balance with petitioner thus effectively extinguishing his contractual
obligation. However, it rejected petitioner's claim of force majeure and ordered the latter
to reconstruct the windmill in accordance with the stipulated one-year guaranty.
His motion for reconsideration having been denied by the Court of Appeals, petitioner
now seeks relief from this Court. He raises two issues: firstly, whether the agreement to
construct the windmill system included the installation of a deep well
and, secondly, whether petitioner is under obligation to reconstruct the windmill after it
collapsed.
We reverse the appellate court on the first issue but sustain it on the second.
The preponderance of evidence supports the finding of the trial court that the
installation of a deep well was not included in the proposals of petitioner to construct a
windmill system for respondent. There were in fact two (2) proposals: one dated 19 May
1987 which pegged the contract price at P87,000.00 (Exh. "1"). This was rejected by
respondent. The other was submitted three days later, i.e., on 22 May 1987 which
contained more specifications but proposed a lower contract price of P60,000.00 (Exh.
"A").The latter proposal was accepted by respondent and the construction immediately
followed. The pertinent portions of the first letter-proposal (Exh. "1") are
reproducedhereunder -

In connection with your Windmill System and Installation, we would like to quote to
you as follows:

One (1) Set - Windmill suitable for 2 inches diameter deepwell, 2 HP, capacity, 14
feet in diameter, with 20 pieces blade, Tower 40 feet high, including mechanism
which is not advisable to operate during extra-intensity wind. Excluding cylinder
pump.

UNIT CONTRACT PRICE P87,000.00

The second letter-proposal (Exh. "A") provides as follows:

In connection with your Windmill system Supply of Labor Materials and Installation,
operated water pump, we would like to quote to you as follows -

One (1) set - Windmill assembly for 2 inches or 3 inches deep-well pump, 6 Stroke,
14 feet diameter, 1-lot blade materials, 40 feet Tower complete with standard
appurtenances up to Cylinder pump, shafting U.S. adjustable International Metal.

One (1) lot - Angle bar, G. I. pipe, Reducer Coupling, Elbow Gate valve, cross Tee
coupling.

One (1) lot - Float valve.

One (1) lot - Concreting materials foundation.

F. O. B. Laguna

Contract Price P60,000.00

Notably, nowhere in either proposal is the installation of a deep well mentioned, even
remotely. Neither is there an itemization or description of the materials to be used in
constructing the deep well. There is absolutely no mention in the two (2) documents that
a deep well pump is a component of the proposed windmill system. The contract prices
fixed in both proposals cover only the features specifically described therein and no
other. While the words "deep well" and "deep well pump" are mentioned in both, these do
not indicate that a deep well is part of the windmill system. They merely describe the type
of deep well pump for which the proposed windmill would be suitable. As correctly pointed
out by petitioner, the words "deep well" preceded by the prepositions "for" and "suitable
for" were meant only to convey the idea that the proposed windmill would be appropriate
for a deep well pump with a diameter of 2 to 3 inches. For if the real intent of petitioner
was to include a deep well in the agreement to construct a windmill, he would have used
instead the conjunctions "and" or "with." Since the terms of the instruments are clear and
leave no doubt as to their meaning they should not be disturbed.
Moreover, it is a cardinal rule in the interpretation of contracts that the intention of the
parties shall be accorded primordial consideration[5] and, in case of doubt, their
contemporaneous and subsequent acts shall be principally considered.[6] An examination
of such contemporaneous and subsequent acts of respondent as well as the attendant
circumstances does not persuade us to uphold him.
Respondent insists that petitioner verbally agreed that the contract price
of P60,000.00 covered the installation of a deep well pump. He contends that since
petitioner did not have the capacity to install the pump the latter agreed to have a third
party do the work the cost of which was to be deducted from the contract price. To prove
his point, he presented Guillermo Pili of SPGMI who declared that petitioner Tanguilig
approached him with a letter from respondent Herce Jr. asking him to build a deep well
pump as "part of the price/contract which Engineer (Herce) had with Mr. Tanguilig." [7]
 We are disinclined to accept the version of respondent. The claim of Pili that Herce
Jr. wrote him a letter is unsubstantiated. The alleged letter was never presented in court
by private respondent for reasons known only to him. But granting that this written
communication existed, it could not have simply contained a request for Pili to install a
deep well; it would have also mentioned the party who would pay for the undertaking. It
strains credulity that respondent would keep silent on this matter and leave it all to
petitioner Tanguilig to verbally convey to Pili that the deep well was part of the windmill
construction and that its payment would come from the contract price of P60,000.00.
We find it also unusual that Pili would readily consent to build a deep well the payment
for which would come supposedly from the windmill contract price on the mere
representation of petitioner, whom he had never met before, without a written commitment
at least from the former. For if indeed the deep well were part of the windmill project, the
contract for its installation would have been strictly a matter between petitioner and Pili
himself with the former assuming the obligation to pay the price. That it was respondent
Herce Jr. himself who paid for the deep well by handing over to Pili the amount
of P15,000.00 clearly indicates that the contract for the deep well was not part of the
windmill project but a separate agreement between respondent and Pili. Besides, if the
price of P60,000.00 included the deep well, the obligation of respondent was to pay the
entire amount to petitioner without prejudice to any action that Guillermo Pili or SPGMI
may take, if any, against the latter. Significantly, when asked why he tendered payment
directly to Pili and not to petitioner, respondent explained, rather lamely, that he did it
"because he has (sic) the money, so (he) just paid the money in his possession." [8]
Can respondent claim that Pili accepted his payment on behalf of
petitioner? No. While the law is clear that "payment shall be made to the person in
whose favor theobligation has been constituted, or his successor in
interest, or any person authorized to receive it,".[9] It does not appear from the record
that Pili and/or SPGMI was so authorized.
Respondent cannot claim the benefit of the law concerning "payments made by a
third person."[10] The Civil Code provisions do not apply in the instant case because no
creditor-debtor relationship between petitioner and Guillermo Pili and/or SPGMI has been
established regarding the construction of the deep well. Specifically, witness Pili did not
testify that he entered into a contract with petitioner for the construction of respondent's
deep well. If SPGMI was really commissioned by petitioner to construct the deep well, an
agreement particularly to this effect should have been entered into.
The contemporaneous and subsequent acts of the parties concerned effectively belie
respondent's assertions. These circumstances only show that the construction of the well
by SPGMI was for the sole account of respondent and that petitioner merely supervised
the installation of the well because the windmill was to be connected to it. There is no
legal nor factual basis by which this Court can impose upon petitioner an obligation he
did not expressly assume nor ratify.
The second issue is not a novel one. In a long line of cases[11] this Court has
consistently held that in order for a party to claim exemption from liability by reason of
fortuitous event under Art. 1174 of the Civil Code the event should be the sole
and proximate cause of the loss or destruction of the object of the
contract. In Nakpil vs. Court of Appeals,[12] four (4) requisites must concur: (a) the cause
of the breach of the obligation must be independent of the will of the debtor; (b) the event
must be either unforeseeable or unavoidable; (c) the event must be such as to render it
impossible for the debtor to fulfill his obligation in a normal manner; and, (d) the debtor
must be free from any participation in or aggravation of the injury to the creditor.
Petitioner failed to show that the collapse of the windmill was due solely to a fortuitous
event. Interestingly, the evidence does not disclose that there was actually a typhoon on
the day the windmill collapsed. Petitioner merely stated that there was a "strong wind."
But a strong wind in this case cannot be fortuitous - unforeseeable nor unavoidable.On
the contrary, a strong wind should be present in places where windmills are constructed,
otherwise the windmills will not turn.
The appellate court correctly observed that "given the newly-constructed windmill
system, the same would not have collapsed had there been no inherent defect in it which
could only be attributable to the appellee."[13] It emphasized that
respondent had in his favor the presumption that
"things have happened according to the ordinary course of nature and the ordinary habits
of life."[14] This presumption has not been rebutted by petitioner.
Finally, petitioner's argument that private respondent was already in default in the
payment of his outstanding balance of P15,000.00 and hence should bear his own loss,
is untenable. In reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is incumbent upon
him.[15]When the windmill failed to function properly it became incumbent upon petitioner
to institute the proper repairs in accordance with the guaranty stated in the contract. Thus,
respondent cannot be said to have incurred in delay; instead, it is petitioner who should
bear the expenses for the reconstruction of the windmill. Article 1167 of the Civil Code is
explicit on this point that if a person obliged to do something fails to do it, the same shall
be executed at his cost.
WHEREFORE, the appealed decision is MODIFIED. Respondent VICENTE HERCE
JR. is directed to pay petitioner JACINTO M. TANGUILIG the balance of P15,000.00 with
interest at the legal rate from the date of the filing of the complaint. In return, petitioner is
ordered to "reconstruct subject defective windmill system, in accordance with the one-
year guaranty"[16]and to complete the same within three (3) months from the finality of this
decision.
SO ORDERED.
 FIRST DIVISION

[G.R. No. 144169. March 28, 2001]

KHE HONG CHENG, alias FELIX KHE, SANDRA JOY KHE and RAY
STEVEN KHE, petitioners, vs. COURT OF APPEALS, HON. TEOFILO
GUADIZ, RTC 147, MAKATI CITY and PHILAM INSURANCE CO.,
INC., respondents.

DECISION
KAPUNAN, J.:

Before the Court is a Petition for Review on Certiorari under Rule 45, seeking to set aside the
decision of the Court of Appeals dated April 10, 2000 and its resolution dated July 11, 2000
denying the motion for reconsideration of the aforesaid decision. The original complaint that is the
subject matter of this case is an accion pauliana-- an action filed by Philam Insurance Company,
Inc. (respondent Philam) to rescind or annul the donations made by petitioner Khe Hong Cheng
allegedly in fraud of creditors. The main issue for resolution is whether or not the action to rescind
the donations has already prescribed. While the first paragraph of Article 1389 of the Civil Code
states: The action to claim rescission must be commenced within four years... the question is, from
which point or event does this prescriptive period commence to run?
The facts are as follows:
Petitioner Khe Hong Cheng, alias Felix Khe, is the owner of Butuan Shipping Lines. It appears
that on or about October 4, 1985, the Philippine Agricultural Trading Corporation shipped on
board the vessel M/V PRINCE ERIC, owned by petitioner Khe Hong Cheng, 3,400 bags of copra
at Masbate, Masbate, for delivery to Dipolog City, Zamboanga del Norte. The said shipment of
copra was covered by a marine insurance policy issued by American Home Insurance Company
(respondent Philam's assured). M/V PRINCE ERIC, however, sank somewhere between Negros
Island and Northeastern Mindanao, resulting in the total loss of the shipment. Because of the loss,
the insurer, American Home, paid the amount of P354,000.00 (the value of the copra) to the
consignee.
Having been subrogated into the rights of the consignee, American Home instituted Civil Case
No. 13357 in the Regional Trial Court (RTC) of Makati, Branch 147 to recover the money paid to
the consignee, based on breach of contract of carriage. While the case was still pending, or on
December 20, 1989, petitioner Khe Hong Cheng executed deeds of donations of parcels of land in
favor of his children, herein co-petitioners Sandra Joy and Ray Steven. The parcel of land with an
area of 1,000 square meters covered by Transfer Certificate of Title (TCT) No. T-3816 was
donated to Ray Steven. Petitioner Khe Hong Cheng likewise donated in favor of Sandra Joy two
(2) parcels of land located in Butuan City, covered by TCT No. RT-12838. On the basis of said
deeds, TCT No. T-3816 was cancelled and in lieu thereof, TCT No. T-5072 was issued in favor of
Ray Steven and TCT No. RT-12838 was cancelled and in lieu thereof, TCT No. RT-21054 was
issued in the name of Sandra Joy.
The trial court rendered judgment against petitioner Khe Hong Cheng in Civil Case No. 13357
on December 29, 1993, four years after the donations were made and the TCTs were registered in
the donees names. The decretal portion of the aforesaid decision reads:

Wherefore, in view of the foregoing, the Court hereby renders judgment in favor of
the plaintiff and against the defendant, ordering the latter to pay the former:

1) the sum of P354,000.00 representing the amount paid by the plaintiff to the
Philippine Agricultural Trading Corporation with legal interest at 12% from the time
of the filing of the complaint in this case;

2) the sum of P50,000.00 as attorneys fees;

3) the costs.[1]

After the said decision became final and executory, a writ of execution was forthwith issued
on September 14, 1995. Said writ of execution, however, was not served. An alias writ of
execution was, thereafter, applied for and granted in October 1996. Despite earnest efforts, the
sheriff found no property under the name of Butuan Shipping Lines and/or petitioner Khe Hong
Cheng to levy or garnish for the satisfaction of the trial court's decision. When the sheriff,
accompanied by counsel of respondent Philam, went to Butuan City on January 17, 1997, to
enforce the alias writ of execution, they discovered that petitioner Khe Hong Cheng no longer had
any property and that he had conveyed the subject properties to his children.
On February 25, 1997, respondent Philam filed a complaint with the Regional Trial Court of
Makati City, Branch 147, for the rescission of the deeds of donation executed by petitioner Khe
Hong Cheng in favor of his children and for the nullification of their titles (Civil Case No. 97-
415). Respondent Philam alleged, inter alia, that petitioner Khe Hong Cheng executed the
aforesaid deeds in fraud of his creditors, including respondent Philam.[2]
Petitioners subsequently filed their answer to the complaint a quo. They moved for its
dismissal on the ground that the action had already prescribed. They posited that the registration
of the deeds of donation on December 27, 1989 constituted constructive notice and since the
complaint a quo was filed only on February 25, 1997, or more than four (4) years after said
registration, the action was already barred by prescription.[3]
Acting thereon, the trial court denied the motion to dismiss. It held that respondent Philam's
complaint had not yet prescribed. According to the trial court, the prescriptive period began to run
only from December 29, 1993, the date of the decision of the trial court in Civil Case No. 13357.[4]
On appeal by petitioners, the CA affirmed the trial court's decision in favor of respondent
Philam. The CA declared that the action to rescind the donations had not yet prescribed. Citing
Articles 1381 and 1383 of the Civil Code, the CA basically ruled that the four year period to
institute the action for rescission began to run only in January 1997, and not when the decision in
the civil case became final and executory on December 29, 1993. The CA reckoned the accrual of
respondent Philam's cause of action on January 1997, the time when it first learned that the
judgment award could not be satisfied because the judgment creditor, petitioner Khe Hong Cheng,
had no more properties in his name. Prior thereto, respondent Philam had not yet exhausted all
legal means for the satisfaction of the decision in its favor, as prescribed under Article 1383 of the
Civil Code.[5]
The Court of Appeals thus denied the petition for certiorari filed before it, and held that the
trial court did not commit any error in denying petitioners' motion to dismiss. Their motion for
reconsideration was likewise dismissed in the appellate court's resolution dated July 11, 2000.
Petitioners now assail the aforesaid decision and resolution of the CA alleging that:
I

PUBLIC RESPONDENT GRAVELY ERRED AND ACTED IN GRAVE

ABUSE OF DISCRETION WHEN IT DENIED THE PETITION TO DISMISS
THE CASE BASED ON THE GROUND OF PRESCRIPTION.
II

PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN

HOLDING THAT PRESCRIPTION BEGINS TO RUN WHEN IN JANUARY
1997 THE SHERIFF WENT TO BUTUAN CITY IN SEARCH OF
PROPERTIES OF PETITIONER FELIX KHE CHENG TO SATISFY THE
JUDGMENT IN CIVIL CASE NO. 13357 AND FOUND OUT THAT AS
EARLY AS DEC. 20, 1989, PETITIONERS KHE CHENG EXECUTED THE
DEEDS OF DONATIONS IN FAVOR OF HIS CO-PETITIONERS THAT THE
ACTION FOR RESCISSION ACCRUED BECAUSE PRESCRIPTION BEGAN
TO RUN WHEN THESE DONATIONS WERE REGISTERED WITH THE
REGISTER OF DEEDS IN DECEMBER 1989, AND WHEN THE
COMPLAINT WAS FILED ONLY IN FEBRUARY 1997, MORE THAN FOUR
YEARS HAVE ALREADY LAPSED AND THEREFORE, IT HAS ALREADY
PRESCRIBED.[6]

Essentially, the issue for resolution posed by petitioners is this: When did the four (4) year
prescriptive period as provided for in Article 1389 of the Civil Code for respondent Philam to file
its action for rescission of the subject deeds of donation commence to run?
The petition is without merit.
Article 1389 of the Civil Code simply provides that, The action to claim rescission must be
commenced within four years. Since this provision of law is silent as to when the prescriptive
period would commence, the general rule, i.e, from the moment the cause of action accrues,
therefore, applies. Article 1150 of the Civil Code is particularly instructive:
Art. 1150. The time for prescription for all kinds of actions, when there is no special
provision which ordains otherwise, shall be counted from the day they may be
brought.

Indeed, this Court enunciated the principle that it is the legal possibility of bringing the action
which determines the starting point for the computation of the prescriptive period for the
action.[7] Article 1383 of the Civil Code provides as follows:

Art. 1383. An action for rescission is subsidiary; it cannot be instituted except when
the party suffering damage has no other legal means to obtain reparation for the same.

It is thus apparent that an action to rescind or an accion pauliana must be of last resort, availed
of only after all other legal remedies have been exhausted and have been proven futile. For
an accion pauliana to accrue, the following requisites must concur:

1) That the plaintiff asking for rescission has a credit prior to the alienation, although
demandable later; 2) That the debtor has made a subsequent contract conveying a
patrimonial benefit to a third person; 3) That the creditor has no other legal remedy to
satisfy his claim, but would benefit by rescission of the conveyance to the third
person; 4) That the act being impugned is fraudulent; 5) That the third person who
received the property conveyed, if by onerous title, has been an accomplice in the
fraud.[8] (Emphasis ours)

We quote with approval the following disquisition of the CA on the matter:

An accion pauliana accrues only when the creditor discovers that he has no other
legal remedy for the satisfaction of his claim against the debtor other than an accion
pauliana. The accion pauliana is an action of a last resort. For as long as the creditor
still has a remedy at law for the enforcement of his claim against the debtor, the
creditor will not have any cause of action against the creditor for rescission of the
contracts entered into by and between the debtor and another person or
persons. Indeed, an accion pauliana presupposes a judgment and the issuance by the
trial court of a writ of execution for the satisfaction of the judgment and the failure of
the Sheriff to enforce and satisfy the judgment of the court. It presupposes that the
creditor has exhausted the property of the debtor. The date of the decision of the trial
court against the debtor is immaterial. What is important is that the credit of the
plaintiff antedates that of the fraudulent alienation by the debtor of his property. After
all, the decision of the trial court against the debtor will retroact to the time when the
debtor became indebted to the creditor.[9]

Petitioners, however, maintain that the cause of action of respondent Philam against them for
the rescission of the deeds of donation accrued as early as December 27, 1989, when petitioner
Khe Hong Cheng registered the subject conveyances with the Register of Deeds. Respondent
Philam allegedly had constructive knowledge of the execution of said deeds under Section 52 of
Presidential Decree No. 1529, quoted infra, as follows:

Section 52. Constructive knowledge upon registration. Every conveyance, mortgage,

lease, lien, attachment, order, judgment, instrument or entry affecting registered land
shall, if registered, filed or entered in the Office of the Register of Deeds for the
province or city where the land to which it relates lies, be constructive notice to all
persons from the time of such registering, filing, or entering.

Petitioners argument that the Civil Code must yield to the Mortgage and Registration Laws is
misplaced, for in no way does this imply that the specific provisions of the former may be all
together ignored. To count the four year prescriptive period to rescind an allegedly fraudulent
contract from the date of registration of the conveyance with the Register of Deeds, as alleged by
the petitioners, would run counter to Article 1383 of the Civil Code as well as settled jurisprudence.
It would likewise violate the third requisite to file an action for rescission of an allegedly fraudulent
conveyance of property, i.e., the creditor has no other legal remedy to satisfy his claim.
An accion pauliana thus presupposes the following: 1) A judgment; 2) the issuance by the
trial court of a writ of execution for the satisfaction of the judgment, and 3) the failure of the sheriff
to enforce and satisfy the judgment of the court. It requires that the creditor has exhausted the
property of the debtor. The date of the decision of the trial court is immaterial. What is important
is that the credit of the plaintiff antedates that of the fraudulent alienation by the debtor of his
property. After all, the decision of the trial court against the debtor will retroact to the time when
the debtor became indebted to the creditor.
Tolentino, a noted civilist, explained:

xxx[T]herefore, credits with suspensive term or condition are excluded, because

the accion pauliana presupposes a judgment and unsatisfied execution, which cannot
exist when the debt is not yet demandable at the time the rescissory action is brought.
Rescission is a subsidiary action, which presupposes that the creditor has exhausted
the property of the debtor which is impossible in credits which cannot be enforced
because of a suspensive term or condition.

While it is necessary that the credit of the plaintiff in the accion pauliana must be
prior to the fraudulent alienation, the date of the judgment enforcing it is immaterial.
Even if the judgment be subsequent to the alienation, it is merely declaratory with
retroactive effect to the date when the credit was constituted.[10]

These principles were reiterated by the Court when it explained the requisites of an accion
pauliana in greater detail, to wit:

The following successive measures must be taken by a creditor before he may bring
an action for rescission of an allegedly fraudulent sale: (1) exhaust the properties of
the debtor through levying by attachment and execution upon all the property of the
debtor, except such as are exempt from execution; (2) exercise all the rights and
actions of the debtor, save those personal to him (accion subrogatoria); and (3) seek
rescission of the contracts executed by the debtor in fraud of their rights (accion
pauliana). Without availing of the first and second remedies, i.e., exhausting the
properties of the debtor or subrogating themselves in Francisco Baregs transmissible
rights and actions, petitioners simply undertook the third measure and filed an action
for annulment of sale. This cannot be done.[11] (Emphasis ours)

In the same case, the Court also quoted the rationale of the CA when it upheld the dismissal
of the accion pauliana on the basis of lack of cause of action:

In this case, plaintiffs appellants had not even commenced an action against
defendants-appellees Bareng for the collection of the alleged indebtedness. Plaintiffs-
appellants had not even tried to exhaust the property of defendants-appellees Bareng.
Plaintiffs-appellants, in seeking the rescission of the contracts of sale entered into
between defendants-appellees, failed to show and prove that defendants-appellees
Bareng had no other property, either at the time of the sale or at the time this action
was filed, out of which they could have collected this (sic) debts. (Emphasis ours)

Even if respondent Philam was aware, as of December 27, 1989, that petitioner Khe Hong
Cheng had executed the deeds of donation in favor of his children, the complaint against Butuan
Shipping Lines and/or petitioner Khe Hong Cheng was still pending before the trial court.
Respondent Philam had no inkling, at the time, that the trial court's judgment would be in its favor
and further, that such judgment would not be satisfied due to the deeds of donation executed by
petitioner Khe Hong Cheng during the pendency of the case. Had respondent Philam filed his
complaint on December 27, 1989, such complaint would have been dismissed for being premature.
Not only were all other legal remedies for the enforcement of respondent Philams claims not yet
exhausted at the time the deeds of donation were executed and registered. Respondent Philam
would also not have been able to prove then that petitioner Khe Hong Chneg had no more property
other than those covered by the subject deeds to satisfy a favorable judgment by the trial court.
It bears stressing that petitioner Khe Hong Cheng even expressly declared and represented
that he had reserved to himself property sufficient to answer for his debts contracted prior to this
date:

That the DONOR further states, for the same purpose as expressed in the next
preceding paragraph, that this donation is not made with the object of defrauding his
creditors having reserved to himself property sufficient to answer his debts contracted
prior to this date.[12]

As mentioned earlier, respondent Philam only learned about the unlawful conveyances made
by petitioner Khe Hong Cheng in January 1997 when its counsel accompanied the sheriff to Butuan
City to attach the properties of petitioner Khe Hong Cheng. There they found that he no longer
had any properties in his name. It was only then that respondent Philam's action for rescission of
the deeds of donation accrued because then it could be said that respondent Philam had exhausted
all legal means to satisfy the trial court's judgment in its favor. Since respondent Philam filed its
complaint for accion pauliana against petitioners on February 25, 1997, barely a month from its
discovery that petitioner Khe Hong Cheng had no other property to satisfy the judgment award
against him, its action for rescission of the subject deeds clearly had not yet prescribed.
A final point. Petitioners now belatedly raise on appeal the defense of improper venue
claiming that respondent Philams complaint is a real action and should have been filed with the
RTC of Butuan City since the property subject matter of the donations are located therein. Suffice
it to say that petitioners are already deemed to have waived their right to question the venue of the
instant case. Improper venue should be objected to as follows 1) in a motion to dismiss filed within
the time but before the filing of the answer;[13] or 2) in the answer as an affirmative defense over
which, in the discretion of the court, a preliminary hearing may be held as if a motion to dismiss
had been filed.[14] Having failed to either file a motion to dismiss on the ground of improper of venue
or include the same as an affirmative defense in their answer, petitioners are deemed to have their
right to object to improper venue.
WHEREFORE, premises considered, the petition is hereby DENIED for lack of merit.
SO ORDERED.
Davide, Jr., C.J. (Chairman), Pardo, and Ynares-Santiago, JJ., concur.
Puno, J., on official leave.
 FIRST DIVISION

[G.R. No. 134685. November 19, 1999]

MARIA ANTONIA SIGUAN, petitioner, vs. ROSA LIM, LINDE LIM,

INGRID LIM and NEIL LIM, respondents.

DECISION
DAVIDE, JR., C.J.:

May the Deed of Donation executed by respondent Rosa Lim (hereafter LIM) in favor of her
children be rescinded for being in fraud of her alleged creditor, petitioner Maria Antonia
Siguan? This is the pivotal issue to be resolved in this petition for review on certiorari under Rule
45 of the Revised Rules of Court.
The relevant facts, as borne out of the records, are as follows:
On 25 and 26 August 1990, LIM issued two Metrobank checks in the sums of P300,000
and P241,668, respectively, payable to cash. Upon presentment by petitioner with the drawee
bank, the checks were dishonored for the reason account closed. Demands to make good the checks
proved futile. As a consequence, a criminal case for violation of Batas Pambansa Blg. 22, docketed
as Criminal Cases Nos. 22127-28, were filed by petitioner against LIM with Branch 23 of the
Regional Trial Court (RTC) of Cebu City. In its decision[1] dated 29 December 1992, the court a
quo convicted LIM as charged. The case is pending before this Court for review and docketed as
G.R. No. 134685.
It also appears that on 31 July 1990 LIM was convicted of estafa by the RTC of Quezon City
in Criminal Case No. Q-89-2216[2] filed by a certain Victoria Suarez. This decision was affirmed
by the Court of Appeals. On appeal, however, this Court, in a decision[3] promulgated on 7 April
1997, acquitted LIM but held her civilly liable in the amount of P169,000, as actual damages, plus
legal interest.
Meanwhile, on 2 July 1991, a Deed of Donation[4] conveying the following parcels of land and
purportedly executed by LIM on 10 August 1989 in favor of her children, Linde, Ingrid and Neil,
was registered with the Office of the Register of Deeds of Cebu City:
(1) a parcel of land situated at Barrio Lahug, Cebu City, containing an area of 563 sq. m. and
covered by TCT No. 93433;
(2) a parcel of land situated at Barrio Lahug, Cebu City, containing an area of 600 sq. m. and
covered by TCT No. 93434;
(3) a parcel of land situated at Cebu City containing an area of 368 sq. m. and covered by TCT
No. 87019; and
 (4) a parcel of land situated at Cebu City, Cebu containing an area of 511 sq. m. and covered by
TCT No. 87020.
New transfer certificates of title were thereafter issued in the names of the donees.[5]
On 23 June 1993, petitioner filed an accion pauliana against LIM and her children before
Branch 18 of the RTC of Cebu City to rescind the questioned Deed of Donation and to declare as
null and void the new transfer certificates of title issued for the lots covered by the questioned
Deed. The complaint was docketed as Civil Case No. CEB-14181. Petitioner claimed therein that
sometime in July 1991, LIM, through a Deed of Donation, fraudulently transferred all her real
property to her children in bad faith and in fraud of creditors, including her; that LIM conspired
and confederated with her children in antedating the questioned Deed of Donation, to petitioners
and other creditors prejudice; and that LIM, at the time of the fraudulent conveyance, left no
sufficient properties to pay her obligations.
On the other hand, LIM denied any liability to petitioner. She claimed that her convictions in
Criminal Cases Nos. 22127-28 were erroneous, which was the reason why she appealed said
decision to the Court of Appeals. As regards the questioned Deed of Donation, she maintained that
it was not antedated but was made in good faith at a time when she had sufficient property.Finally,
she alleged that the Deed of Donation was registered only on 2 July 1991 because she was seriously
ill.
In its decision of 31 December 1994,[6] the trial court ordered the rescission of the questioned
deed of donation; (2) declared null and void the transfer certificates of title issued in the names of
private respondents Linde, Ingrid and Neil Lim; (3) ordered the Register of Deeds of Cebu City to
cancel said titles and to reinstate the previous titles in the name of Rosa Lim; and (4) directed the
LIMs to pay the petitioner, jointly and severally, the sum of P10,000 as moral damages; P10,000
as attorneys fees; and P5,000 as expenses of litigation.
On appeal, the Court of Appeals, in a decision[7] promulgated on 20 February 1998, reversed
the decision of the trial court and dismissed petitioners accion pauliana. It held that two of the
requisites for filing an accion pauliana were absent, namely, (1) there must be a credit existing
prior to the celebration of the contract; and (2) there must be a fraud, or at least the intent to commit
fraud, to the prejudice of the creditor seeking the rescission.
According to the Court of Appeals, the Deed of Donation, which was executed and
acknowledged before a notary public, appears on its face to have been executed on 10 August
1989.Under Section 23 of Rule 132 of the Rules of Court, the questioned Deed, being a public
document, is evidence of the fact which gave rise to its execution and of the date thereof. No
antedating of the Deed of Donation was made, there being no convincing evidence on record to
indicate that the notary public and the parties did antedate it. Since LIMs indebtedness to petitioner
was incurred in August 1990, or a year after the execution of the Deed of Donation, the first
requirement for accion pauliana was not met.
Anent petitioners contention that assuming that the Deed of Donation was not antedated it was
nevertheless in fraud of creditors because Victoria Suarez became LIMs creditor on 8 October
1987, the Court of Appeals found the same untenable, for the rule is basic that the fraud must
prejudice the creditor seeking the rescission.
 Her motion for reconsideration having been denied, petitioner came to this Court and submits
the following issue:

WHETHER OR NOT THE DEED OF DONATION, EXH. 1, WAS ENTERED

INTO IN FRAUD OF [THE] CREDITORS OF RESPONDENT ROSA [LIM].

Petitioner argues that the finding of the Court of Appeals that the Deed of Donation was not
in fraud of creditors is contrary to well-settled jurisprudence laid down by this Court as early as
1912 in the case of Oria v. McMicking,[8] which enumerated the various circumstances indicating
the existence of fraud in a transaction. She reiterates her arguments below, and adds that another
fact found by the trial court and admitted by the parties but untouched by the Court of Appeals is
the existence of a prior final judgment against LIM in Criminal Case No. Q-89-2216 declaring
Victoria Suarez as LIMs judgment creditor before the execution of the Deed of Donation.
Petitioner further argues that the Court of Appeals incorrectly applied or interpreted Section
23,[9] Rule 132 of the Rules of Court, in holding that being a public document, the said deed of
donation is evidence of the fact which gave rise to its execution and of the date of the latter. Said
provision should be read with Section 30[10] of the same Rule which provides that notarial
documents are prima facie evidence of their execution, not of the facts which gave rise to their
execution and of the date of the latter.
Finally, petitioner avers that the Court of Appeals overlooked Article 759 of the New Civil
Code, which provides: The donation is always presumed to be in fraud of creditors when at the
time of the execution thereof the donor did not reserve sufficient property to pay his debts prior to
the donation. In this case, LIM made no reservation of sufficient property to pay her creditors prior
to the execution of the Deed of Donation.
On the other hand, respondents argue that (a) having agreed on the law and requisites of accion
pauliana, petitioner cannot take shelter under a different law; (b) petitioner cannot invoke the
credit of Victoria Suarez, who is not a party to this case, to support her accion pauliana; (c) the
Court of Appeals correctly applied or interpreted Section 23 of Rule 132 of the Rules of Court; (d)
petitioner failed to present convincing evidence that the Deed of Donation was antedated and
executed in fraud of petitioner; and (e) the Court of Appeals correctly struck down the awards of
damages, attorneys fees and expenses of litigation because there is no factual basis therefor in the
body of the trial courts decision.
The primordial issue for resolution is whether the questioned Deed of Donation was made in
fraud of petitioner and, therefore, rescissible. A corollary issue is whether the awards of damages,
attorneys fees and expenses of litigation are proper.
We resolve these issues in the negative.
The rule is well settled that the jurisdiction of this Court in cases brought before it from the
Court of Appeals via Rule 45 of the Rules of Court is limited to reviewing errors of law. Findings
of fact of the latter court are conclusive, except in a number of instances.[11] In the case at bar, one
of the recognized exceptions warranting a review by this Court of the factual findings of the Court
of Appeals exists, to wit, the factual findings and conclusions of the lower court and Court of
Appeals are conflicting, especially on the issue of whether the Deed of Donation in question was
in fraud of creditors.
 Article 1381 of the Civil Code enumerates the contracts which are rescissible, and among
them are those contracts undertaken in fraud of creditors when the latter cannot in any other manner
collect the claims due them.
The action to rescind contracts in fraud of creditors is known as accion pauliana. For this
action to prosper, the following requisites must be present: (1) the plaintiff asking for rescission
has a credit prior to the alienation,[12] although demandable later; (2) the debtor has made a
subsequent contract conveying a patrimonial benefit to a third person; (3) the creditor has no other
legal remedy to satisfy his claim; [13] (4) the act being impugned is fraudulent;[14] (5) the third person
who received the property conveyed, if it is by onerous title, has been an accomplice in the fraud.[15]
The general rule is that rescission requires the existence of creditors at the time of the alleged
fraudulent alienation, and this must be proved as one of the bases of the judicial pronouncement
setting aside the contract.[16] Without any prior existing debt, there can neither be injury nor
fraud. While it is necessary that the credit of the plaintiff in the accion pauliana must exist prior
to the fraudulent alienation, the date of the judgment enforcing it is immaterial. Even if the
judgment be subsequent to the alienation, it is merely declaratory, with retroactive effect to the
date when the credit was constituted.[17]
In the instant case, the alleged debt of LIM in favor of petitioner was incurred in August 1990,
while the deed of donation was purportedly executed on 10 August 1989.
We are not convinced with the allegation of the petitioner that the questioned deed was
antedated to make it appear that it was made prior to petitioners credit. Notably, that deed is a
public document, it having been acknowledged before a notary public.[18] As such, it is evidence
of the fact which gave rise to its execution and of its date, pursuant to Section 23, Rule 132 of the
Rules of Court.
Petitioners contention that the public documents referred to in said Section 23 are only those
entries in public records made in the performance of a duty by a public officer does not hold
water. Section 23 reads:

SEC. 23. Public documents as evidence. Documents consisting of entries in public

records made in the performance of a duty by a public officer are prima
facie evidence of the facts therein stated. All other public documents are evidence,
even against a third person, of the fact which gave rise to their execution and of the
date of the latter. (Emphasis supplied).

The phrase all other public documents in the second sentence of Section 23 means those public
documents other than the entries in public records made in the performance of a duty by a public
officer. And these include notarial documents, like the subject deed of donation. Section 19, Rule
132 of the Rules of Court provides:

SEC. 19. Classes of documents. -- For the purpose of their presentation in evidence,
documents are either public or private.

Public documents are:

(a) . . .

(b) Documents acknowledged before a notary public except last wills and testaments. .
..

It bears repeating that notarial documents, except last wills and testaments, are public
documents and are evidence of the facts that gave rise to their execution and of their date.
In the present case, the fact that the questioned Deed was registered only on 2 July 1991 is not
enough to overcome the presumption as to the truthfulness of the statement of the date in the
questioned deed, which is 10 August 1989. Petitioners claim against LIM was constituted only in
August 1990, or a year after the questioned alienation. Thus, the first two requisites for the
rescission of contracts are absent.
Even assuming arguendo that petitioner became a creditor of LIM prior to the celebration of
the contract of donation, still her action for rescission would not fare well because the third
requisite was not met. Under Article 1381 of the Civil Code, contracts entered into in fraud of
creditors may be rescinded only when the creditors cannot in any manner collect the claims due
them. Also, Article 1383 of the same Code provides that the action for rescission is but a subsidiary
remedy which cannot be instituted except when the party suffering damage has no other legal
means to obtain reparation for the same. The term subsidiary remedy has been defined as the
exhaustion of all remedies by the prejudiced creditor to collect claims due him before rescission is
resorted to.[19] It is, therefore, essential that the party asking for rescission prove that he has
exhausted all other legal means to obtain satisfaction of his claim.[20] Petitioner neither alleged nor
proved that she did so. On this score, her action for the rescission of the questioned deed is not
maintainable even if the fraud charged actually did exist.[21]
The fourth requisite for an accion pauliana to prosper is not present either.
Article 1387, first paragraph, of the Civil Code provides: All contracts by virtue of which the
debtor alienates property by gratuitous title are presumed to have been entered into in fraud of
creditors when the donor did not reserve sufficient property to pay all debts contracted before the
donation. Likewise, Article 759 of the same Code, second paragraph, states that the donation is
always presumed to be in fraud of creditors when at the time thereof the donor did not reserve
sufficient property to pay his debts prior to the donation.
For this presumption of fraud to apply, it must be established that the donor did not leave
adequate properties which creditors might have recourse for the collection of their credits existing
before the execution of the donation.
As earlier discussed, petitioners alleged credit existed only a year after the deed of donation
was executed. She cannot, therefore, be said to have been prejudiced or defrauded by such
alienation. Besides, the evidence disclose that as of 10 August 1989, when the deed of donation
was executed, LIM had the following properties:
(1) A parcel of land containing an area of 220 square meters, together with the house
constructed thereon, situated in Sto. Nio Village, Mandaue City, Cebu, registered in
the name of Rosa Lim and covered by TCT No. 19706;[22]
(2) A parcel of land located in Benros Subdivision, Lawa-an, Talisay, Cebu;[23]
 (3) A parcel of land containing an area of 2.152 hectares, with coconut trees thereon,
situated at Hindag-an, St. Bernard, Southern Leyte, and covered by Tax Declaration
No. 13572.[24]
(4) A parcel of land containing an area of 3.6 hectares, with coconut trees thereon, situated
at Hindag-an, St. Bernard, Southern Leyte, and covered by Tax Declaration No.
13571.[25]
During her cross-examination, LIM declared that the house and lot mentioned in no. 1 was
bought by her in the amount of about P800,000 to P900,000.[26] Thus:
ATTY. FLORIDO:
Q These properties at the Sto. Nio Village, how much did you acquire this property?
A Including the residential house P800,000.00 to P900,000.00.
Q How about the lot which includes the house. How much was the price in the Deed of Sale of the house
and lot at Sto. Nio Violage [sic]?
A I forgot.
Q How much did you pay for it?
A That is P800,000.00 to P900,000.00.
Petitioner did not adduce any evidence that the price of said property was lower. Anent the
property in no. 2, LIM testified that she sold it in 1990.[27] As to the properties in nos. 3 and 4, the
total market value stated in the tax declarations dated 23 November 1993 was P56,871.60. Aside
from these tax declarations, petitioner did not present evidence that would indicate the actual
market value of said properties. It was not, therefore, sufficiently established that the properties
left behind by LIM were not sufficient to cover her debts existing before the donation was
made.Hence, the presumption of fraud will not come into play.
Nevertheless, a creditor need not depend solely upon the presumption laid down in Articles
759 and 1387 of the Civil Code. Under the third paragraph of Article 1387, the design to defraud
may be proved in any other manner recognized by the law of evidence. Thus in the consideration
of whether certain transfers are fraudulent, the Court has laid down specific rules by which the
character of the transaction may be determined. The following have been denominated by the
Court as badges of fraud:
(1) The fact that the consideration of the conveyance is fictitious or is inadequate;
(2) A transfer made by a debtor after suit has begun and while it is pending against him;
(3) A sale upon credit by an insolvent debtor;
(4) Evidence of large indebtedness or complete insolvency;
(5) The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or
greatly embarrassed financially;
(6) The fact that the transfer is made between father and son, when there are present other of the
above circumstances; and
(7) The failure of the vendee to take exclusive possession of all the property.[28]
 The above enumeration, however, is not an exclusive list. The circumstances evidencing fraud
are as varied as the men who perpetrate the fraud in each case. This Court has therefore declined
to define it, reserving the liberty to deal with it under whatever form it may present itself.[29]
Petitioner failed to discharge the burden of proving any of the circumstances enumerated
above or any other circumstance from which fraud can be inferred. Accordingly, since the four
requirements for the rescission of a gratuitous contract are not present in this case, petitioners
action must fail.
In her further attempt to support her action for rescission, petitioner brings to our attention the
31 July 1990 Decision[30] of the RTC of Quezon City, Branch 92, in Criminal Case No. Q-89-
2216. LIM was therein held guilty of estafa and was ordered to pay complainant Victoria Suarez
the sum of P169,000 for the obligation LIM incurred on 8 October 1987. This decision was
affirmed by the Court of Appeals. Upon appeal, however, this Court acquitted LIM of estafa but
held her civilly liable for P169,000 as actual damages.
It should be noted that the complainant in that case, Victoria Suarez, albeit a creditor prior to
the questioned alienation, is not a party to this accion pauliana. Article 1384 of the Civil Code
provides that rescission shall only be to the extent necessary to cover the damages caused. Under
this Article, only the creditor who brought the action for rescission can benefit from the rescission;
those who are strangers to the action cannot benefit from its effects.[31] And the revocation is only
to the extent of the plaintiff creditors unsatisfied credit; as to the excess, the alienation is
maintained.[32] Thus, petitioner cannot invoke the credit of Suarez to justify rescission of the subject
deed of donation.
Now on the propriety of the trial courts awards of moral damages, attorneys fees and expenses
of litigation in favor of the petitioner. We have pored over the records and found no factual or legal
basis therefor. The trial court made these awards in the dispositive portion of its decision without
stating, however, any justification for the same in the ratio decidendi. Hence, the Court of Appeals
correctly deleted these awards for want of basis in fact, law or equity.
WHEREFORE, the petition is hereby DISMISSED and the challenged decision of the Court
of Appeals in CA-G.R. CV. No. 50091 is AFFIRMED in toto.
No pronouncement as to costs.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-47851 October 3, 1986

JUAN F. NAKPIL & SONS, and JUAN F. NAKPIL, petitioners,

vs.
THE COURT OF APPEALS, UNITED CONSTRUCTION COMPANY, INC., JUAN J. CARLOS, and
the PHILIPPINE BAR ASSOCIATION, respondents.

G.R. No. L-47863 October 3, 1986

THE UNITED CONSTRUCTION CO., INC., petitioner,

vs.
COURT OF APPEALS, ET AL., respondents.

G.R. No. L-47896 October 3, 1986

PHILIPPINE BAR ASSOCIATION, ET AL., petitioners,

vs.
COURT OF APPEALS, ET AL., respondents.

PARAS, J.:

These are petitions for review on certiorari of the November 28, 1977 decision of the Court of
Appeals in CA-G.R. No. 51771-R modifying the decision of the Court of First Instance of
Manila, Branch V, in Civil Case No. 74958 dated September 21, 1971 as modified by the Order
of the lower court dated December 8, 1971. The Court of Appeals in modifying the decision of
the lower court included an award of an additional amount of P200,000.00 to the Philippine
Bar Association to be paid jointly and severally by the defendant United Construction Co. and
by the third-party defendants Juan F. Nakpil and Sons and Juan F. Nakpil.

The dispositive portion of the modified decision of the lower court reads:

WHEREFORE, judgment is hereby rendered:

(a) Ordering defendant United Construction Co., Inc. and third-party

defendants (except Roman Ozaeta) to pay the plaintiff, jointly and severally,
the sum of P989,335.68 with interest at the legal rate from November 29, 1968,
the date of the filing of the complaint until full payment;

(b) Dismissing the complaint with respect to defendant Juan J. Carlos;

(c) Dismissing the third-party complaint;

 (d) Dismissing the defendant's and third-party defendants' counterclaims for
lack of merit;

(e) Ordering defendant United Construction Co., Inc. and third-party

defendants (except Roman Ozaeta) to pay the costs in equal shares.

SO ORDERED. (Record on Appeal p. 521; Rollo, L- 47851, p. 169).

The dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, the judgment appealed from is modified to include an award of

P200,000.00 in favor of plaintiff-appellant Philippine Bar Association, with
interest at the legal rate from November 29, 1968 until full payment to be paid
jointly and severally by defendant United Construction Co., Inc. and third party
defendants (except Roman Ozaeta). In all other respects, the judgment dated
September 21, 1971 as modified in the December 8, 1971 Order of the lower
court is hereby affirmed with COSTS to be paid by the defendant and third
party defendant (except Roman Ozaeta) in equal shares.

SO ORDERED.

Petitioners Juan F. Nakpil & Sons in L-47851 and United Construction Co., Inc. and Juan J.
Carlos in L-47863 seek the reversal of the decision of the Court of Appeals, among other
things, for exoneration from liability while petitioner Philippine Bar Association in L-47896
seeks the modification of aforesaid decision to obtain an award of P1,830,000.00 for the loss
of the PBA building plus four (4) times such amount as damages resulting in increased cost
of the building, P100,000.00 as exemplary damages; and P100,000.00 as attorney's fees.

These petitions arising from the same case filed in the Court of First Instance of Manila were
consolidated by this Court in the resolution of May 10, 1978 requiring the respective
respondents to comment. (Rollo, L-47851, p. 172).

The facts as found by the lower court (Decision, C.C. No. 74958; Record on Appeal, pp. 269-
348; pp. 520-521; Rollo, L-47851, p. 169) and affirmed by the Court of Appeals are as follows:

The plaintiff, Philippine Bar Association, a civic-non-profit association, incorporated under

the Corporation Law, decided to construct an office building on its 840 square meters lot
located at the comer of Aduana and Arzobispo Streets, Intramuros, Manila. The construction
was undertaken by the United Construction, Inc. on an "administration" basis, on the
suggestion of Juan J. Carlos, the president and general manager of said corporation. The
proposal was approved by plaintiff's board of directors and signed by its president Roman
Ozaeta, a third-party defendant in this case. The plans and specifications for the building
were prepared by the other third-party defendants Juan F. Nakpil & Sons. The building was
completed in June, 1966.

In the early morning of August 2, 1968 an unusually strong earthquake hit Manila and its
environs and the building in question sustained major damage. The front columns of the
building buckled, causing the building to tilt forward dangerously. The tenants vacated the
building in view of its precarious condition. As a temporary remedial measure, the building
was shored up by United Construction, Inc. at the cost of P13,661.28.
On November 29, 1968, the plaintiff commenced this action for the recovery of damages
arising from the partial collapse of the building against United Construction, Inc. and its
President and General Manager Juan J. Carlos as defendants. Plaintiff alleges that the
collapse of the building was accused by defects in the construction, the failure of the
contractors to follow plans and specifications and violations by the defendants of the terms
of the contract.

Defendants in turn filed a third-party complaint against the architects who prepared the plans
and specifications, alleging in essence that the collapse of the building was due to the
defects in the said plans and specifications. Roman Ozaeta, the then president of the plaintiff
Bar Association was included as a third-party defendant for damages for having included
Juan J. Carlos, President of the United Construction Co., Inc. as party defendant.

On March 3, 1969, the plaintiff and third-party defendants Juan F. Nakpil & Sons and Juan F.
Nakpil presented a written stipulation which reads:

1. That in relation to defendants' answer with counterclaims and third- party

complaints and the third-party defendants Nakpil & Sons' answer thereto, the
plaintiff need not amend its complaint by including the said Juan F. Nakpil &
Sons and Juan F. Nakpil personally as parties defendant.

2. That in the event (unexpected by the undersigned) that the Court should find
after the trial that the above-named defendants Juan J. Carlos and United
Construction Co., Inc. are free from any blame and liability for the collapse of
the PBA Building, and should further find that the collapse of said building was
due to defects and/or inadequacy of the plans, designs, and specifications p
by the third-party defendants, or in the event that the Court may find Juan F.
Nakpil and Sons and/or Juan F. Nakpil contributorily negligent or in any way
jointly and solidarily liable with the defendants, judgment may be rendered in
whole or in part. as the case may be, against Juan F. Nakpil & Sons and/or
Juan F. Nakpil in favor of the plaintiff to all intents and purposes as if plaintiff's
complaint has been duly amended by including the said Juan F. Nakpil & Sons
and Juan F. Nakpil as parties defendant and by alleging causes of action
against them including, among others, the defects or inadequacy of the plans,
designs, and specifications prepared by them and/or failure in the performance
of their contract with plaintiff.

3. Both parties hereby jointly petition this Honorable Court to approve this
stipulation. (Record on Appeal, pp. 274-275; Rollo, L-47851,p.169).

Upon the issues being joined, a pre-trial was conducted on March 7, 1969, during which
among others, the parties agreed to refer the technical issues involved in the case to a
Commissioner. Mr. Andres O. Hizon, who was ultimately appointed by the trial court,
assumed his office as Commissioner, charged with the duty to try the following issues:

1. Whether the damage sustained by the PBA building during the August 2,
1968 earthquake had been caused, directly or indirectly, by:

(a) The inadequacies or defects in the plans and specifications prepared by

third-party defendants;
 (b) The deviations, if any, made by the defendants from said plans and
specifications and how said deviations contributed to the damage sustained;

(c) The alleged failure of defendants to observe the requisite quality of

materials and workmanship in the construction of the building;

(d) The alleged failure to exercise the requisite degree of supervision expected
of the architect, the contractor and/or the owner of the building;

(e) An act of God or a fortuitous event; and

(f) Any other cause not herein above specified.

2. If the cause of the damage suffered by the building arose from a

combination of the above-enumerated factors, the degree or proportion in
which each individual factor contributed to the damage sustained;

3. Whether the building is now a total loss and should be completely

demolished or whether it may still be repaired and restored to a tenantable
condition. In the latter case, the determination of the cost of such restoration
or repair, and the value of any remaining construction, such as the foundation,
which may still be utilized or availed of (Record on Appeal, pp. 275-276; Rollo,
L-47851, p. 169).

Thus, the issues of this case were divided into technical issues and non-technical issues. As
aforestated the technical issues were referred to the Commissioner. The non-technical issues
were tried by the Court.

Meanwhile, plaintiff moved twice for the demolition of the building on the ground that it may
topple down in case of a strong earthquake. The motions were opposed by the defendants
and the matter was referred to the Commissioner. Finally, on April 30, 1979 the building was
authorized to be demolished at the expense of the plaintiff, but not another earthquake of
high intensity on April 7, 1970 followed by other strong earthquakes on April 9, and 12, 1970,
caused further damage to the property. The actual demolition was undertaken by the buyer of
the damaged building. (Record on Appeal, pp. 278-280; Ibid.)

After the protracted hearings, the Commissioner eventually submitted his report on
September 25, 1970 with the findings that while the damage sustained by the PBA building
was caused directly by the August 2, 1968 earthquake whose magnitude was estimated at 7.3
they were also caused by the defects in the plans and specifications prepared by the third-
party defendants' architects, deviations from said plans and specifications by the defendant
contractors and failure of the latter to observe the requisite workmanship in the construction
of the building and of the contractors, architects and even the owners to exercise the
requisite degree of supervision in the construction of subject building.

All the parties registered their objections to aforesaid findings which in turn were answered
by the Commissioner.

The trial court agreed with the findings of the Commissioner except as to the holding that the
owner is charged with full nine supervision of the construction. The Court sees no legal or
contractual basis for such conclusion. (Record on Appeal, pp. 309-328; Ibid).
Thus, on September 21, 1971, the lower court rendered the assailed decision which was
modified by the Intermediate Appellate Court on November 28, 1977.

All the parties herein appealed from the decision of the Intermediate Appellate Court. Hence,
these petitions.

On May 11, 1978, the United Architects of the Philippines, the Association of Civil Engineers,
and the Philippine Institute of Architects filed with the Court a motion to intervene as amicus
curiae. They proposed to present a position paper on the liability of architects when a
building collapses and to submit likewise a critical analysis with computations on the
divergent views on the design and plans as submitted by the experts procured by the parties.
The motion having been granted, the amicus curiae were granted a period of 60 days within
which to submit their position.

After the parties had all filed their comments, We gave due course to the petitions in Our
Resolution of July 21, 1978.

The position papers of the amicus curiae (submitted on November 24, 1978) were duly noted.

The amicus curiae gave the opinion that the plans and specifications of the Nakpils were not
defective. But the Commissioner, when asked by Us to comment, reiterated his conclusion
that the defects in the plans and specifications indeed existed.

Using the same authorities availed of by the amicus curiae such as the Manila Code (Ord. No.
4131) and the 1966 Asep Code, the Commissioner added that even if it can be proved that the
defects in the constructionalone (and not in the plans and design) caused the damage to the
building, still the deficiency in the original design and jack of specific provisions against
torsion in the original plans and the overload on the ground floor columns (found by an the
experts including the original designer) certainly contributed to the damage which occurred.
(Ibid, p. 174).

In their respective briefs petitioners, among others, raised the following assignments of
errors: Philippine Bar Association claimed that the measure of damages should not be
limited to P1,100,000.00 as estimated cost of repairs or to the period of six (6) months for loss
of rentals while United Construction Co., Inc. and the Nakpils claimed that it was an act of
God that caused the failure of the building which should exempt them from responsibility and
not the defective construction, poor workmanship, deviations from plans and specifications
and other imperfections in the case of United Construction Co., Inc. or the deficiencies in the
design, plans and specifications prepared by petitioners in the case of the Nakpils. Both
UCCI and the Nakpils object to the payment of the additional amount of P200,000.00 imposed
by the Court of Appeals. UCCI also claimed that it should be reimbursed the expenses of
shoring the building in the amount of P13,661.28 while the Nakpils opposed the payment of
damages jointly and solidarity with UCCI.

The pivotal issue in this case is whether or not an act of God-an unusually strong
earthquake-which caused the failure of the building, exempts from liability, parties who are
otherwise liable because of their negligence.

The applicable law governing the rights and liabilities of the parties herein is Article 1723 of
the New Civil Code, which provides:
 Art. 1723. The engineer or architect who drew up the plans and specifications
for a building is liable for damages if within fifteen years from the completion
of the structure the same should collapse by reason of a defect in those plans
and specifications, or due to the defects in the ground. The contractor is
likewise responsible for the damage if the edifice fags within the same period
on account of defects in the construction or the use of materials of inferior
quality furnished by him, or due to any violation of the terms of the contract. If
the engineer or architect supervises the construction, he shall be solidarily
liable with the contractor.

Acceptance of the building, after completion, does not imply waiver of any of
the causes of action by reason of any defect mentioned in the preceding
paragraph.

The action must be brought within ten years following the collapse of the
building.

On the other hand, the general rule is that no person shall be responsible for events which
could not be foreseen or which though foreseen, were inevitable (Article 1174, New Civil
Code).

An act of God has been defined as an accident, due directly and exclusively to natural causes
without human intervention, which by no amount of foresight, pains or care, reasonably to
have been expected, could have been prevented. (1 Corpus Juris 1174).

There is no dispute that the earthquake of August 2, 1968 is a fortuitous event or an act of
God.

To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of an
obligation due to an "act of God," the following must concur: (a) the cause of the breach of
the obligation must be independent of the will of the debtor; (b) the event must be either
unforseeable or unavoidable; (c) the event must be such as to render it impossible for the
debtor to fulfill his obligation in a normal manner; and (d) the debtor must be free from any
participation in, or aggravation of the injury to the creditor. (Vasquez v. Court of Appeals, 138
SCRA 553; Estrada v. Consolacion, 71 SCRA 423; Austria v. Court of Appeals, 39 SCRA 527;
Republic of the Phil. v. Luzon Stevedoring Corp., 21 SCRA 279; Lasam v. Smith, 45 Phil. 657).

Thus, if upon the happening of a fortuitous event or an act of God, there concurs a
corresponding fraud, negligence, delay or violation or contravention in any manner of the
tenor of the obligation as provided for in Article 1170 of the Civil Code, which results in loss
or damage, the obligor cannot escape liability.

The principle embodied in the act of God doctrine strictly requires that the act must be one
occasioned exclusively by the violence of nature and all human agencies are to be excluded
from creating or entering into the cause of the mischief. When the effect, the cause of which
is to be considered, is found to be in part the result of the participation of man, whether it be
from active intervention or neglect, or failure to act, the whole occurrence is thereby
humanized, as it were, and removed from the rules applicable to the acts of God. (1 Corpus
Juris, pp. 1174-1175).

Thus it has been held that when the negligence of a person concurs with an act of God in
producing a loss, such person is not exempt from liability by showing that the immediate
cause of the damage was the act of God. To be exempt from liability for loss because of an
act of God, he must be free from any previous negligence or misconduct by which that loss
or damage may have been occasioned. (Fish & Elective Co. v. Phil. Motors, 55 Phil. 129;
Tucker v. Milan, 49 O.G. 4379; Limpangco & Sons v. Yangco Steamship Co., 34 Phil. 594, 604;
Lasam v. Smith, 45 Phil. 657).

The negligence of the defendant and the third-party defendants petitioners was established
beyond dispute both in the lower court and in the Intermediate Appellate Court. Defendant
United Construction Co., Inc. was found to have made substantial deviations from the plans
and specifications. and to have failed to observe the requisite workmanship in the
construction as well as to exercise the requisite degree of supervision; while the third-party
defendants were found to have inadequacies or defects in the plans and specifications
prepared by them. As correctly assessed by both courts, the defects in the construction and
in the plans and specifications were the proximate causes that rendered the PBA building
unable to withstand the earthquake of August 2, 1968. For this reason the defendant and
third-party defendants cannot claim exemption from liability. (Decision, Court of Appeals, pp.
30-31).

It is well settled that the findings of facts of the Court of Appeals are conclusive on the
parties and on this court (cases cited in Tolentino vs. de Jesus, 56 SCRA 67; Cesar vs.
Sandiganbayan, January 17, 1985, 134 SCRA 105, 121), unless (1) the conclusion is a finding
grounded entirely on speculation, surmise and conjectures; (2) the inference made is
manifestly mistaken; (3) there is grave abuse of discretion; (4) the judgment is based on
misapprehension of facts; (5) the findings of fact are conflicting , (6) the Court of Appeals
went beyond the issues of the case and its findings are contrary to the admissions of both
appellant and appellees (Ramos vs. Pepsi-Cola Bottling Co., February 8, 1967, 19 SCRA 289,
291-292; Roque vs. Buan, Oct. 31, 1967, 21 SCRA 648, 651); (7) the findings of facts of the
Court of Appeals are contrary to those of the trial court; (8) said findings of facts are
conclusions without citation of specific evidence on which they are based; (9) the facts set
forth in the petition as well as in the petitioner's main and reply briefs are not disputed by the
respondents (Garcia vs. CA, June 30, 1970, 33 SCRA 622; Alsua-Bett vs. Court of Appeals,
July 30, 1979, 92 SCRA 322, 366); (10) the finding of fact of the Court of Appeals is premised
on the supposed absence of evidence and is contradicted by evidence on record (Salazar vs.
Gutierrez, May 29, 1970, 33 SCRA 243, 247; Cited in G.R. No. 66497-98, Sacay v.
Sandiganbayan, July 10, 1986).

It is evident that the case at bar does not fall under any of the exceptions above-mentioned.
On the contrary, the records show that the lower court spared no effort in arriving at the
correct appreciation of facts by the referral of technical issues to a Commissioner chosen by
the parties whose findings and conclusions remained convincingly unrebutted by the
intervenors/amicus curiae who were allowed to intervene in the Supreme Court.

In any event, the relevant and logical observations of the trial court as affirmed by the Court
of Appeals that "while it is not possible to state with certainty that the building would not
have collapsed were those defects not present, the fact remains that several buildings in the
same area withstood the earthquake to which the building of the plaintiff was similarly
subjected," cannot be ignored.

The next issue to be resolved is the amount of damages to be awarded to the PBA for the
partial collapse (and eventual complete collapse) of its building.
The Court of Appeals affirmed the finding of the trial court based on the report of the
Commissioner that the total amount required to repair the PBA building and to restore it to
tenantable condition was P900,000.00 inasmuch as it was not initially a total loss. However,
while the trial court awarded the PBA said amount as damages, plus unrealized rental income
for one-half year, the Court of Appeals modified the amount by awarding in favor of PBA an
additional sum of P200,000.00 representing the damage suffered by the PBA building as a
result of another earthquake that occurred on April 7, 1970 (L-47896, Vol. I, p. 92).

The PBA in its brief insists that the proper award should be P1,830,000.00 representing the
total value of the building (L-47896, PBA's No. 1 Assignment of Error, p. 19), while both the
NAKPILS and UNITED question the additional award of P200,000.00 in favor of the PBA (L-
47851, NAKPIL's Brief as Petitioner, p. 6, UNITED's Brief as Petitioner, p. 25). The PBA further
urges that the unrealized rental income awarded to it should not be limited to a period of one-
half year but should be computed on a continuing basis at the rate of P178,671.76 a year until
the judgment for the principal amount shall have been satisfied L- 47896, PBA's No. 11
Assignment of Errors, p. 19).

The collapse of the PBA building as a result of the August 2, 1968 earthquake was only partial
and it is undisputed that the building could then still be repaired and restored to its
tenantable condition. The PBA, however, in view of its lack of needed funding, was unable,
thru no fault of its own, to have the building repaired. UNITED, on the other hand, spent
P13,661.28 to shore up the building after the August 2, 1968 earthquake (L-47896, CA
Decision, p. 46). Because of the earthquake on April 7, 1970, the trial court after the needed
consultations, authorized the total demolition of the building (L-47896, Vol. 1, pp. 53-54).

There should be no question that the NAKPILS and UNITED are liable for the damage
resulting from the partial and eventual collapse of the PBA building as a result of the
earthquakes.

We quote with approval the following from the erudite decision penned by Justice Hugo E.
Gutierrez (now an Associate Justice of the Supreme Court) while still an Associate Justice of
the Court of Appeals:

There is no question that an earthquake and other forces of nature such as

cyclones, drought, floods, lightning, and perils of the sea are acts of God. It
does not necessarily follow, however, that specific losses and suffering
resulting from the occurrence of these natural force are also acts of God. We
are not convinced on the basis of the evidence on record that from the
thousands of structures in Manila, God singled out the blameless PBA building
in Intramuros and around six or seven other buildings in various parts of the
city for collapse or severe damage and that God alone was responsible for the
damages and losses thus suffered.

The record is replete with evidence of defects and deficiencies in the designs
and plans, defective construction, poor workmanship, deviation from plans
and specifications and other imperfections. These deficiencies are attributable
to negligent men and not to a perfect God.

The act-of-God arguments of the defendants- appellants and third party

defendants-appellants presented in their briefs are premised on legal
generalizations or speculations and on theological fatalism both of which
ignore the plain facts. The lengthy discussion of United on ordinary
earthquakes and unusually strong earthquakes and on ordinary fortuitous
events and extraordinary fortuitous events leads to its argument that the
August 2, 1968 earthquake was of such an overwhelming and destructive
character that by its own force and independent of the particular negligence
alleged, the injury would have been produced. If we follow this line of
speculative reasoning, we will be forced to conclude that under such a
situation scores of buildings in the vicinity and in other parts of Manila would
have toppled down. Following the same line of reasoning, Nakpil and Sons
alleges that the designs were adequate in accordance with pre-August 2, 1968
knowledge and appear inadequate only in the light of engineering information
acquired after the earthquake. If this were so, hundreds of ancient buildings
which survived the earthquake better than the two-year old PBA building must
have been designed and constructed by architects and contractors whose
knowledge and foresight were unexplainably auspicious and prophetic.
Fortunately, the facts on record allow a more down to earth explanation of the
collapse. The failure of the PBA building, as a unique and distinct construction
with no reference or comparison to other buildings, to weather the severe
earthquake forces was traced to design deficiencies and defective
construction, factors which are neither mysterious nor esoteric. The
theological allusion of appellant United that God acts in mysterious ways His
wonders to perform impresses us to be inappropriate. The evidence reveals
defects and deficiencies in design and construction. There is no mystery about
these acts of negligence. The collapse of the PBA building was no wonder
performed by God. It was a result of the imperfections in the work of the
architects and the people in the construction company. More relevant to our
mind is the lesson from the parable of the wise man in the Sermon on the
Mount "which built his house upon a rock; and the rain descended and the
floods came and the winds blew and beat upon that house; and it fen not; for it
was founded upon a rock" and of the "foolish upon the sand. And the rain
descended and man which built his house the floods came, and the winds
blew, and beat upon that house; and it fell and great was the fall of it. (St.
Matthew 7: 24-27)." The requirement that a building should withstand rains,
floods, winds, earthquakes, and natural forces is precisely the reason why we
have professional experts like architects, and engineers. Designs and
constructions vary under varying circumstances and conditions but the
requirement to design and build well does not change.

The findings of the lower Court on the cause of the collapse are more rational
and accurate. Instead of laying the blame solely on the motions and forces
generated by the earthquake, it also examined the ability of the PBA building,
as designed and constructed, to withstand and successfully weather those
forces.

The evidence sufficiently supports a conclusion that the negligence and fault
of both United and Nakpil and Sons, not a mysterious act of an inscrutable
God, were responsible for the damages. The Report of the Commissioner,
Plaintiff's Objections to the Report, Third Party Defendants' Objections to the
Report, Defendants' Objections to the Report, Commissioner's Answer to the
various Objections, Plaintiffs' Reply to the Commissioner's Answer,
Defendants' Reply to the Commissioner's Answer, Counter-Reply to
Defendants' Reply, and Third-Party Defendants' Reply to the Commissioner's
Report not to mention the exhibits and the testimonies show that the main
arguments raised on appeal were already raised during the trial and fully
considered by the lower Court. A reiteration of these same arguments on
appeal fails to convince us that we should reverse or disturb the lower Court's
factual findings and its conclusions drawn from the facts, among them:

The Commissioner also found merit in the allegations of the defendants as to

the physical evidence before and after the earthquake showing the inadequacy
of design, to wit:

Physical evidence before the earthquake providing (sic) inadequacy of design;

1. inadequate design was the cause of the failure of the building.

2. Sun-baffles on the two sides and in front of the building;

a. Increase the inertia forces that move the building laterally toward the Manila
Fire Department.

b. Create another stiffness imbalance.

3. The embedded 4" diameter cast iron down spout on all exterior columns
reduces the cross-sectional area of each of the columns and the strength
thereof.

4. Two front corners, A7 and D7 columns were very much less reinforced.

Physical Evidence After the Earthquake, Proving Inadequacy of design;

1. Column A7 suffered the severest fracture and maximum sagging. Also D7.

2. There are more damages in the front part of the building than towards the
rear, not only in columns but also in slabs.

3. Building leaned and sagged more on the front part of the building.

4. Floors showed maximum sagging on the sides and toward the front corner
parts of the building.

5. There was a lateral displacement of the building of about 8", Maximum

sagging occurs at the column A7 where the floor is lower by 80 cm. than the
highest slab level.

6. Slab at the corner column D7 sagged by 38 cm.

The Commissioner concluded that there were deficiencies or defects in the

design, plans and specifications of the PBA building which involved
appreciable risks with respect to the accidental forces which may result from
earthquake shocks. He conceded, however, that the fact that those
deficiencies or defects may have arisen from an obsolete or not too
conservative code or even a code that does not require a design for
earthquake forces mitigates in a large measure the responsibility or liability of
the architect and engineer designer.
The Third-party defendants, who are the most concerned with this portion of
the Commissioner's report, voiced opposition to the same on the grounds that
(a) the finding is based on a basic erroneous conception as to the design
concept of the building, to wit, that the design is essentially that of a heavy
rectangular box on stilts with shear wan at one end; (b) the finding that there
were defects and a deficiency in the design of the building would at best be
based on an approximation and, therefore, rightly belonged to the realm of
speculation, rather than of certainty and could very possibly be outright error;
(c) the Commissioner has failed to back up or support his finding with
extensive, complex and highly specialized computations and analyzes which
he himself emphasizes are necessary in the determination of such a highly
technical question; and (d) the Commissioner has analyzed the design of the
PBA building not in the light of existing and available earthquake engineering
knowledge at the time of the preparation of the design, but in the light of recent
and current standards.

The Commissioner answered the said objections alleging that third-party

defendants' objections were based on estimates or exhibits not presented
during the hearing that the resort to engineering references posterior to the
date of the preparation of the plans was induced by the third-party defendants
themselves who submitted computations of the third-party defendants are
erroneous.

The issue presently considered is admittedly a technical one of the highest

degree. It involves questions not within the ordinary competence of the bench
and the bar to resolve by themselves. Counsel for the third-party defendants
has aptly remarked that "engineering, although dealing in mathematics, is not
an exact science and that the present knowledge as to the nature of
earthquakes and the behaviour of forces generated by them still leaves much
to be desired; so much so "that the experts of the different parties, who are all
engineers, cannot agree on what equation to use, as to what earthquake co-
efficients are, on the codes to be used and even as to the type of structure that
the PBA building (is) was (p. 29, Memo, of third- party defendants before the
Commissioner).

The difficulty expected by the Court if tills technical matter were to be tried and
inquired into by the Court itself, coupled with the intrinsic nature of the
questions involved therein, constituted the reason for the reference of the said
issues to a Commissioner whose qualifications and experience have eminently
qualified him for the task, and whose competence had not been questioned by
the parties until he submitted his report. Within the pardonable limit of the
Court's ability to comprehend the meaning of the Commissioner's report on
this issue, and the objections voiced to the same, the Court sees no
compelling reasons to disturb the findings of the Commissioner that there
were defects and deficiencies in the design, plans and specifications prepared
by third-party defendants, and that said defects and deficiencies involved
appreciable risks with respect to the accidental forces which may result from
earthquake shocks.

(2) (a) The deviations, if any, made by the defendants from the plans and
specifications, and how said deviations contributed to the damage sustained
by the building.
(b) The alleged failure of defendants to observe the requisite quality of
materials and workmanship in the construction of the building.

These two issues, being interrelated with each other, will be discussed
together.

The findings of the Commissioner on these issues were as follows:

We now turn to the construction of the PBA Building and the alleged
deficiencies or defects in the construction and violations or deviations from
the plans and specifications. All these may be summarized as follows:

a. Summary of alleged defects as reported by Engineer Mario M. Bundalian.

(1) Wrongful and defective placing of reinforcing bars.

(2) Absence of effective and desirable integration of the 3 bars in the cluster.

(3) Oversize coarse aggregates: 1-1/4 to 2" were used. Specification requires
no larger than 1 inch.

(4) Reinforcement assembly is not concentric with the column, eccentricity

being 3" off when on one face the main bars are only 1 1/2' from the surface.

(5) Prevalence of honeycombs,

(6) Contraband construction joints,

(7) Absence, or omission, or over spacing of spiral hoops,

(8) Deliberate severance of spirals into semi-circles in noted on Col. A-5,

ground floor,

(9) Defective construction joints in Columns A-3, C-7, D-7 and D-4, ground
floor,

(10) Undergraduate concrete is evident,

(11) Big cavity in core of Column 2A-4, second floor,

(12) Columns buckled at different planes. Columns buckled worst where there
are no spirals or where spirals are cut. Columns suffered worst displacement
where the eccentricity of the columnar reinforcement assembly is more acute.

b. Summary of alleged defects as reported by Engr. Antonio Avecilla.

Columns are first (or ground) floor, unless otherwise stated.

(1) Column D4 — Spacing of spiral is changed from 2" to 5" on centers,

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

(3) Column D6 — Spacing of spiral over 4 l/2,

(4) Column D7 — Lack of lateral ties,

(5) Column C7 — Absence of spiral to a height of 20" from the ground level,
Spirals are at 2" from the exterior column face and 6" from the inner column
face,

(6) Column B6 — Lack of spiral on 2 feet below the floor beams,

(7) Column B5 — Lack of spirals at a distance of 26' below the beam,

(8) Column B7 — Spirals not tied to vertical reinforcing bars, Spirals are
uneven 2" to 4",

(9) Column A3 — Lack of lateral ties,

(10) Column A4 — Spirals cut off and welded to two separate clustered vertical
bars,

(11) Column A4 — (second floor Column is completely hollow to a height of 30"

(12) Column A5 — Spirals were cut from the floor level to the bottom of the
spandrel beam to a height of 6 feet,

(13) Column A6 — No spirals up to a height of 30' above the ground floor level,

(14) Column A7— Lack of lateralties or spirals,

c. Summary of alleged defects as reported by the experts of the Third-Party

defendants.

Ground floor columns.

(1) Column A4 — Spirals are cut,

(2) Column A5 — Spirals are cut,

(3) Column A6 — At lower 18" spirals are absent,

(4) Column A7 — Ties are too far apart,

(5) Column B5 — At upper fourth of column spirals are either absent or

improperly spliced,

(6) Column B6 — At upper 2 feet spirals are absent,

(7) Column B7 — At upper fourth of column spirals missing or improperly
spliced.

(8) Column C7— Spirals are absent at lowest 18"

(9) Column D5 — At lowest 2 feet spirals are absent,

(10) Column D6 — Spirals are too far apart and apparently improperly spliced,

(11) Column D7 — Lateral ties are too far apart, spaced 16" on centers.

There is merit in many of these allegations. The explanations given by the

engineering experts for the defendants are either contrary to general principles
of engineering design for reinforced concrete or not applicable to the
requirements for ductility and strength of reinforced concrete in earthquake-
resistant design and construction.

We shall first classify and consider defects which may have appreciable
bearing or relation to' the earthquake-resistant property of the building.

As heretofore mentioned, details which insure ductility at or near the

connections between columns and girders are desirable in earthquake
resistant design and construction. The omission of spirals and ties or hoops at
the bottom and/or tops of columns contributed greatly to the loss of
earthquake-resistant strength. The plans and specifications required that these
spirals and ties be carried from the floor level to the bottom reinforcement of
the deeper beam (p. 1, Specifications, p. 970, Reference 11). There were several
clear evidences where this was not done especially in some of the ground floor
columns which failed.

There were also unmistakable evidences that the spacings of the spirals and
ties in the columns were in many cases greater than those called for in the
plans and specifications resulting again in loss of earthquake-resistant
strength. The assertion of the engineering experts for the defendants that the
improper spacings and the cutting of the spirals did not result in loss of
strength in the column cannot be maintained and is certainly contrary to the
general principles of column design and construction. And even granting that
there be no loss in strength at the yield point (an assumption which is very
doubtful) the cutting or improper spacings of spirals will certainly result in the
loss of the plastic range or ductility in the column and it is precisely this
plastic range or ductility which is desirable and needed for earthquake-
resistant strength.

There is no excuse for the cavity or hollow portion in the column A4, second
floor, and although this column did not fail, this is certainly an evidence on the
part of the contractor of poor construction.

The effect of eccentricities in the columns which were measured at about 2 1/2
inches maximum may be approximated in relation to column loads and column
and beam moments. The main effect of eccentricity is to change the beam or
girder span. The effect on the measured eccentricity of 2 inches, therefore, is
to increase or diminish the column load by a maximum of about 1% and to
increase or diminish the column or beam movements by about a maximum of
2%. While these can certainly be absorbed within the factor of safety, they
nevertheless diminish said factor of safety.

The cutting of the spirals in column A5, ground floor is the subject of great
contention between the parties and deserves special consideration.

The proper placing of the main reinforcements and spirals in column A5,
ground floor, is the responsibility of the general contractor which is the UCCI.
The burden of proof, therefore, that this cutting was done by others is upon the
defendants. Other than a strong allegation and assertion that it is the plumber
or his men who may have done the cutting (and this was flatly denied by the
plumber) no conclusive proof was presented. The engineering experts for the
defendants asserted that they could have no motivation for cutting the bar
because they can simply replace the spirals by wrapping around a new set of
spirals. This is not quite correct. There is evidence to show that the pouring of
concrete for columns was sometimes done through the beam and girder
reinforcements which were already in place as in the case of column A4
second floor. If the reinforcement for the girder and column is to subsequently
wrap around the spirals, this would not do for the elasticity of steel would
prevent the making of tight column spirals and loose or improper spirals would
result. The proper way is to produce correct spirals down from the top of the
main column bars, a procedure which can not be done if either the beam or
girder reinforcement is already in place. The engineering experts for the
defendants strongly assert and apparently believe that the cutting of the
spirals did not materially diminish the strength of the column. This belief
together with the difficulty of slipping the spirals on the top of the column once
the beam reinforcement is in place may be a sufficient motivation for the
cutting of the spirals themselves. The defendants, therefore, should be held
responsible for the consequences arising from the loss of strength or ductility
in column A5 which may have contributed to the damages sustained by the
building.

The lack of proper length of splicing of spirals was also proven in the visible
spirals of the columns where spalling of the concrete cover had taken place.
This lack of proper splicing contributed in a small measure to the loss of
strength.

The effects of all the other proven and visible defects although nor can
certainly be accumulated so that they can contribute to an appreciable loss in
earthquake-resistant strength. The engineering experts for the defendants
submitted an estimate on some of these defects in the amount of a few
percent. If accumulated, therefore, including the effect of eccentricity in the
column the loss in strength due to these minor defects may run to as much as
ten percent.

To recapitulate: the omission or lack of spirals and ties at the bottom and/or at
the top of some of the ground floor columns contributed greatly to the collapse
of the PBA building since it is at these points where the greater part of the
failure occurred. The liability for the cutting of the spirals in column A5, ground
floor, in the considered opinion of the Commissioner rests on the shoulders of
 the defendants and the loss of strength in this column contributed to the
damage which occurred.

It is reasonable to conclude, therefore, that the proven defects, deficiencies

and violations of the plans and specifications of the PBA building contributed
to the damages which resulted during the earthquake of August 2, 1968 and
the vice of these defects and deficiencies is that they not only increase but
also aggravate the weakness mentioned in the design of the structure. In other
words, these defects and deficiencies not only tend to add but also to multiply
the effects of the shortcomings in the design of the building. We may say,
therefore, that the defects and deficiencies in the construction contributed
greatly to the damage which occurred.

Since the execution and supervision of the construction work in the hands of
the contractor is direct and positive, the presence of existence of all the major
defects and deficiencies noted and proven manifests an element of negligence
which may amount to imprudence in the construction work. (pp. 42-49,
Commissioners Report).

As the parties most directly concerned with this portion of the Commissioner's report, the
defendants voiced their objections to the same on the grounds that the Commissioner should
have specified the defects found by him to be "meritorious"; that the Commissioner failed to
indicate the number of cases where the spirals and ties were not carried from the floor level
to the bottom reinforcement of the deeper beam, or where the spacing of the spirals and ties
in the columns were greater than that called for in the specifications; that the hollow in
column A4, second floor, the eccentricities in the columns, the lack of proper length of
splicing of spirals, and the cut in the spirals in column A5, ground floor, did not aggravate or
contribute to the damage suffered by the building; that the defects in the construction were
within the tolerable margin of safety; and that the cutting of the spirals in column A5, ground
floor, was done by the plumber or his men, and not by the defendants.

Answering the said objections, the Commissioner stated that, since many of the defects were
minor only the totality of the defects was considered. As regards the objection as to failure to
state the number of cases where the spirals and ties were not carried from the floor level to
the bottom reinforcement, the Commissioner specified groundfloor columns B-6 and C-5 the
first one without spirals for 03 inches at the top, and in the latter, there were no spirals for 10
inches at the bottom. The Commissioner likewise specified the first storey columns where
the spacings were greater than that called for in the specifications to be columns B-5, B-6, C-
7, C-6, C-5, D-5 and B-7. The objection to the failure of the Commissioner to specify the
number of columns where there was lack of proper length of splicing of spirals, the
Commissioner mentioned groundfloor columns B-6 and B-5 where all the splices were less
than 1-1/2 turns and were not welded, resulting in some loss of strength which could be
critical near the ends of the columns. He answered the supposition of the defendants that the
spirals and the ties must have been looted, by calling attention to the fact that the missing
spirals and ties were only in two out of the 25 columns, which rendered said supposition to
be improbable.

The Commissioner conceded that the hollow in column A-4, second floor, did not aggravate
or contribute to the damage, but averred that it is "evidence of poor construction." On the
claim that the eccentricity could be absorbed within the factor of safety, the Commissioner
answered that, while the same may be true, it also contributed to or aggravated the damage
suffered by the building.
The objection regarding the cutting of the spirals in Column A-5, groundfloor, was answered
by the Commissioner by reiterating the observation in his report that irrespective of who did
the cutting of the spirals, the defendants should be held liable for the same as the general
contractor of the building. The Commissioner further stated that the loss of strength of the
cut spirals and inelastic deflections of the supposed lattice work defeated the purpose of the
spiral containment in the column and resulted in the loss of strength, as evidenced by the
actual failure of this column.

Again, the Court concurs in the findings of the Commissioner on these issues and fails to
find any sufficient cause to disregard or modify the same. As found by the Commissioner, the
"deviations made by the defendants from the plans and specifications caused indirectly the
damage sustained and that those deviations not only added but also aggravated the damage
caused by the defects in the plans and specifications prepared by third-party defendants.
(Rollo, Vol. I, pp. 128-142)

The afore-mentioned facts clearly indicate the wanton negligence of both the defendant and
the third-party defendants in effecting the plans, designs, specifications, and construction of
the PBA building and We hold such negligence as equivalent to bad faith in the performance
of their respective tasks.

Relative thereto, the ruling of the Supreme Court in Tucker v. Milan (49 O.G. 4379, 4380)
which may be in point in this case reads:

One who negligently creates a dangerous condition cannot escape liability for the natural and
probable consequences thereof, although the act of a third person, or an act of God for which
he is not responsible, intervenes to precipitate the loss.

As already discussed, the destruction was not purely an act of God. Truth to tell hundreds of
ancient buildings in the vicinity were hardly affected by the earthquake. Only one thing spells
out the fatal difference; gross negligence and evident bad faith, without which the damage
would not have occurred.

WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special
and environmental circumstances of this case, We deem it reasonable to render a decision
imposing, as We do hereby impose, upon the defendant and the third-party defendants (with
the exception of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra, p. 10) indemnity in
favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to cover all
damages (with the exception of attorney's fees) occasioned by the loss of the building
(including interest charges and lost rentals) and an additional ONE HUNDRED THOUSAND
(P100,000.00) Pesos as and for attorney's fees, the total sum being payable upon the finality
of this decision. Upon failure to pay on such finality, twelve (12%) per cent interest per annum
shall be imposed upon afore-mentioned amounts from finality until paid. Solidary costs
against the defendant and third-party defendants (except Roman Ozaeta).

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-21749 September 29, 1967

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
LUZON STEVEDORING CORPORATION, defendant-appellant.

Office of the Solicitor General for plaintiff-appellee.

H. San Luis and L.V. Simbulan for defendant-appellant.

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

The present case comes by direct appeal from a decision of the Court of First Instance of Manila
(Case No. 44572) adjudging the defendant-appellant, Luzon Stevedoring Corporation, liable in
damages to the plaintiff-appellee Republic of the Philippines.

In the early afternoon of August 17, 1960, barge L-1892, owned by the Luzon Stevedoring
Corporation was being towed down the Pasig river by tugboats "Bangus" and "Barbero"1 also
belonging to the same corporation, when the barge rammed against one of the wooden piles of the
Nagtahan bailey bridge, smashing the posts and causing the bridge to list. The river, at the time, was
swollen and the current swift, on account of the heavy downpour of Manila and the surrounding
provinces on August 15 and 16, 1960.

Sued by the Republic of the Philippines for actual and consequential damage caused by its
employees, amounting to P200,000 (Civil Case No. 44562, CFI of Manila), defendant Luzon
Stevedoring Corporation disclaimed liability therefor, on the grounds that it had exercised due
diligence in the selection and supervision of its employees; that the damages to the bridge were
caused by force majeure; that plaintiff has no capacity to sue; and that the Nagtahan bailey bridge is
an obstruction to navigation.

After due trial, the court rendered judgment on June 11, 1963, holding the defendant liable for the
damage caused by its employees and ordering it to pay to plaintiff the actual cost of the repair of the
Nagtahan bailey bridge which amounted to P192,561.72, with legal interest thereon from the date of
the filing of the complaint.

Defendant appealed directly to this Court assigning the following errors allegedly committed by the
court a quo, to wit:

I — The lower court erred in not holding that the herein defendant-appellant had exercised
the diligence required of it in the selection and supervision of its personnel to prevent
damage or injury to others. 1awphîl.nèt
 II — The lower court erred in not holding that the ramming of the Nagtahan bailey bridge by
barge L-1892 was caused by force majeure.

III — The lower court erred in not holding that the Nagtahan bailey bridge is an obstruction, if
not a menace, to navigation in the Pasig river.

IV — The lower court erred in not blaming the damage sustained by the Nagtahan bailey
bridge to the improper placement of the dolphins.

V — The lower court erred in granting plaintiff's motion to adduce further evidence in chief
after it has rested its case.

VI — The lower court erred in finding the plaintiff entitled to the amount of P192,561.72 for
damages which is clearly exorbitant and without any factual basis.

However, it must be recalled that the established rule in this jurisdiction is that when a party appeals
directly to the Supreme Court, and submits his case there for decision, he is deemed to have waived
the right to dispute any finding of fact made by the trial Court. The only questions that may be raised
are those of law (Savellano vs. Diaz, L-17441, July 31, 1963; Aballe vs. Santiago, L-16307, April 30,
1963; G.S.I.S. vs. Cloribel, L-22236, June 22, 1965). A converso, a party who resorts to the Court of
Appeals, and submits his case for decision there, is barred from contending later that his claim was
beyond the jurisdiction of the aforesaid Court. The reason is that a contrary rule would encourage
the undesirable practice of appellants' submitting their cases for decision to either court in
expectation of favorable judgment, but with intent of attacking its jurisdiction should the decision be
unfavorable (Tyson Tan, et al. vs. Filipinas Compañia de Seguros) et al., L-10096, Res. on Motion to
Reconsider, March 23, 1966). Consequently, we are limited in this appeal to the issues of law raised
in the appellant's brief.

Taking the aforesaid rules into account, it can be seen that the only reviewable issues in this appeal
are reduced to two:

1) Whether or not the collision of appellant's barge with the supports or piers of the Nagtahan
bridge was in law caused by fortuitous event or force majeure, and

2) Whether or not it was error for the Court to have permitted the plaintiff-appellee to
introduce additional evidence of damages after said party had rested its case.

As to the first question, considering that the Nagtahan bridge was an immovable and stationary
object and uncontrovertedly provided with adequate openings for the passage of water craft,
including barges like of appellant's, it is undeniable that the unusual event that the barge, exclusively
controlled by appellant, rammed the bridge supports raises a presumption of negligence on the part
of appellant or its employees manning the barge or the tugs that towed it. For in the ordinary course
of events, such a thing does not happen if proper care is used. In Anglo American Jurisprudence,
the inference arises by what is known as the "res ipsa loquitur" rule (Scott vs. London Docks Co., 2
H & C 596; San Juan Light & Transit Co. vs. Requena, 224 U.S. 89, 56 L. Ed., 680; Whitwell vs.
Wolf, 127 Minn. 529, 149 N.W. 299; Bryne vs. Great Atlantic & Pacific Tea Co., 269 Mass. 130; 168
N.E. 540; Gribsby vs. Smith, 146 S.W. 2d 719).

The appellant strongly stresses the precautions taken by it on the day in question: that it assigned
two of its most powerful tugboats to tow down river its barge L-1892; that it assigned to the task the
more competent and experienced among its patrons, had the towlines, engines and equipment
double-checked and inspected; that it instructed its patrons to take extra precautions; and concludes
that it had done all it was called to do, and that the accident, therefore, should be held due to force
majeure or fortuitous event.

These very precautions, however, completely destroy the appellant's defense. For caso
fortuito or force majeure(which in law are identical in so far as they exempt an obligor from
liability)2 by definition, are extraordinary events not foreseeable or avoidable, "events that could
not be foreseen, or which, though foreseen, were inevitable" (Art. 1174, Civ. Code of the
Philippines). It is, therefore, not enough that the event should not have been foreseen or anticipated,
as is commonly believed, but it must be one impossible to foresee or to avoid. The mere difficulty to
foresee the happening is not impossibility to foresee the same: "un hecho no constituye caso fortuito
por la sola circunstancia de que su existencia haga mas dificil o mas onerosa la accion diligente del
presento ofensor" (Peirano Facio, Responsibilidad Extra-contractual, p. 465; Mazeaud Trait de la
Responsibilite Civil, Vol. 2, sec. 1569). The very measures adopted by appellant prove that the
possibility of danger was not only foreseeable, but actually foreseen, and was not caso fortuito.

Otherwise stated, the appellant, Luzon Stevedoring Corporation, knowing and appreciating the perils
posed by the swollen stream and its swift current, voluntarily entered into a situation involving
obvious danger; it therefore assured the risk, and can not shed responsibility merely because the
precautions it adopted turned out to be insufficient. Hence, the lower Court committed no error in
holding it negligent in not suspending operations and in holding it liable for the damages caused.

It avails the appellant naught to argue that the dolphins, like the bridge, were improperly located.
Even if true, these circumstances would merely emphasize the need of even higher degree of care
on appellant's part in the situation involved in the present case. The appellant, whose barges and
tugs travel up and down the river everyday, could not safely ignore the danger posed by these
allegedly improper constructions that had been erected, and in place, for years.

On the second point: appellant charges the lower court with having abused its discretion in the
admission of plaintiff's additional evidence after the latter had rested its case. There is an insinuation
that the delay was deliberate to enable the manipulation of evidence to prejudice defendant-
appellant.

We find no merit in the contention. Whether or not further evidence will be allowed after a party
offering the evidence has rested his case, lies within the sound discretion of the trial Judge, and this
discretion will not be reviewed except in clear case of abuse.3

In the present case, no abuse of that discretion is shown. What was allowed to be introduced, after
plaintiff had rested its evidence in chief, were vouchers and papers to support an item of P1,558.00
allegedly spent for the reinforcement of the panel of the bailey bridge, and which item already
appeared in Exhibit GG. Appellant, in fact, has no reason to charge the trial court of being unfair,
because it was also able to secure, upon written motion, a similar order dated November 24, 1962,
allowing reception of additional evidence for the said defendant-appellant.4

WHEREFORE, finding no error in the decision of the lower Court appealed from, the same is hereby
affirmed. Costs against the defendant-appellant.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-25906 May 28, 1970

PEDRO D. DIOQUINO, plaintiff-appellee,

vs.
FEDERICO LAUREANO, AIDA DE LAUREANO and JUANITO LAUREANO, defendants-
appellants.

Pedro D. Dioquino in his own behalf.

Arturo E. Valdomero, Jose L. Almario and Rolando S. Relova for defendants-appellants.

FERNANDO, J.:

The present lawsuit had its origin in a relationship, if it could be called such, the use of a car owned
by plaintiff Pedro D. Dioquino by defendant Federico Laureano, clearly of a character casual and
temporary but unfortunately married by an occurrence resulting in its windshield being damaged. A
stone thrown by a boy who, with his other companions, was thus engaged in what undoubtedly for
them must have been mistakenly thought to be a none too harmful prank did not miss its mark.
Plaintiff would hold defendant Federico Laureano accountable for the loss thus sustained, including
in the action filed the wife, Aida de Laureano, and the father, Juanito Laureano. Plaintiff prevail in the
lower court, the judgment however going only against the principal defendant, his spouse and his
father being absolved of any responsibility. Nonetheless, all three of them appealed directly to us,
raising two questions of law, the first being the failure of the lower court to dismiss such a suit as no
liability could have been incurred as a result of a fortuitous event and the other being its failure to
award damages against plaintiff for the unwarranted inclusion of the wife and the father in this
litigation. We agree that the lower court ought to have dismissed the suit, but it does not follow that
thereby damages for the inclusion of the above two other parties in the complaint should have been
awarded appellants.

The facts as found by the lower court follow: "Attorney Pedro Dioquino, a practicing lawyer of
Masbate, is the owner of a car. On March 31, 1964, he went to the office of the MVO, Masbate, to
register the same. He met the defendant Federico Laureano, a patrol officer of said MVO office, who
was waiting for a jeepney to take him to the office of the Provincial Commander, PC, Masbate.
Attorney Dioquino requested the defendant Federico Laureano to introduce him to one of the clerks
in the MVO Office, who could facilitate the registration of his car and the request was graciously
attended to. Defendant Laureano rode on the car of Atty. Dioquino on his way to the P.C. Barracks
at Masbate. While about to reach their destination, the car driven by plaintiff's driver and with
defendant Federico Laureano as the sole passenger was stoned by some 'mischievous boys,' and
its windshield was broken. Defendant Federico Laureano chased the boys and he was able to catch
one of them. The boy was taken to Atty. Dioquino [and] admitted having thrown the stone that broke
the car's windshield. The plaintiff and the defendant Federico Laureano with the boy returned to the
P.C. barracks and the father of the boy was called, but no satisfactory arrangements [were] made
about the damage to the
windshield."1

It was likewise noted in the decision now on appeal: "The defendant Federico Laureano refused to
file any charges against the boy and his parents because he thought that the stone-throwing was
merely accidental and that it was due to force majeure. So he did not want to take any action and
after delaying the settlement, after perhaps consulting a lawyer, the defendant Federico Laureano
refused to pay the windshield himself and challenged that the case be brought to court for judicial
adjudication. There is no question that the plaintiff tried to convince the defendant Federico
Laureano just to pay the value of the windshield and he even came to the extent of asking the wife to
convince her husband to settle the matter amicably but the defendant Federico Laureano refused to
make any settlement, clinging [to] the belief that he could not be held liable because a minor child
threw a stone accidentally on the windshield and therefore, the same was due to force majeure."2

1. The law being what it is, such a belief on the part of defendant Federico Laureano was justified.
The express language of Art. 1174 of the present Civil Code which is a restatement of Art. 1105 of
the Old Civil Code, except for the addition of the nature of an obligation requiring the assumption of
risk, compels such a conclusion. It reads thus: "Except in cases expressly specified by the law, or
when it is otherwise declared by stipulation, or when the nature of the obligation requires the
assumption of risk, no person shall be responsible for those events which could not be, foreseen, or
which, though foreseen were inevitable." Even under the old Civil Code then, as stressed by us in
the first decision dating back to 1908, in an opinion by Justice Mapa, the rule was well-settled that in
the absence of a legal provision or an express covenant, "no one should be held to account for
fortuitous cases."3 Its basis, as Justice Moreland stressed, is the Roman law principle major casus
est, cui humana infirmitas resistere non potest.4Authorities of repute are in agreement, more
specifically concerning an obligation arising from contract "that some extraordinary circumstance
independent of the will of the obligor, or of his employees, is an essential element of a caso
fortuito."5 If it could be shown that such indeed was the case, liability is ruled out. There is no
requirement of "diligence beyond what human care and foresight can provide."6

The error committed by the lower court in holding defendant Federico Laureano liable appears to be
thus obvious. Its own findings of fact repel the motion that he should be made to respond in
damages to the plaintiff for the broken windshield. What happened was clearly unforeseen. It was a
fortuitous event resulting in a loss which must be borne by the owner of the car. An element of
reasonableness in the law would be manifestly lacking if, on the circumstances as thus disclosed,
legal responsibility could be imputed to an individual in the situation of defendant Laureano. Art.
1174 of the Civil Code guards against the possibility of its being visited with such a reproach.
Unfortunately, the lower court was of a different mind and thus failed to heed its command.

It was misled, apparently, by the inclusion of the exemption from the operation of such a provision of
a party assuming the risk, considering the nature of the obligation undertaken. A more careful
analysis would have led the lower court to a different and correct interpretation. The very wording of
the law dispels any doubt that what is therein contemplated is the resulting liability even if caused by
a fortuitous event where the party charged may be considered as having assumed the risk incident
in the nature of the obligation to be performed. It would be an affront, not only to the logic but to the
realities of the situation, if in the light of what transpired, as found by the lower court, defendant
Federico Laureano could be held as bound to assume a risk of this nature. There was no such
obligation on his part.

Reference to the leading case of Republic v. Luzon Stevedoring Corp.7 will illustrate when the nature
of the obligation is such that the risk could be considered as having been assumed. As noted in the
opinion of Justice J.B.L. Reyes, speaking for the Court: "The appellant strongly stresses the
precautions taken by it on the day in question: that it assigned two of its most powerful tugboats to
tow down river its barge L-1892; that it assigned to the task the more competent and experienced
among its patrons, had the towlines, engines and equipment double-checked and inspected; that it
instructed its patrons to take extra-precautions; and concludes that it had done all it was called to do,
and that the accident, therefore, should be held due to force majeure or fortuitous event." Its next
paragraph explained clearly why the defense of caso fortuito or force majeure does not lie. Thus:
"These very precautions, however, completely destroy the appellant's defense. For caso
fortuito or force majeure (which in law are identical in so far as they exempt an obligor from liability)
by definition, are extraordinary events not foreseeable or avoidable, 'events that could not be
foreseen, or which, though foreseen, were inevitable' (Art. 1174, Civil Code of the Philippines). It is,
therefore, not enough that the event should not have been foreseen or participated, as is commonly
believed, but it must be one impossible to foresee or to avoid. The mere difficulty to foresee the
happening is not impossibility to foresee the same: un hecho no constituye caso fortuito por la sola
circunstancia de que su existencia haga mas dificil o mas onerosa la accion diligente del presente
ofensor' (Peirano Facio, Responsibilidad Extra-contractual, p. 465; Mazeaud, Traite de la
Responsibilite Civile, Vol. 2, sec. 1569). The very measures adopted by appellant prove that the
possibility of danger was not only foreseeable, but actually foreseen, and was not caso fortuito."

In that case then, the risk was quite evident and the nature of the obligation such that a party could
rightfully be deemed as having assumed it. It is not so in the case before us. It is anything but that. If
the lower court, therefore, were duly mindful of what this particular legal provision contemplates, it
could not have reached the conclusion that defendant Federico Laureano could be held liable. To
repeat, that was clear error on its part.

2. Appellants do not stop there. It does not suffice for them that defendant Federico Laureano would
be freed from liability. They would go farther. They would take plaintiff to task for his complaint
having joined the wife, Aida de Laureano, and the father, Juanita Laureano. They were far from
satisfied with the lower court's absolving these two from any financial responsibility. Appellants
would have plaintiff pay damages for their inclusion in this litigation. We are not disposed to view the
matter thus.

It is to be admitted, of course, that plaintiff, who is a member of the bar, ought to have exercised
greater care in selecting the parties against whom he would proceed. It may be said that his view of
the law that would consider defendant Federico Laureano liable on the facts as thus disclosed, while
erroneous, is not bereft of plausibility. Even the lower court, mistakenly of course, entertained similar
view. For plaintiff, however, to have included the wife and the father would seem to indicate that his
understanding of the law is not all that it ought to have been.

Plaintiff apparently was not entirely unaware that the inclusion in the suit filed by him was
characterized by unorthodoxy. He did attempt to lend some color of justification by explicitly setting
forth that the father was joined as party defendant in the case as he was the administrator of the
inheritance of an undivided property to which defendant Federico Laureano could lay claim and that
the wife was likewise proceeded against because the conjugal partnership would be made to
respond for whatever liability would be adjudicated against the husband.

It cannot be said that such an attempt at justification is impressed with a high persuasive quality. Far
from it. Nonetheless, mistaken as plaintiff apparently was, it cannot be concluded that he was
prompted solely by the desire to inflict needless and unjustified vexation on them. Considering the
equities of the situation, plaintiff having suffered a pecuniary loss which, while resulting from a
fortuitous event, perhaps would not have occurred at all had not defendant Federico Laureano
borrowed his car, we, feel that he is not to be penalized further by his mistaken view of the law in
including them in his complaint. Well-worth paraphrasing is the thought expressed in a United States
Supreme Court decision as to the existence of an abiding and fundamental principle that the
expenses and annoyance of litigation form part of the social burden of living in a society which seeks
to attain social control through law.8

WHEREFORE, the decision of the lower court of November 2, 1965 insofar as it orders defendant
Federico Laureano to pay plaintiff the amount of P30,000.00 as damages plus the payment of costs,
is hereby reversed. It is affirmed insofar as it dismissed the case against the other two defendants,
Juanita Laureano and Aida de Laureano, and declared that no moral damages should be awarded
the parties. Without pronouncement as to costs.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-29640 June 10, 1971

GUILLERMO AUSTRIA, petitioner,

vs.
THE COURT OF APPEALS (Second Division), PACIFICO ABAD and MARIA G.
ABAD, respondents.

Antonio Enrile Inton for petitioner.

Jose A. Buendia for respondents.

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

Guillermo Austria petitions for the review of the decision rendered by the Court of Appeal (in CA-
G.R. No. 33572-R), on the sole issue of whether in a contract of agency (consignment of goods for
sale) it is necessary that there be prior conviction for robbery before the loss of the article shall
exempt the consignee from liability for such loss.

In a receipt dated 30 January 1961, Maria G. Abad acknowledged having received from Guillermo
Austria one (1) pendant with diamonds valued at P4,500.00, to be sold on commission basis or to be
returned on demand. On 1 February 1961, however, while walking home to her residence in
Mandaluyong, Rizal, Abad was said to have been accosted by two men, one of whom hit her on the
face, while the other snatched her purse containing jewelry and cash, and ran away. Among the
pieces of jewelry allegedly taken by the robbers was the consigned pendant. The incident became
the subject of a criminal case filed in the Court of First Instance of Rizal against certain persons
(Criminal Case No. 10649, People vs. Rene Garcia, et al.).

As Abad failed to return the jewelry or pay for its value notwithstanding demands, Austria brought in
the Court of First Instance of Manila an action against her and her husband for recovery of the
pendant or of its value, and damages. Answering the allegations of the complaint, defendants
spouses set up the defense that the alleged robbery had extinguished their obligation.

After due hearing, the trial court rendered judgment for the plaintiff, and ordered defendants
spouses, jointly and severally, to pay to the former the sum of P4,500.00, with legal interest thereon,
plus the amount of P450.00 as reasonable attorneys' fees, and the costs. It was held that defendants
failed to prove the fact of robbery, or, if indeed it was committed, that defendant Maria Abad was
guilty of negligence when she went home without any companion, although it was already getting
dark and she was carrying a large amount of cash and valuables on the day in question, and such
negligence did not free her from liability for damages for the loss of the jewelry.
Not satisfied with his decision, the defendants went to the Court of Appeals, and there secured a
reversal of the judgment. The appellate court overruling the finding of the trial court on the lack of
credibility of the two defense witnesses who testified on the occurrence of the robbery, and holding
that the facts of robbery and defendant Maria Abad's possesion of the pendant on that unfortunate
day have been duly published, declared respondents not responsible for the loss of the jewelry on
account of a fortuitous event, and relieved them from liability for damages to the owner. Plaintiff
thereupon instituted the present proceeding.

It is now contended by herein petitioner that the Court of Appeals erred in finding that there was
robbery in the case, although nobody has been found guilty of the supposed crime. It is petitioner's
theory that for robbery to fall under the category of a fortuitous event and relieve the obligor from his
obligation under a contract, pursuant to Article 1174 of the new Civil Code, there ought to be prior
finding on the guilt of the persons responsible therefor. In short, that the occurrence of the robbery
should be proved by a final judgment of conviction in the criminal case. To adopt a different view,
petitioner argues, would be to encourage persons accountable for goods or properties received in
trust or consignment to connive with others, who would be willing to be accused in court for the
robbery, in order to be absolved from civil liability for the loss or disappearance of the entrusted
articles.

We find no merit in the contention of petitioner.

It is recognized in this jurisdiction that to constitute a caso fortuito that would exempt a person from
responsibility, it is necessary that (1) the event must be independent of the human will (or rather, of
the debtor's or obligor's); (2) the occurrence must render it impossible for the debtor to fulfill the
obligation in a normal manner; and that (3) the obligor must be free of participation in or aggravation
of the injury to the creditor.1 A fortuitous event, therefore, can be produced by nature, e.g.,
earthquakes, storms, floods, etc., or by the act of man, such as war, attack by bandits, robbery,2 etc.,
provided that the event has all the characteristics enumerated above.

It is not here disputed that if respondent Maria Abad were indeed the victim of robbery, and if it were
really true that the pendant, which she was obliged either to sell on commission or to return to
petitioner, were taken during the robbery, then the occurrence of that fortuitous event would have
extinguished her liability. The point at issue in this proceeding is how the fact of robbery is to be
established in order that a person may avail of the exempting provision of Article 1174 of the new
Civil Code, which reads as follows:

ART. 1174. Except in cases expressly specified by law, or when it is otherwise

declared by stipulation, or when the nature of the obligation requires the assumption
of risk, no person shall be responsible for those events which could not be foreseen,
or which, though foreseen, were inevitable.

It may be noted the reform that the emphasis of the provision is on the events, not on the agents or
factors responsible for them. To avail of the exemption granted in the law, it is not necessary that the
persons responsible for the occurrence should be found or punished; it would only be sufficient to
established that the enforceable event, the robbery in this case did take place without any
concurrent fault on the debtor's part, and this can be done by preponderant evidence. To require in
the present action for recovery the prior conviction of the culprits in the criminal case, in order to
establish the robbery as a fact, would be to demand proof beyond reasonable doubt to prove a fact
in a civil case.
It is undeniable that in order to completely exonerate the debtor for reason of a fortutious event, such
debtor must, in addition to the cams itself, be free of any concurrent or contributory fault or
negligence.3 This is apparent from Article 1170 of the Civil Code of the Philippines, providing that:

ART. 1170. Those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof, are
liable for damages.

It is clear that under the circumstances prevailing at present in the City of Manila and its suburbs,
with their high incidence of crimes against persons and property that renders travel after nightfall a
matter to be sedulously avoided without suitable precaution and protection, the conduct of
respondent Maria G. Abad, in returning alone to her house in the evening, carrying jewelry of
considerable value would be negligent per se and would not exempt her from responsibility in the
case of a robbery. We are not persuaded, however, that the same rule should obtain ten years
previously, in 1961, when the robbery in question did take place, for at that time criminality had not
by far reached the levels attained in the present day.

There is likewise no merit in petitioner's argument that to allow the fact of robbery to be recognized
in the civil case before conviction is secured in the criminal action, would prejudice the latter case, or
would result in inconsistency should the accused obtain an acquittal or should the criminal case be
dismissed. It must be realized that a court finding that a robbery has happened would not
necessarily mean that those accused in the criminal action should be found guilty of the crime; nor
would a ruling that those actually accused did not commit the robbery be inconsistent with a finding
that a robbery did take place. The evidence to establish these facts would not necessarily be the
same.

WHEREFORE, finding no error in the decision of the Court of Appeals under review, the petition in
this case is hereby dismissed with costs against the petitioner.
 [Syllabus]

THIRD DIVISION

[G.R. No. 113194. March 11, 1996]

NATIONAL POWER CORPORATION, petitioner, vs. COURT OF

APPEALS and MACAPANTON MANGONDATO, respondents.

DECISION
PANGANIBAN, J.:

At what point in time should the value of the land subject of expropriation be
computed: at the date of the taking or the date of the filing of the complaint for eminent
domain? This is the main question posed by the parties in this petition for review on
certiorari assailing the Decision[1] of the Court of Appeals[2] which affirmed in toto the
decision of the Regional Trial Court of Marawi City.[3] The dispositive portion of the
decision of the trial court reads:[4]

WHEREFORE, the prayer in the recovery case for Napocors surrender of the property
is denied but Napocor is ordered to pay monthly rentals in the amount of P15,000.00
from 1978 up to July 1992 with 12% interest per annum from which sum the amount
of P2,199,500.00 should be deducted; and the property is condemned in favor of
Napocor effective July 1992 upon payment of the fair market value of the property at
One Thousand (P1,000.00) Pesos per square meter or a total of Twenty-One Million
Nine Hundred Ninety-Five Thousand (P21,995,000.00) Pesos.

SO ORDERED. Costs against NAPOCOR.

The Facts

The facts are undisputed by both the petitioner and the private respondent,[5] and are
quoted from the Decision of the respondent Court,[6] as follows:

In 1978, National Power Corporation (NAPOCOR), took possession of a 21,995

square meter land which is a portion of Lot 1 of the subdivision plan (LRC) Psd-
116159 situated in Marawi City, owned by Mangondato, and covered by Transfer
Certificate of Title No. T-378-A, under the mistaken belief that it forms part of the
public land reserved for use by NAPOCOR for hydroelectric power purposes under
Proclamation No. 1354 of the President of the Philippines dated December 3, 1974.

NAPOCOR alleged that the subject land was until then possessed and administered by
Marawi City so that in exchange for the citys waiver and quitclaim of any right over
the property, NAPOCOR had paid the city a financial assistance of P40.00 per square
meter.

In 1979, when NAPOCOR started building its Agus I HE (Hydroelectric Plant)

Project, Mangondato demanded compensation from NAPOCOR. NAPOCOR refused
to compensate insisting that the property is public land and that it had already paid
financial assistance to Marawi City in exchange for the rights over the property.

Mangondato claimed that the subject land is his duly registered private property
covered by Transfer Certificate of Title No. T-378-A in his name, and that he is not
privy to any agreement between NAPOCOR and Marawi City and that any payment
made to said city cannot be considered as payment to him.

More than a decade later NAPOCOR acceded to the fact that the property belongs to
Mangondato.

At the outset, in March, 1990, NAPOCORs regional legal counsel, pursuant to

Executive Order No. 329 dated July 11, 1988 requested Marawi Citys City Appraisal
Committee to appraise the market value of the property in
Saduc, Marawi City affected by the infrastructure projects of NAPOCOR without
specifying any particular land-owner. The City Appraisal Committee in its Minutes
dated March 8, 1990, fixed the fair market value as follows:
[7]

Land Fair Market Value Per Sq. M.

Price Per Sq. M Price per Sq. M.

Along the City Not in the City
National Highway National Highway

P150 Residential Lot P100

P250 Commercial Lot P180
P300 Industrial Lot P200

(Records, Civil Case No. 610-92, p. 20).

On July 13, 1990, NAPOCORs National Power Board (hereafter NAPOCORs board)
passed Resolution No. 90-225 resolving to pay Mangondato P100.00 per square meter
for only a 12,132 square meter portion of the subject property plus 12% interest per
annum from 1978. However, in the August 7, 1990 board meeting, confirmation of
said resolution was deferred to allow NAPOCORs regional legal counsel to determine
whether P100.00 per square meter is the fair market value. (Records, Civil Case No.
605-92, p. 45).

On August 14, 1990, NAPOCORs board passed Resolution No. 90-316 resolving that
Mangondato be paid the base price of P40.00 per square meter for the 12,132 square
meter portion (P485,280.00) plus 12% interest per annum from 1978 (P698,808.00)
pending the determination whether P100.00 per square meter is the fair market value
of the property (id.).

Pursuant to the aforementioned resolution Mangondato was paid

P1,184,088.00 (Id., p. 58).

NAPOCORs regional legal counsels findings embodied in 2 memoranda to

NAPOCORs general counsel (dated January 29, 1991 and February 19, 1991) state
that Mangondatos property is classified as industrial, that the market value of
industrial lots in Marawi City when NAPOCOR took possession is P300.00 for those
along the national highway and P200.00 for those not along the highway and that on
the basis of recent Supreme Court decisions, NAPOCOR has to pay not less than
P300.00 per square meter. NAPOCORs general counsel incorporated the foregoing
findings in his report to the board plus the data that the area possessed by NAPOCOR
is 21,995 square meters, and that the legal rate of interest per annum from the time of
the taking of the property alleged to be in 1978, is 12%, but recommended to the
board that the fair market value of the property is P 100.00 per square meter;
NAPOCORs board on May 17, 1991 passed Resolution No. 91-247 resolving to pay
Mangondato P100.00 per square meter for the property excluding 12% interest per
annum (id., pp. 50-52).

In a letter dated December 17, 1991, Mangondato disagreed with the NAPOCOR
boards Resolution No. 91-247 pegging the compensation for his land at P 100.00 per
square meter without interest from 1978. Mangondato submitted that the fair market
value of his land is even more than the P300.00 (per) square meter stated in the City
Appraisal Report but that for expediency, he is willing to settle for P300.00 per square
meter plus 12% interest per annum from 1978 (id., pp. 53-59).

In another letter dated February 4, 1992, Mangondato reiterated his disagreement to

the P100.00 per square meter compensation without interest. At the same time, to get
partial payment, he asked that he be paid in the meantime, P 100.00 per square meter
without prejudice to pursuing his claim for the proper and just compensation plus
interest thereon (id., p. 60).
On February 12, 1992, NAPOCORs general counsel filed a memorandum for its
president finding no legal impediment if they, in the meantime were to pay
Mangondato P100.00 per square meter without prejudice to the final determination of
the proper and just compensation by the board inasmuch as the regional counsel
submitted to him (general counsel) 2 memoranda stating that the appraisal of
industrial lots in Marawi City when NAPOCOR took possession is P300.00 per
square meter for those along the national highway and P200.00 per square meter for
those not along the highway, and that NAPOCOR has to pay not less than P300.00 per
square meter plus 12% interest on the basis of recent Supreme Court decisions.
Further, the general counsel submitted that since the board has already set the
purchase price at P100.00 per square meter (Resolution No. 91-247), NAPOCOR
would not be prejudiced thereby (id., pp 60-62)

In March, 1992, the parties executed a Deed of Sale Of A Registered Property where
NAPOCOR acceded to Mangondatos request of provisional payment of P100.00 per
square meter excluding interest and without prejudice to Mangondatos pursuance of
claims for just compensation and interest. Mangondato was paid P1,015,412.00 in
addition to the P1,184,088.00 earlier paid to him by NAPOCOR which payments total
P2,199,500.00 for the 12,995 square meter land (Records, Civil Case No. 610-92, pp.
85-87).

In his letter to NAPOCORs president dated April 20, 1992, Mangondato asked for the
payment of P300.00 per square meter plus 12% interest per annum from 1978.
NAPOCORs president, in his memorandum to the board dated April 24,
1992 recommended the approval of Mangondatos request (Records, Civil Case No.
605-92, pp. 63-69).

On May 25, 1992, NAPOCORs board passed Resolution No. 92-121 granting its
president the authority to negotiate for the payment of P100.00 per square meter for
the land plus 12% interest per annum from 1978 less the payments already made to
Mangondato and to Marawi City on the portion of his land and with the provisos that
said authorized payment shall be effected only after Agus I HE Project has been
placed in operation and that said payment shall be covered by a deed of absolute sale
with a quitclaim executed by Mangondato (Id., pp. 70-71).

On July 7, 1992, Mangondato filed before the lower court Civil Case No. 605-92
against NAPOCOR seeking to recover the possession of the property described in the
complaint as Lots 1 and 3 of the subdivision plan (LRC) Psd-116159 against
NAPOCOR, the payment of a monthly rent of P15,000.00 from 1978 until the
surrender of the property, attorneys fees and costs, and the issuance of a temporary
restraining order and a writ of preliminary mandatory injunction to restrain
NAPOCOR from proceeding with any construction and/or improvements on
Mangondatos land or from committing any act of dispossession (id., pp. 1-8).

The temporary restraining order was issued by the lower court. Anent the prayer for
the writ of preliminary mandatory injunction, NAPOCOR filed its Opposition thereto
on July 23, 1992 (Id., pp. 17-20).

Before the lower court could resolve the pending incident on the writ of preliminary
mandatory injunction, and instead of filing a motion to dismiss, NAPOCOR, on July
27, 1992, filed also before the lower court, Civil Case No. 610-92 which is a
Complaint for eminent domain against Mangondato over the subject property
(Records, Civil Case No. 610-92, pp. 1-3).

On the same date Mangondato filed his Manifestation in Lieu of Answer contending
that the negotiations for payment made by NAPOCOR were virtual dictations on a
take it or leave it basis; that he was given the run-around by NAPOCOR for 15 years;
so that there was no agreement reached as to payment because of NAPOCORs
insistence of its own determination of the price; that he treats the P2,199.500.00 so far
received by him as partial payment for the rent for the use of his property.
Mangondato prayed that he be compensated in damages for the unauthorized taking
and continued possession of his land from 1978 until the filing of the Complaiant (sic)
in the expropriation case; that should the lower court order the expropriation of the
subject property, that the just compensation for the land be reckoned from the time of
the filing of the expropriation case; that the expropriation case be consolidated with
the recovery of possession case; that the restraining order issued in the recovery of
possession case be maintained and a writ of preliminary injunction be at once issued
against NAPOCOR; and that NAPOCOR be ordered to deposit the value of the land
as provisionally determined by the lower court (id., pp. 4-5).

Upon agreement of the parties, the 2 cases were ordered consolidated and the lower
court appointed the following commissioners: Atty. Saipal Alawi, representing the
lower court; Atty. Connie Doromal, representing NAPOCOR; and Mr. Alimbsar A.
Ali, from the City Assessors Office to ascertain and report to the court the just
compensation (id., pp. 6-7).

The lower court ordered NAPOCOR to deposit with the Philippine National Bank the
amount of P10,997,500.00, provisionally fixing the value of the land at P500.00 per
square meter P100.00 lower than the assessed value of the land appearing in Tax
Declaration No. 0873 for 1992 which was used as basis by the lower court (id., p. 8).

In its Motion for Reconsideration of the Order For Provisional Deposit[,] NAPOCOR
opposed the provisional value quoted by the lower court saying that the basis of the
provisional value of the land should be the assessed value of the property as of the
time of the taking which in this case is 1978 when the assessed value of the land under
Tax Declaration No. 7394 was P100.00 per square meter (id., pp. 28-32). In reply,
Mangondato filed his Opposition To Motion For Reconsideration Of the Order For
Provisional Deposit (id., pp. 44-46). However, the lower court did not rule on the
provisional value to be deposited and chose to go right into the determination of just
compensation on the ground that the provisional valuation could not be decided
without going into the second phase of expropriation cases which is the determination
by the court of the just compensation for the property soguht (sic) to be taken
(NPC vs. Jocson, supra) (Decision, p. 5).

On August 5, 1992, Mangondato filed a Motion To Dismiss in the expropriation case

alleging that NAPOCOR filed its Complaint for eminent domain not for the legitimate
aim of pursuing NAPOCORs business and purpose but to legitimize a patently illegal
possession and at the same time continue dictating its own valuation of the property.
Said motion was however, later withdrawn by Mangondato (id., pp. 37-39 and 47).

In the meanwhile, the commissioners filed their respective reports. On July 28, 1992,
Commissioner Doromal filed his report recommending a fair market value of P300.00
per square meter as of November 23, 1978, (Id., pp. 11-27). On August 6, 1992,
Commissioners Alawi and Ali filed their joint report recommending a fair market
value of P1,000.00 per square meter as of 1992 (id., pp. 40-42).

After the parties filed their respective comments to the commissioners reports, on
August 21, 1992, the lower court rendered its decision denying Mangondato recovery
of possession of the property but ordering NAPOCOR to pay a monthly rent of
P15,000.00 from 1978 up to July 1992 with 12% interest per annum and condemning
the property in favor of NAPOCOR effective July, 1992 upon the payment of
P1,000.00 per square meter or a total of P2 1,995,000.00 as just compensation.

Mangondato filed a Motion For Partial Execution Pending Appeal which was granted
by the lower court in an Order dated September 15, 1992 (id., pp. 151-152 and 157-
160). However, on appeal by NAPOCOR via a Petition For Certiorari in CA-G.R. SP
No. 28971 to this Court, said Order was annulled and set aside (Rollo, pp. 30-37).

NAPOCOR filed a Motion For Reconsideration of the decision alleging that the fair
market value of the property at the time it was taken allegedly in 1978 is P40.00 per
square meter. After Mangondato filed his Opposition To Motion For Reconsideration
the lower court denied NAPOCORs motion for reconsideration in an Order
dated September 15, 1992 (Records, Civil Case No. 610-92, pp. 145-149).
In the meanwhile, on August 7, 1992, Mangondato filed an Ex-Parte Manifestation
To Correct Clerical Error of Description of Property submitting that Lot 3 which does
not form part of the subject property was included in the Complaint because of a
clerical error inadvertently committed by the typist who continuously copied the
description of the property covered by Transfer Certificate of Title No. T-378-A, and
thus praying that the portion of the Complaint describing Lot 3 be deleted (Records,
Civil Case No. 605-92, p. 22).

On August 12, 1992, the intervenors filed their Motion For Intervention and
Intervention claiming interest against each of the parties on the ground that Lot 3
which is included in the Complaint has since been conveyed by Mangondato to their
predecessors-in-interest and that they are entitled to just compensation from
NAPOCOR should the lower court decide that NAPOCOR is entitled to expropriate
the entire area described in the Complaint (id., pp. 23-34).

In an Order dated August 19, 1992 the lower court granted intervenors Motion For
Intervention (id., p. 72).

On August 25, 1992, the lower court ordered the deletion of the portion in the
Complaint describing Lot 3 and declared that intervenors Motion For Intervention has
become moot (id., p. 82).

On October 13, 1992 the intervenors filed their Motion To Reconsider The Order
Of August 25, 1992 and The Decision Dated August 21, 1992 which was however
denied by the lower court in an Order dated November 26, 1992 (id., pp. 162-184).

The Issues

Two errors were raised before this Court by the petitioner, thus:[8]
ASSIGNMENT OF ERRORS

THE RESPONDENT COURT ERRED IN AFFIRMING THAT THE JUST

COMPENSATION FOR THE PROPERTY IS ITS VALUE IN 1992, WHEN THE
COMPLAINT WAS FILED, AND NOT ITS VALUE IN 1978, WHEN THE
PROPERTY WAS TAKEN BY PETITIONER.

THE COURT ERRED IN FIXING THE VALUE OF JUST COMPENSATION AT P

1,000.00 PER SQUARE METER INSTEAD OF P40.00 PER SQUARE METER.

The petitioner summarized the two issues it raised by asking whether or not the
respondent court was justified in deviating from the well-settled doctrine that just
compensation is the equivalent of the value of the property taken for public use reckoned
from the time of taking.[9] In his Comment, private respondent worded the issues as
follows:[10]

x x x As stated by the respondent court, Napocor, in its appeal

x x x avers that the taking of the proerty (sic) should not be reckoned as of the year
1992 when NAPOCOR filed its Complaint for eminent domain but as of the year
1978 when it took possession of the property, and that the just compensation,
determined as it should be, on the basis of the value of the property as of 1978, as
P40.00 per square meter.

The petitioner, after failing to persuade both lower courts, reiterated before us its
proposition (with cited cases) that when the taking of property precedes the filing of the
judicial proceeding, the value of the property at the time it was taken shall be the basis
for the payment of just compensation.[11]

The First Issue: Date of Taking or Date of Suit?

The general rule in determining just compensation in eminent domain is the value of
the property as of the date of the filing of the complaint, as follows: [12]

Sec. 4. Order of Condemnation. When such a motion is overruled or when any party
fails to defend as required by this rule, the court may enter an order of condemnation
declaring that the plaintiff has a lawful right to take the property sought to be
condemned, for the public use or purpose described in the complaint, upon the
payment of just compensation to be determined as of the date of the filing of the
complaint x x x (Italics supplied).

Normally, the time of the taking coincides with the filing of the complaint for
expropriation. Hence, many rulings of this Court have equated just compensation with the
value of the property as of the time of filing of the complaint consistent with the above
provision of the Rules. So too, where the institution of the action precedes entry into the
property, the just compensation is to be ascertained as of the time of the filing of the
complaint.[13]
The general rule, however, admits of an exception: where this Court fixed the value
of the property as of the date it was taken and not at the date of the commencement of
the expropriation proceedings.
In the old case of Provincial Government of Rizal vs. Caro de Araullo,[14] the Court
ruled that x x x the owners of the land have no right to recover damages for this unearned
increment resulting from the construction of the public improvement (lengthening of Taft
Avenue from Manila to Pasay) for which the land was taken. To permit them to do so
would be to allow them to recover more than the value of the land at the time when it was
taken, which is the true measure of the damages, or just compensation, and would
discourage the construction of important public improvements.
In subsequently cases,[15] the Court, following the above doctrine, invariably held that
the time of taking is the critical date in determining lawful or just compensation. Justifying
this stance, Mr. Justice (later Chief Justice) Enrique Fernando, speaking for the Court
in Municipality of La Carlota vs. The Spouses Felicidad Baltazar and Vicente Gan,[16] said,
x x x the owner as is the constitutional intent, is paid what he is entitled to according to
the value of the property so devoted to public use as of the date of the taking. From that
time, he had been deprived thereof. He had no choice but to submit. He is not, however,
to be despoiled of such a right. No less than the fundamental law guarantees just
compensation. It would be an injustice to him certainly if from such a period, he could not
recover the value of what was lost. There could be on the other hand, injustice to the
expropriator if by a delay in the collection, the increment in price would accrue to the
owner. The doctrine to which this Court has been committed is intended precisely to avoid
either contingency fraught with unfairness.
Simply stated, the exception finds application where the owner would be given undue
incremental advantages arising from the use to which the government devotes the
property expropriated -as for instance, the extension of a main thoroughfare as was the
case in Caro de Araullo. In the instant case, however, it is difficult to conceive of how
there could have been an extra-ordinary increase in the value of the owners land arising
from the expropriation, as indeed the records do not show any evidence that the valuation
of P1,000.00 reached in 1992 was due to increments directly caused by petitioners use
of the land. Since the petitioner is claiming an exception to Rule 67, Section 4,[17] it has the
burden of proving its claim that its occupancy and use - not ordinary inflation and increase
in land values - was the direct cause of the increase in valuation from 1978 to 1992.

Side Issue: When is There Taking of Property?

But there is yet another cogent reason why this petition should be denied and why
the respondent Court should be sustained. An examination of the undisputed factual
environment would show that the taking was not really made in 1978.
This Court has defined the elements of taking as the main ingredient in the exercise
of power of eminent domain,[18] in the following words:

A number of circumstances must be present in the taking of property for purposes of

eminent domain: (1) the expropriator must enter a private property; (2) the entrance
into private property must be for more than a momentary period; (3) the entry into the
property should be under warrant or color of legal authority; (4) the property must be
devoted to a public use or otherwise informally appropriated or injuriously affected;
and (5) the utilization of the property for public use must be in such a way to oust the
owner and deprive him of all beneficial enjoyment of the property. (Italics supplied)
In this case, the petitioners entrance in 1978 was without intent to expropriate or was
not made under warrant or color of legal authority, for it believed the property was
public land covered by Proclamation No. 1354. When the private respondent raised
his claim of ownership sometime in 1979, the petitioner flatly refused the claim for
compensation, nakedly insisted that the property was public land and wrongly
justified its possession by alleging it had already paid financial assistance
to Marawi City in exchange for the rights over the property. Only in 1990, after more
than a decade of beneficial use, did the petitioner recognize private respondents
ownership and negotiate for the voluntary purchase of the property. A Deed of Sale
with provisional payment and subject to negotiations for the correct price was then
executed.

Clearly, this is not the intent nor the expropriation contemplated by law. This is a simple
attempt at a voluntary purchase and sale. Obviously, the petitioner neglected and/or
refused to exercise the power of eminent domain.
Only in 1992, after the private respondent sued to recover possession and petitioner
filed its Complaint to expropriate, did petitioner manifest its intention to exercise the power
of eminent domain. Thus, the respondent Court correctly held:[19]

If We decree that the fair market value of the land be determined as of 1978, then We
would be sanctioning a deceptive scheme whereby NAPOCOR, for any reason other
than for eminent domain would occupy anothers property and when later pressed for
payment, first negotiate for a low price and then conveniently expropriate the property
when the land owner refuses to accept its offer claiming that the taking of the property
for the purpose of eminent domain should be reckoned as of the date when it started to
occupy the property and that the value of the property should be computed as of the
date of the taking despite the increase in the meantime in the value of the property.

In Noble vs. City of Manila,[20] the City entered into a lease-purchase agreement of a
building constructed by the petitioners predecessor-in-interest in accordance with the
specifications of the former. The Court held that being bound by the said contract, the
City could not expropriate the building. Expropriation could be resorted to only when it is
made necessary by the opposition of the owner to the sale or by the lack of any agreement
as to the price. Said the Court:

The contract, therefore, in so far as it refers to the purchase of the building, as we have
interpreted it, is in force, not having been revoked by the parties or by judicial
decision. This being the case, the city being bound to buy the building at an agreed
price, under a valid and subsisting contract, and the plaintiff being agreeable to its
sale, the expropriation thereof, as sought by the defendant, is baseless. Expropriation
lies only when it is made necessary by the opposition of the owner to the sale or by the
lack of any agreement as to the price. There being in the present case a valid and
subsisting contract, between the owner of the building and the city, for the purchase
thereof at an agreed price, there is no reason for the expropriation. (Italics supplied)

In the instant case, petitioner effectively repudiated the deed of sale it entered into
with the private respondent when it passed Resolution No. 92-121
on May 25, 1992authorizing its president to negotiate, inter alia, that payment shall be
effected only after Agus I HE project has been placed in operation. It was only then that
petitioners intent to expropriate became manifest as private respondent disagreed and,
barely a month after, filed suit.

The Second Issue: Valuation

We now come to the issue of valuation.

The fair market value as held by the respondent Court, is the amount of P1,000.00
per square meter. In an expropriation case where the principal issue is the determination
of just compensation, as is the case here, a trial before Commissioners is indispensable
to allow the parties to present evidence on the issue of just compensation.[21] Inasmuch as
the determination of just compensation in eminent domain cases is a judicial
function[22] and factual findings of the Court of Appeals are conclusive on the parties and
reviewable only when the case falls within the recognized exceptions, [23] which is not the
situation obtaining in this petition, we see no reason to disturb the factual findings as to
valuation of the subject property. As can be gleaned from the records, the court-and-the-
parties-appointed commissioners did not abuse their authority in evaluating the evidence
submitted to them nor misappreciate the clear preponderance of evidence. The amount
fixed and agreed to by the respondent appellate Court is not grossly exorbitant.[24] To
quote:[25]

Commissioner Ali comes from the Office of the Register of Deeds who may well be
considered an expert, with a general knowledge of the appraisal of real estate and the
prevailing prices of land in the vicinity of the land in question so that his opinion on
the valuation of the property cannot be lightly brushed aside.

The prevailing market value of the land is only one of the determinants used by the
commissioners report the others being as herein shown:

xxx xxx xxx

Commissioner Doromals report, recommending P300.00 per square meter, differs

from the 2 commissioners only because his report was based on the valuation as of
1978 by the City Appraisal Committee as clarified by the latters chairman in response
to NAPOCORs general counsels query (id., pp. 128-129).
 In sum, we agree with the Court of Appeals that petitioner has failed to show why it
should be granted an exemption from the general rule in determining just compensation
provided under Section 4 of Rule 67. On the contrary, private respondent has convinced
us that, indeed, such general rule should in fact be observed in this case.
WHEREFORE, the petition is hereby DISMISSED and the judgment appealed from
AFFIRMED, except as to the interest on the monthly rentals, which is hereby reduced
from twelve percent (12%) to the legal rate of six percent (6%) per annum. Costs against
the petitioner.
SO ORDERED.
SYLLABUS
1. POLITICAL LAW; EMINENT DOMAIN; JUST COMPENSATION; DETERMINATION
THEREOF; GENERAL RULE IS DATE OF FILING OF THE COMPLAINT.- The
general rule in determining just compensation in eminent domain is the value of the
property as of the date of the filing of the complaint. Normally, the time of the taking
coincides with the filing of the complaint for expropriation. Hence, many rulings of this
Court have equated just compensation with the value of the property as of the time
of filing of the complaint consistent with the above provision of Section 4, Rule 67 of
the Revised Rules of Court. So too, where the institution of the action precedes entry
into the property, the just compensation is to be ascertained as of the time of the filing
of the complaint.
2. ID.; ID.; ID.; ID.; ID.; EXCEPTION IS WHERE THE COURT FIXED THE VALUE OF
THE PROPERTY AS OF THE DATE OF TAKING; NOT APPLICABLE IN CASE AT
BAR. The general rule admits of an exception; where this Court fixed the value of the
property as of the date it was taken and not at the date of the commencement of the
expropriation proceedings. This exception finds application where the owner would
be given undue incremental advantages arising from the use to which the government
devotes the property expropriated - as for instance, the extension of a main
thoroughfare as was the case in Caro de Araullo. In the instant case, however, it is
difficult to conceive of how there could have been an extra-ordinary increase in the
value of the owners land arising from the expropriation, as indeed the records do not
show any evidence that the valuation of P1,000.00 reached in 1992 was due to
increments directly caused by petitioners use of the land. Since the petitioner is
claiming an exception to Rule 67, Section 4, it has the burden of proving its claim that
its occupancy and use - not ordinary inflation and increase in land values - was the
direct cause of the increase in valuation from 1978 to 1992.
3. ID.; ID.; TAKING THEREIN; ELEMENTS; WHEN SATISFIED IN CASE AT BAR.
- This Court has defined the elements of taking as the main ingredient in the exercise
of power of eminent domain, in the following words: A number of circumstances must
be present in the taking of property for purposes of eminent domain: (1) the
expropriator must enter a private property; (2) the entrance into private property must
be for more than a momentary period; (3) the entry into the property should be under
warrant or color of legal authority; (4) the property must be devoted to a public use or
otherwise informally appropriated or injuriously affected; and (5) the utilization of the
 property for public use must be in such a way to oust the owner and deprive him of
all beneficial enjoyment of the property. In this case, the petitioners entrance in 1978
was without intent to expropriate or was not made under warrant or color of legal
authority, for it believed the property was public land covered by Proclamation No.
1354 and flatly refused the claim for compensation. Only in 1990, did the petitioner
recognize private respondents ownership and negotiate for the voluntary purchase of
the property. A Deed of Sale with provisional payment and subject to negotiations for
the correct price was then executed. This is not the intent nor the expropriation
contemplated by law. This is a simple attempt at a voluntary purchase and sale.
Petitioner neglected and/or refused to exercise the power of eminent domain. Only in
1992, did petitioner manifest its intention to exercise the power of eminent domain.
4. -ID.; ID.; JUST COMPENSATION; VALUATION OF COMMISSIONERS; FINDINGS
OF FACTS OF THE COURT OF APPEALS, RESPECTED. - In an expropriation case
where the principal issue is the determination of just compensation, as is the case
here, a trial before Commissioners is indispensable to allow the parties to present
evidence on the issue of just compensation. Inasmuch as the determination
of just compensation in eminent domain cases is a judicial function and factual
findings of the Court of Appeals are conclusive on the parties and reviewable only
when the case falls within the recognized exceptions, which is not the situation
obtaining in this petition, we see no reason to disturb the factual findings as to
valuation of the subject property. As can be gleaned from the records, the court-and-
the-parties-appointed commissioners did not abuse their authority in evaluating the
evidence submitted to them nor misappropriate the clear preponderance of evidence.
The amount fixed and agreed to by the respondent appellate Court is not grossly
exorbitant.
 THIRD DIVISION

[G.R. No. 113003. October 17, 1997]

ALBERTA YOBIDO and CRESENCIO YOBIDO, petitioners, vs. COURT

OF APPEALS, LENY TUMBOY, ARDEE TUMBOY and JASMIN
TUMBOY, respondents.

DECISION
ROMERO, J.:

In this petition for review on certiorari of the decision of the Court of Appeals, the
issue is whether or not the explosion of a newly installed tire of a passenger vehicle is a
fortuitous event that exempts the carrier from liability for the death of a passenger.
On April 26, 1988, spouses Tito and Leny Tumboy and their minor children named
Ardee and Jasmin, boarded at Mangagoy, Surigao del Sur, a Yobido Liner bus bound for
Davao City. Along Picop Road in Km. 17, Sta. Maria, Agusan del Sur, the left front tire of
the bus exploded. The bus fell into a ravine around three (3) feet from the road and struck
a tree. The incident resulted in the death of 28-year-old Tito Tumboy and physical injuries
to other passengers.
On November 21, 1988, a complaint for breach of contract of carriage, damages and
attorneys fees was filed by Leny and her children against Alberta Yobido, the owner of
the bus, and Cresencio Yobido, its driver, before the Regional Trial Court of Davao
City. When the defendants therein filed their answer to the complaint, they raised the
affirmative defense of caso fortuito. They also filed a third-party complaint against
Philippine Phoenix Surety and Insurance, Inc. This third-party defendant filed an answer
with compulsory counterclaim. At the pre-trial conference, the parties agreed to a
stipulation of facts.[1]
Upon a finding that the third party defendant was not liable under the insurance
contract, the lower court dismissed the third party complaint. No amicable settlement
having been arrived at by the parties, trial on the merits ensued.
The plaintiffs asserted that violation of the contract of carriage between them and the
defendants was brought about by the drivers failure to exercise the diligence required of
the carrier in transporting passengers safely to their place of destination. According to
Leny Tumboy, the bus left Mangagoy at 3:00 oclock in the afternoon. The winding road it
traversed was not cemented and was wet due to the rain; it was rough with crushed
rocks. The bus which was full of passengers had cargoes on top. Since it was running
fast, she cautioned the driver to slow down but he merely stared at her through the mirror.
At around 3:30 p.m., in Trento, she heard something explode and immediately, the bus
fell into a ravine.
 For their part, the defendants tried to establish that the accident was due to a
fortuitous event. Abundio Salce, who was the bus conductor when the incident happened,
testified that the 42-seater bus was not full as there were only 32 passengers, such that
he himself managed to get a seat. He added that the bus was running at a speed of 60
to 50 and that it was going slow because of the zigzag road. He affirmed that the left front
tire that exploded was a brand new tire that he mounted on the bus on April 21, 1988 or
only five (5) days before the incident. The Yobido Liner secretary, Minerva Fernando,
bought the new Goodyear tire from Davao Toyo Parts on April 20, 1988 and she was
present when it was mounted on the bus by Salce. She stated that all driver applicants in
Yobido Liner underwent actual driving tests before they were employed. Defendant
Cresencio Yobido underwent such test and submitted his professional drivers license and
clearances from the barangay, the fiscal and the police.
On August 29, 1991, the lower court rendered a decision[2] dismissing the action for
lack of merit. On the issue of whether or not the tire blowout was a caso fortuito, it found
that the falling of the bus to the cliff was a result of no other outside factor than the tire
blow-out. It held that the ruling in the La Mallorca and Pampanga Bus Co. v. De
Jesus[3]that a tire blowout is a mechanical defect of the conveyance or a fault in its
equipment which was easily discoverable if the bus had been subjected to a more
thorough or rigid check-up before it took to the road that morning is inapplicable to this
case. It reasoned out that in said case, it was found that the blowout was caused by the
established fact that the inner tube of the left front tire was pressed between the inner
circle of the left wheel and the rim which had slipped out of the wheel. In this case,
however, the cause of the explosion remains a mystery until at present. As such, the court
added, the tire blowout was a caso fortuito which is completely an extraordinary
circumstance independent of the will of the defendants who should be relieved of
whatever liability the plaintiffs may have suffered by reason of the explosion pursuant to
Article 1174[4] of the Civil Code.
Dissatisfied, the plaintiffs appealed to the Court of Appeals. They ascribed to the
lower court the following errors: (a) finding that the tire blowout was a caso fortuito; (b)
failing to hold that the defendants did not exercise utmost and/or extraordinary diligence
required of carriers under Article 1755 of the Civil Code, and (c) deciding the case contrary
to the ruling in Juntilla v. Fontanar,[5] and Necesito v. Paras.[6]
On August 23, 1993, the Court of Appeals rendered the Decision [7] reversing that of
the lower court. It held that:

To Our mind, the explosion of the tire is not in itself a fortuitous event. The cause of
the blow-out, if due to a factory defect, improper mounting, excessive tire pressure, is
not an unavoidable event. On the other hand, there may have been adverse conditions
on the road that were unforeseeable and/or inevitable, which could make the blow-out
a caso fortuito. The fact that the cause of the blow-out was not known does not relieve
the carrier of liability. Owing to the statutory presumption of negligence against the
carrier and its obligation to exercise the utmost diligence of very cautious persons to
carry the passenger safely as far as human care and foresight can provide, it is the
burden of the defendants to prove that the cause of the blow-out was a fortuitous
event. It is not incumbent upon the plaintiff to prove that the cause of the blow-out is
not caso-fortuito.

Proving that the tire that exploded is a new Goodyear tire is not sufficient to discharge
defendants burden. As enunciated in Necesito vs. Paras, the passenger has neither
choice nor control over the carrier in the selection and use of its equipment, and the
good repute of the manufacturer will not necessarily relieve the carrier from liability.

Moreover, there is evidence that the bus was moving fast, and the road was wet and
rough. The driver could have explained that the blow-out that precipitated the accident
that caused the death of Toto Tumboy could not have been prevented even if he had
exercised due care to avoid the same, but he was not presented as witness.

The Court of Appeals thus disposed of the appeal as follows:

WHEREFORE, the judgment of the court a quo is set aside and another one entered
ordering defendants to pay plaintiffs the sum of P50,000.00 for the death of Tito
Tumboy, P30,000.00 in moral damages, and P7,000.00 for funeral and burial
expenses.

SO ORDERED.

The defendants filed a motion for reconsideration of said decision which was denied
on November 4, 1993 by the Court of Appeals. Hence, the instant petition asserting the
position that the tire blowout that caused the death of Tito Tumboy was a caso
fortuito. Petitioners claim further that the Court of Appeals, in ruling contrary to that of the
lower court, misapprehended facts and, therefore, its findings of fact cannot be
considered final which shall bind this Court. Hence, they pray that this Court review the
facts of the case.
The Court did re-examine the facts and evidence in this case because of the
inapplicability of the established principle that the factual findings of the Court of Appeals
are final and may not be reviewed on appeal by this Court. This general principle is
subject to exceptions such as the one present in this case, namely, that the lower court
and the Court of Appeals arrived at diverse factual findings. [8] However, upon such re-
examination, we found no reason to overturn the findings and conclusions of the Court of
Appeals.
As a rule, when a passenger boards a common carrier, he takes the risks incidental
to the mode of travel he has taken. After all, a carrier is not an insurer of the safety of its
passengers and is not bound absolutely and at all events to carry them safely and without
injury.[9] However, when a passenger is injured or dies while travelling, the law presumes
that the common carrier is negligent. Thus, the Civil Code provides:
Art. 1756. In case of death or injuries to passengers, common carriers are presumed to
have been at fault or to have acted negligently, unless they prove that they observed
extraordinary diligence as prescribed in articles 1733 and 1755.

Article 1755 provides that (a) common carrier is bound to carry the passengers safely
as far as human care and foresight can provide, using the utmost diligence of very
cautious persons, with a due regard for all the circumstances. Accordingly, in culpa
contractual, once a passenger dies or is injured, the carrier is presumed to have been at
fault or to have acted negligently. This disputable presumption may only be overcome by
evidence that the carrier had observed extraordinary diligence as prescribed by Articles
1733,[10] 1755 and 1756 of the Civil Code or that the death or injury of the passenger was
due to a fortuitous event.[11] Consequently, the court need not make an express finding of
fault or negligence on the part of the carrier to hold it responsible for damages sought by
the passenger.[12]
In view of the foregoing, petitioners contention that they should be exempt from
liability because the tire blowout was no more than a fortuitous event that could not have
been foreseen, must fail. A fortuitous event is possessed of the following characteristics:
(a) the cause of the unforeseen and unexpected occurrence, or the failure of the debtor
to comply with his obligations, must be independent of human will; (b) it must be
impossible to foresee the event which constitutes the caso fortuito, or if it can be foreseen,
it must be impossible to avoid; (c) the occurrence must be such as to render it impossible
for the debtor to fulfill his obligation in a normal manner; and (d) the obligor must be free
from any participation in the aggravation of the injury resulting to the creditor.[13] As Article
1174 provides, no person shall be responsible for a fortuitous event which could not be
foreseen, or which, though foreseen, was inevitable. In other words, there must be an
entire exclusion of human agency from the cause of injury or loss.[14]
Under the circumstances of this case, the explosion of the new tire may not be
considered a fortuitous event. There are human factors involved in the situation. The fact
that the tire was new did not imply that it was entirely free from manufacturing defects or
that it was properly mounted on the vehicle. Neither may the fact that the tire bought and
used in the vehicle is of a brand name noted for quality, resulting in the conclusion that it
could not explode within five days use. Be that as it may, it is settled that an accident
caused either by defects in the automobile or through the negligence of its driver is not
a caso fortuito that would exempt the carrier from liability for damages.[15]
Moreover, a common carrier may not be absolved from liability in case of force
majeure or fortuitous event alone. The common carrier must still prove that it
was notnegligent in causing the death or injury resulting from an accident.[16] This Court
has had occasion to state:

While it may be true that the tire that blew-up was still good because the grooves of
the tire were still visible, this fact alone does not make the explosion of the tire a
fortuitous event. No evidence was presented to show that the accident was due to
adverse road conditions or that precautions were taken by the jeepney driver to
compensate for any conditions liable to cause accidents. The sudden blowing-up,
therefore, could have been caused by too much air pressure injected into the tire
coupled by the fact that the jeepney was overloaded and speeding at the time of the
accident. [17]

It is interesting to note that petitioners proved through the bus conductor, Salce, that
the bus was running at 60-50 kilometers per hour only or within the prescribed lawful
speed limit. However, they failed to rebut the testimony of Leny Tumboy that the bus was
running so fast that she cautioned the driver to slow down. These contradictory facts
must, therefore, be resolved in favor of liability in view of the presumption of negligence
of the carrier in the law. Coupled with this is the established condition of the road rough,
winding and wet due to the rain. It was incumbent upon the defense to establish that it
took precautionary measures considering partially dangerous condition of the road. As
stated above, proof that the tire was new and of good quality is not sufficient proof that it
was not negligent. Petitioners should have shown that it undertook extraordinary
diligence in the care of its carrier, such as conducting daily routinary check-ups of the
vehicles parts. As the late Justice J.B.L. Reyes said:

It may be impracticable, as appellee argues, to require of carriers to test the strength of

each and every part of its vehicles before each trip; but we are of the opinion that a
due regard for the carriers obligations toward the traveling public demands adequate
periodical tests to determine the condition and strength of those vehicle portions the
failure of which may endanger the safety of the passengers. [18]

Having failed to discharge its duty to overthrow the presumption of negligence with
clear and convincing evidence, petitioners are hereby held liable for damages. Article
1764[19] in relation to Article 2206[20] of the Civil Code prescribes the amount of at least three
thousand pesos as damages for the death of a passenger. Under prevailing
jurisprudence, the award of damages under Article 2206 has been increased to fifty
thousand pesos (P50,000.00).[21]
Moral damages are generally not recoverable in culpa contractual except when bad
faith had been proven. However, the same damages may be recovered when breach of
contract of carriage results in the death of a passenger,[22] as in this case. Exemplary
damages, awarded by way of example or correction for the public good when moral
damages are awarded,[23] may likewise be recovered in contractual obligations if the
defendant acted in wanton, fraudulent, reckless, oppressive, or malevolent
manner.[24]Because petitioners failed to exercise the extraordinary diligence required of a
common carrier, which resulted in the death of Tito Tumboy, it is deemed to have acted
recklessly.[25] As such, private respondents shall be entitled to exemplary damages.
WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED subject to
the modification that petitioners shall, in addition to the monetary awards therein, be liable
for the award of exemplary damages in the amount of P20,000.00. Costs against
petitioners.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. Nos. 81100-01 February 7, 1990

BACOLOD-MURCIA MILLING CO., INC., petitioner,

vs.
HON. COURT OF APPEALS AND ALONSO GATUSLAO, respondents.

BACOLOD-MURCIA MILLING CO., INC., petitioner,

vs.
HON. COURT OF APPEALS, ALONSO GATUSLAO, AGRO-INDUSTRIAL DEVELOPMENT OF
SILAY-SARAVIA (AIDSISA) AND BACOLOD-MURCIA AGRICULTURAL COOPERATIVE
MARKETING ASSOCIATION (BM-ACMA), respondents.

Jalandoni, Herrera, Del Castillo & Associates for petitioner.

Tañada, Vico & Tan for respondent AIDSISA.

San Juan, Gonzalez, San Agustin & Sinense for respondents Alfonso Gatuslao and BM-
ACMA.

PARAS, J.:

This is a petition for review on certiorari of the decision of the Court of Appeals in CA-G.R.
CV Nos. 59716-59717 promulgated on September 11, 1987 affirming in toto the decision of the
Court of First Instance of Negros Occidental in two consolidated civil cases, the dispositive
portion of which reads as follows:

PREMISES CONSIDERED, the decision appealed from is hereby affirmed in

toto.

The uncontroverted facts of the case 1 are as follows:

1. xxx xxx xxx

2. BMMC is the owner and operator of the sugar central in Bacolod City,
Philippines;

3. ALONSO GATUSLAO is a registered planter of the Bacolod-Murcia Mill

District with Plantation Audit No. 3-79, being a registered owner of Lot Nos.
310, 140, 141 and 101-A of the Cadastral Survey of Murcia, Negros Occidental,
otherwise known as Hda. San Roque;

4. On May 24, 1957 BMMC and Alonso Gatuslao executed an 'Extension and
Modification of Milling Contract (Annex 'A' of the complaint in both cases)
which was registered on September 17, 1962 in the Office of the Register of
Deeds of Negros Occidental, and annotated on Transfer Certificates of Title
 Nos. T-24207, RT-2252, RT-12035, and RT-12036 covering said Lot Nos. 310,
140, 141 and 101-A;

5. That since the crop year 1957-1958 up to crop year 1967-1968, inclusive,
Alonso Gatuslao has been milling all the sugarcane grown and produced on
said Lot Nos. 310, 140, 141 and 101-A with the Mill of BMMC;.

6. Since the crop year 1920-21 to crop year 1967-1968, inclusive, the canes of
planters adhered to the mill of BMMC were transported from the plantation to
the mill by means of cane cars and through railway system operated by BMMC;

7. The loading points at which planters Alonso Gatuslao was and should
deliver and load all his canes produced in his plantation, Hda. San Roque, were
at the Arimas Line, Switch 2, and from which loading stations, BMMC had been
hauling planter Gatuslao's sugar cane to its mill or factory continuously until
the crop year 1967-68;

8. BMMC had not been able to use its cane cars and railway system for the
cargo crop year 1968-1969;

9. Planter Alonso Gatuslao on various dates requested transportation facilities

of BMMC to be sent to his loading stations or switches for purposes of hauling
and milling his sugarcane crops of crop year 1968-1969;

10. The estimated gross production of Hda. San Roque for the crop year 1968-
1969 is 4,500 piculs.

The records show that since the crop year 1920-1921 to the crop year 1967-1968, the canes of
the adhered planters were transported from the plantation to the mill of BMMC by means of
cane cars and through a railway system operated by BMMC which traversed the land of the
adherent planters, corresponding to the rights of way on their lands granted by the planters
to the Central for the duration of the milling contracts which is for "un periodo de cuarenta y
cinco anos o cosechas a contar desde la cosecha de 1920-1921" 2 (a period of 45 years or
harvests, beginning with a harvest of 1920-1921).

BMMC constructed the railroad tracks in 1920 and the adherent planters granted the BMMC a
right of way over their lands as provided for in the milling contracts. The owners of the
hacienda Helvetia were among the signatories of the milling contracts. When their milling
contracts with petitioner BMMC expired at the end of the 1964-1965 crop year, the
corresponding right of way of the owners of the hacienda Helvetia granted to the Central also
expired.

Thus, the BMMC was unable to use its railroad facilities during the crop year 1968-1969 due
to the closure in 1968 of the portion of the railway traversing the hacienda Helvetia as per
decision of the Court in Angela Estate, Inc. and Fernando F. Gonzaga, Inc. v. Court of First
Instance of Negros Occidental, G.R. No. L-27084, (24 SCRA 500 [1968]). In the same case the
Court ruled that the Central's conventional right of way over the hacienda Helvetia ceased
with the expiration of its amended milling contracts with the landowners of the hacienda at
the end of the 1964-1965 crop year and that in the absence of a renewal contract or the
establishment of a compulsory servitude of right of way on the same spot and route which
must be predicated on the satisfaction of the preconditions required by law, there subsists
no right of way to be protected.
Consequently, the owners of the hacienda Helvetia required the Central to remove the railway
tracks in the hacienda occupying at least 3,245 lineal meters with a width of 7 meters or a
total of 22,715 square meters, more or less. That was the natural consequence of the
expiration of the milling contracts with the landowners of the hacienda Helvetia (Angela
Estate, Inc. and Fernando Gonzaga, Inc. v. Court of First Instance of Negros Occidental, ibid).
BMMC filed a complaint for legal easement against the owners of the hacienda, with the Court
of First Instance of Negros Occidental which issued on October 4, 1965 an ex partewrit of
preliminary injunction restraining the landowners from reversing and/or destroying the
railroad tracks in question and from impeding, obstructing or in any way preventing the
passage and operation of plaintiffs locomotives and cane cars over defendants' property
during the pendency of the litigation and maintained the same in its subsequent orders of
May 31, and November 26, 1966. The outcome of the case, however, was not favorable to the
plaintiff BMMC. In the same case the landowners asked this Court to restrain the lower court
from enforcing the writ of preliminary injunction it issued, praying that after the hearing on
the merits, the restraining order be made permanent and the orders complained of be
annulled and set aside. The Court gave due course to the landowner's petition and on August
10, 1967 issued the writ of preliminary injunction enjoining the lower court from enforcing the
writ of preliminary injunction issued by the latter on October 4, 1965.

The writ of preliminary injunction issued by the Court was lifted temporarily on motion that
through the mediation of the President of the Philippines the Angela Estate and the Gonzaga
Estate agreed with the Central to allow the use of the railroad tracks passing through the
hacienda Helvetia during the 1967-1968 milling season only, for the same purpose for which
they had been previously used, but it was understood that the lifting of the writ was without
prejudice to the respective rights and positions of the parties in the case and not deemed a
waiver of any of their respective claims and allegations in G.R. No. L-27084 or in any other
case between the same parties, future or pending. The Court resolved to approve the motion
only up to and including June 30, 1968 to give effect to the agreement but to be deemed
automatically reinstated beginning July 1, 1968 (Angela Estate, Inc. and Fernando F.
Gonzaga, Inc. v. Court of First Instance of Negros Occidental, ibid.).

The temporary lifting of the writ of preliminary injunction assured the milling of the 1967-1968
crop but not the produce of the succeeding crop years which situation was duly
communicated by the President and General Manager of the BMMC to the President of
Bacolod-Murcia Sugar Farmers Corporation (BMSFC) on January 2, 1968. 3

On October 30, 1968, Alonso Gatuslao, one of private respondents herein, and his wife, Maria H.
Gatuslao, filed Civil Case No. 8719 in the Court of First Instance of Negros Occidental, against
petitioner herein, Bacolod-Murcia Milling Co., Inc. (BMMC), for breach of contract, praying among
others, for the issuance of a writ of preliminary mandatory injunction ordering defendant to
immediately send transportation facilities and haul the already cut sugarcane to the mill site and
principally praying after hearing, that judgment be rendered declaring the rescission of the milling
contract executed by plaintiffs and defendant in 1957 for seventeen (17) years or up to crop year
1973-74, invoking as ground the alleged failure and/or inability of defendant to comply with its
specific obligation of providing the necessary transportation facilities to haul the sugarcane of
Gatuslao from plaintiffs plantation specifically for the crop year 1967-1968. Plaintiffs further prayed
for the recovery of actual and compensatory damages as well as moral and exemplary damages and
attorney's fees. 4

In answer, defendant BMMC claimed that despite its inability to use its railways system for its
locomotives and cane cars to haul the sugarcanes of all its adhered planters including plaintiffs for
the 1968-69 crop year allegedly due to force majeure, in order to comply with its obligation,
defendant hired at tremendous expense, private trucks as prime movers for its trailers to be used for
hauling of the canes, especially for those who applied for and requested transportation facilities.
Plaintiffs, being one of said planters, instead of loading their cut canes for the 1968-69 crop on the
cargo trucks of defendant, loaded their cut canes on trucks provided by the Bacolod-Murcia
Agricultural Cooperative Marketing Association, Inc. (B-M ACMA) which transported plaintiffs' canes
of the 1968-69 sugarcanes crop. Defendant prayed in its counterclaim for the dismissal of Civil Case
No. 8719 for the recovery of actual damages, moral and exemplary damages and for attorney's
fees.5

On November 21, 1968, BMMC filed in the same court Civil Case No. 8745 against Alonso
Gatuslao, the Agro-Industrial Development of Silay-Saravia (AIDSISA) and the Bacolod-Murcia
Agricultural Cooperative Marketing Associations, Inc. (B-M ACMA), seeking specific performance
under the mining contract executed on May 24, 1957 between plaintiff and defendant Alonso
Gatuslao praying for the issuance of writs of preliminary mandatory injunction to stop the alleged
violation of the contract by defendant Alonso Gatuslao in confederation, collaboration and
connivance with defendant BM-ACMA, AIDSISA, and for the recovery of actual, moral and
exemplary damages and attorney's fees. 6

Defendant Alonso Gatuslao and the Bacolod-Murcia Agricultural Cooperative Marketing Association,
Inc. filed their answer on January 27, 1969 with compulsory counter-claims, stating by way of special
and affirmative defense, among others, that the case is barred by another action pending between
the same parties for the same cause of action. 7

Defendant Agro-Industrial Development Corporation of Silay-Saravia, Inc. filed its answer on

February 8, 1969, alleging among others by way of affirmative defense that before it agreed to mill
the sugarcane of its co-defendant Alonso Gatuslao, it carefully ascertained and believed in good
faith that: (a) plaintiff was incapable of the sugarcane of AIDSISA's co-defendant planters as well as
the sugarcane of other planters formerly adherent to plaintiff, (b) plaintiff had in effect agreed to a
rescission of its milling contracts with its adhered planters, including the defendant planter, because
of inadequate means of transportation. and had warned and advised them to mill their sugarcane
elsewhere, and had thus induced them to believe and act on the belief, that it could not mill their
sugarcane and that it would not object to their milling with other centrals; and (c) up to now plaintiff is
incapable of hauling the sugarcane of AIDSISA's co-defendants to plaintiffs mill site for milling
purposes.

The two cases, Civil Cases Nos. 8719 and 8745 were consolidated for joint trial before Branch II of
the Court of First Instance of Negros Occidental. 8 On September 8, 1969, the parties in both civil
cases filed their partial stipulation of facts which included a statement of the issues raised by the
parties. 9

On February 6, 1976, the lower court rendered judgment declaring the milling contract dated May
24, 1957 rescinded. The dispositive portion of the decision 10 reads:

WHEREFORE, judgment is hereby rendered as follows:

(1) In Civil Case No. 8719 the milling contract (Exh. "121") dated May 24, 1957 is
hereby declared rescinded or resolved and the defendant Bacolod-Murcia Company,
Inc. is hereby ordered to pay plaintiffs Alonso Gatuslao and Maria H. Gatuslao the
amount of P2,625.00 with legal interest from the time of the filing of the complaint by
way of actual damages; P5,000.00 as attorney's fees and the costs of the suit;
defendant's counterclaim is dismissed; and
 (2) The complaint in Civil Case No. 8745 as well as the counterclaims therein are
ordered dismissed, without costs.

Bacolod-Murcia Milling Co., Inc. defendant in Civil Case No. 8719 and plaintiff in Civil Case No. 8745
appealed the case to respondent Court of Appeals which affirmed in toto (Rollo, p. 81) the decision
of the lower court. The motion for reconsideration filed by defendant-appellant Bacolod-Murcia
Milling Company, petitioner herein, was denied by the appellate court for lack of merit. 11 Hence, this
petition.

The issues 12 raised by petitioner are as follows:

WHETHER OR NOT THE CLOSURE OF PETITIONER'S RAIL ROAD LINES

CONSTITUTE FORCE MAJEURE.

II

WHETHER OR NOT PRIVATE RESPONDENT GATUSLAO HAS THE RIGHT TO

RESCIND THE MILLING CONTRACT WITH PETITIONER UNDER ARTICLE 1191
OF THE CIVIL CODE.

III

WHETHER OR NOT PRIVATE RESPONDENT GATUSLAO WAS JUSTIFIED IN

VIOLATING HIS MILLING CONTRACT WITH PETITIONER.

IV

WHETHER OR NOT PRIVATE RESPONDENTS GATUSLAO AND B-M ACMA ARE

GUILTY OF BAD FAITH IN THE EXERCISE OF THEIR DUTIES AND ARE IN
ESTOPPEL TO QUESTION THE ADEQUACY OF THE TRANSPORTATION
FACILITIES OF PETITIONER AND ITS CAPACITY TO MILL AND HAUL THE
CANES OF ITS ADHERENT PLANTERS.

The crux of the issue is whether or not the termination of petitioner's right of way over the hacienda
Helvetia caused by the expiration of its amended milling contracts with the landowners of the lands
in question is a fortuitous event or force majeure which will exempt petitioner BMMC from fulfillment
of its contractual obligations.

It is the position of petitioner Bacolod-Murcia Milling Co., Inc. (BMMC) that the closure of its railroad
lines constitute force majeure, citing Article 1174 of the Civil Code, exempting a person from liability
for events which could not be foreseen or which though foreseen were inevitable.

This Court has consistently ruled that when an obligor is exempted from liability under the aforecited
provision of the Civil Code for a breach of an obligation due to an act of God, the following elements
must concur: (a) the cause of the breach of the obligation must be independent of the wig of the
debtor; (b) the event must be either unforseeable or unavoidable; (c) the event must be such as to
render it impossible for the debtor to fulfill his obligation in a normal manner; (d) the debtor must be
free from any participation in, or aggravation of the injury to the creditor (Vasquez v. Court of
Appeals, 138 SCRA 553 [1985]; Juan F. Nakpil & Sons v. Court of Appeals, 144 SCRA 596 [1986]).
Applying the criteria to the instant case, there can be no other conclusion than that the closure of the
railroad tracks does not constitute force majeure.

The terms of the milling contracts were clear and undoubtedly there was no reason for BAMC to
expect otherwise. The closure of any portion of the railroad track, not necessarily in the hacienda
Helvetia but in any of the properties whose owners decided not to renew their milling contracts with
the Central upon their expiration, was forseeable and inevitable.

Petitioner Central should have anticipated and should have provided for the eventuality before
committing itself. Under the circumstances it has no one to blame but itself and cannot now claim
exemption from liability.

In the language of the law, the event must have been impossible to foresee, or if it could be
foreseen, must have been impossible to avoid. There must be an entire exclusion of human agency
from the cause of the injury or loss (Vasquez v. Court of Appeals, supra). In the case at bar, despite
its awareness that the conventional contract of lease would expire in Crop Year 1964-1965 and that
refusal on the part of any one of the landowners to renew their milling contracts and the
corresponding use of the right of way on their lands would render impossible compliance of its
commitments, petitioner took a calculated risk that all the landowners would renew their contracts.
Unfortunately, the sugar plantation of Angela Estate, Inc. which is located at the entrance of the mill
was the one which refused to renew its milling contract. As a result, the closure of the railway
located inside said plantation paralyzed the entire transportation system. Thus, the closure of the
railway lines was not an act of God nor does it constitute force majeure. It was due to the termination
of the contractual relationships of the parties, for which petitioner is charged with knowledge. Verily,
the lower court found that the Angela Estate, Inc. notified BMMC as far back as August or
September 1965 of its intention not to allow the passage of the railway system thru its land after the
aforesaid crop year. Adequate measures should have been adopted by BMMC to forestall such
paralyzation but the records show none. All its efforts were geared toward the outcome of the court
litigation but provided no solutions to the transport problem early enough in case of an adverse
decision.

The last three issues being inter-related will be treated as one. Private respondent Gatuslao filed an
action for rescission while BMMC filed in the same court an action against Gatuslao, the Agro
Industrial Development Silay Saravia (AIDSISA) and the Bacolod-Murcia Agricultural Cooperative
Marketing Associations, Inc. (B-M ACMA) for specific performance under the milling contract.

There is no question that the contract in question involves reciprocal obligations; as such party is a
debtor and creditor of the other, such that the obligation of one is dependent upon the obligation of
the other. They are to be performed simultaneously so that the performance of one is conditioned
upon the simultaneous fulfillment of the other (Boysaw v. Interphil Promotions, Inc., 148 SCRA 643
[1987]).

Under Article 1191 of the Civil Code, the power to rescind obligations is implied in reciprocal ones in
case one of the obligors should not comply with what is incumbent upon him. In fact, it is well
established that the party who deems the contract violated may consider it revoked or rescinded
pursuant to their agreement and act accordingly, even without previous court action (U.P. v. de los
Angeles, 35 SCRA 102 [1970]; Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 43 SCRA
94 [1972]).

It is the general rule, however, that rescission of a contract will not be permitted for a slight or casual
breach, but only for such substantial and fundamental breach as would defeat the very object of the
parties in making the agreement. The question of whether a breach of a contract is substantial
depends upon the attendant circumstances (Universal Food Corporation v. Court of Appeals, et al.,
33 SCRA 1 [1970]).

The issue therefore, hinges on who is guilty of the breach of the milling contract.

Both parties are agreed that time is of the essence in the sugar industry; so that the sugarcanes
have to be milled at the right time, not too early or too late, if the quantity and quality of the juice are
to be assured. As found by the trial court, upon the execution of the amended milling contract on
May 24, 1957 for a period of 17 crop years, BMMC undertook expressly among its principal
prestations not only to mill Gatuslao's canes but to haul them by railway from the loading stations to
the mill. Atty. Solidum, Chief Legal Counsel and in Charge of the Legal-Crop Loan Department of the
BMMC Bacolod City admits that the mode of transportation of canes from the fields to the mill is a
vital factor in the sugar industry; precisely for this reason the mode of transportation or hauling the
canes is embodied in the milling contract. 13 But BMMC is now unable to haul the canes by railways
as stipulated because of the closure of the railway lines; so that resolution of this issue ultimately
rests on whether or not BMMC was able to provide adequate and efficient transportation facilities of
the canes of Gatuslao and the other planters milling with BMMC during the crop year 1968-1969. As
found by both the trial court and the Court of Appeals, the answer is in the negative.

Armando Guanzon, Dispatcher of the Transportation Department of BMMC testified that when the
Central was still using the railway lines, it had between 900 to 1,000 cane cars and 10 locomotives,
each locomotive pulling from 30 to 50 cane cars with maximum capacity of 8 tons each.14 This
testimony was corroborated by Rodolfo Javelosa, Assistant Crop Loan Inspector in the Crop Loan
Department of petitioner. 15 After the closure of the railway lines, petitioner on February 5, 1968
through its President and General Manager, informed the National Committee of the National
Federation of Sugarcane Planters that the trucking requirement for hauling adherent planters
produce with a milling average of 3,500 tons of canes daily at an average load of 5 tons per truck is
not less than 700 trucks daily plus another 700 empty trucks to be shuttled back to the plantations to
be available for loading the same day. 16Guanzon, however, testified that petitioner had only 280
units of trailers, 20 tractors and 3 trucks plus 20 trucks more or less hired by the Central and given
as repartos (allotments) to the different planters. 17 The 180 trailers that the Central initially had were
permanently leased to some planters who had their own cargo trucks while out of the 250 BMMC
trailers existing during the entire milling season only 70 were left available to the rest of the planters
pulled by 3 trucks. 18

It is true that BMMC purchased 20 units John Deere Tractors (prime movers) and 230 units,
Vanguard Trailers with land capacity of 3 tons each but that was only on October 1968 as registered
in the Land Transportation Commission, Bacolod City. 19

The evidence shows that great efforts had been exerted by the planters to enter into some concrete
understanding with BMMC with a view of obtaining a reasonable assurance that the latter would be
able to haul and mill their canes for the 1968-1969 crop year, but to no avail. 20

As admitted by BMMC itself, in its communications with the planters, it is not in a position to provide
adequate transportation for the canes in compliance with its commitment under the milling contract.
Said communications 21were quoted by the Court of Appeals as follows:

We are sorry to inform you that unless we can work out a fair and equitable solution
to this problem of closure of our railroad lines, the milling of your canes for the crop
year 1968-69 would be greatly hampered to the great detriment of our economy and
the near elimination of the means of livelihood of most planters and the possible
 starvation of thousands of laborers working in the sugar District of Bacolod-Murcia
Milling Co.

and

We are fully conscious of our contractual obligations to our existing Milling Contract.
But, if prevented by judicial order we will find ourselves unable to serve you in the
hauling of the canes through our railroad lines. It is for this reason that we suggest
you explore other solutions to the problem in the face of such an eventuality so that
you may be able to proceed with the planting of your canes with absolute peace of
mind and the certainty that the same will be properly milled and not left to rot in the
fields.

also,

In the meantime, and before July 1, 1968, the end of the temporary arrangement we
have with Fernando Gonzaga, Inc. and the Angela Estate, Inc. for the use of the
rights of ways, our lawyers are studying the possibility of getting a new injunction
from the Supreme Court or the Court of First Instance of Negros Occidental based on
the new grounds interposed in said memorandum not heretofore raised previously
nor in the Capitol Subdivision case. And if we are doing this, it is principally to
prevent any injury to your crops or foreclosure of your property, which is just in line
with the object of your plans.

On March 26, 1968 the President of the Bacolod-Murcia Sugar Farmer's Corporation writing on
behalf of its planter-members demanded to know the plans of the Central for the crop year 1968-
1969, stating that if they fail to hear from the Central on or before the 15th of April they will feel free
to make their own plans in order to save their crops and the possibility of foreclosure of their
properties. 22

In its letter dated April 1, 1968, the president of BMMC simply informed the Bacolod-Murcia Sugar
Farmer's Corporation that they were studying the possibility of getting a new injunction from the court
before expiration of their temporary arrangement with Fernando Gonzaga, Inc. and the Angela
Estate, Inc. 23

Pressing for a more definite commitment (not a mere hope or expectation), on May 30, 1968 the
Bacolod-Murcia Sugar Farmer's Corporation requested the Central to put up a performance bond in
the amount of P13 million within a 5-day period to allay the fears of the planters that their sugar
canes can not be milled at the Central in the coming milling season. 24

BMMC's reply was only to express optimism over the final outcome of its pending cases in court.

Hence, what actually happened afterwards is that petitioner failed to provide adequate transportation
facilities to Gatuslao and other adherent planters.

As found by the trial court, the experience of Alfonso Gatuslao at the start of the 1968-1969 milling
season is reflective of the inadequacies of the reparto or trailer allotment as well as the state of
unpreparedness on the part of BMMC to meet the problem posed by the closure of the railway lines.

It was established that after Gatuslao had cut his sugarcanes for hauling, no trailers arrived and
when two trailers finally arrived on October 20, 1968 after several unheeded requests, they were left
on the national highway about one (1) kilometer away from the loading station. Such fact was
confirmed by Carlos Butog the driver of the truck that hauled the trailers. 25

Still further, Javelosa, Assistant Crop Loan Inspector, testified that the estimated production of
Gatuslao for the crop year 1968-1969 was 4,400 piculs hauled by 10 cane cars a week with a
maximum capacity of 8 tons. 26 Compared with his later schedule of only one trailer a week with a
maximum capacity of only 3 to 4 tons, 27 there appears to be no question that the means of
transportation provided by BMMC is very inadequate to answer the needs of Gatuslao.

Undoubtedly, BMMC is guilty of breach of the conditions of the milling contract and that Gatuslao is
the injured party. Under the same Article 1191 of the Civil Code, the injured party may choose
between the fulfillment and the rescission of the obligation, with the payment of damages in either
case. In fact, he may also seek rescission even after he had chosen fulfillment if the latter should
become impossible.

Under the foregoing, Gatuslao has the right to rescind the milling contract and neither the court a
quo erred in decreeing the rescission claimed nor the Court of Appeals in affirming the same.

Conversely, BMMC cannot claim enforcement of the contract. As ruled by this Court, by virtue of the
violations of the terms of the contract, the offending party has forfeited any right to its enforcement
(Boysaw v. Interphil Promotions, Inc., 148 SCRA 645 [1987]).

Likewise, the Bacolod-Murcia Agricultural Cooperative Marketing Association, Inc. (B-M ACMA)
cannot be faulted for organizing itself to take care of the needs of its members. Definitely, it was
organized at that time when petitioner could not assure the planters that it could definitely haul and
mill their canes. More importantly, as mentioned earlier in a letter dated January 12, 1968, J.
Araneta, President & General Manager of the Central itself suggested to the Bacolod-Murcia Sugar
Farmer's Corporation that it explore solutions to the problem of hauling the canes to the milling
station in the face of the eventuality of a judicial order permanently closing the railroad lines so that
the planters may be able to proceed with their planting of the canes with absolute peace of mind and
the certainty that they will be properly milled and not left to rot in the fields. As a result, the signing of
the milling contract between private respondents AIDSISA and B-M-ACMA on June 19, 196828 was a
matter of self-preservation inasmuch as the sugarcanes were already matured and the planters had
crop loans to pay. Further delay would mean tremendous losses. 29

In its defense AIDSISA stressed as earlier stated, that it agreed to mill the sugarcanes of Gatuslao
only after it had carefully ascertained and believed in good faith that BMMC was incapable of milling
the sugarcanes of the adherent planters because of inadequate transportation and in fact up to now
said Central is incapable of hauling the sugarcanes of the said planters to its mill site for milling
purposes.

As an extra precaution, AIDSISA provided in paragraph 15 30 of its milling contract that—

If any member of the planter has an existing milling contract with other sugar central,
then this milling contract with the Central shall be of no force and effect with respect
to that member or those members having such contract, if that other sugar central is
able, ready and willing, to mill said member or members' canes in accordance with
their said milling contract. (Emphasis supplied)

The President of BANC himself induced the planters to believe and to act on the belief that said
Central would not object to the milling of their canes with other centrals.
Under the circumstances, no evidence of bad faith on the part of private respondents could be found
much less any plausible reason to disturb the findings and conclusions of the trial court and the
Court of Appeals.

PREMISES CONSIDERED, the petition is hereby DENIED for lack of merit and the decision of the
Court of Appeals is hereby AFFIRMED in toto.

SO ORDERED.
 SECOND DIVISION

[G.R. No. 147324. May 25, 2004]

PHILIPPINE COMMUNICATIONS SATELLITE

CORPORATION, petitioner, vs. GLOBE TELECOM, INC. (formerly
and Globe Mckay Cable and Radio Corporation), respondents.

[G.R. No. 147334. May 25, 2004]

GLOBE TELECOM, INC., petitioner, vs. PHILIPPINE COMMUNICATION

SATELLITE CORPORATION, respondent.

DECISION
TINGA, J.:

Before the Court are two Petitions for Review assailing the Decision of the Court of
Appeals, dated 27 February 2001, in CA-G.R. CV No. 63619.[1]
The facts of the case are undisputed.
For several years prior to 1991, Globe Mckay Cable and Radio Corporation, now
Globe Telecom, Inc. (Globe), had been engaged in the coordination of the provision of
various communication facilities for the military bases of the United States of America
(US) in Clark Air Base, Angeles, Pampanga and Subic Naval Base in Cubi Point,
Zambales. The said communication facilities were installed and configured for the
exclusive use of the US Defense Communications Agency (USDCA), and for security
reasons, were operated only by its personnel or those of American companies contracted
by it to operate said facilities. The USDCA contracted with said American companies, and
the latter, in turn, contracted with Globe for the use of the communication facilities. Globe,
on the other hand, contracted with local service providers such as the Philippine
Communications Satellite Corporation (Philcomsat) for the provision of the
communication facilities.
On 07 May 1991, Philcomsat and Globe entered into an Agreement whereby
Philcomsat obligated itself to establish, operate and provide an IBS Standard B earth
station (earth station) within Cubi Point for the exclusive use of the USDCA.[2] The term of
the contract was for 60 months, or five (5) years.[3] In turn, Globe promised to pay
Philcomsat monthly rentals for each leased circuit involved.[4]
 At the time of the execution of the Agreement, both parties knew that the Military
Bases Agreement between the Republic of the Philippines and the US (RP-US Military
Bases Agreement), which was the basis for the occupancy of the Clark Air Base and
Subic Naval Base in Cubi Point, was to expire in 1991. Under Section 25, Article XVIII of
the 1987 Constitution, foreign military bases, troops or facilities, which include those
located at the US Naval Facility in Cubi Point, shall not be allowed in the Philippines
unless a new treaty is duly concurred in by the Senate and ratified by a majority of the
votes cast by the people in a national referendum when the Congress so requires, and
such new treaty is recognized as such by the US Government.
Subsequently, Philcomsat installed and established the earth station at Cubi Point
and the USDCA made use of the same.
On 16 September 1991, the Senate passed and adopted Senate Resolution No. 141,
expressing its decision not to concur in the ratification of the Treaty of Friendship,
Cooperation and Security and its Supplementary Agreements that was supposed to
extend the term of the use by the US of Subic Naval Base, among others. [5] The last two
paragraphs of the Resolution state:

FINDING that the Treaty constitutes a defective framework for the continuing
relationship between the two countries in the spirit of friendship, cooperation and
sovereign equality: Now, therefore, be it

Resolved by the Senate, as it is hereby resolved, To express its decision not to concur
in the ratification of the Treaty of Friendship, Cooperation and Security and its
Supplementary Agreements, at the same time reaffirming its desire to continue
friendly relations with the government and people of the United States of America. [6]

On 31 December 1991, the Philippine Government sent a Note Verbale to the US

Government through the US Embassy, notifying it of the Philippines termination of the
RP-US Military Bases Agreement. The Note Verbale stated that since the RP-US Military
Bases Agreement, as amended, shall terminate on 31 December 1992, the withdrawal of
all US military forces from Subic Naval Base should be completed by said date.
In a letter dated 06 August 1992, Globe notified Philcomsat of its intention to
discontinue the use of the earth station effective 08 November 1992 in view of the
withdrawal of US military personnel from Subic Naval Base after the termination of the
RP-US Military Bases Agreement. Globe invoked as basis for the letter of termination
Section 8 (Default) of the Agreement, which provides:

Neither party shall be held liable or deemed to be in default for any failure to perform
its obligation under this Agreement if such failure results directly or indirectly from
force majeure or fortuitous event. Either party is thus precluded from performing its
obligation until such force majeure or fortuitous event shall terminate. For the purpose
of this paragraph, force majeure shall mean circumstances beyond the control of the
party involved including, but not limited to, any law, order, regulation, direction or
request of the Government of the Philippines, strikes or other labor difficulties,
insurrection riots, national emergencies, war, acts of public enemies, fire, floods,
typhoons or other catastrophies or acts of God.

Philcomsat sent a reply letter dated 10 August 1992 to Globe, stating that we expect
[Globe] to know its commitment to pay the stipulated rentals for the remaining terms of
the Agreement even after [Globe] shall have discontinue[d] the use of the earth station
after November 08, 1992.[7] Philcomsat referred to Section 7 of the Agreement, stating as
follows:

7. DISCONTINUANCE OF SERVICE

Should [Globe] decide to discontinue with the use of the earth station after it has been
put into operation, a written notice shall be served to PHILCOMSAT at least sixty
(60) days prior to the expected date of termination. Notwithstanding the non-use of
the earth station, [Globe] shall continue to pay PHILCOMSAT for the rental of the
actual number of T1 circuits in use, but in no case shall be less than the first two (2)
T1 circuits, for the remaining life of the agreement. However, should PHILCOMSAT
make use or sell the earth station subject to this agreement, the obligation of [Globe]
to pay the rental for the remaining life of the agreement shall be at such monthly rate
as may be agreed upon by the parties. [8]

After the US military forces left Subic Naval Base, Philcomsat sent Globe a letter
dated 24 November 1993 demanding payment of its outstanding obligations under the
Agreement amounting to US$4,910,136.00 plus interest and attorneys fees. However,
Globe refused to heed Philcomsats demand.
On 27 January 1995, Philcomsat filed with the Regional Trial Court of Makati
a Complaint against Globe, praying that the latter be ordered to pay liquidated damages
under the Agreement, with legal interest, exemplary damages, attorneys fees and costs
of suit. The case was raffled to Branch 59 of said court.
Globe filed an Answer to the Complaint, insisting that it was constrained to end the
Agreement due to the termination of the RP-US Military Bases Agreement and the non-
ratification by the Senate of the Treaty of Friendship and Cooperation, which events
constituted force majeure under the Agreement. Globe explained that the occurrence of
said events exempted it from paying rentals for the remaining period of the Agreement.
On 05 January 1999, the trial court rendered its Decision, the dispositive portion of
which reads:

WHEREFORE, premises considered, judgment is hereby rendered as follows:

1. Ordering the defendant to pay the plaintiff the amount of Ninety Two Thousand
Two Hundred Thirty Eight US Dollars (US$92,238.00) or its equivalent in
Philippine Currency (computed at the exchange rate prevailing at the time of
 compliance or payment) representing rentals for the month of December 1992
with interest thereon at the legal rate of twelve percent (12%) per annum
starting December 1992 until the amount is fully paid;
2. Ordering the defendant to pay the plaintiff the amount of Three Hundred
Thousand (P300,000.00) Pesos as and for attorneys fees;
3. Ordering the DISMISSAL of defendants counterclaim for lack of merit; and
4. With costs against the defendant.

SO ORDERED. [9]

Both parties appealed the trial courts Decision to the Court of Appeals.
Philcomsat claimed that the trial court erred in ruling that: (1) the non-ratification by
the Senate of the Treaty of Friendship, Cooperation and Security and its Supplementary
Agreements constitutes force majeure which exempts Globe from complying with its
obligations under the Agreement; (2) Globe is not liable to pay the rentals for the
remainder of the term of the Agreement; and (3) Globe is not liable to Philcomsat for
exemplary damages.
Globe, on the other hand, contended that the RTC erred in holding it liable for
payment of rent of the earth station for December 1992 and of attorneys fees. It explained
that it terminated Philcomsats services on 08 November 1992; hence, it had no reason to
pay for rentals beyond that date.
On 27 February 2001, the Court of Appeals promulgated its Decision dismissing
Philcomsats appeal for lack of merit and affirming the trial courts finding that certain
events constituting force majeure under Section 8 the Agreement occurred and justified
the non-payment by Globe of rentals for the remainder of the term of the Agreement.
The appellate court ruled that the non-ratification by the Senate of the Treaty of
Friendship, Cooperation and Security, and its Supplementary Agreements, and the
termination by the Philippine Government of the RP-US Military Bases Agreement
effective 31 December 1991 as stated in the Philippine Governments Note Verbale to the
US Government, are acts, directions, or requests of the Government of the Philippines
which constitute force majeure. In addition, there were circumstances beyond the control
of the parties, such as the issuance of a formal order by Cdr. Walter Corliss of the US
Navy, the issuance of the letter notification from ATT and the complete withdrawal of all
US military forces and personnel from Cubi Point, which prevented further use of the earth
station under the Agreement.
However, the Court of Appeals ruled that although Globe sought to terminate
Philcomsats services by 08 November 1992, it is still liable to pay rentals for the
December 1992, amounting to US$92,238.00 plus interest, considering that the US
military forces and personnel completely withdrew from Cubi Point only on 31 December
1992.[10]
Both parties filed their respective Petitions for Review assailing the Decision of the
Court of Appeals.
 In G.R. No. 147324,[11] petitioner Philcomsat raises the following assignments of error:

A. THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING A

DEFINITION OF FORCE MAJEURE DIFFERENT FROM WHAT ITS
LEGAL DEFINITION FOUND IN ARTICLE 1174 OF THE CIVIL
CODE, PROVIDES, SO AS TO EXEMPT GLOBE TELECOM FROM
COMPLYING WITH ITS OBLIGATIONS UNDER THE SUBJECT
AGREEMENT.

B. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT

GLOBE TELECOM IS NOT LIABLE TO PHILCOMSAT FOR
RENTALS FOR THE REMAINING TERM OF THE AGREEMENT,
DESPITE THE CLEAR TENOR OF SECTION 7 OF THE AGREEMENT.

C. THE HONORABLE OCURT OF APPEALS ERRED IN DELETING THE

TRIAL COURTS AWARD OF ATTORNEYS FEES IN FAVOR OF
PHILCOMSAT.

D. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT

GLOBE TELECOM IS NOT LIABLE TO PHILCOMSAT FOR
EXEMPLARY DAMAGES. [12]

Philcomsat argues that the termination of the RP-US Military Bases Agreement
cannot be considered a fortuitous event because the happening thereof was
foreseeable.Although the Agreement was freely entered into by both parties, Section 8
should be deemed ineffective because it is contrary to Article 1174 of the Civil
Code. Philcomsat posits the view that the validity of the parties definition of force
majeure in Section 8 of the Agreement as circumstances beyond the control of the party
involved including, but not limited to, any law, order, regulation, direction or request of the
Government of the Philippines, strikes or other labor difficulties, insurrection riots, national
emergencies, war, acts of public enemies, fire, floods, typhoons or other catastrophies or
acts of God, should be deemed subject to Article 1174 which defines fortuitous events as
events which could not be foreseen, or which, though foreseen, were inevitable.[13]
Philcomsat further claims that the Court of Appeals erred in holding that Globe is not
liable to pay for the rental of the earth station for the entire term of the Agreement because
it runs counter to what was plainly stipulated by the parties in Section 7 thereof. Moreover,
said ruling is inconsistent with the appellate courts pronouncement that Globe is liable to
pay rentals for December 1992 even though it terminated Philcomsats services effective
08 November 1992, because the US military and personnel completely withdrew from
Cubi Point only in December 1992. Philcomsat points out that it was Globe which
proposed the five-year term of the Agreement, and that the other provisions of the
Agreement, such as Section 4.1[14] thereof, evince the intent of Globe to be bound to pay
rentals for the entire five-year term.[15]
 Philcomsat also maintains that contrary to the appellate courts findings, it is entitled
to attorneys fees and exemplary damages.[16]
In its Comment to Philcomsats Petition, Globe asserts that Section 8 of the
Agreement is not contrary to Article 1174 of the Civil Code because said provision does
not prohibit parties to a contract from providing for other instances when they would be
exempt from fulfilling their contractual obligations. Globe also claims that the termination
of the RP-US Military Bases Agreement constitutes force majeure and exempts it from
complying with its obligations under the Agreement.[17] On the issue of the propriety of
awarding attorneys fees and exemplary damages to Philcomsat, Globe maintains that
Philcomsat is not entitled thereto because in refusing to pay rentals for the remainder of
the term of the Agreement, Globe only acted in accordance with its rights. [18]
In G.R. No. 147334,[19] Globe, the petitioner therein, contends that the Court of
Appeals erred in finding it liable for the amount of US$92,238.00, representing rentals for
December 1992, since Philcomsats services were actually terminated on 08 November
1992.[20]
In its Comment, Philcomsat claims that Globes petition should be dismissed as it
raises a factual issue which is not cognizable by the Court in a petition for review
on certiorari.[21]
On 15 August 2001, the Court issued a Resolution giving due course to
Philcomsats Petition in G.R. No. 147324 and required the parties to submit their
respective memoranda.[22]
Similarly, on 20 August 2001, the Court issued a Resolution giving due course to
the Petition filed by Globe in G.R. No. 147334 and required both parties to submit their
memoranda.[23]
Philcomsat and Globe thereafter filed their respective Consolidated Memoranda in
the two cases, reiterating their arguments in their respective petitions.
The Court is tasked to resolve the following issues: (1) whether the termination of the
RP-US Military Bases Agreement, the non-ratification of the Treaty of Friendship,
Cooperation and Security, and the consequent withdrawal of US military forces and
personnel from Cubi Point constitute force majeure which would exempt Globe from
complying with its obligation to pay rentals under its Agreement with Philcomsat; (2)
whether Globe is liable to pay rentals under the Agreement for the month of December
1992; and (3) whether Philcomsat is entitled to attorneys fees and exemplary damages.
No reversible error was committed by the Court of Appeals in issuing the
assailed Decision; hence the petitions are denied.
There is no merit is Philcomsats argument that Section 8 of the Agreement cannot be
given effect because the enumeration of events constituting force majeure therein unduly
expands the concept of a fortuitous event under Article 1174 of the Civil Code and is
therefore invalid.
In support of its position, Philcomsat contends that under Article 1174 of the Civil
Code, an event must be unforeseen in order to exempt a party to a contract from
complying with its obligations therein. It insists that since the expiration of the RP-US
Military Bases Agreement, the non-ratification of the Treaty of Friendship, Cooperation
and Security and the withdrawal of US military forces and personnel from Cubi Point were
not unforeseeable, but were possibilities known to it and Globe at the time they entered
into the Agreement, such events cannot exempt Globe from performing its obligation of
paying rentals for the entire five-year term thereof.
However, Article 1174, which exempts an obligor from liability on account of fortuitous
events or force majeure, refers not only to events that are unforeseeable, but also to
those which are foreseeable, but inevitable:

Art. 1174. Except in cases specified by the law, or when it is otherwise declared by
stipulation, or when the nature of the obligation requires the assumption of risk, no
person shall be responsible for those events which, could not be foreseen, or which,
though foreseen were inevitable.

A fortuitous event under Article 1174 may either be an act of God, or natural
occurrences such as floods or typhoons,[24] or an act of man, such as riots, strikes or
wars.[25]
Philcomsat and Globe agreed in Section 8 of the Agreement that the following events
shall be deemed events constituting force majeure:

1. Any law, order, regulation, direction or request of the Philippine

Government;

2. Strikes or other labor difficulties;

3. Insurrection;

4. Riots;

5. National emergencies;

6. War;

7. Acts of public enemies;

8. Fire, floods, typhoons or other catastrophies or acts of God;

9. Other circumstances beyond the control of the parties.

Clearly, the foregoing are either unforeseeable, or foreseeable but beyond the control
of the parties. There is nothing in the enumeration that runs contrary to, or expands, the
concept of a fortuitous event under Article 1174.
 Furthermore, under Article 1306[26] of the Civil Code, parties to a contract may
establish such stipulations, clauses, terms and conditions as they may deem fit, as long
as the same do not run counter to the law, morals, good customs, public order or public
policy.[27]
Article 1159 of the Civil Code also provides that [o]bligations arising from contracts
have the force of law between the contracting parties and should be complied with in good
faith.[28] 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.[29]
Not being contrary to law, morals, good customs, public order, or public policy,
Section 8 of the Agreement which Philcomsat and Globe freely agreed upon has the force
of law between them.[30]
In order that Globe may be exempt from non-compliance with its obligation to pay
rentals under Section 8, the concurrence of the following elements must be
established: (1) the event must be independent of the human will; (2) the occurrence must
render it impossible for the debtor to fulfill the obligation in a normal manner; and (3) the
obligor must be free of participation in, or aggravation of, the injury to the creditor.[31]
The Court agrees with the Court of Appeals and the trial court that the
abovementioned requisites are present in the instant case. Philcomsat and Globe had no
control over the non-renewal of the term of the RP-US Military Bases Agreement when
the same expired in 1991, because the prerogative to ratify the treaty extending the life
thereof belonged to the Senate. Neither did the parties have control over the subsequent
withdrawal of the US military forces and personnel from Cubi Point in December 1992:

Obviously the non-ratification by the Senate of the RP-US Military Bases Agreement
(and its Supplemental Agreements) under its Resolution No. 141. (Exhibit 2) on
September 16, 1991 is beyond the control of the parties. This resolution was followed
by the sending on December 31, 1991 o[f] a Note Verbale (Exhibit 3) by the
Philippine Government to the US Government notifying the latter of the formers
termination of the RP-US Military Bases Agreement (as amended) on 31 December
1992 and that accordingly, the withdrawal of all U.S. military forces from Subic
Naval Base should be completed by said date. Subsequently, defendant [Globe]
received a formal order from Cdr. Walter F. Corliss II Commander USN dated July
31, 1992 and a notification from ATT dated July 29, 1992 to terminate the provision
of T1s services (via an IBS Standard B Earth Station) effective November 08,
1992. Plaintiff [Philcomsat] was furnished with copies of the said order and letter by
the defendant on August 06, 1992.

Resolution No. 141 of the Philippine Senate and the Note Verbale of the Philippine
Government to the US Government are acts, direction or request of the Government
of the Philippines and circumstances beyond the control of the defendant. The formal
order from Cdr. Walter Corliss of the USN, the letter notification from ATT and the
complete withdrawal of all the military forces and personnel from Cubi Point in the
year-end 1992 are also acts and circumstances beyond the control of the defendant.

Considering the foregoing, the Court finds and so holds that the afore-narrated
circumstances constitute force majeure or fortuitous event(s) as defined under
paragraph 8 of the Agreement.

From the foregoing, the Court finds that the defendant is exempted from paying the
rentals for the facility for the remaining term of the contract.

As a consequence of the termination of the RP-US Military Bases Agreement (as

amended) the continued stay of all US Military forces and personnel from Subic
Naval Base would no longer be allowed, hence, plaintiff would no longer be in any
position to render the service it was obligated under the Agreement. To put it blantly
(sic), since the US military forces and personnel left or withdrew from Cubi Point in
the year end December 1992, there was no longer any necessity for the plaintiff to
continue maintaining the IBS facility. (Emphasis in the original.)
[32]

The aforementioned events made impossible the continuation of the Agreement until
the end of its five-year term without fault on the part of either party. The Court of Appeals
was thus correct in ruling that the happening of such fortuitous events rendered Globe
exempt from payment of rentals for the remainder of the term of the Agreement.
Moreover, it would be unjust to require Globe to continue paying rentals even though
Philcomsat cannot be compelled to perform its corresponding obligation under the
Agreement. As noted by the appellate court:

We also point out the sheer inequity of PHILCOMSATs position. PHILCOMSAT

would like to charge GLOBE rentals for the balance of the lease term without there
being any corresponding telecommunications service subject of the lease. It will be
grossly unfair and iniquitous to hold GLOBE liable for lease charges for a service that
was not and could not have been rendered due to an act of the government which was
clearly beyond GLOBEs control. The binding effect of a contract on both parties is
based on the principle that the obligations arising from contracts have the force of law
between the contracting parties, and there must be mutuality between them based
essentially on their equality under which it is repugnant to have one party bound by
the contract while leaving the other party free therefrom (Allied Banking Corporation
v. Court of Appeals, 284 SCRA 357). [33]

With respect to the issue of whether Globe is liable for payment of rentals for the
month of December 1992, the Court likewise affirms the appellate courts ruling that Globe
should pay the same.
 Although Globe alleged that it terminated the Agreement with Philcomsat effective 08
November 1992 pursuant to the formal order issued by Cdr. Corliss of the US Navy, the
date when they actually ceased using the earth station subject of the Agreement was not
established during the trial.[34] However, the trial court found that the US military forces and
personnel completely withdrew from Cubi Point only on 31 December 1992. [35] Thus, until
that date, the USDCA had control over the earth station and had the option of using the
same. Furthermore, Philcomsat could not have removed or rendered ineffective said
communication facility until after 31 December 1992 because Cubi Point was accessible
only to US naval personnel up to that time. Hence, the Court of Appeals did not err when
it affirmed the trial courts ruling that Globe is liable for payment of rentals until December
1992.
Neither did the appellate court commit any error in holding that Philcomsat is not
entitled to attorneys fees and exemplary damages.
The award of attorneys fees is the exception rather than the rule, and must be
supported by factual, legal and equitable justifications.[36] In previously decided cases, the
Court awarded attorneys fees where a party acted in gross and evident bad faith in
refusing to satisfy the other partys claims and compelled the former to litigate to protect
his rights;[37] when the action filed is clearly unfounded,[38] or where moral or exemplary
damages are awarded.[39] However, in cases where both parties have legitimate claims
against each other and no party actually prevailed, such as in the present case where the
claims of both parties were sustained in part, an award of attorneys fees would not be
warranted.[40]
Exemplary damages may be awarded in cases involving contracts or quasi-contracts,
if the erring party acted in a wanton, fraudulent, reckless, oppressive or malevolent
manner.[41] In the present case, it was not shown that Globe acted wantonly or
oppressively in not heeding Philcomsats demands for payment of rentals. It was
established during the trial of the case before the trial court that Globe had valid grounds
for refusing to comply with its contractual obligations after 1992.
WHEREFORE, the Petitions are DENIED for lack of merit. The assailed Decision of
the Court of Appeals in CA-G.R. CV No. 63619 is AFFIRMED.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. 97412 July 12, 1994

EASTERN SHIPPING LINES, INC., petitioner,

vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents.

Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.

Zapa Law Office for private respondent.

VITUG, J.:

The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a
shipment of goods can be a solidary, or joint and several, liability of the common carrier, the arrastre
operator and the customs broker; (b) whether the payment of legal interest on an award for loss or
damage is to be computed from the time the complaint is filed or from the date the decision
appealed from is rendered; and (c) whether the applicable rate of interest, referred to above, is
twelve percent (12%) or six percent (6%).

The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed
facts that have led to the controversy are hereunder reproduced:

This is an action against defendants shipping company, arrastre operator and broker-
forwarder for damages sustained by a shipment while in defendants' custody, filed by
the insurer-subrogee who paid the consignee the value of such losses/damages.

On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama,
Japan for delivery vessel "SS EASTERN COMET" owned by defendant Eastern
Shipping Lines under Bill of Lading
No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance
Policy No. 81/01177 for P36,382,466.38.

Upon arrival of the shipment in Manila on December 12, 1981, it was discharged
unto the custody of defendant Metro Port Service, Inc. The latter excepted to one
drum, said to be in bad order, which damage was unknown to plaintiff.

On January 7, 1982 defendant Allied Brokerage Corporation received the shipment

from defendant Metro Port Service, Inc., one drum opened and without seal (per
"Request for Bad Order Survey." Exh. D).
 On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries
of the shipment to the consignee's warehouse. The latter excepted to one drum
which contained spillages, while the rest of the contents was adulterated/fake (per
"Bad Order Waybill" No. 10649, Exh. E).

Plaintiff contended that due to the losses/damage sustained by said drum, the
consignee suffered losses totaling P19,032.95, due to the fault and negligence of
defendants. Claims were presented against defendants who failed and refused to
pay the same (Exhs. H, I, J, K, L).

As a consequence of the losses sustained, plaintiff was compelled to pay the

consignee P19,032.95 under the aforestated marine insurance policy, so that it
became subrogated to all the rights of action of said consignee against defendants
(per "Form of Subrogation", "Release" and Philbanking check, Exhs. M, N, and O).
(pp. 85-86, Rollo.)

There were, to be sure, other factual issues that confronted both courts. Here, the appellate court
said:

Defendants filed their respective answers, traversing the material allegations of the
complaint contending that: As for defendant Eastern Shipping it alleged that the
shipment was discharged in good order from the vessel unto the custody of Metro
Port Service so that any damage/losses incurred after the shipment was incurred
after the shipment was turned over to the latter, is no longer its liability (p. 17,
Record); Metroport averred that although subject shipment was discharged unto its
custody, portion of the same was already in bad order (p. 11, Record); Allied
Brokerage alleged that plaintiff has no cause of action against it, not having negligent
or at fault for the shipment was already in damage and bad order condition when
received by it, but nonetheless, it still exercised extra ordinary care and diligence in
the handling/delivery of the cargo to consignee in the same condition shipment was
received by it.

From the evidence the court found the following:

The issues are:

1. Whether or not the shipment sustained losses/damages;

2. Whether or not these losses/damages were sustained while in the

custody of defendants (in whose respective custody, if determinable);

3. Whether or not defendant(s) should be held liable for the

losses/damages (see plaintiff's pre-Trial Brief, Records, p. 34; Allied's
pre-Trial Brief, adopting plaintiff's Records, p. 38).

As to the first issue, there can be no doubt that the shipment

sustained losses/damages. The two drums were shipped in good
order and condition, as clearly shown by the Bill of Lading and
Commercial Invoice which do not indicate any damages drum that
was shipped (Exhs. B and C). But when on December 12, 1981 the
shipment was delivered to defendant Metro Port Service, Inc., it
excepted to one drum in bad order.
 Correspondingly, as to the second issue, it follows that the
losses/damages were sustained while in the respective and/or
successive custody and possession of defendants carrier (Eastern),
arrastre operator (Metro Port) and broker (Allied Brokerage). This
becomes evident when the Marine Cargo Survey Report (Exh. G),
with its "Additional Survey Notes", are considered. In the latter notes,
it is stated that when the shipment was "landed on vessel" to dock of
Pier # 15, South Harbor, Manila on December 12, 1981, it was
observed that "one (1) fiber drum (was) in damaged condition,
covered by the vessel's Agent's Bad Order Tally Sheet No. 86427."
The report further states that when defendant Allied Brokerage
withdrew the shipment from defendant arrastre operator's custody on
January 7, 1982, one drum was found opened without seal, cello bag
partly torn but contents intact. Net unrecovered spillages was
15 kgs. The report went on to state that when the drums reached the
consignee, one drum was found with adulterated/faked contents. It is
obvious, therefore, that these losses/damages occurred before the
shipment reached the consignee while under the successive
custodies of defendants. Under Art. 1737 of the New Civil Code, the
common carrier's duty to observe extraordinary diligence in the
vigilance of goods remains in full force and effect even if the goods
are temporarily unloaded and stored in transit in the warehouse of the
carrier at the place of destination, until the consignee has been
advised and has had reasonable opportunity to remove or dispose of
the goods (Art. 1738, NCC). Defendant Eastern Shipping's own
exhibit, the "Turn-Over Survey of Bad Order Cargoes" (Exhs. 3-
Eastern) states that on December 12, 1981 one drum was found
"open".

and thus held:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby

rendered:

A. Ordering defendants to pay plaintiff, jointly and severally:

1. The amount of P19,032.95, with the present legal interest of

12% per annum from October 1, 1982, the date of filing of this
complaints, until fully paid (the liability of defendant Eastern Shipping,
Inc. shall not exceed US$500 per case or the CIF value of the loss,
whichever is lesser, while the liability of defendant Metro Port
Service, Inc. shall be to the extent of the actual invoice value of each
package, crate box or container in no case to exceed P5,000.00
each, pursuant to Section 6.01 of the Management Contract);

2. P3,000.00 as attorney's fees, and

3. Costs.

B. Dismissing the counterclaims and crossclaim of

defendant/cross-claimant Allied Brokerage
Corporation.
 SO ORDERED. (p. 207, Record).

Dissatisfied, defendant's recourse to US.

The appeal is devoid of merit.

After a careful scrutiny of the evidence on record. We find that the conclusion drawn
therefrom is correct. As there is sufficient evidence that the shipment sustained
damage while in the successive possession of appellants, and therefore they are
liable to the appellee, as subrogee for the amount it paid to the consignee. (pp. 87-
89, Rollo.)

The Court of Appeals thus affirmed in toto the judgment of the court
a quo.

In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse of
discretion on the part of the appellate court when —

I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE

ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF
PRIVATE RESPONDENT AS GRANTED IN THE QUESTIONED DECISION;

II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE

RESPONDENT SHOULD COMMENCE FROM THE DATE OF THE FILING OF THE
COMPLAINT AT THE RATE OF TWELVE PERCENT PER ANNUM INSTEAD OF
FROM THE DATE OF THE DECISION OF THE TRIAL COURT AND ONLY AT THE
RATE OF SIX PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING
INDISPUTABLY UNLIQUIDATED.

The petition is, in part, granted.

In this decision, we have begun by saying that the questions raised by petitioner carrier are not all
that novel. Indeed, we do have a fairly good number of previous decisions this Court can merely tack
to.

The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the
time the articles are surrendered to or unconditionally placed in the possession of, and received by,
the carrier for transportation until delivered to, or until the lapse of a reasonable time for their
acceptance by, the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court
of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods
shipped either are lost or arrive in damaged condition, a presumption arises against the carrier of its
failure to observe that diligence, and there need not be an express finding of negligence to hold it
liable (Art. 1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139 SCRA 87; Metro
Port Service vs. Court of Appeals, 131 SCRA 365). There are, of course, exceptional cases when
such presumption of fault is not observed but these cases, enumerated in Article 17341 of the Civil
Code, are exclusive, not one of which can be applied to this case.

The question of charging both the carrier and the arrastre operator with the obligation of properly
delivering the goods to the consignee has, too, been passed upon by the Court. In Fireman's Fund
Insurance vs. Metro Port Services (182 SCRA 455), we have explained, in holding the carrier and
the arrastre operator liable in solidum, thus:
 The legal relationship between the consignee and the arrastre operator is akin to that
of a depositor and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5
[1967]. The relationship between the consignee and the common carrier is similar to
that of the consignee and the arrastre operator (Northern Motors, Inc. v. Prince Line,
et al., 107 Phil. 253 [1960]). Since it is the duty of the ARRASTRE to take good care
of the goods that are in its custody and to deliver them in good condition to the
consignee, such responsibility also devolves upon the CARRIER. Both the
ARRASTRE and the CARRIER are therefore charged with the obligation to deliver
the goods in good condition to the consignee.

We do not, of course, imply by the above pronouncement that the arrastre operator and the customs
broker are themselves always and necessarily liable solidarily with the carrier, or vice-versa, nor that
attendant facts in a given case may not vary the rule. The instant petition has been brought solely by
Eastern Shipping Lines, which, being the carrier and not having been able to rebut the presumption
of fault, is, in any event, to be held liable in this particular case. A factual finding of both the court a
quo and the appellate court, we take note, is that "there is sufficient evidence that the shipment
sustained damage while in the successive possession of appellants" (the herein petitioner among
them). Accordingly, the liability imposed on Eastern Shipping Lines, Inc., the sole petitioner in this
case, is inevitable regardless of whether there are others solidarily liable with it.

It is over the issue of legal interest adjudged by the appellate court that deserves more than just a
passing remark.

Let us first see a chronological recitation of the major rulings of this Court:

The early case of Malayan Insurance Co., Inc., vs. Manila Port
Service,2 decided3 on 15 May 1969, involved a suit for recovery of money arising out of short
deliveries and pilferage of goods. In this case, appellee Malayan Insurance (the plaintiff in the lower
court) averred in its complaint that the total amount of its claim for the value of the undelivered goods
amounted to P3,947.20. This demand, however, was neither established in its totality nor definitely
ascertained. In the stipulation of facts later entered into by the parties, in lieu of proof, the amount of
P1,447.51 was agreed upon. The trial court rendered judgment ordering the appellants (defendants)
Manila Port Service and Manila Railroad Company to pay appellee Malayan Insurance the sum of
P1,447.51 with legal interest thereon from the date the complaint was filed on 28 December 1962
until full payment thereof. The appellants then assailed, inter alia, the award of legal interest. In
sustaining the appellants, this Court ruled:

Interest upon an obligation which calls for the payment of money, absent a
stipulation, is the legal rate. Such interest normally is allowable from the date of
demand, judicial or extrajudicial. The trial court opted for judicial demand as the
starting point.

But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be
recovered upon unliquidated claims or damages, except when the demand can be
established with reasonable certainty." And as was held by this Court in Rivera
vs. Perez,4 L-6998, February 29, 1956, if the suit were for damages, "unliquidated
and not known until definitely ascertained, assessed and determined by the courts
after proof (Montilla c. Corporacion de P.P. Agustinos, 25 Phil. 447; Lichauco
v. Guzman,
38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis
supplied)
The case of Reformina vs. Tomol,5 rendered on 11 October 1985, was for "Recovery of Damages for
Injury to Person and Loss of Property." After trial, the lower court decreed:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party
defendants and against the defendants and third party plaintiffs as follows:

Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay
jointly and severally the following persons:

xxx xxx xxx

(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00
which is the value of the boat F B Pacita III together with its accessories, fishing gear
and equipment minus P80,000.00 which is the value of the insurance recovered and
the amount of P10,000.00 a month as the estimated monthly loss suffered by them
as a result of the fire of May 6, 1969 up to the time they are actually paid or
already the total sum of P370,000.00 as of June 4, 1972 with legal interest from the
filing of the complaint until paid and to pay attorney's fees of P5,000.00 with costs
against defendants and third party plaintiffs. (Emphasis supplied.)

On appeal to the Court of Appeals, the latter modified the amount of damages awarded but
sustained the trial court in adjudging legal interest from the filing of the complaint until fully
paid. When the appellate court's decision became final, the case was remanded to the lower
court for execution, and this was when the trial court issued its assailed resolution which
applied the 6% interest per annum prescribed in Article 2209 of the Civil Code. In their
petition for review on certiorari, the petitioners contended that Central Bank Circular
No. 416, providing thus —

By virtue of the authority granted to it under Section 1 of Act 2655, as amended,

Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that
the rate of interest for the loan, or forbearance of any money, goods, or credits and
the rate allowed in judgments, in the absence of express contract as to such rate of
interest, shall be twelve (12%) percent per annum. This Circular shall take effect
immediately. (Emphasis found in the text) —

should have, instead, been applied. This Court6 ruled:

The judgments spoken of and referred to are judgments in litigations involving loans
or forbearance of any money, goods or credits. Any other kind of monetary judgment
which has nothing to do with, nor involving loans or forbearance of any money,
goods or credits does not fall within the coverage of the said law for it is not within
the ambit of the authority granted to the Central Bank.

xxx xxx xxx

Coming to the case at bar, the decision herein sought to be executed is one
rendered in an Action for Damages for injury to persons and loss of property and
does not involve any loan, much less forbearances of any money, goods or credits.
As correctly argued by the private respondents, the law applicable to the said case is
Article 2209 of the New Civil Code which reads —
 Art. 2209. — 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
interest agreed upon, and in the absence of stipulation, the legal
interest which is six percent per annum.

The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz,7 promulgated on 28 July
1986. The case was for damages occasioned by an injury to person and loss of property. The trial
court awarded private respondent Pedro Manabat actual and compensatory damages in the amount
of P72,500.00 with legal interest thereon from the filing of the complaint until fully paid. Relying on
the Reformina v. Tomol case, this Court8 modified the interest award from 12% to 6% interest per
annum but sustained the time computation thereof, i.e., from the filing of the complaint until fully
paid.

In Nakpil and Sons vs. Court of Appeals,9 the trial court, in an action for the recovery of damages
arising from the collapse of a building, ordered,
inter alia, the "defendant United Construction Co., Inc. (one of the petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from November 29,
1968, the date of the filing of the complaint until full payment . . . ." Save from the modification of the
amount granted by the lower court, the Court of Appeals sustained the trial court's decision. When
taken to this Court for review, the case, on 03 October 1986, was decided, thus:

WHEREFORE, the decision appealed from is hereby MODIFIED and considering the
special and environmental circumstances of this case, we deem it reasonable to
render a decision imposing, as We do hereby impose, upon the defendant and the
third-party defendants (with the exception of Roman Ozaeta) a solidary (Art. 1723,
Civil Code, Supra.
p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION
(P5,000,000.00) Pesos to cover all damages (with the exception to attorney's fees)
occasioned by the loss of the building (including interest charges and lost rentals)
and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for
attorney's fees, the total sum being payable upon the finality of this decision. Upon
failure to pay on such finality, twelve (12%) per cent interest per annum shall be
imposed upon aforementioned amounts from finality until paid. Solidary costs against
the defendant and third-party defendants (Except Roman Ozaeta). (Emphasis
supplied)

A motion for reconsideration was filed by United Construction, contending that "the interest
of twelve (12%) per cent per annum imposed on the total amount of the monetary award was
in contravention of law." The Court10 ruled out the applicability of the Reformina and
Philippine Rabbit Bus Lines cases and, in its resolution of 15 April 1988, it explained:

There should be no dispute that the imposition of 12% interest pursuant to Central
Bank Circular No. 416 . . . is applicable only in the following: (1) loans; (2)
forbearance of any money, goods or credit; and
(3) rate allowed in judgments (judgments spoken of refer to judgments involving
loans or forbearance of any money, goods or credits. (Philippine Rabbit Bus Lines
Inc. v. Cruz, 143 SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260
[1985]). It is true that in the instant case, there is neither a loan or a forbearance, but
then no interest is actually imposed provided the sums referred to in the judgment
are paid upon the finality of the judgment. It is delay in the payment of such final
judgment, that will cause the imposition of the interest.
 It will be noted that in the cases already adverted to, the rate of interest is imposed
on the total sum, from the filing of the complaint until paid; in other words, as part of
the judgment for damages. Clearly, they are not applicable to the instant case.
(Emphasis supplied.)

The subsequent case of American Express International, Inc., vs. Intermediate Appellate Court11 was
a petition for review on certiorari from the decision, dated 27 February 1985, of the then Intermediate
Appellate Court reducing the amount of moral and exemplary damages awarded by the trial court, to
P240,000.00 and P100,000.00, respectively, and its resolution, dated 29 April 1985, restoring the
amount of damages awarded by the trial court, i.e., P2,000,000.00 as moral damages and
P400,000.00 as exemplary damages with interest thereon at 12% per annum from notice of
judgment, plus costs of suit. In a decision of 09 November 1988, this Court, while recognizing the
right of the private respondent to recover damages, held the award, however, for moral damages by
the trial court, later sustained by the IAC, to be inconceivably large. The Court12 thus set aside the
decision of the appellate court and rendered a new one, "ordering the petitioner to pay private
respondent the sum of One Hundred Thousand (P100,000.00) Pesos as moral damages, with
six (6%) percent interest thereon computed from the finality of this decision until paid. (Emphasis
supplied)

Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz13 which arose from
a breach of employment contract. For having been illegally dismissed, the petitioner was awarded by
the trial court moral and exemplary damages without, however, providing any legal interest thereon.
When the decision was appealed to the Court of Appeals, the latter held:

WHEREFORE, except as modified hereinabove the decision of the CFI of Negros

Oriental dated October 31, 1972 is affirmed in all respects, with the modification that
defendants-appellants, except defendant-appellant Merton Munn, are ordered to pay,
jointly and severally, the amounts stated in the dispositive portion of the decision,
including the sum of P1,400.00 in concept of compensatory damages, with interest at
the legal rate from the date of the filing of the complaint until fully paid(Emphasis
supplied.)

The petition for review to this Court was denied. The records were thereupon transmitted to
the trial court, and an entry of judgment was made. The writ of execution issued by the trial
court directed that only compensatory damages should earn interest at 6% per annum from
the date of the filing of the complaint. Ascribing grave abuse of discretion on the part of the
trial judge, a petition for certiorari assailed the said order. This Court said:

. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the
legal rate" from the time of the filing of the complaint. . . Said circular [Central Bank
Circular No. 416] does not apply to actions based on a breach of employment
contract like the case at bar. (Emphasis supplied)

The Court reiterated that the 6% interest per annum on the damages should be computed
from the time the complaint was filed until the amount is fully paid.

Quite recently, the Court had another occasion to rule on the matter. National Power Corporation
vs. Angas,14decided on 08 May 1992, involved the expropriation of certain parcels of land. After
conducting a hearing on the complaints for eminent domain, the trial court ordered the petitioner to
pay the private respondents certain sums of money as just compensation for their lands so
expropriated "with legal interest thereon . . . until fully paid." Again, in applying the 6% legal
interest per annum under the Civil Code, the Court15 declared:
 . . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods
or credits but expropriation of certain parcels of land for a public purpose, the
payment of which is without stipulation regarding interest, and the interest adjudged
by the trial court is in the nature of indemnity for damages. The legal interest required
to be paid on the amount of just compensation for the properties expropriated is
manifestly in the form of indemnity for damages for the delay in the payment thereof.
Therefore, since the kind of interest involved in the joint judgment of the lower court
sought to be enforced in this case is interest by way of damages, and not by way of
earnings from loans, etc. Art. 2209 of the Civil Code shall apply.

Concededly, there have been seeming variances in the above holdings. The cases can perhaps be
classified into two groups according to the similarity of the issues involved and the corresponding
rulings rendered by the court. The "first group" would consist of the cases of Reformina
v. Tomol (1985), Philippine Rabbit Bus Lines v. Cruz(1986), Florendo v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second group" would be Malayan
Insurance Company v.Manila Port Service (1969), Nakpil and Sons v. Court of
Appeals (1988), and American Express International v.Intermediate Appellate Court (1988).

In the "first group", the basic issue focuses on the application of either the 6% (under the Civil Code)
or 12% (under the Central Bank Circular) interest per annum. It is easily discernible in these cases
that there has been a consistent holding that the Central Bank Circular imposing the 12%
interest per annum applies only to loans or forbearance16 of money, goods or credits, as well as to
judgments involving such loan or forbearance of money, goods or credits, and that the 6% interest
under the Civil Code governs when the transaction involves the payment of indemnities in the
concept of damage arising from the breach or a delay in the performance of obligations in general.
Observe, too, that in these cases, a common time frame in the computation of the 6% interest per
annum has been applied, i.e., from the time the complaint is filed until the adjudged amount is fully
paid.

The "second group", did not alter the pronounced rule on the application of the 6% or 12%
interest per annum,17depending on whether or not the amount involved is a loan or forbearance, on
the one hand, or one of indemnity for damage, on the other hand. Unlike, however, the "first group"
which remained consistent in holding that the running of the legal interest should be from the time of
the filing of the complaint until fully paid, the "second group" varied on the commencement of the
running of the legal interest.

Malayan held that the amount awarded should bear legal interest from the date of the decision of the
court a quo,explaining that "if the suit were for damages, 'unliquidated and not known until definitely
ascertained, assessed and determined by the courts after proof,' then, interest 'should be from the
date of the decision.'" American Express International v. IAC, introduced a different time frame for
reckoning the 6% interest by ordering it to be "computed from the finality of (the) decision until paid."
The Nakpil and Sons case ruled that 12% interest per annum should be imposed from the finality of
the decision until the judgment amount is paid.

The ostensible discord is not difficult to explain. The factual circumstances may have called for
different applications, guided by the rule that the courts are vested with discretion, depending on the
equities of each case, on the award of interest. Nonetheless, it may not be unwise, by way of
clarification and reconciliation, to suggest the following rules of thumb for future guidance.

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-
delicts18 is breached, the contravenor can be held liable for damages.19 The provisions under Title
XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages.20
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in
writing.21 Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded.22 In the absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions
of Article 116923 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on

the amount of damages awarded may be imposed at the discretion of the court24 at the rate of
6% per annum.25 No interest, however, shall be adjudged on unliquidated claims or damages except
when or until the demand can be established with reasonable certainty.26 Accordingly, where the
demand is established with reasonable certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall begin to run only from the
date the judgment of the court is made (at which time the quantification of damages may be deemed
to have been reasonably ascertained). The actual base for the computation of legal interest shall, in
any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.

WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the
MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due
computed from the decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX
PERCENT (6%), shall be imposed on such amount upon finality of this decision until the payment
thereof.

SO ORDERED.

SYLLABI/SYNOPSIS
 THIRD DIVISION

[G.R. No. 128721. March 9, 1999]

CRISMINA GARMENTS, INC., petitioner, vs. COURT OF APPEAL AND

NORMA SIAPNO, respondents.

DECISION
PANGANIBAN, J.:

Interest shall be computed in accordance with the stipulation of the parties. In the absence of
such agreement, the rate shall be twelve percent (12%) per annum when the obligation arises out
of a loan or a forbearance of money, goods or credits. In other cases, it shall be six percent (6%).

The Case

On May 5, 1997, Crismina Garments, Inc. filed a Petition for Review on Certiorari[1] assailing
the December 28, 1995 Decision[2] and March 17, 1997 Resolution[3] of the Court of Appeals in
CA-GR CV No. 28973. On September 24, 1997, this Court issued a minute Resolution[4] denying
the petition for its failure to show any reversible error on the part of the Court of Appeals.
Petitioner then filed a Motion for Reconsideration,[5] arguing that the interest rate should be
computed at 6 percent per annum as provided under Article 2209 of the Civil Code, not 12 percent
per annum as prescribed under Circular No. 416 of the Central Bank of the Philippines. Acting on
the Motion, the Court reinstated[6] the Petition, but only with respect to the issue of which interest
rate should be applied.[7]

The Facts

As the facts of the case are no longer disputed, we are reproducing hereunder the findings of
the appellate court:

During the period from February 1979 to April 1979, the [herein petitioner], which
was engaged in the export of girls denim pants, contracted the services of the
[respondent], the sole proprietress of the DWilmar Garments, for the sewing of 20,762
pieces of assorted girls[] denims supplied by the [petitioner] under Purchase Orders
Nos. 1404, dated February 15, 1979, 0430 dated February 1, 1979, 1453 dated April
30, 1979. The [petitioner] was obliged to pay the [respondent], for her services, in the
total amount of P76,410.00. The [respondent] sew[ed] the materials and delivered the
same to the [petitioner] which acknowledged the same per Delivery Receipt Nos.
0030, dated February 9, 1979; 0032, dated February 15, 1979; 0033 dated February
21, 1979; 0034, dated February 24, 1979; 0036, dated February 20, 1979; 0038, dated
March 11, 1979[;] 0039, dated March 24, 1979; 0040 dated March 27, 1979; 0041,
dated March 29, 1979; 0044, dated Marc[h] 25, 1979; 0101 dated May 18, 1979[;]
0037, dated March 10, 1979 and 0042 dated March 10, 1979, in good order
condition. At first, the [respondent] was told that the sewing of some of the pants
w[as] defective. She offered to take delivery of the defective pants. However, she was
later told by [petitioner]s representative that the goods were already good. She was
told to just return for her check of P76,410.00. However, the [petitioner] failed to pay
her the aforesaid amount. This prompted her to hire the services of counsel who, on
November 12, 1979, wrote a letter to the [petitioner] demanding payment of the
aforesaid amount within ten (10) days from receipt thereof. On February 7, 1990, the
[petitioner]s [v]ice-[p]resident-[c]omptroller, wrote a letter to [respondent]s counsel,
averring, inter alia, that the pairs of jeans sewn by her, numbering 6,164 pairs, were
defective and that she was liable to the [petitioner] for the amount of P49,925.51
which was the value of the damaged pairs of denim pants and demanded refund of the
aforesaid amount.

On January 8, 1981, the [respondent] filed her complaint against the [petitioner] with
the [trial court] for the collection of the principal amount of P76,410.00. x x x

xxxxxxxxx

After due proceedings, the [trial court] rendered judgment, on February 28, 1989, in
favor of the [respondent] against the [petitioner], the dispositive portion of which
reads as follows:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendant ordering the latter to pay the former:

(1) The sum of P76,140.00 with interest thereon at 12% per annum, to be counted from the filing
of this complaint on January 8, 1981, until fully paid;
(2) The sum of P5,000 as attorney[]s fees; and
(3) The costs of this suit;
(4) Defendants counterclaim is hereby dismissed.[8]
The Court of Appeals (CA) affirmed the trial courts ruling, except for the award of attorneys
fees which was deleted.[9] Subsequently, the CA denied the Motion for Reconsideration.[10]
Hence, this recourse to this Court.[11]
 Sole Issue

In light of the Courts Resolution dated April 27, 1998, petitioner submits for our consideration
this sole issue:

Whether or not it is proper to impose interest at the rate of twelve percent (12%) per annum for
an obligation that does not involve a loan or forbearance of money in the absence of stipulation
of the parties.[12]

This Courts Ruling

We sustain petitioners contention that the interest rate should be computed at six percent (6%)
per annum.

Sole Issue: Interest Rate

The controversy revolves around petitioners payment of the price beyond the period
prescribed in a contract for a piece of work. Article 1589 of the Civil Code provides that [t]he
vendee [herein petitioner] shall owe interest for the period between the delivery of the thing and
the payment of the price x x x should he be in default, from the time of judicial or extrajudicial
demand for the payment of the price. The only issue now is the applicable rate of interest for the
late payment.
Because the case before us is an action for the enforcement of an obligation for payment of
money arising from a contract for a piece of work,[13] petitioner submits that the interest rate should
be six percent (6%), pursuant to Article 2209 of the Civil Code, which states:

If the obligation consists in the payment 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. (Emphasis supplied.)

On the other hand, private respondent maintains that the interest rate should be twelve percent
(12%) per annum, in accordance with Central Bank (CB) Circular No. 416, which reads:

By virtue of the authority granted to it under Section 1 of Act No. 2655, as amended,
otherwise known as the Usury Law, the Monetary Board, in its Resolution No. 1622
dated July 29, 1974, has prescribed that the rate of interest for the loan or forbearance
of any money, goods or credits and the rate allowed in judgments, in the absence of
express contract as to such rate of interest, shall be twelve per cent (12%) per
annum. (Emphasis supplied.)
 She argues that the circular applies, since the money sought to be recovered by her is in the
form of forbearance.[14]
We agree with the petitioner. In Reformina v. Tomol Jr.,[15] this Court stressed that the interest
rate under CB Circular No. 416 applies to (1) loans; (2) forbearance of money, goods or credits;
or (3) a judgment involving a loan or forbearance of money, goods or credits. Cases beyond the
scope of the said circular are governed by Article 2209 of the Civil Code,[16] which considers
interest a form of indemnity for the delay in the performance of an obligation.[17]

In Eastern Shipping Lines, Inc. v. Court of Appeals,[18] the Court gave the following guidelines
for the application of the proper interest rates:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,

delicts or quasi-delicts is breached, the contravenor can be held liable for
damages. The provisions under Title XVIII on Damages of the Civil Code govern in
determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed,
as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached,

an interest on the amount of damages awarded may be imposed at the discretion of the
court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be
so reasonably established at the time the demand is made, the interest shall begin to
run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The
actual base for the computation of legal interest shall, in any case, be xxx the amount
finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.[19]

In Keng Hua Paper Products Co., Inc. v. CA,[20] we also ruled that the monetary award shall
earn interest at twelve percent (12%) per annum from the date of the finality of the judgment until
its satisfaction, regardless of whether or not the case involves a loan or forbearance of money. The
interim period is deemed to be equivalent to a forbearance of credit.[21]
Because the amount due in this case arose from a contract for a piece of work, not from a loan
or forbearance of money, the legal interest of six percent (6%) per annum should be
applied.Furthermore, since the amount of the demand could be established with certainty when the
Complaint was filed, the six percent (6%) interest should be computed from the filing of the said
Complaint. But after the judgment becomes final and executory until the obligation is satisfied,
the interest should be reckoned at twelve percent (12%) per year.
Private respondent maintains that the twelve percent (12%) interest should be imposed,
because the obligation arose from a forbearance of money.[22] This is erroneous. In Eastern
Shipping,[23] the Court observed that a forbearance in the context of the usury law is a contractual
obligation of lender or creditor to refrain, during a given period of time, from requiring the
borrower or debtor to repay a loan or debt then due and payable. Using this standard, the obligation
in this case was obviously not a forbearance of money, goods or credit.
WHEREFORE, the appealed Decision is MODIFIED. The rate of interest shall be six
percent (6%) per annum, computed from the time of the filing of the Complaint in the trial court
until the finality of the judgment. If the adjudged principal and the interest (or any part thereof)
remain unpaid thereafter, the interest rate shall be twelve percent (12%) per annum computed from
the time the judgment becomes final and executory until it is fully satisfied. No pronouncement as
to costs.
SO ORDERED.
SYNOPSIS
Petitioner Crismina Garments, Inc. contracted the services of respondent Norma
Siapno, the sole proprietress of D Wilmar Garments for sewing assorted pieces of
assorted girls denims supplied by petitioner under several purchase orders. Petitioner
was obliged to pay the respondent for her services, in the total amount
P76,410.00. However, petitioner failed to pay said amount. Respondent filed a
complaint with the trial court for the collection of the principal amount of P76,410.00
and after due proceedings, the trial court rendered judgment in favor of respondent
ordering petitioner to pay respondent the amount of P76,410.00 with interest thereon at
12% per annum. On appeal to the Court of Appeals, the appellate court affirmed the
trial courts ruling. Petitioners motion for reconsideration was subsequently denied by
the Court of Appeals. Hence, the present petition. Petitioner contended that the interest
rate should be six percent (6%) per annum, pursuant to Article 2209 of the Civil
Code. On the other hand, private respondent maintained that the interest rate should be
twelve percent (12%) per annum, in accordance with Central Bank Circular No. 416.
The Supreme Court found petitioners contention tenable. The Court had previously
ruled that the interest rate under CB Circular No. 416 applies to (1) loans; (2)
forbearance of money, goods or credits; or (3) a judgment involving a loan or
forbearance of money, goods or credits. Cases beyond the scope of said circular are
governed by Article 2209 of the Civil Code, which considers interest a form of
indemnity for the delay in the performance of an obligation. Applying the said doctrine
in the case at bar, the Court ruled that since the amount due in the present case arose
from a contract for a piece of work, not from a loan or forbearance of money, the legal
rate of six percent (6%) interest per annum should be applied. Private respondents
contention that the twelve percent (12%) interest per annum should be imposed because
the obligation arose from a forbearance of money was found by the Court erroneous
because a forbearance in the context of the Usury Law is a contractual obligation of
lender or creditor to refrain, during a given period of time from requiring the borrower
or debtor to repay a loan or debt then due and payable. Using the said standard in case
at bar, the Court concluded that the obligation was obviously not a forbearance of
money, goods or credits.
SYLLABUS
CIVIL LAW; DAMAGES; ACTUAL OR COMPENSATORY; RATE OF INTEREST OF THE AMOUNT
DUE IN A CASE ARISING FROM A CONTRACT FOR A PIECE OF WORK, NOT FROM A LOAN
OR FORBEARANCE OF MONEY SHOULD BE THE LEGAL INTEREST OF SIX PERCENT (6%)
PER ANNUM PURSUANT TO ARTICLE 2209 OF THE CIVIL CODE. Because the amount due in this
case arose from a contract for a piece of work, not from a loan or forbearance of money, the legal interest of six
percent (6%) per annum should be applied. Furthermore, since the amount of the demand could be established
with certainty when the Complaint was filed, the six percent (6%) interest should be computed from the filing
of the said Complaint. But after the judgment becomes final and executory until the obligation is satisfied, the
interest should be reckoned at twelve percent (12%) per year. Private respondent maintains that the twelve
percent (12%) interest should be imposed, because the obligation arose from a forbearance of money. This is
erroneous. In Eastern Shipping, the Court observed that a forbearance in the context of the usury law is a
contractual obligation of lender or creditor to refrain, during a given period of time, from requiring the borrower
or debtor to repay a loan or debt then due and payable. Using this standard, the obligation in this case was
obviously not a forbearance of money, goods or credit.
 FIRST DIVISION

[G.R. No. 116863. February 12, 1998]

KENG HUA PAPER PRODUCTS CO. INC., petitioner, vs. COURT OF

APPEALS; REGIONAL TRIAL COURT OF MANILA, BR. 21; and
SEA-LAND SERVICE, INC., respondents.

DECISION
PANGANIBAN, J.:

What is the nature of a bill of lading? When does a bill of lading become binding on a
consignee? Will an alleged overshipment justify the consignees refusal to receive the
goods described in the bill of lading? When may interest be computed on unpaid
demurrage charges?

Statement of the Case

These are the main questions raised in this petition assailing the Decision[1] of the
Court of Appeals[2] promulgated on May 20, 1994 in C.A.-G.R. CV No. 29953 affirming in
toto the decision[3] dated September 28, 1990 in Civil Case No. 85-33269 of the Regional
Trial Court of Manila, Branch 21. The dispositive portion of the said RTC decision reads:
WHEREFORE, the Court finds by preponderance of evidence that
Plaintiff has proved its cause of action and right to relief. Accordingly,
judgment is hereby rendered in favor of the Plaintiff and against
Defendant, ordering the Defendant to pay plaintiff:

1. The sum of P67,340.00 as demurrage charges, with interest at the legal

rate from the date of the extrajudicial demand until fully paid;

2. A sum equivalent to ten (10%) percent of the total amount due as Attorneys
fees and litigation expenses.

Send copy to respective counsel of the parties.

SO ORDERED.[4]

The Facts
The factual antecedents of this case as found by the Court of Appeals are as follows:
Plaintiff (herein private respondent), a shipping company, is a foreign
corporation licensed to do business in the Philippines. On June 29,
1982, plaintiff received at its Hong Kong terminal a sealed container,
Container No. SEAU 67523, containing seventy-six bales of unsorted
waste paper for shipment to defendant (herein petitioner), Keng Hua
Paper Products, Co. in Manila. A bill of lading (Exh. A) to cover the
shipment was issued by the plaintiff.
On July 9, 1982, the shipment was discharged at the Manila
International Container Port. Notices of arrival were transmitted to the
defendant but the latter failed to discharge the shipment from the
container during the free time period or grace period. The said
shipment remained inside the plaintiffs container from the moment the
free time period expired on July 29, 1982 until the time when the
shipment was unloaded from the container on November 22, 1983, or
a total of four hundred eighty-one (481) days. During the 481-day
period, demurrage charges accrued. Within the same period, letters
demanding payment were sent by the plaintiff to the defendant who,
however, refused to settle its obligation which eventually amounted to
P67,340.00. Numerous demands were made on the defendant but the
obligation remained unpaid. Plaintiff thereafter commenced this civil
action for collection and damages.
In its answer, defendant, by way of special and affirmative defense,
alleged that it purchased fifty (50) tons of waste paper from the shipper
in Hong Kong, Ho Kee Waste Paper, as manifested in Letter of Credit
No. 824858 (Exh. 7. p. 110. Original Record) issued by Equitable
Banking Corporation, with partial shipment permitted; that under
the letter of credit, the remaining balance of the shipment was only ten
(10) metric tons as shown in Invoice No. H-15/82 (Exh. 8, p. 111,
Original Record); that the shipment plaintiff was asking defendant to
accept was twenty (20) metric tons which is ten (10) metric tons more
than the remaining balance; that if defendant were to accept the
shipment, it would be violating Central Bank rules and regulations and
custom and tariff laws; that plaintiff had no cause of action against the
defendant because the latter did not hire the former to carry the
merchandise; that the cause of action should be against the shipper
which contracted the plaintiffs services and not against defendant; and
that the defendant duly notified the plaintiff about the wrong shipment
through a letter dated January 24, 1983 (Exh. D for plaintiff, Exh. 4 for
defendant, p. 5. Folder of Exhibits).
 As previously mentioned, the RTC found petitioner liable for demurrage, attorneys
fees and expenses of litigation. The petitioner appealed to the Court of Appeals, arguing
that the lower court erred in (1) awarding the sum of P67,340 in favor of the private
respondent, (2) rejecting petitioners contention that there was overshipment, (3) ruling
that petitioners recourse was against the shipper, and (4) computing legal interest from
date of extrajudicial demand.[5]
Respondent Court of Appeals denied the appeal and affirmed the lower courts
decision in toto. In a subsequent resolution,[6] it also denied the petitioners motion for
reconsideration.
Hence, this petition for review.[7]

The Issues

In its memorandum, petitioner submits the following issues:

I. Whether or not petitioner had accepted the bill of lading;

II. Whether or not the award of the sum of P67,340.00 to private respondent
was proper;

III. Whether or not petitioner was correct in not accepting the overshipment;

IV. Whether or not the award of legal interest from the date of private respondents
extrajudicial demand was proper;[8]

In the main, the case revolves around the question of whether petitioner was bound
by the bill of lading. We shall, thus, discuss the above four issues as they intertwine with
this main question.

The Courts Ruling

The petition is partly meritorious. We affirm petitioners liability for demurrage, but
modify the interest rate thereon.

Main Issue: Liability Under the Bill of Lading

A bill of lading serves two functions. First, it is a receipt for the goods
shipped. Second, it is a contract by which three parties, namely, the shipper, the carrier,
and the consignee undertake specific responsibilities and assume stipulated
obligations.[9] A bill of lading delivered and accepted constitutes the contract of carriage
even though not signed,[10] because the (a)cceptance of a paper containing the terms of a
proposed contract generally constitutes an acceptance of the contract and of all of its
terms and conditions of which the acceptor has actual or constructive notice. [11] In a
nutshell, the acceptance of a bill of lading by the shipper and the consignee, with full
knowledge of its contents, gives rise to the presumption that the same was a perfected
and binding contract.[12]
In the case at bar, both lower courts held that the bill of lading was a valid and
perfected contract between the shipper (Ho Kee), the consignee (Petitioner Keng Hua),
and the carrier (Private Respondent Sea-Land). Section 17 of the bill of lading provided
that the shipper and the consignee were liable for the payment of demurrage charges for
the failure to discharge the containerized shipment beyond the grace period allowed by
tariff rules. Applying said stipulation, both lower courts found petitioner liable. The
aforementioned section of the bill of lading reads:
17. COOPERAGE FINES. The shipper and consignee shall be liable
for, indemnify the carrier and ship and hold them harmless
against, and the carrier shall have a lien on the goods for, all expenses
and charges for mending cooperage, baling, repairing or
reconditioning the goods, or the van, trailers or containers, and all
expenses incurred in protecting, caring for or otherwise made for the
benefit of the goods, whether the goods be damaged or not, and for
any payment, expense, penalty fine, dues, duty, tax or impost, loss,
damage, detention, demurrage, or liability of whatsoever nature,
sustained or incurred by or levied upon the carrier or the ship in
connection with the goods or by reason of the goods being or having
been on board, or because of shippers failure to procure consular or
other proper permits, certificates or any papers that may be required at
any port or place or shippers failure to supply information or otherwise
to comply with all laws, regulations and requirements of law in
connection with the goods of from any other act or omission of the
shipper or consignee: (Underscoring supplied.)
Petitioner contends, however, that it should not be bound by the bill of lading because
it never gave its consent thereto. Although petitioner admits physical acceptance of the
bill of lading, it argues that its subsequent actions belie the finding that it accepted the
terms and conditions printed therein.[13] Petitioner cites as support the Notice of Refused
or On Hand Freight it received on November 2, 1982 from private respondent, which
acknowledged that petitioner declined to accept the shipment. Petitioner adds that it sent
a copy of the said notice to the shipper on December 29, 1982. Petitioner points to its
January 24, 1983 letter to the private respondent, stressing that its acceptance of the bill
of lading would be tantamount to an act of smuggling as the amount it had imported (with
full documentary support) was only (at that time) for 10,000 kilograms and not for 20,313
kilograms as stated in the bill of lading and could lay them vulnerable to legal sanctions
for violation of customs and tariff as well as Central Bank laws.[14] Petitioner further argues
that the demurrage was a consequence of the shippers mistake of shipping more than
what was bought. The discrepancy in the amount of waste paper it actually purchased,
as reflected in the invoice vis--vis the excess amount in the bill of lading, allegedly justifies
its refusal to accept the shipment.[15]

Petitioner Bound by the Bill of Lading

We are not persuaded. Petitioner admits that it received the bill of lading immediately
after the arrival of the shipment[16] on July 8, 1982.[17] Having been afforded an opportunity
to examine the said document, petitioner did not immediately object to or dissent from
any term or stipulation therein. It was only six months later, on January 24, 1983, that
petitioner sent a letter to private respondent saying that it could not accept the
shipment. Petitioners inaction for such a long period conveys the clear inference that it
accepted the terms and conditions of the bill of lading. Moreover, said letter spoke only
of petitioners inability to use the delivery permit, i.e. to pick up the cargo, due to the
shippers failure to comply with the terms and conditions of the letter of credit, for which
reason the bill of lading and other shipping documents were returned by the banks to the
shipper.[18] The letter merely proved petitioners refusal to pick up the cargo, not its rejection
of the bill of lading.
Petitioners reliance on the Notice of Refused or On Hand Freight, as proof of its
nonacceptance of the bill of lading, is of no consequence. Said notice was not written by
petitioner; it was sent by private respondent to petitioner in November 1982, or four
months after petitioner received the bill of lading. If the notice has any legal significance
atall, it is to highlight petitioners prolonged failure to object to the bill of lading. Contrary
to petitioners contention, the notice and the letter support not belie the findings of the two
lower courts that the bill of lading was impliedly accepted by petitioner.
As aptly stated by Respondent Court of Appeals:
In the instant case, (herein petitioner) cannot and did not allege non-
receipt of its copy of the bill of lading from the shipper. Hence, the
terms and conditions as well as the various entries contained therein
were brought to its knowledge. (Herein petitioner) accepted the bill of
lading without interposing any objection as to its contents.This raises
the presumption that (herein petitioner) agreed to the entries and
stipulations imposed therein.
Moreover, it is puzzling that (herein petitioner) allowed months to pass,
six (6) months to be exact, before notifying (herein private respondent)
of the wrong shipment. It was only on January 24, 1983 that (herein
petitioner) sent (herein private respondent) such a letter of notification
(Exh D for plaintiff, Exh. 4 for defendant; p. 5, Folder of
Exhibits). Thus, for the duration of those six months (herein private
respondent never knew the reason for (herein petitioners) refusal to
discharge the shipment.
 After accepting the bill of lading, receiving notices of arrival of the
shipment, failing to object thereto, (herein petitioner) cannot now deny
that it is bound by the terms in the bill of lading. If it did not intend to be
bound, (herein petitioner) would not have waited for six months to
lapse before finally bringing the matter to (herein private respondents
attention. The most logical reaction in such a case would be to
immediately verify the matter with the other parties involved. In this
case, however, (herein petitioner) unreasonably detained (herein
private respondents) vessel to the latters prejudice. [19]

Petitioners attempt to evade its obligation to receive the shipment on the pretext that
this may cause it to violate customs, tariff and central bank laws must likewise fail. Mere
apprehension of violating said laws, without a clear demonstration that taking delivery of
the shipment has become legally impossible,[20] cannot defeat the petitioners contractual
obligation and liability under the bill of lading.
In any event, the issue of whether petitioner accepted the bill of lading was raised for
the first time only in petitioners memorandum before this Court. Clearly, we cannot now
entertain an issue raised for the very first time on appeal, in deference to the well-settled
doctrine that (a)n issue raised for the first time on appeal and not raised timely in the
proceedings in the lower court is barred by estoppel. Questions raised on appeal must be
within the issues framed by the parties and, consequently, issues not raised in the trial
court cannot be raised for the first time on appeal.[21]
In the case at bar, the prolonged failure of petitioner to receive and discharge the
cargo from the private respondents vessel constitutes a violation of the terms of the bill
of lading. It should thus be liable for demurrage to the former.
In The Apollon,[22] Justice Story made the following relevant comment on the nature of
demurrage:
In truth, demurrage is merely an allowance or compensation for the
delay or detention of a vessel. It is often a matter of contract, but not
necessarily so. The very circumstance that in ordinary commercial
voyages, a particular sum is deemed by the parties a fair
compensation for delays, is the very reason why it is, and ought to be,
adopted as a measure of compensation, in cases ex delicto. What
fairer rule can be adopted than that which founds itself upon
mercantile usage as to indemnity, and fixes a recompense upon the
deliberate consideration of all the circumstances attending the usual
earnings and expenditures in common voyages? It appears to us that
an allowance, by way of demurrage, is the true measure of damages
in all cases of mere detention, for that allowance has reference to the
ships expenses, wear and tear, and common employment. [23]
Amount of Demurrage Charges

Petitioner argues that it is not obligated to pay any demurrage charges because, prior
to the filing of the complaint, private respondent made no demand for the sum
of P67,340. Moreover, private respondents loss and prevention manager, Loi Gillera,
demanded P50,260, but its counsel, Sofronio Larcia, subsequently asked for a different
amount of P37,800.
Petitioners position is puerile. The amount of demurrage charges in the sum
of P67,340 is a factual conclusion of the trial court that was affirmed by the Court of
Appeals and, thus, binding on this Court.[24] Besides such factual finding is supported by
the extant evidence.[25] The apparent discrepancy was a result of the variance of the dates
when the two demands were made. Necessarily, the longer the cargo remained
unclaimed, the higher the demurrage. Thus, while in his letter dated April 24,
1983,[26] private respondents counsel demanded payment of only P37,800, the additional
demurrage incurred by petitioner due to its continued refusal to receive delivery of the
cargo ballooned to P67,340 by November 22, 1983. The testimony of Counsel Sofronio
Larcia as regards said letter of April 24, 1983 elucidates, viz:
Q Now, after you sent this letter, do you know what happened?
A Defendant continued to refuse to take delivery of the shipment and the shipment stayed at
the port for a longer period.
Q So, what happened to the shipment?
A The shipment incurred additional demurrage charges which amounted to P67,340.00 as of
November 22, 1983 or more than a year after - almost a year after the shipment arrived
at the port.
Q So, what did you do?
A We requested our collection agency to pursue the collection of this amount.[27]
Bill of Lading Separate from
Other Letter of Credit Arrangements
In a letter of credit, there are three distinct and independent contracts: (1) the contract
of sale between the buyer and the seller, (2) the contract of the buyer with the issuing
bank, and (3) the letter of credit proper in which the bank promises to pay the seller
pursuant to the terms and conditions stated therein. Few things are more clearly settled
in law than that the three contracts which make up the letter of credit arrangement are to
be maintained in a state of perpetual separation.[28] A transaction involving the purchase
of goods may also require, apart from a letter of credit, a contract of transportation
specially when the seller and the buyer are not in the same locale or country, and the
goods purchased have to be transported to the latter.
Hence, the contract of carriage, as stipulated in the bill of lading in the present case,
must be treated independently of the contract of sale between the seller and the buyer,
and the contract for the issuance of a letter of credit between the buyer and the issuing
bank. Any discrepancy between the amount of the goods described in the commercial
invoice in the contract of sale and the amount allowed in the letter of credit will not affect
the validity and enforceability of the contract of carriage as embodied in the bill of
lading. As the bank cannot be expected to look beyond the documents presented to it by
the seller pursuant to the letter of credit,[29] neither can the carrier be expected to go
beyond the representations of the shipper in the bill of lading and to verify their
accuracy vis--vis the commercial invoice and the letter of credit. Thus, the discrepancy
between the amount of goods indicated in the invoice and the amount in the bill of lading
cannot negate petitioners obligation to private respondent arising from the contract of
transportation. Furthermore, private respondent, as carrier, had no knowledge of the
contents of the container. The contract of carriage was under the arrangement known as
Shippers Load And Count, and the shipper was solely responsible for the loading of the
container while the carrier was oblivious to the contents of the shipment. Petitioners
remedy in case of overshipment lies against the seller/shipper, not against the carrier.

Payment of Interest

Petitioner posits that it first knew of the demurrage claim of P67,340 only when it
received, by summons, private respondents complaint. Hence, interest may not be
allowed to run from the date of private respondents extrajudicial demands on March 8,
1983 for P50,260 or on April 24, 1983 for P37,800, considering that, in both cases, there
was no demand for interest.[30] We agree.
Jurisprudence teaches us:

2. When an obligation, not constituting a loan or forbearance of money, is

breached, an interest on the amount of damages awarded may be imposed at
the discretion of the court at the rate of 6% per annum. No interest, however,
shall be adjudged on unliquidated claims or damages except when or until the
demand can be established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest shall begin to
run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil
Code) but when such certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages
may be deemed to have been reasonably ascertained). The actual base for
the computation of legal interest shall, in any case, be on the amount finally
adjudged.

3. When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality
until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit. [31]
 The case before us involves an obligation not arising from a loan or forbearance of
money; thus, pursuant to Article 2209 of the Civil Code, the applicable interest rate is six
percent per annum. Since the bill of lading did not specify the amount of demurrage, and
the sum claimed by private respondent increased as the days went by, the total amount
demanded cannot be deemed to have been established with reasonable certainty until
the trial court rendered its judgment. Indeed, (u)nliquidated damages or claims, it is said,
are those which are not or cannot be known until definitely ascertained, assessed and
determined by the courts after presentation of proof. [32] Consequently, the legal interest
rate is six percent, to be computed from September 28, 1990, the date of the trial courts
decision. And in accordance with Philippine Natonal Bank[33] and Eastern Shipping,[34]the
rate of twelve percent per annum shall be charged on the total then outstanding, from the
time the judgment becomes final and executory until its satisfaction.
Finally, the Court notes that the matter of attorneys fees was taken up only in the
dispositive portion of the trial courts decision. This falls short of the settled requirement
that the text of the decision should state the reason for the award of attorneys fees, for
without such justification, its award would be a conclusion without a premise, its basis
being improperly left to speculation and conjecture.[35]
WHEREFORE, the assailed Decision is hereby AFFIRMED with
the MODIFICATION that the legal interest of six percent per annum shall be computed
from September 28, 1990 until its full payment before finality of judgment. The rate of
interest shall be adjusted to twelve percent per annum, computed from the time said
judgment became final and executory until full satisfaction. The award of attorneys fees
is DELETED.
SO ORDERED.
 [Syllabus]

FIRST DIVISON

[G.R. No. 113926. October 23, 1996]

SECURITY BANK AND TRUST COMPANY, petitioner, vs. REGIONAL

TRIAL COURT OF MAKATI, BRANCH 61, MAGTANGGOL
EUSEBIO and LEILA VENTURA, respondents.

DECISION
HERMOSISIMA, JR., J.:

Questions of law which are the first impression are sought to be resolved in this
case: Should the rate of interest on a loan or forbearance of money, goods or credits, as
stipulated in a contract, far in excess of the ceiling prescribed under or pursuant to the
Usury Law, prevail over Section 2 of Central Bank Circular No. 905 which prescribes that
the rate of interest thereof shall continue to be 12% per annum? Do the Courts have the
discretion to arbitrarily override stipulated interest rates of promissory notes and
stipulated interest rates of promissory notes and thereby impose a 12% interest on the
loans, in the absence of evidence justifying the impositions of a higher rate?
This is a petition for review on certiorari for the purpose of assailing the decision of
Honorable Judge Fernando V. Gorospe of the Regional Trial Court of Makati, Branch 61,
dated March 30, 1993, which found private respondent Eusebio liable to petitioner for a
sum of money. Interest was lowered by the court a quo from 23% per annum as agreed
upon by the parties to 12% per annum.
The undisputed facts are as follows:
On April 27, 1983, private respondent Magtanggol Eusebio executed Promissory
Note No. TL/74/178/83 in favor of petitioner Security Bank and Trust Co. (SBTC) in the
total amount of One Hundred Thousand Pesos (P100,000.00) payable in six monthly
installments with a stipulated interest of 23% per annum up to the fifth installments. [1]
On July 28, 1983, respondent Eusebio again executed Promissory note No
TL/74/1296/83 in favor of petitioner SBTC. Respondent bound himself to pay the sum of
One Hundred Thousand Pesos (P100.000.00) in six (6) monthly installments plus 23%
interest per annum.[2]
Finally, another Promissory Note No. TL74/1491/83 was executed on August 31,
1983 in the amount of Sixty Five Thousand Pesos (P65,000.00). Respondent agreed to
pay this note in six (6) monthly installments plus interest at the rate of 23% per annum. [3]
On all the abovementioned notes, private respondents Leila Ventura had signed as
co-maker.[4]
 Upon maturity which fell on the different dates below, the principal balance remaining
on the notes stood at:

1) PN No. TL/74/748/83 P16,665.00 as of September 1983.

2) PN No. TL/74/1296/83 P83,333.00 as of August 1983

3) PN No. TL/74/1991/83 P65,000.00 as of August 1983.

Upon the failure and refusal of respondent Eusebio to pay the aforestated balance
payable, a collectible case was filed in court by petitioner SBTC.[5] On March 30, 1993,
the court a quo rendered a judgment in favor of petitioner SBTC, the dispositive portion
which reads:

WHEREFORE, premises above-considered, and plaintiffs claim having been duly

proven, judgment is hereby rendered in favor of plaintiff and as against defendant
Eusebio who is hereby ordered to:

1. Pay the sum of P16,665.00, plus interest of 12% per annum starting 27 September
1983, until fully paid;

2. Pay the sum of P83,333.00, plus interest of 12% per annum starting 28 August
1983, until fully paid;

3. Pay the sum of P65,000.00, plus interest of 12% per annum starting 31 August
1983, until fully paid;

4. Pay the sum equivalent to 20% of the total amount due and payable to plaintiff as
and by way of attorneys fees; and to

5. Pay the cost of this suit.

SO ORDERED.[6]

On August 6, 1993, a motion for partial reconsideration was filed by petitioner SBTC
contending that:
(1) the interest rate agreed upon by the parties during the signing of the promissory notes
was 23% per annum;
(2) the interests awarded should be compounded quarterly from due date as provided in
three (3) promissory notes;
(3) defendant Leila Ventura should likewise be held liable to pay the balance on
the promissory notes since she has signed as co-maker and as such, is liable jointly
and severally with defendant Eusebio without a need for demand upon her. [7]
 Consequently, an Order was issued by the court a quo denying the motion to grant
the rates of interest beyond 12% per annum; and holding defendant Leila Ventura jointly
and severally liable with co-defendant Eusebio.
Hence, this petition.
The sole issue to be settled in this petition is whether or not the 23% rate of interest
per annum agreed upon by petitioner bank and respondents is allowable and not against
the Usury Law.
We find merit in this petition.
From the examination of the records, it appears that indeed the agreed rate of interest
as stipulated on the three (3) promissory notes is 23% per annum.[8] The applicable
provision of law is the Central Bank Circular No. 905 which took effect on December 22,
1982, particularly Sections 1 and 2 which state:[9]

Sec. 1. The rate of interest, including commissions, premiums, fees and other charges,
on a loan or forbearance of any money, goods or credits, regardless of maturity and
whether secured or unsecured, that may be charged or collected by any person,
whether natural or judicial, shall not be subject to any ceiling prescribed under or
pursuant to the Usury Law, as amended.

Sec. 2. The rate of interest for the loan or forbearance of any money, goods or credits
and the rate allowed in judgments, in the absence of express contract as to such rate of
interest, shall continue to be twelve per cent (12%) per annum.

CB Circular 905 was issued by the Central Banks Monetary Board pursuant to P.D.
1684 empowering them to prescribe the maximum rates of interest for loans and certain
forbearances, to wit:

SECTION 1. Section 1-a of Act No. 2655, as amended, is hereby amended to read as
follows:

SEC. 1-a The Monetary Board is hereby authorized to prescribed the maximum rate or
rates of interest for the loan or renewal thereof or the forbearance of any money,
goods or credits, and to change such rate or rates whenever warranted by prevailing
economic and social conditions: Provided, That changes in such rates or rates may be
effected gradually on scheduled dates announced in advance.

In the exercise of the authority herein granted, the Monetary Board may prescribed higher
maximum rates for loans of low priority, such as consumer loans or renewals thereof as well as
such loans made by pawnshops, finance companies and other similar credit institutions although
the rates prescribed for these institutions need not necessarily be uniform. The Monetary Board
is also authorized to prescribed different maximum rate or rates for different types of
borrowings, including deposits and deposit substitutes, or loans of financial intermediaries.[10]
This court has ruled in the case of Philippine National Bank v. Court of Appeals [11] that:

P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to
stipulate freely regarding any subsequent adjustment in the interest rate that shall
accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to
adjust, upward or downward, the interest previously stipulated.

All the promissory notes were signed in 1983 and, therefore, were already covered
by CB Circular No. 905. Contrary to the claim of respondent court, this circular did not
repeal nor in anyway amend the Usury Law but simply suspended the latters effectivity.
Basic is the rule of statutory construction that when the law is clear and unambiguous,
the court is left with no alternative but to apply the same according to its clear
language. As we have held in the case of Quijano v. Development Bank of
the Philippines:[12]

xxx We cannot see any room for interpretation or construction in the clear and
unambiguous language of the above-quoted provision of law. This Court had
steadfastly adhered to the doctrine that its first and fundamental duty is the application
of the law according to its express terms, interpretation being called for only when
such literal application is impossible. No process of interpretation or construction
need be resorted to where a provision of law peremptorily calls for application. Where
a requirement or condition is made in explicit and unambiguous terms, no discretion is
left to the judiciary. It must see to it that its mandate is obeyed.

The rate of interest was agreed upon by the parties freely. Significantly, respondent
did not question that rate. It is not for respondent court a quo to change the stipulations
in the contract where it is not illegal. Furthermore, Article 1306 of the New Civil code
provides 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. We find no valid reason for the respondent
court a quo to impose a 12% rate of interest on the principal balance owing to petitioner
by respondent in the presence of a valid stipulation. In a loan or forbearance of money,
the interest due should be that stipulated in writing, and in the absence thereof, the rate
shall be 12% per annum.[13] Hence, only in the absence of a stipulation can the court
impose the 12% rate of interest.
The promissory notes were signed by both parties voluntarily. Therefore, stipulations
therein are binding between them. Respondent Eusebio, likewise, did not question any of
the stipulations therein. In fact, in the Comment file by respondent Eusebio to this court,
he chose not to question the decision and instead expressed his desire to negotiate with
the petitioner bank for terms within which to settle his obligation.[14]
IN VIEW OF THE FOREGOING, the decision of the respondent court a quo, is hereby
AFFIRMED with the MODIFICATION that the rate of interest that should be imposed be
23% per annum.
 SO ORDERED.

SYLLABUS

1. CIVIL LAW; LOANS; INTEREST; USURIOUS, NOT A CASE OF; APPLICABILITY OF

CENTRAL BANK CIRCULAR 905 IN CASE AT BENCH.- From the examination of
the records, it appears that indeed the agreed rate of interest as stipulated on the
three (3) promissory notes is 23% per annum. The applicable provision of law is
Central Bank Circular No. 905 which took effect of December 22, 1982, particularly
Sections 1 and 2. x x x CB Circular 905 was issued by the Central Bank's Monetary
Board pursuant to P.D. 1684 empowering them to prescribe the maximum rates of
interest for loans and certain forbearances. x x x All the promissory notes were signed
in 1983 and, therefore, were already covered by CB Circular No. 905. Contrary to the
claim of respondent court, this circular did not repeal nor in anyway amend the Usury
Law but simply suspended the latter's effectivity.
2. STATUTORY CONSTRUCTION; RULE APPLICABLE WHEN THE LAW IS CLEAR
AND UNAMBIGUOUS.- Basic is the rule of statutory construction that when the law
is clear and unambiguous, the court is left with no alternative but to apply the same
according to its clear language.
3. CIVIL LAW; LOANS; INTEREST RATE WHEN VALIDLY STIPULATED MAY NOT BE
CHANGED; CASE AT BENCH.- The rate of interest was agreed upon by the parties
freely.Significantly, respondent did not question that rate. It is not for respondent court
a quo to change the stipulations in the contract where it is not illegal. Furthermore,
Article 1306 of the New Civil Code provides 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. We find no valid reason for the respondent court a quo to impose a 12% rate
of interest on the principal balance owing to petitioner by respondent in the presence
of a valid stipulation.
4. ID.; ID.; ID.; 12% INTEREST RATE IS IMPOSED WHEN THERE IS NO STIPULATED
INTEREST DUE.- In a loan or forbearance of money, the interest due should be that
stipulated in writing, and in the absence thereof, the rate shall be 12% per
annum. Hence, only in the absence of a stipulation can the court impose the 12%
rate of interest.
 Republic of the Philippines
SUPREME COURT
Baguio City

FIRST DIVISION

G.R. No. 113412 April 17, 1996

Spouses PONCIANO ALMEDA and EUFEMIA P. ALMEDA, petitioner,

vs.
THE COURT OF APPEALS and PHILIPPINE NATIONAL BANK, respondents.

KAPUNAN, J.:p

On various dates in 1981, the Philippine National Bank granted to herein petitioners, the spouses Ponciano L. Almeda and Eufemia P.
Almeda several loan/credit accommodations totaling P18.0 Million pesos payable in a period of six years at an interest rate of 21% per
annum. To secure the loan, the spouses Almeda executed a Real Estate Mortgage Contract covering a 3,500 square meter parcel of land,
together with the building erected thereon (the Marvin Plaza) located at Pasong Tamo, Makati, Metro Manila. A credit agreement embodying
the terms and conditions of the loan was executed between the parties. Pertinent portions of the said agreement are quoted below:

SPECIAL CONDITIONS

xxx xxx xxx

The loan shall be subject to interest at the rate of twenty one per cent (21%) per
annum, payable semi-annually in arrears, the first interest payment to become due
and payable six (6) months from date of initial release of the loan. The loan shall
likewise be subject to the appropriate service charge and a penalty charge of three
per cent (30%) per annum to be imposed on any amount remaining unpaid or not
rendered when due.

xxx xxx xxx

III. OTHER CONDITIONS

(c) Interest and Charges

(1) The Bank reserves the right to increase the interest rate within the
limits allowed by law at any time depending on whatever policy it may
adopt in the future; provided, that the interest rate on this/these
accommodations shall be correspondingly decreased in the event
that the applicable maximum interest rate is reduced by law or by the
Monetary Board. In either case, the adjustment in
the interest rate agreed upon shall take effect on the effectivity date
of the increase or decrease of the maximum interest rate.1

Between 1981 and 1984, petitioners made several partial payments on the loan totaling.
P7,735,004.66,2 a substantial portion of which was applied to accrued interest.3 On March 31, 1984,
respondent bank, over petitioners' protestations, raised the interest rate to 28%, allegedly pursuant
to Section III-c (1) of its credit agreement. Said interest rate thereupon increased from an initial 21%
to a high of 68% between March of 1984 to September, 1986.4

Petitioner protested the increase in interest rates, to no avail. Before the loan was to mature in
March, 1988, the spouses filed on February 6, 1988 a petition for declaratory relief with prayer for a
writ of preliminary injunction and temporary restraining order with the Regional Trial Court of Makati,
docketed as Civil Case No. 18872. In said petition, which was raffled to Branch 134 presided by
Judge Ignacio Capulong, the spouses sought clarification as to whether or not the PNB could
unilaterally raise interest rates on the loan, pursuant to the credit agreement's escalation clause, and
in relation to Central Bank Circular No. 905. As a preliminary measure, the lower court, on March 3,
1988, issued a writ of preliminary injunction enjoining the Philippine National Bank from enforcing an
interest rate above the 21% stipulated in the credit agreement. By this time the spouses were
already in default of their loan obligations.

Invoking the Law on Mandatory Foreclosure (Act 3135, as amended and P.D. 385), the PNB
countered by ordering the extrajudicial foreclosure of petitioner's mortgaged properties and
scheduled an auction sale for March 14, 1989. Upon motion by petitioners, however, the lower court,
on April 5, 1989, granted a supplemental writ of preliminary injunction, staying the public auction of
the mortgaged property.

On January 15, 1990, upon the posting of a counterbond by the PNB, the trial court dissolved the
supplemental writ of preliminary injunction. Petitioners filed a motion for reconsideration. In the
interim, respondent bank once more set a new date for the foreclosure sale of Marvin Plaza which
was March 12, 1990. Prior to the scheduled date, however, petitioners tendered to respondent bank
the amount of P40,142,518.00, consisting of the principal (P18,000,000.00) and accrued interest
calculated at the originally stipulated rate of 21%. The PNB refused to accept the payment.5

As a result of PNB's refusal of the tender of payment, petitioners, on March 8, 1990, formally
consigned the amount of P40,142,518.00 with the Regional Trial Court in Civil Case No. 90-663.
They prayed therein for a writ of preliminary injunction with a temporary restraining order. The case
was raffled to Branch 147, presided by Judge Teofilo Guadiz. On March 15, 1990, respondent bank
sought the dismissal of the case.

On March 30, 1990 Judge Guadiz in Civil Case No. 90-663 issued an order granting the writ of
preliminary injunction enjoining the foreclosure sale of "Marvin Plaza" scheduled on March 12, 1990.
On April 17, 1990 respondent bank filed a motion for reconsideration of the said order.

On August 16, 1991, Civil Case No. 90-663 we transferred to Branch 66 presided by Judge Eriberto
Rosario who issued an order consolidating said case with Civil Case 18871 presided by Judge
Ignacio Capulong.

For Judge Ignacio's refusal to lift the writ of preliminary injunction issued March 30, 1990,
respondent bank filed a petition for Certiorari, Prohibition and Mandamus with respondent Court of
Appeals, assailing the following orders of the Regional Trial Court:

1. Order dated March 30, 1990 of Judge Guadiz granting the writ of preliminary
injunction restraining the foreclosure sale of Mavin Plaza set on March 12, 1990;

2. Order of Judge Ignacio Capulong dated January 10, 1992 denying respondent
bank's motion to lift the writ of injunction issued by Judge Guadiz as well as its
motion to dismiss Civil Case No. 90-663;
 3. Order of Judge Capulong dated July 3, 1992 denying respondent bank's
subsequent motion to lift the writ of preliminary injunction; and

4. Order of Judge Capulong dated October 20, 1992 denying respondent bank's
motion for reconsideration.

On August 27, 1993, respondent court rendered its decision setting aside the assailed orders and
upholding respondent bank's right to foreclose the mortgaged property pursuant to Act 3135, as
amended and P.D. 385. Petitioners' Motion for Reconsideration and Supplemental Motion for
Reconsideration, dated September 15, 1993 and October 28, 1993, respectively, were denied by
respondent court in its resolution dated January 10, 1994.

Hence the instant petition.

This appeal by certiorari from the respondent court's decision dated August 27, 1993 raises two
principal issues namely: 1) Whether or not respondent bank was authorized to raise its interest rates
from 21% to as high as 68% under the credit agreement; and 2) Whether or not respondent bank is
granted the authority to foreclose the Marvin Plaza under the mandatory foreclosure provisions of
P.D. 385.

In its comment dated April 19, 1994, respondent bank vigorously denied that the increases in the
interest rates were illegal, unilateral, excessive and arbitrary, it argues that the escalated rates of
interest it imposed was based on the agreement of the parties. Respondent bank further contends
that it had a right to foreclose the mortgaged property pursuant to P.D. 385, after petitioners were
unable to pay their loan obligations to the bank based on the increased rates upon maturity in 1984.

The instant petition is impressed with merit.

The binding effect of any agreement between parties to a contract is premised on two settled
principles: (1) that any obligation arising from contract has the force of law between the parties; and
(2) that there must be mutuality between the parties based on their essential equality.6 Any contract
which appears to be heavily weighed in favor of one of the parties so as to lead to an
unconscionable result is void. Any stipulation regarding the validity or compliance of the contract
which is left solely to the will of one of the parties, is likewise, invalid.

It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank
unilaterally altered the terms of its contract with petitioners by increasing the interest rates on the
loan without the prior assent of the latter. In fact, the manner of agreement is itself explicitly
stipulated by the Civil Code when it provides, in Article 1956 that "No interest shall be due unless it
has been expressly stipulated in writing." What has been "stipulated in writing" from a perusal of
interest rate provision of the credit agreement signed between the parties is that petitioners were
bound merely to pay 21% interest, subject to a possible escalation or de-escalation, when 1) the
circumstances warrant such escalation or de-escalation; 2) within the limits allowed by law; and 3)
upon agreement.

Indeed, the interest rate which appears to have been agreed upon by the parties to the contract in
this case was the 21% rate stipulated in the interest provision. Any doubt about this is in fact readily
resolved by a careful reading of the credit agreement because the same plainly uses the phrase
"interest rate agreed upon," in reference to the original 21% interest rate. The interest provision
states:

(c) interest and Charges

 (1) The Bank reserves the right to increase the interest rate within the limits allowed
by law at any time depending on whatever policy it may adopt in the future; provided,
that the interest rate on this/these accommodations shall be correspondingly
decreased in the event that the applicable maximum interest rate is reduced by law
or by the Monetary Board. In either case, the adjustment in the interest rate agreed
upon shall take effect on the effectivity date of the increase or decrease of the
maximum interest rate.

In Philippine National Bank v. Court of Appeals, 7 this Court disauthorized respondent bank from
unilaterally raising the interest rate in the borrower's loan from 18% to 32%, 41% and 48% partly
because the aforestated increases violated the principle of mutuality of contracts expressed in Article
1308 of the Civil Code. The Court held:

CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury
Law ceiling on interest rates —

. . . increases in interest rates are not subject to any ceiling

prescribed by the Usury Law.

but it did not authorize the PNB, or any bank for that matter, to unilaterally and
successively increase the agreed interest rates from 18% to 48% within a span of
four (4) months, in violation of P.D. 116 which limits such changes to once every
twelve months.

Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest
rate on the private respondent's loan, violated the mutuality of contracts ordained in
Article 1308 of the Civil Code:

Art. 308. The contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them.

In order that obligations arising from contracts may have the force of law between the
parties, there must be mutuality between the parties based on their essential
equality. A contract containing a condition which makes its fulfillment dependent
exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia
vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million
loan agreement between the PNB and the private respondent gave the PNB a
license (although in fact there was none) to increase the interest rate at will during
the term of the loan, that license would have been null and void for being violative of
the principle of mutuality essential in contracts. It would have invested the loan
agreement with the character of a contract of adhesion, where the parties do not
bargain on equal footing, the weaker party's (the debtor) participation being reduced
to the alternative "to take it or lease it" (Qua vs. Law Union & Rock Insurance Co., 95
Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts of
justice must protect against abuse and imposition.

PNB's successive increases of the interest rate on the private respondent's loan,
over the latter's protest, were arbitrary as they violated an express provision of the
Credit Agreement (Exh. 1) Section 9.01 that its terms "may be amended only by an
instrument in writing signed by the party to be bound as burdened by such
amendment." The increases imposed by PNB also contravene Art. 1956 of the Civil
 Code which provides that "no interest shall be due unless it has been expressly
stipulated in writing."

The debtor herein never agreed in writing to pay the interest increases fixed by the
PNB beyond 24%per annum, hence, he is not bound to pay a higher rate than that.

That an increase in the interest rate from 18% to 48% within a period of four (4)
months is excessive, as found by the Court of Appeals, is indisputable.

Clearly, the galloping increases in interest rate imposed by respondent bank on petitioners' loan,
over the latter's vehement protests, were arbitrary.

Moreover, respondent bank's reliance on C.B. Circular No. 905, Series of 1982 did not authorize the
bank, or any lending institution for that matter, to progressively increase interest rates on borrowings
to an extent which would have made it virtually impossible for debtors to comply with their own
obligations. True, escalation clauses in credit agreements are perfectly valid and do not contravene
public policy. Such clauses, however, (as are stipulations in other contracts) are nonetheless still
subject to laws and provisions governing agreements between parties, which agreements — while
they may be the law between the contracting parties — implicitly incorporate provisions of existing
law. Consequently, while the Usury Law ceiling on interest rates was lifted by C.B. Circular 905,
nothing in the said circular could possibly be read as granting respondent bank carte
blanche authority to raise interest rates to levels which would either enslave its borrowers or lead to
a hemorrhaging of their assets. Borrowing represents a transfusion of capital from lending
institutions to industries and businesses in order to stimulate growth. This would not, obviously, be
the effect of PNB's unilateral and lopsided policy regarding the interest rates of petitioners'
borrowings in the instant case.

Apart from violating the principle of mutuality of contracts, there is authority for disallowing the
interest rates imposed by respondent bank, for the credit agreement specifically requires that the
increase be "within the limits allowed by law". In the case of PNB v. Court of Appeals, cited above,
this Court clearly emphasized that C.B. Circular No. 905 could not be properly invoked to justify the
escalation clauses of such contracts, not being a grant of specific authority.

Furthermore, the escalation clause of the credit agreement requires that the same be made "within
the limits allowed by law," obviously referring specifically to legislative enactments not administrative
circulars. Note that the phrase "limits imposed by law," refers only to the escalation clause. However,
the same agreement allows reduction on the basis of law or the Monetary Board. Had the parties
intended the word "law" to refer to both legislative enactments and administrative circulars and
issuances, the agreement would not have gone as far as making a distinction between "law or the
Monetary Board Circulars" in referring to mutually agreed upon reductions in interest rates. This
distinction was the subject of the Court's disquisition in the case of Banco Filipino Savings and
Mortgage Bank v. Navarro8 where the Court held that:

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." (Emphasis supplied). "An administrative regulation adopted pursuant
to law has the force and effect of law." "That administrative rules and regulations
have the force of law can no longer be questioned."

The distinction between a law and an administrative regulation is recognized in the

Monetary Board guidelines quoted in the latter 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 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."

Petitioners never agreed in writing to pay the increased interest rates demanded by respondent bank
in contravention to the tenor of their credit agreement. That an increase in interest rates from 18% to
as much as 68% is excessive and unconscionable is indisputable. Between 1981 and 1984,
petitioners had paid an amount equivalent to virtually half of the entire principal
(P7,735,004.66) which was applied to interest alone. By the time the spouses tendered the amount
of P40,142,518.00 in settlement of their obligations; respondent bank was demanding
P58,377,487.00 over and above those amounts already previously paid by the spouses.

Escalation clauses are not basically wrong or legally objectionable so long as they are not solely
potestative but based on reasonable and valid grounds.9 Here, as clearly demonstrated above, not
only the increases of the interest rates on the basis of the escalation clause patently unreasonable
and unconscionable, but also there are no valid and reasonable standards upon which the increases
are anchored.

We go now to respondent bank's claim that the principal issue in the case at bench involves its right
to foreclose petitioners' properties under P.D. 385. We find respondent's pretense untenable.

Presidential Decree No. 385 was issued principally to guarantee that government financial
institutions would not be denied substantial cash inflows necessary to finance the government's
development projects all over the country by large borrowers who resort to litigation to prevent or
delay the government's collection of their debts or loans. 10 In facilitating collection of debts through
its automatic foreclosure provisions, the government is however, not exempted from observing basic
principles of law, and ordinary fairness and decency under the due process clause of the
Constitution. 11

In the first place, because of the dispute regarding the interest rate increases, an issue which was
never settled on merit in the courts below, the exact amount of petitioner's obligations could not be
determined. Thus, the foreclosure provisions of P.D. 385 could be validly invoked by respondent
only after settlement of the question involving the interest rate on the loan, and only after the
spouses refused to meet their obligations following such determination. In Filipinas Marble
Corporation v. Intermediate Appellate Court, 12 involving P.D. 385's provisions on mandatory
foreclosure, we held that:

We cannot, at this point, conclude that respondent DBP together with the Bancom
people actually misappropriated and misspent the $5 million loan in whole or in part
although the trial court found that there is "persuasive" evidence that such acts were
committed by the respondent. This matter should rightfully be litigated below in the
main action. Pending the outcome of such litigation, P.D. 385 cannot automatically
be applied for if it is really proven that respondent DBP is responsible for the
misappropriation of the loan, even if only in part, then the foreclosure of the
petitioner's properties under the provisions of P.D. 385 to satisfy the whole amount of
 the loan would be a gross mistake. It would unduly prejudice the petitioner, its
employees and their families.

Only after trial on the merits of the main case can the true amount of the loan which
was applied wisely or not, for the benefit of the petitioner be determined.
Consequently, the extent of the loan where there was no failure of consideration and
which may be properly satisfied by foreclosure proceedings under P.D. 385 will have
to await the presentation of evidence in a trial on the merits.

In Republic Planters Bank v. Court of Appeals 13 the Court reiterating the dictum in Filipinas Marble
Corporation, held:

The enforcement of P.D. 385 will sweep under the rug' this iceberg of a scandal in
the sugar industry during the Marcos Martial Law years. This we can not allow to
happen. For the benefit of future generations, all the dirty linen in the
PHILSUCUCOM/NASUTRA/RPB closets have to be exposed in public so that the
same may NEVER be repeated.

It is of paramount national interest, that we allow the trial court to proceed with
dispatch to allow the parties below to present their evidence.

Furthermore, petitioners made a valid consignation of what they, in good faith and in compliance
with the letter of the Credit Agreement, honestly believed to be the real amount of their remaining
obligations with the respondent bank. The latter could not therefore claim that there was no honest-
to-goodness attempt on the part of the spouse to settle their obligations. Respondent's rush to
inequitably invoke the foreclosure provisions of P.D. 385 through its legal machinations in the courts
below, in spite of the unsettled differences in interpretation of the credit agreement was obviously
made in bad faith, to gain the upper hand over petitioners.

In the face of the unequivocal interest rate provisions in the credit agreement and in the law requiring
the parties to agree to changes in the interest rate in writing, we hold that the unilateral and
progressive increases imposed by respondent PNB were null and void. Their effect was to increase
the total obligation on an eighteen million peso loan to an amount way over three times that which
was originally granted to the borrowers. That these increases, occasioned by crafty manipulations in
the interest rates is unconscionable and neutralizes the salutary policies of extending loans to spur
business cannot be disputed.

WHEREFORE, PREMISES CONSIDERED, the decision of the Court of Appeals dated August 27,
1993, as well as the resolution dated February 10, 1994 is hereby REVERSED AND SET ASIDE.
The case is remanded to the Regional Trial Court of Makati for further proceedings.

SO ORDERED.
 SECOND DIVISION

[G.R. No. 141811. November 15, 2001]

FIRST METRO INVESTMENT CORPORATION, petitioner, vs. ESTE DEL

SOL MOUNTAIN RESERVE, INC., VALENTIN S. DAEZ, JR.,
MANUEL Q. SALIENTES, MA. ROCIO A. DE VEGA, ALEXANDER
G. ASUNCION, ALBERTO* M. LADORES, VICENTE M. DE VERA,
JR., and FELIPE B. SESE, respondents.

DECISION
DE LEON, JR., J.:

Before us is a petition for review on certiorari of the Decision[1] of the Court of

Appeals[2] dated November 8, 1999 in CA-G.R. CV No. 53328 reversing the Decision[3] of the
Regional Trial Court of Pasig City, Branch 159 dated June 2, 1994 in Civil Case No.
39224. Essentially, the Court of Appeals found and declared that the fees provided for in the
Underwriting and Consultancy Agreements executed by and between petitioner First Metro
Investment Corp. (FMIC) and respondent Este del Sol Mountain Reserve, Inc. (Este del Sol)
simultaneously with the Loan Agreement dated January 31, 1978 were mere subterfuges to
camouflage the usurious interest charged by petitioner FMIC.
The facts of the case are as follows:
It appears that on January 31, 1978, petitioner FMIC granted respondent Este del Sol a loan
of Seven Million Three Hundred Eighty-Five Thousand Five Hundred Pesos (P7,385,500.00) to
finance the construction and development of the Este del Sol Mountain Reserve, a sports/resort
complex project located at Barrio Puray, Montalban, Rizal.[4]
Under the terms of the Loan Agreement, the proceeds of the loan were to be released on
staggered basis. Interest on the loan was pegged at sixteen (16%) percent per annum based on the
diminishing balance. The loan was payable in thirty-six (36) equal and consecutive monthly
amortizations to commence at the beginning of the thirteenth month from the date of the first
release in accordance with the Schedule of Amortization.[5] In case of default, an acceleration
clause was, among others, provided and the amount due was made subject to a twenty (20%)
percent one-time penalty on the amount due and such amount shall bear interest at the highest rate
permitted by law from the date of default until full payment thereof plus liquidated damages at the
rate of two (2%) percent per month compounded quarterly on the unpaid balance and accrued
interests together with all the penalties, fees, expenses or charges thereon until the unpaid balance
is fully paid, plus attorneys fees equivalent to twenty-five (25%) percent of the sum sought to be
recovered, which in no case shall be less than Twenty Thousand Pesos (P20,000.00) if the services
of a lawyer were hired.[6]
 In accordance with the terms of the Loan Agreement, respondent Este del Sol executed several
documents[7] as security for payment, among them, (a) a Real Estate Mortgage dated January 31,
1978 over two (2) parcels of land being utilized as the site of its development project with an area
of approximately One Million Twenty-Eight Thousand and Twenty-Nine (1,028,029) square
meters and particularly described in TCT Nos. N-24332 and N-24356 of the Register of Deeds of
Rizal, inclusive of all improvements, as well as all the machineries, equipment, furnishings and
furnitures existing thereon; and (b) individual Continuing Suretyship agreements by co-
respondents Valentin S. Daez, Jr., Manuel Q. Salientes, Ma. Rocio A. De Vega, Alexander G.
Asuncion, Alberto M. Ladores, Vicente M. De Vera, Jr. and Felipe B. Sese, all dated February 2,
1978, to guarantee the payment of all the obligations of respondent Este del Sol up to the aggregate
sum of Seven Million Five Hundred Thousand Pesos (P7,500,000 00) each.[8]
Respondent Este del Sol also executed, as provided for by the Loan Agreement, an
Underwriting Agreement on January 31, 1978 whereby petitioner FMIC shall underwrite on a best-
efforts basis the public offering of One Hundred Twenty Thousand (120,000) common shares of
respondent Este del Sols capital stock for a one-time underwriting fee of Two Hundred Thousand
Pesos (P200,000.00). In addition to the underwriting fee, the Underwriting Agreement provided
that for supervising the public offering of the shares, respondent Este del Sol shall pay petitioner
FMIC an annual supervision fee of Two Hundred Thousand Pesos (P200,000.00) per annum for a
period of four (4) consecutive years. The Underwriting Agreement also stipulated for the payment
by respondent Este del Sol to petitioner FMIC a consultancy fee of Three Hundred Thirty-Two
Thousand Five Hundred Pesos (P332,500.00) per annum for a period of four (4) consecutive
years.Simultaneous with the execution of and in accordance with the terms of the Underwriting
Agreement, a Consultancy Agreement was also executed on January 31, 1978 whereby respondent
Este del Sol engaged the services of petitioner FMIC for a fee as consultant to render general
consultancy services.[9]
In three (3) letters all dated February 22, 1978 petitioner billed respondent Este del Sol for the
amounts of [a] Two Hundred Thousand Pesos (P200,000.00) as the underwriting fee of petitioner
FMIC in connection with the public offering of the common shares of stock of respondent Este del
Sol; [b] One Million Three Hundred Thirty Thousand Pesos (P1,330,000.00) as consultancy fee
for a period of four (4) years; and [c] Two Hundred Thousand Pesos (P200,000.00) as supervision
fee for the year beginning February, 1978, in accordance to the Underwriting Agreement. [10] The
said amounts of fees were deemed paid by respondent Este del Sol to petitioner FMIC which
deducted the same from the first release of the loan.
Since respondent Este del Sol failed to meet the schedule of repayment in accordance with a
revised Schedule of Amortization, it appeared to have incurred a total obligation of Twelve Million
Six Hundred Seventy-Nine Thousand Six Hundred Thirty Pesos and Ninety-Eight Centavos
(P12,679,630.98) per the petitioners Statement of Account dated June 23, 1980,[11] to wit:

STATEMENT OF ACCOUNT OF
ESTE DEL SOL MOUNTAIN RESERVE, INC.
AS OF JUNE 23, 1980

PARTICULARS AMOUNT
Total amount due as of 11-22-78 per
revised amortization schedule dated
1-3-78 P7,999,631.42

Interest on P7,999,631.42 @ 16% p.a. from

11-22-78 to 2-22-79 (92 days) 327,096.04

Balance 8,326,727.46

One time penalty of 20% of the entire unpaid

obligations under Section 6.02 (ii) of
Loan Agreement 1,665,345.49

Past due interest under Section 6.02 (iii)

of loan Agreement:
@ 19% p.a. from 2-22-79 to 11-30-79
(281 days) 1,481,879.93
@ 21% p.a. from 11-30-79 to 6-23-80
(206 days) 1,200,714.10

Other charges publication of extra judicial

foreclosure of REM made on
5-23-80 & 6-6-80 4,964.00

Total Amount Due and Collectible as of

June 23, 1980 P12,679,630.98

Accordingly, petitioner FMIC caused the extrajudicial foreclosure of the real estate mortgage
on June 23, 1980.[12] At the public auction, petitioner FMIC was the highest bidder of the
mortgaged properties for Nine Million Pesos (P9,000,000.00). The total amount of Three Million
One Hundred Eighty-Eight Thousand Six Hundred Thirty Pesos and Seventy-Five Centavos
(P3,188,630.75) was deducted therefrom, that is, for the publication fee for the publication of the
Sheriffs Notice of Sale, Four Thousand Nine Hundred Sixty-Four Pesos (P4,964.00); for Sheriffs
fees for conducting the foreclosure proceedings, Fifteen Thousand Pesos (P15,000.00); and for
Attorneys fees, Three Million One Hundred Sixty-Eight Thousand Six Hundred Sixty-Six Pesos
and Seventy-Five Centavos (P3,168,666.75). The remaining balance of Five Million Eight
Hundred Eleven Thousand Three Hundred Sixty-Nine Pesos and Twenty-Five Centavos
(P5,811,369.25) was applied to interests and penalty charges and partly against the principal, due
as of June 23, 1980, thereby leaving a balance of Six Million Eight Hundred Sixty-Three Thousand
Two Hundred Ninety-Seven Pesos and Seventy-Three Centavos (P6,863,297.73) on the principal
amount of the loan as of June 23, 1980.[13]
Failing to secure from the individual respondents, as sureties of the loan of respondent Este
del Sol by virtue of their continuing surety agreements, the payment of the alleged deficiency
balance, despite individual demands sent to each of them,[14] petitioner instituted on November 11,
1980 the instant collection suit[15]against the respondents to collect the alleged deficiency balance
of Six Million Eight Hundred Sixty-Three Thousand Two Hundred Ninety-Seven Pesos and
Seventy-Three Centavos (P6,863,297.73) plus interest thereon at twenty-one (21%) percent per
annum from June 24, 1980 until fully paid, and twenty-five (25%) percent thereof as and for
attorneys fees and costs.
In their Answer, the respondents sought the dismissal of the case and set up several special
and affirmative defenses, foremost of which is that the Underwriting and Consultancy Agreements
executed simultaneously with and as integral parts of the Loan Agreement and which provided for
the payment of Underwriting, Consultancy and Supervision fees were in reality subterfuges
resorted to by petitioner FMIC and imposed upon respondent Este del Sol to camouflage the
usurious interest being charged by petitioner FMIC.[16]
The petitioner FMIC presented as its witnesses during the trial: Cesar Valenzuela, its former
Senior Vice-President, Felipe Neri, its Vice-President for Marketing, and Dennis Aragon, an
Account Manager of its Account Management Group, as well as documentary evidence. On the
other hand, co-respondents Vicente M. De Vera, Jr. and Valentin S. Daez, Jr., and Perfecto Doroja,
former Senior Manager and Assistant Vice-President of FMIC, testified for the respondents.
After the trial, the trial court rendered its decision in favor of petitioner FMIC, the dispositive
portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against

defendants, ordering defendants jointly and severally to pay to plaintiff the amount of
P6,863,297.73 plus 21% interest per annum, from June 24, 1980, until the entire
amount is fully paid, plus the amount equivalent to 25% of the total amount due, as
attorneys fees, plus costs of suit.

Defendants counterclaims are dismissed, for lack of merit.

Finding the decision of the trial court unacceptable, respondents interposed an appeal to the
Court of Appeals. On November 8, 1999, the appellate court reversed the challenged decision of
the trial court. The appellate court found and declared that the fees provided for in the
Underwriting and Consultancy Agreements were mere subterfuges to camouflage the excessively
usurious interest charged by the petitioner FMIC on the loan of respondent Este del Sol; and that
the stipulated penalties, liquidated damages and attorneys fees were excessive, iniquitous,
unconscionable and revolting to the conscience, and declared that in lieu thereof, the stipulated
one time twenty (20%) percent penalty on the amount due and ten (10%) percent of the amount
due as attorneys fees would be reasonable and suffice to compensate petitioner FMIC for those
items. Thus, the appellate court dismissed the complaint as against the individual respondents
sureties and ordered petitioner FMIC to pay or reimburse respondent Este del Sol the amount of
Nine Hundred Seventy-One Thousand Pesos (P971,000.00) representing the difference between
what is due to the petitioner and what is due to respondent Este del Sol, based on the following
computation:[17]

A: DUE TO THE [PETITIONER]

Principal of Loan P7,382,500.00
Add: 20% one-time
Penalty 1,476,500.00
Attorneys fees 900,000.00 P9,759,000.00
Less: Proceeds of foreclosure
Sale 9,000,000.00
Deficiency P 759,000.00

B. DUE TO [RESPONDENT ESTE DEL SOL]

Return of usurious interest in the form of:

Underwriting fee P 200,000.00
Supervision fee 200,000.00
Consultancy fee 1,330,000.00
Total amount due Este P 1,730,000.00

The appellee is, therefore, obliged to return to the appellant Este del Sol the difference
of P971,000.00 or (P1,730,000.00 less P759,000.00).

Petitioner moved for reconsideration of the appellate courts adverse decision. However, this was
denied in a Resolution[18]dated February 9, 2000 of the appellate court.
Hence, the instant petition anchored on the following assigned errors:[19]

THE APPELLATE COURT HAS DECIDED QUESTIONS OF SUBSTANCE

IN A WAY NOT IN ACCORD WITH LAW AND WITH APPLICABLE
DECISIONS OF THIS HONORABLE COURT WHEN IT:

a] HELD THAT ALLEGEDLY THE UNDERWRITING AND

CONSULTANCY AGREEMENTS SHOULD NOT BE CONSIDERED
SEPARATE AND DISTINCT FROM THE LOAN AGREEMENT, AND
INSTEAD, THEY SHOULD BE CONSIDERED AS A SINGLE CONTRACT.

b] HELD THAT THE UNDERWRITING AND CONSULTANCY

AGREEMENTS ARE MERE SUBTERFUGES TO CAMOUFLAGE THE
USURIOUS INTEREST CHARGED BY THE PETITIONER.

c] REFUSED TO CONSIDER THE TESTIMONIES OF PETITIONERS

WITNESSES ON THE SERVICES PERFORMED BY PETITIONER.

d] REFUSED TO CONSIDER THE FACT [i] THAT RESPONDENTS HAD

WAIVED THEIR RIGHT TO SEEK RECOVERY OF THE AMOUNTS THEY
PAID TO PETITIONER, AND [ii] THAT RESPONDENTS HAD ADMITTED
THE VALIDITY OF THE UNDERWRITING AND CONSULTANCY
AGREEMENTS.

e] MADE AN ERRONEOUS COMPUTATION ON SUPPOSEDLY WHAT IS

DUE TO EACH PARTY AFTER THE FORECLOSURE SALE, AS SHOWN IN
PP. 34-35 OF THE ASSAILED DECISION, EVEN GRANTING JUST FOR THE
SAKE OF ARGUMENT THAT THE APPELLATE COURT WAS CORRECT
IN STIGMATIZING [i] THE PROVISIONS OF THE LOAN AGREEMENT
THAT REFER TO STIPULATED PENALTIES, LIQUIDATED DAMAGES
AND ATTORNEYS FEES AS SUPPOSEDLY EXCESSIVE, INIQUITOUS
AND UNCONSCIONABLE AND REVOLTING TO THE CONSCIENCE AND
[ii] THE UNDERWRITING, SUPERVISION AND CONSULTANCY
SERVICES AGREEMENT AS SUPPOSEDLY MERE SUBTERFUGES TO
CAMOUFLAGE THE USURIOUS INTEREST CHARGED UPON THE
RESPONDENT ESTE BY PETITIONER.

f] REFUSED TO CONSIDER THE FACT THAT RESPONDENT ESTE, AND

THUS THE INDIVIDUAL RESPONDENTS, ARE STILL OBLIGATED TO
THE PETITIONER.

Petitioner essentially assails the factual findings and conclusion of the appellate court that the
Underwriting and Consultancy Agreements were executed to conceal a usurious loan. Inquiry
upon the veracity of the appellate courts factual findings and conclusion is not the function of this
Court for the Supreme Court is not a trier of facts. Only when the factual findings of the trial court
and the appellate court are opposed to each other does this Court exercise its discretion to re-
examine the factual findings of both courts and weigh which, after considering the record of the
case, is more in accord with law and justice.
After a careful and thorough review of the record including the evidence adduced, we find no
reason to depart from the findings of the appellate court.
First, there is no merit to petitioner FMICs contention that Central Bank Circular No. 905
which took effect on January 1, 1983 and removed the ceiling on interest rates for secured and
unsecured loans, regardless of maturity, should be applied retroactively to a contract executed on
January 31, 1978, as in the case at bar, that is, while the Usury Law was in full force and effect.It
is an elementary rule of contracts that the laws, in force at the time the contract was made and
entered into, govern it.[20] More significantly, Central Bank Circular No. 905 did not repeal nor in
any way amend the Usury Law but simply suspended the latters effectivity.[21] The illegality of
usury is wholly the creature of legislation. A Central Bank Circular cannot repeal a law. Only a
law can repeal another law.[22] Thus, retroactive application of a Central Bank Circular cannot, and
should not, be presumed.[23]
Second, when a contract between two (2) parties is evidenced by a written instrument, such
document is ordinarily the best evidence of the terms of the contract. Courts only need to rely on
the face of written contracts to determine the intention of the parties. However, this rule is not
without exception.[24] The form of the contract is not conclusive for the law will not permit a
usurious loan to hide itself behind a legal form. Parol evidence is admissible to show that a written
document though legal in form was in fact a device to cover usury. If from a construction of the
whole transaction it becomes apparent that there exists a corrupt intention to violate the Usury
Law, the courts should and will permit no scheme, however ingenious, to becloud the crime of
usury.[25]
In the instant case, several facts and circumstances taken altogether show that the
Underwriting and Consultancy Agreements were simply cloaks or devices to cover an illegal
scheme employed by petitioner FMIC to conceal and collect excessively usurious interest, and
these are:
a) The Underwriting and Consultancy Agreements are both dated January 31, 1978 which is
the same date of the Loan Agreement.[26] Furthermore, under the Underwriting Agreement payment
of the supervision and consultancy fees was set for a period of four (4) years[27] to coincide
ultimately with the term of the Loan Agreement.[28] This fact means that all the said agreements
which were executed simultaneously were set to mature or shall remain effective during the same
period of time.
b) The Loan Agreement dated January 31, 1978 stipulated for the execution and delivery of
an underwriting agreement[29]and specifically mentioned that such underwriting agreement is a
condition precedent[30]for petitioner FMIC to extend the loan to respondent Este del Sol, indicating
and as admitted by petitioner FMICs employees,[31] that such Underwriting Agreement is part and
parcel of the Loan Agreement.[32]
c) Respondent Este del Sol was billed by petitioner on February 28, 1978 One Million Three
Hundred Thirty Thousand Pesos (P1,330,000.00)[33] as consultancy fee despite the clear provision
in the Consultancy Agreement that the said agreement is for Three Hundred Thirty-Two Thousand
Five Hundred Pesos (P332,500.00) per annum for four (4) years and that only the first year
consultancy fee shall be due upon signing of the said consultancy agreement.[34]
d) The Underwriting, Supervision and Consultancy fees in the amounts of Two Hundred
Thousand Pesos (P200,000.00), Two Hundred Thousand Pesos (P200,000.00) and One Million
Three Hundred Thirty Thousand Pesos (P1,330,000.00), respectively, were billed by petitioner to
respondent Este del Sol on February 22, 1978,[35] that is, on the same occasion of the first partial
release of the loan in the amount of Two Million Three Hundred Eighty-Two Thousand Five
Hundred Pesos (P2,382,500.00).[36] It is from this first partial release of the loan that the said
corresponding bills for Underwriting, Supervision and Consultancy fees were deducted and
apparently paid, thus, reverting back to petitioner FMIC the total amount of One Million Seven
Hundred Thirty Thousand Pesos (P1,730,000.00) as part of the amount loaned to respondent Este
del Sol.[37]
e) Petitioner FMIC was in fact unable to organize an underwriting/selling syndicate to sell any
share of stock of respondent Este del Sol and much less to supervise such a syndicate, thus failing
to comply with its obligation under the Underwriting Agreement.[38] Besides, there was really no
need for an Underwriting Agreement since respondent Este del Sol had its own licensed marketing
arm to sell its shares and all its shares have been sold through its marketing arm.[39]
f) Petitioner FMIC failed to comply with its obligation under the Consultancy
Agreement,[40] aside from the fact that there was no need for a Consultancy Agreement, since
respondent Este del Sols officers appeared to be more competent to be consultants in the
development of the projected sports/resort complex.[41]
All the foregoing established facts and circumstances clearly belie the contention of petitioner
FMIC that the Loan, Underwriting and Consultancy Agreements are separate and independent
transactions. The Underwriting and Consultancy Agreements which were executed and delivered
contemporaneously with the Loan Agreement on January 31, 1978 were exacted by petitioner
FMIC as essential conditions for the grant of the loan. An apparently lawful loan is usurious when
it is intended that additional compensation for the loan be disguised by an ostensibly unrelated
contract providing for payment by the borrower for the lenders services which are of little value
or which are not in fact to be rendered, such as in the instant case.[42] In this connection, Article
1957 of the New Civil Code clearly provides that:

Art. 1957. Contracts and stipulations, under any cloak or device whatever, intended to
circumvent the laws against usury shall be void. The borrower may recover in
accordance with the laws on usury.

In usurious loans, the entire obligation does not become void because of an agreement
for usurious interest; the unpaid principal debt still stands and remains valid but the
stipulation as to the usurious interest is void, consequently, the debt is to be considered
without stipulation as to the interest.[43] The reason for this rule was adequately explained in the
case of Angel Jose Warehousing Co., Inc. v. Child Enterprises[44]where this Court held:

In simple loan with stipulation of usurious interest, the prestation of the debtor to pay
the principal debt, which is the cause of the contract (Article 1350, Civil Code), is not
illegal. The illegality lies only as to the prestation to pay the stipulated interest; hence,
being separable, the latter only should be deemed void, since it is the only one that is
illegal.

Thus, the nullity of the stipulation on the usurious interest does not affect the lenders right to
receive back the principal amount of the loan. With respect to the debtor, the amount paid as
interest under a usurious agreement is recoverable by him, since the payment is deemed to have
been made under restraint, rather than voluntarily.[45]
This Court agrees with the factual findings and conclusion of the appellate court, to wit:

We find the stipulated penalties, liquidated damages and attorneys fees, excessive,
iniquitous and unconscionable and revolting to the conscience as they hardly allow the
borrower any chance of survival in case of default. And true enough, ESTE folded up
when the appellee extrajudicially foreclosed on its (ESTEs) development project and
literally closed its offices as both the appellee and ESTE were at the time holding
office in the same building. Accordingly, we hold that 20% penalty on the amount due
and 10% of the proceeds of the foreclosure sale as attorneys fees would suffice to
compensate the appellee, especially so because there is no clear showing that the
appellee hired the services of counsel to effect the foreclosure; it engaged counsel
only when it was seeking the recovery of the alleged deficiency.

Attorneys fees as provided in penal clauses are in the nature of liquidated damages. So long
as such stipulation does not contravene any law, morals, or public order, it is binding upon the
parties. Nonetheless, courts are empowered to reduce the amount of attorneys fees if the same is
iniquitous or unconscionable.[46] Articles 1229 and 2227 of the New Civil Code provide that:

Art. 1229. The judge shall equitably reduce the penalty when the principal obligation
has been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable.

Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall

be equitably reduced if they are iniquitous or unconscionable.

In the case at bar, the amount of Three Million One Hundred Eighty-Eight Thousand Six
Hundred Thirty Pesos and Seventy-Five Centavos (P3,188,630.75) for the stipulated attorneys fees
equivalent to twenty-five (25%) percent of the alleged amount due, as of the date of the auction
sale on June 23, 1980, is manifestly exorbitant and unconscionable. Accordingly, we agree with
the appellate court that a reduction of the attorneys fees to ten (10%) percent is appropriate and
reasonable under the facts and circumstances of this case.
Lastly, there is no merit to petitioner FMICs contention that the appellate court erred in
awarding an amount allegedly not asked nor prayed for by respondents. Whether the exact amount
of the relief was not expressly prayed for is of no moment for the reason that the relief was plainly
warranted by the allegations of the respondents as well as by the facts as found by the appellate
court. A party is entitled to as much relief as the facts may warrant.[47]
In view of all the foregoing, the Court is convinced that the appellate court committed no
reversible error in its challenged Decision.
WHEREFORE, the instant petition is hereby DENIED, and the assailed Decision of the
Court of Appeals is AFFIRMED. Costs against petitioner.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-11827 July 31, 1961

FERNANDO A. GAITE, plaintiff-appellee,

vs.
ISABELO FONACIER, GEORGE KRAKOWER, LARAP MINES & SMELTING CO., INC.,
SEGUNDINA VIVAS, FRNACISCO DANTE, PACIFICO ESCANDOR and FERNANDO
TY, defendants-appellants.

Alejo Mabanag for plaintiff-appellee.

Simplicio U. Tapia, Antonio Barredo and Pedro Guevarra for defendants-appellants.

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

This appeal comes to us directly from the Court of First Instance because the claims involved
aggregate more than P200,000.00.

Defendant-appellant Isabelo Fonacier was the owner and/or holder, either by himself or in a
representative capacity, of 11 iron lode mineral claims, known as the Dawahan Group, situated in
the municipality of Jose Panganiban, province of Camarines Norte.

By a "Deed of Assignment" dated September 29, 1952(Exhibit "3"), Fonacier constituted and
appointed plaintiff-appellee Fernando A. Gaite as his true and lawful attorney-in-fact to enter into a
contract with any individual or juridical person for the exploration and development of the mining
claims aforementioned on a royalty basis of not less than P0.50 per ton of ore that might be
extracted therefrom. On March 19, 1954, Gaite in turn executed a general assignment (Record on
Appeal, pp. 17-19) conveying the development and exploitation of said mining claims into the Larap
Iron Mines, a single proprietorship owned solely by and belonging to him, on the same royalty basis
provided for in Exhibit "3". Thereafter, Gaite embarked upon the development and exploitation of the
mining claims in question, opening and paving roads within and outside their boundaries, making
other improvements and installing facilities therein for use in the development of the mines, and in
time extracted therefrom what he claim and estimated to be approximately 24,000 metric tons of iron
ore.

For some reason or another, Isabelo Fonacier decided to revoke the authority granted by him to
Gaite to exploit and develop the mining claims in question, and Gaite assented thereto subject to
certain conditions. As a result, a document entitled "Revocation of Power of Attorney and Contract"
was executed on December 8, 1954 (Exhibit "A"),wherein Gaite transferred to Fonacier, for the
consideration of P20,000.00, plus 10% of the royalties that Fonacier would receive from the mining
claims, all his rights and interests on all the roads, improvements, and facilities in or outside said
claims, the right to use the business name "Larap Iron Mines" and its goodwill, and all the records
and documents relative to the mines. In the same document, Gaite transferred to Fonacier all his
rights and interests over the "24,000 tons of iron ore, more or less" that the former had already
extracted from the mineral claims, in consideration of the sum of P75,000.00, P10,000.00 of which
was paid upon the signing of the agreement, and
 b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00) will be paid from and out
of the first letter of credit covering the first shipment of iron ores and of the first amount
derived from the local sale of iron ore made by the Larap Mines & Smelting Co. Inc., its
assigns, administrators, or successors in interests.

To secure the payment of the said balance of P65,000.00, Fonacier promised to execute in favor of
Gaite a surety bond, and pursuant to the promise, Fonacier delivered to Gaite a surety bond dated
December 8, 1954 with himself (Fonacier) as principal and the Larap Mines and Smelting Co. and its
stockholders George Krakower, Segundina Vivas, Pacifico Escandor, Francisco Dante, and
Fernando Ty as sureties (Exhibit "A-1"). Gaite testified, however, that when this bond was presented
to him by Fonacier together with the "Revocation of Power of Attorney and Contract", Exhibit "A", on
December 8, 1954, he refused to sign said Exhibit "A" unless another bond under written by a
bonding company was put up by defendants to secure the payment of the P65,000.00 balance of
their price of the iron ore in the stockpiles in the mining claims. Hence, a second bond, also dated
December 8, 1954 (Exhibit "B"),was executed by the same parties to the first bond Exhibit "A-1", with
the Far Eastern Surety and Insurance Co. as additional surety, but it provided that the liability of the
surety company would attach only when there had been an actual sale of iron ore by the Larap
Mines & Smelting Co. for an amount of not less then P65,000.00, and that, furthermore, the liability
of said surety company would automatically expire on December 8, 1955. Both bonds were attached
to the "Revocation of Power of Attorney and Contract", Exhibit "A", and made integral parts thereof.

On the same day that Fonacier revoked the power of attorney he gave to Gaite and the two
executed and signed the "Revocation of Power of Attorney and Contract", Exhibit "A", Fonacier
entered into a "Contract of Mining Operation", ceding, transferring, and conveying unto the Larap
Mines and Smelting Co., Inc. the right to develop, exploit, and explore the mining claims in question,
together with the improvements therein and the use of the name "Larap Iron Mines" and its good will,
in consideration of certain royalties. Fonacier likewise transferred, in the same document, the
complete title to the approximately 24,000 tons of iron ore which he acquired from Gaite, to the
Larap & Smelting Co., in consideration for the signing by the company and its stockholders of the
surety bonds delivered by Fonacier to Gaite (Record on Appeal, pp. 82-94).

Up to December 8, 1955, when the bond Exhibit "B" expired with respect to the Far Eastern Surety
and Insurance Company, no sale of the approximately 24,000 tons of iron ore had been made by the
Larap Mines & Smelting Co., Inc., nor had the P65,000.00 balance of the price of said ore been paid
to Gaite by Fonacier and his sureties payment of said amount, on the theory that they had lost right
to make use of the period given them when their bond, Exhibit "B" automatically expired (Exhibits "C"
to "C-24"). And when Fonacier and his sureties failed to pay as demanded by Gaite, the latter filed
the present complaint against them in the Court of First Instance of Manila (Civil Case No. 29310) for
the payment of the P65,000.00 balance of the price of the ore, consequential damages, and
attorney's fees.

All the defendants except Francisco Dante set up the uniform defense that the obligation sued upon
by Gaite was subject to a condition that the amount of P65,000.00 would be payable out of the first
letter of credit covering the first shipment of iron ore and/or the first amount derived from the local
sale of the iron ore by the Larap Mines & Smelting Co., Inc.; that up to the time of the filing of the
complaint, no sale of the iron ore had been made, hence the condition had not yet been fulfilled; and
that consequently, the obligation was not yet due and demandable. Defendant Fonacier also
contended that only 7,573 tons of the estimated 24,000 tons of iron ore sold to him by Gaite was
actually delivered, and counterclaimed for more than P200,000.00 damages.

At the trial of the case, the parties agreed to limit the presentation of evidence to two issues:
(1) Whether or not the obligation of Fonacier and his sureties to pay Gaite P65,000.00 become due
and demandable when the defendants failed to renew the surety bond underwritten by the Far
Eastern Surety and Insurance Co., Inc. (Exhibit "B"), which expired on December 8, 1955; and

(2) Whether the estimated 24,000 tons of iron ore sold by plaintiff Gaite to defendant Fonacier were
actually in existence in the mining claims when these parties executed the "Revocation of Power of
Attorney and Contract", Exhibit "A."

On the first question, the lower court held that the obligation of the defendants to pay plaintiff the
P65,000.00 balance of the price of the approximately 24,000 tons of iron ore was one with a term:
i.e., that it would be paid upon the sale of sufficient iron ore by defendants, such sale to be effected
within one year or before December 8, 1955; that the giving of security was a condition precedent to
Gait's giving of credit to defendants; and that as the latter failed to put up a good and sufficient
security in lieu of the Far Eastern Surety bond (Exhibit "B") which expired on December 8, 1955, the
obligation became due and demandable under Article 1198 of the New Civil Code.

As to the second question, the lower court found that plaintiff Gaite did have approximately 24,000
tons of iron ore at the mining claims in question at the time of the execution of the contract Exhibit
"A."

Judgment was, accordingly, rendered in favor of plaintiff Gaite ordering defendants to pay him,
jointly and severally, P65,000.00 with interest at 6% per annum from December 9, 1955 until
payment, plus costs. From this judgment, defendants jointly appealed to this Court.

During the pendency of this appeal, several incidental motions were presented for resolution: a
motion to declare the appellants Larap Mines & Smelting Co., Inc. and George Krakower in
contempt, filed by appellant Fonacier, and two motions to dismiss the appeal as having become
academic and a motion for new trial and/or to take judicial notice of certain documents, filed by
appellee Gaite. The motion for contempt is unmeritorious because the main allegation therein that
the appellants Larap Mines & Smelting Co., Inc. and Krakower had sold the iron ore here in
question, which allegedly is "property in litigation", has not been substantiated; and even if true, does
not make these appellants guilty of contempt, because what is under litigation in this appeal is
appellee Gaite's right to the payment of the balance of the price of the ore, and not the iron ore itself.
As for the several motions presented by appellee Gaite, it is unnecessary to resolve these motions in
view of the results that we have reached in this case, which we shall hereafter discuss.

The main issues presented by appellants in this appeal are:

(1) that the lower court erred in holding that the obligation of appellant Fonacier to pay appellee
Gaite the P65,000.00 (balance of the price of the iron ore in question)is one with a period or term
and not one with a suspensive condition, and that the term expired on December 8, 1955; and

(2) that the lower court erred in not holding that there were only 10,954.5 tons in the stockpiles of
iron ore sold by appellee Gaite to appellant Fonacier.

The first issue involves an interpretation of the following provision in the contract Exhibit "A":

7. That Fernando Gaite or Larap Iron Mines hereby transfers to Isabelo F. Fonacier all his
rights and interests over the 24,000 tons of iron ore, more or less, above-referred to together
with all his rights and interests to operate the mine in consideration of the sum of SEVENTY-
FIVE THOUSAND PESOS (P75,000.00) which the latter binds to pay as follows:
 a. TEN THOUSAND PESOS (P10,000.00) will be paid upon the signing of this agreement.

b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00)will be paid from and out of
the first letter of credit covering the first shipment of iron ore made by the Larap Mines &
Smelting Co., Inc., its assigns, administrators, or successors in interest.

We find the court below to be legally correct in holding that the shipment or local sale of the iron ore
is not a condition precedent (or suspensive) to the payment of the balance of P65,000.00, but was
only a suspensive period or term. What characterizes a conditional obligation is the fact that its
efficacy or obligatory force (as distinguished from its demandability) is subordinated to the
happening of a future and uncertain event; so that if the suspensive condition does not take place,
the parties would stand as if the conditional obligation had never existed. That the parties to the
contract Exhibit "A" did not intend any such state of things to prevail is supported by several
circumstances:

1) The words of the contract express no contingency in the buyer's obligation to pay: "The balance of
Sixty-Five Thousand Pesos (P65,000.00) will be paid out of the first letter of credit covering the first
shipment of iron ores . . ." etc. There is no uncertainty that the payment will have to be made sooner
or later; what is undetermined is merely the exact date at which it will be made. By the very terms of
the contract, therefore, the existence of the obligation to pay is recognized; only
its maturity or demandability is deferred.

2) A contract of sale is normally commutative and onerous: not only does each one of the parties
assume a correlative obligation (the seller to deliver and transfer ownership of the thing sold and the
buyer to pay the price),but each party anticipates performance by the other from the very start. While
in a sale the obligation of one party can be lawfully subordinated to an uncertain event, so that the
other understands that he assumes the risk of receiving nothing for what he gives (as in the case of
a sale of hopes or expectations, emptio spei), it is not in the usual course of business to do so;
hence, the contingent character of the obligation must clearly appear. Nothing is found in the record
to evidence that Gaite desired or assumed to run the risk of losing his right over the ore without
getting paid for it, or that Fonacier understood that Gaite assumed any such risk. This is proved by
the fact that Gaite insisted on a bond a to guarantee payment of the P65,000.00, an not only upon a
bond by Fonacier, the Larap Mines & Smelting Co., and the company's stockholders, but also on
one by a surety company; and the fact that appellants did put up such bonds indicates that they
admitted the definite existence of their obligation to pay the balance of P65,000.00.

3) To subordinate the obligation to pay the remaining P65,000.00 to the sale or shipment of the ore
as a condition precedent, would be tantamount to leaving the payment at the discretion of the
debtor, for the sale or shipment could not be made unless the appellants took steps to sell the ore.
Appellants would thus be able to postpone payment indefinitely. The desireability of avoiding such a
construction of the contract Exhibit "A" needs no stressing.

4) Assuming that there could be doubt whether by the wording of the contract the parties indented a
suspensive condition or a suspensive period (dies ad quem) for the payment of the P65,000.00, the
rules of interpretation would incline the scales in favor of "the greater reciprocity of interests", since
sale is essentially onerous. The Civil Code of the Philippines, Article 1378, paragraph 1, in fine,
provides:

If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of
interests.
and there can be no question that greater reciprocity obtains if the buyer' obligation is deemed to be
actually existing, with only its maturity (due date) postponed or deferred, that if such obligation were
viewed as non-existent or not binding until the ore was sold.

The only rational view that can be taken is that the sale of the ore to Fonacier was a sale on credit,
and not an aleatory contract where the transferor, Gaite, would assume the risk of not being paid at
all; and that the previous sale or shipment of the ore was not a suspensive condition for the payment
of the balance of the agreed price, but was intended merely to fix the future date of the payment.

This issue settled, the next point of inquiry is whether appellants, Fonacier and his sureties, still have
the right to insist that Gaite should wait for the sale or shipment of the ore before receiving payment;
or, in other words, whether or not they are entitled to take full advantage of the period granted them
for making the payment.

We agree with the court below that the appellant have forfeited the right court below that the
appellants have forfeited the right to compel Gaite to wait for the sale of the ore before receiving
payment of the balance of P65,000.00, because of their failure to renew the bond of the Far Eastern
Surety Company or else replace it with an equivalent guarantee. The expiration of the bonding
company's undertaking on December 8, 1955 substantially reduced the security of the vendor's
rights as creditor for the unpaid P65,000.00, a security that Gaite considered essential and upon
which he had insisted when he executed the deed of sale of the ore to Fonacier (Exhibit "A"). The
case squarely comes under paragraphs 2 and 3 of Article 1198 of the Civil Code of the Philippines:

"ART. 1198. The debtor shall lose every right to make use of the period:

(1) . . .

(2) When he does not furnish to the creditor the guaranties or securities which he has
promised.

(3) When by his own acts he has impaired said guaranties or securities after their
establishment, and when through fortuitous event they disappear, unless he immediately
gives new ones equally satisfactory.

Appellants' failure to renew or extend the surety company's bond upon its expiration plainly impaired
the securities given to the creditor (appellee Gaite), unless immediately renewed or replaced.

There is no merit in appellants' argument that Gaite's acceptance of the surety company's bond with
full knowledge that on its face it would automatically expire within one year was a waiver of its
renewal after the expiration date. No such waiver could have been intended, for Gaite stood to lose
and had nothing to gain barely; and if there was any, it could be rationally explained only if the
appellants had agreed to sell the ore and pay Gaite before the surety company's bond expired on
December 8, 1955. But in the latter case the defendants-appellants' obligation to pay became
absolute after one year from the transfer of the ore to Fonacier by virtue of the deed Exhibit "A.".

All the alternatives, therefore, lead to the same result: that Gaite acted within his rights in demanding
payment and instituting this action one year from and after the contract (Exhibit "A") was executed,
either because the appellant debtors had impaired the securities originally given and thereby
forfeited any further time within which to pay; or because the term of payment was originally of no
more than one year, and the balance of P65,000.00 became due and payable thereafter.
Coming now to the second issue in this appeal, which is whether there were really 24,000 tons of
iron ore in the stockpiles sold by appellee Gaite to appellant Fonacier, and whether, if there had
been a short-delivery as claimed by appellants, they are entitled to the payment of damages, we
must, at the outset, stress two things: first, that this is a case of a sale of a specific mass of fungible
goods for a single price or a lump sum, the quantity of "24,000 tons of iron ore, more or less," stated
in the contract Exhibit "A," being a mere estimate by the parties of the total tonnage weight of the
mass; and second, that the evidence shows that neither of the parties had actually measured of
weighed the mass, so that they both tried to arrive at the total quantity by making an estimate of the
volume thereof in cubic meters and then multiplying it by the estimated weight per ton of each cubic
meter.

The sale between the parties is a sale of a specific mass or iron ore because no provision was made
in their contract for the measuring or weighing of the ore sold in order to complete or perfect the
sale, nor was the price of P75,000,00 agreed upon by the parties based upon any such
measurement.(see Art. 1480, second par., New Civil Code). The subject matter of the sale is,
therefore, a determinate object, the mass, and not the actual number of units or tons contained
therein, so that all that was required of the seller Gaite was to deliver in good faith to his buyer all of
the ore found in the mass, notwithstanding that the quantity delivered is less than the amount
estimated by them (Mobile Machinery & Supply Co., Inc. vs. York Oilfield Salvage Co., Inc. 171 So.
872, applying art. 2459 of the Louisiana Civil Code). There is no charge in this case that Gaite did
not deliver to appellants all the ore found in the stockpiles in the mining claims in questions; Gaite
had, therefore, complied with his promise to deliver, and appellants in turn are bound to pay the
lump price.

But assuming that plaintiff Gaite undertook to sell and appellants undertook to buy, not a definite
mass, but approximately 24,000 tons of ore, so that any substantial difference in this quantity
delivered would entitle the buyers to recover damages for the short-delivery, was there really a
short-delivery in this case?

We think not. As already stated, neither of the parties had actually measured or weighed the whole
mass of ore cubic meter by cubic meter, or ton by ton. Both parties predicate their respective claims
only upon an estimated number of cubic meters of ore multiplied by the average tonnage factor per
cubic meter.

Now, appellee Gaite asserts that there was a total of 7,375 cubic meters in the stockpiles of ore that
he sold to Fonacier, while appellants contend that by actual measurement, their witness Cirpriano
Manlañgit found the total volume of ore in the stockpiles to be only 6.609 cubic meters. As to the
average weight in tons per cubic meter, the parties are again in disagreement, with appellants
claiming the correct tonnage factor to be 2.18 tons to a cubic meter, while appellee Gaite claims that
the correct tonnage factor is about 3.7.

In the face of the conflict of evidence, we take as the most reliable estimate of the tonnage factor of
iron ore in this case to be that made by Leopoldo F. Abad, chief of the Mines and Metallurgical
Division of the Bureau of Mines, a government pensionado to the States and a mining engineering
graduate of the Universities of Nevada and California, with almost 22 years of experience in the
Bureau of Mines. This witness placed the tonnage factor of every cubic meter of iron ore at between
3 metric tons as minimum to 5 metric tons as maximum. This estimate, in turn, closely corresponds
to the average tonnage factor of 3.3 adopted in his corrected report (Exhibits "FF" and FF-1") by
engineer Nemesio Gamatero, who was sent by the Bureau of Mines to the mining claims involved at
the request of appellant Krakower, precisely to make an official estimate of the amount of iron ore in
Gaite's stockpiles after the dispute arose.
Even granting, then, that the estimate of 6,609 cubic meters of ore in the stockpiles made by
appellant's witness Cipriano Manlañgit is correct, if we multiply it by the average tonnage factor of
3.3 tons to a cubic meter, the product is 21,809.7 tons, which is not very far from the estimate of
24,000 tons made by appellee Gaite, considering that actual weighing of each unit of the mass was
practically impossible, so that a reasonable percentage of error should be allowed anyone making
an estimate of the exact quantity in tons found in the mass. It must not be forgotten that the contract
Exhibit "A" expressly stated the amount to be 24,000 tons, more or less. (ch. Pine River Logging &
Improvement Co. vs U.S., 279, 46 L. Ed. 1164).

There was, consequently, no short-delivery in this case as would entitle appellants to the payment of
damages, nor could Gaite have been guilty of any fraud in making any misrepresentation to
appellants as to the total quantity of ore in the stockpiles of the mining claims in question, as
charged by appellants, since Gaite's estimate appears to be substantially correct.

WHEREFORE, finding no error in the decision appealed from, we hereby affirm the same, with costs
against appellants.
 THIRD DIVISION

[G.R. No. 131784. September 16, 1999]

FELIX L. GONZALES, petitioner, vs. THE HEIRS OF THOMAS and PAULA

CRUZ, herein represented by ELENA C. TALENS, respondents.

DECISION
PANGANIBAN, J.:

If a stipulation in a contract admits of several meanings, it shall be understood as bearing that

import most adequate to render it effectual. An obligation cannot be enforced unless the plaintiff
has fulfilled the condition upon which it is premised. Hence, an obligation to purchase cannot be
implemented unless and until the sellers have shown their title to the specific portion of the
property being sold.

The Case

Before us is a Petition for Review on Certiorari assailing the August 13, 1997 Decision[1] of
the Court of Appeals[2] in CA-GR CV No. 303754, which disposed as follows:

WHEREFORE, the decision of the trial court dated November 16, 1990 is hereby
REVERSED. The appellee FELIX GONZALES is hereby ordered to surrender
possession of the property covered by the Contract of Lease/Purchase to the
appellants, Heirs of Thomas and Paula Cruz, and to pay to the appellants the
following amounts:

1. P15,000.00 per annum as rentals counted from December 1, 1984 until the appellants shall
have recovered possession of the property subject of the Contract of Lease/Purchase;
2. P15,000.00 as attorneys fees; and
3. Costs of suit.[3]
On the other hand, the trial court[4] Decision,[5] which was reversed by the CA, ruled as follows:

WHEREFORE, premises considered, this Court hereby renders judgment in favor of

the defendant, Felix Gonzales, and against the plaintiffs, as follows:

(1) Ordering the dismissal of the case;

 (2) Sentencing the plaintiffs, jointly and severally, the sum of P20,000.00 as moral damages and
the other sum of P10,000.00 as and for attorneys fees; and
(3) To pay the costs.[6]

The Facts

We hereby reproduce, unedited, the Court of Appeals summary of the facts of this case as
follows:

On December 1, 1983, Paula Ao Cruz together with the plaintiffs heirs of Thomas and
Paula Cruz, namely Ricardo A. Cruz, Carmelita M. Cruz, Salome A. Cruz, Irenea C.
Victoria, Leticia C. Salvador and Elena C. Talens, entered into a Contract of
Lease/Purchase with the defendant, Felix L. Gonzales, the sole proprietor and
manager of Felgon Farms, of a half-portion of a parcel of land containing an area of
12 hectares, more or less, and an accretion of 2 hectares, more or less, situated in
Rodriguez Town, Province of Rizal and covered by Transfer Certificate of Title No.
12111 (Exhibit A, p. 157, Records). The contract of Lease/Purchase contains the
following provisions:

1. The terms of this Contract is for a period of one year upon the signing
thereof. After the period of this Contract, the LESSEE shall purchase the property on
the agreeable price of One Million Pesos (P1,000,000.00) payable within Two (2)
Years period with an interest of 12% per annum subject to the devalued amount of the
Philippine Peso, according to the following schedule of payment:

Upon the execution of the Deed of Sale 50% - and thereafter 25% every six (6)
months thereafter, payable within the first ten (10) days of the beginning of each
period of six (6) months.

2. The LESSEE shall pay by way of annual rental an amount equivalent to Two
Thousand Five Hundred (P2,500.00) Pesos per hectare, upon the signing of this
contract on Dec. 1, 1983.

xxxxxxxxx

9. The LESSORS hereby commit themselves and shall undertake to obtain a separate
and distinct T.C.T. over the herein leased portion to the LESSEE within a reasonable
period of time which shall not in any case exceed four (4) years, after which a new
Contract shall be executed by the herein parties which shall be the same in all respects
with this Contract of Lease/Purchase insofar as the terms and conditions are
concerned.
 xxxxxxxxx

(Exhibits A, A-1; pp. 157-158. Records)

The defendant Gonzales paid the P2,500.00 per hectare or P15,000.00 annual rental
on the half-portion of the property covered by Transfer Certificate of Title No. 12111
in accordance with the second provision of the Contract of Lease/Purchase (p. 12,
TSN, September 14, 1989) and thereafter took possession of the property, installing
thereon the defendant Jesus Sambrano as his caretaker (pp. 16-17, 27, TSN, December
12, 1989). The defendant Gonzales did not, however, exercise his option to purchase
the property immediately after the expiration of the one-year lease on November 30,
1984 (pp. 19-20, TSN, September 14, 1989). He remained in possession of the
property without paying the purchase price provided for in the Contract of
Lease/Purchase (Ibid.) and without paying any further rentals thereon (p. 36, TSN,
November 7, 1989).

A letter was sent by one of the plaintiffs-heirs Ricardo Cruz to the defendant Gonzales
informing him of the lessors decision to rescind the Contract of Lease/Purchase due to
a breach thereof committed by the defendant (Exhibit C; p. 162, Records). The letter
also served as a demand on the defendant to vacate the premises within 10 days from
receipt of said letter (Ibid.).

The defendant Gonzales refused to vacate the property and continued possession
thereof (p. 2, Record). The matter was therefore brought before the barangay captain
of San Isidro, but owing to the defendants refusal to appear before the barangay, a
certification allowing the case to be brought to Court was issued on March 18, 1987
(Exhibit E; p. 165, Records).

The lessor, Paula Ao Cruz died the following day, March 19, 1987 (p. 9, TSN,
September 14, 1989).

A final demand letter to vacate the premises was sent by the remaining lessors who
are also the heirs of the deceased lessor Paula Ao Cruz, through their counsel on
August 24, 1987 which the defendant Gonzales received but did not heed (Exhibits D
and D-1; pp. 163-164, Records).

The property subject of the Contract of Lease/Purchase is currently the subject of an

Extra-Judicial Partition (Exhibits G and G-1; pp. 168-169, Records). Title to the
property remains in the name of the plaintiffs predecessors-in-interest, Bernardina
Calixto and Severo Cruz (Exhibit B; p. 160, Records).
Alleging breach of the provisions of the Contract of Lease/Purchase, the plaintiffs
filed a complaint for recovery of possession of the property - subject of the contract
with damages, both moral and compensatory and attorneys fees and litigation
expenses (p. 3, Records).

Alleging breach of paragraph nine of the Contract of Lease/Purchase, and payment of

only P50,000.00 of the P500,000.00 agreed down payment on the purchase price of
P1,000,000.00, the defendant Gonzales filed his answer on November 23, 1987
praying for a dismissal of the complaint filed against him and an award of moral,
exemplary and actual damages, as well as litigation expenses (pp. 19-22, Records).

The defendant Sambrano was, upon motion, declared in default for failure to file an
answer despite valid service of summons (p. 30, Records).

The parties limited the issues to be resolved to:

(1) Whether or not paragraph 9 of the contract is a condition precedent before the defendant is to
pay the down payment;
(2) Whether or not plaintiffs can rescind the Contract of Lease/Purchase; and
(3) Whether or not plaintiffs can terminate the Contract of Lease. (p. 4, Decision; p. 262, Records)

After the termination of the pre-trial conference, the trial court proceeded to hear the
case on the merits and arrived at its appealed decision based on the following findings
and conclusions:

Paragraph 9 of the contract clearly indicates that the lessors-plaintiffs shall obtain a
Transfer Certificate of Title in the name of the lessee within 4 years before a new
contract is to be entered into under the same terms and conditions as the original
Contract of Lease/Purchase. Thus, before a deed of Sale can be entered into between
the plaintiffs and the defendant, the plaintiffs have to obtain the Transfer Certificate of
Title in favor of the defendant. Article 1181 of the New Civil Code states that: In
conditional obligations, the acquisition of rights, as well as the extinguishment or loss
of those already acquired, shall depend upon the happening of the event which
constitutes the condition. When the obligation assumed by a party to a contract is
expressly subjected to a condition, the obligation cannot be enforced against him
unless the condition is complied with (Wise & Co. vs. Kelly, 37 Phil. 695; PNB vs.
Philippine Trust Co., 68 Phil. 48).

The failure of the plaintiffs to secure the Transfer Certificate of Title, as provided for
in the contract, does not entitle them to rescind the contract[.] Article 1191 of the New
Civil Code states that:The power to rescind obligations is implied in reciprocal ones,
in case one of the obligors should not comply with what is incumbent upon him. The
injured party may choose between the fulfillment of the obligation, with the payment
of damages in either case. He may seek rescission, even after he has chosen
fulfillment, if the latter should become impossible x x x. The power to rescind is given
to the injured party. Where the plaintiff is the party who did not perform, he is not
entitled to insist upon the performance of the contract by the defendant or recover
damages by reason of his own breach (Mateos vs. Lopez, 6 Phil. 206; Borque vs. Yu
Chipco, 14 Phil. 95). An action for specific performance of a contract is an equitable
proceeding, and he who seeks to enforce it must himself be fair and reasonable, and
do equity (Seva vs. Berwin, 48 Phil. 581). In this case, plaintiffs failed to comply with
the conditions precedent after 2-1/2 years from the execution of the contract so as to
entitle them to rescind the contract. Although the contract stated that the same be done
within 4 years from execution, still, the defendant has to be assured that the land
subject of the case will be transferred in his name without any encumbrances, as the
Extra-Judicial Partition dated July 17, 1989 was being processed, and continues to be
in process to this date. The failure to secure the Transfer Certificate of Title in favor
of the defendant entitles not the plaintiffs but, rather, the defendant to either rescind or
to ask for specific performances.

Are the plaintiffs entitled to terminate the Contract of Lease? Article 1670 of the New
Civil Code states that:

If at the end of the contract the lessee should continue enjoying the thing leased for
fifteen days with the acquies[c]ence of the lessor and unless a notice to the contrary
by either party has previously been given, it is understood that there is an implied new
lease, not for the period of the original contract, but for the time established in
Articles 1682 and 1687. The other terms of the original contract shall be revived.

Article 1682 of the New Civil Code states that:

The lease of a piece of rural land, when its duration has not been fixed, is understood
to have been made for all the time necessary for the gathering of the fruits which the
whole estate leased may yield in one year, or which it may yield once, although two or
more years may have to elapse for the purpose.

The plaintiffs filed the complaint on October 12, 1987 after making an extra-judicial
demand on July 2, 1986. The contract was entered into on December 1, 1983. The
demand was thus made more than a year and a half from the expiry date of the
original lease considering that there was no payment made for the second year of the
lease. If one has to consider the fact that the defendant was given the option to
purchase the property after two years, then, the lease would presumably run for at
least two years. If that is so, then, the demand was made seven months after the
expiration of the two-year lease. Still, this demand by the plaintiffs will come under
the implied new lease of Articles 1682 and 1670 so that the plaintiffs are not entitled
to terminate the Contract of Lease.

In sum, the plaintiffs cannot terminate the Contract of Lease due to their failure to
notify the defendant in due time of their intention to that effect. Nor can they rescind
the Contract of Purchase in view of the fact that there is a condition precedent which
the plaintiffs have not fulfilled. It is the defendant now who has the option to either
rescind or demand the performance of the contract.Moreover, according to Article
1654 of the New Civil Code, the lessor is obliged to deliver the thing which is the
object of the contract in such condition as to render it fit for the use
intended.Considering that the lessors-plaintiffs have not delivered the property in
whole over the protest of the defendant, the latter suffered damages therefor. (p. 4-6,
Decision; pp. 262-264, Records)

Their complaint thus dismissed, the plaintiffs, now appellants, assign the trial court of
having committed the following errors:
I

THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT PLAINTIFFS-

APPELLANTS COULD NOT VALIDLY RESCIND AND TERMINATE THE
LEASE/PURCHASE CONTRACT (EXHIBIT A) AND THEREAFTER TO TAKE
POSSESSION OF THE LAND IN QUESTION AND EJECT THEREFROM
DEFENDANTS-APPELLEES.
II

THE TRIAL COURT EQUALLY ERRED IN NOT GRANTING THE RELIEFS

PLEADED AND PRAYED FOR BY PLAINTIFFS-APPELLANTS IN THEIR
COMPLAINT. (p. 42, Rollo)

The case was submitted for decision without the appellees brief as per the Courts
resolution dated July 8, 1992 (p. 71, Rollo).

Ruling of the Court of Appeals

The Court of Appeals reversed the trial court in this wise:

The trial court, in its decision interpreted the ninth provision of the Contract of
Lease/Purchase to mean that before the appellee exercises his option to purchase the
property by paying the 50% plus interest on the P1,000,000.00 purchase price, the
appellants must first transfer the title to the property in the appellees name. The Court
finds this interpretation of the provision strained if not altogether absurd. The transfer
of title to the property in the appellees name cannot be interpreted as a condition
precedent to the payment of the agreed purchase price because such interpretation not
only runs counter [to] the explicit provisions of the contract but also is contrary to the
normal course of things anent the sale of real properties. The terms of the contract
[are] explicit and require no interpretation. Upon the expiration of the lease, the lessee
shall purchase the property. Besides, the normal course of things anent the sale of real
properties dictates that there must firstbe payment of the agreed purchase
price before transfer of title to the vendees name can be made.

This was precisely what the appellants and Paula Ao Cruz had in mind when they had
the ninth provision incorporated in the Contract of Lease/Purchase. They had asked
for a period of 4 years from the time they receive the downpayment of 50% within
which to have [the] title to the property transferred in the name of the appellee. The
reason for this four (4) year period is [that] title to the property still remains in the
name of the original owners, the predecessors-in-interest of the herein appellants and
[transferring] the title to their names and eventually to the lessee-purchaser, appellee
herein, would take quite some time.

The appellee wanted to have the title to the property transferred in his
name first before he exercises his option to purchase allegedly in accordance with the
ninth provision of the contract. But the ninth provision does not give him this right. A
reading of the contract in its entirety shows that the 4 year period asked for by the
appellants within which to have title to the property transferred in the appellees name
will only start to run when the appellee exercises his option to purchase. Since the
appellee never exercised his option to purchase, then appellee is not entitled to have
the title to the property transferred in his name.

Attributing reversible errors to the appellate court, petitioner elevated the case to this Court.[7]

The Issues

In his Memorandum,[8] petitioner submits the following main issues:

I. Whether or not the Court of Appeals has gravely erred and committed grave abuse
of discretion in the interpretation of [the] law between the parties.

II. Whether or not the Court of Appeals committed serious mistakes in the finding of
facts which resulted [in] departing from the usual course of judicial proceedings.

For these issues to be resolved, petitioner asks this Court to answer the following questions:
1. Is there a conflict between the statement in paragraph 1 of the Lease/Purchase
Contract and that [in] paragraph No. 9 thereof?

2. Is paragraph 9 of the Lease/Purchase Contract a condition precedent before

petitioner could exercise his option to buy the property?

3. Can plaintiff rescind or terminate the Contract of Lease after the one-year period?

In fine, the resolution of this case depends upon the proper interpretation of paragraph nine of
the Contract.

The Courts Ruling

The Petition is meritorious.

Main Issue: Interpretation of Paragraph Nine

In its first paragraph, the disputed agreement provides that petitioner shall lease the property
for one year, after which he shall purchase it. Paragraph nine, on the other hand, requires herein
respondents to obtain a separate and distinct Transfer Certificate of Title (TCT) over the
property, viz.:

9. The LESSORS hereby commit themselves and shall undertake to obtain a separate
and distinct T.C.T. over the lease portion to the LESSEE within a reasonable period of
time which shall not in any case exceed four (4) years, after which a new Contract
shall be executed by the herein parties which shall be the same in all respects with this
Contract of Lease/Purchase insofar as the terms and conditions are concerned.

Alleging that petitioner has not purchased the property after the lapse of one year, respondents
seek to rescind the Contract and to recover the property. Petitioner, on the other hand, argues that
he could not be compelled to purchase the property, because respondents have not complied with
paragraph nine, which obligates them to obtain a separate and distinct title in their names.He
contends that paragraph nine was a condition precedent to the purchase of the property.
To be sure, this paragraph and the entire agreement, for that matter -- is not a model of how a
contract should be worded. It is an invitation to a litigation, as in fact the parties had to go all to
way up to this Court to plead for a resolution of their conflict which is rooted in their failure to
express themselves clearly. Small wonder, even the two lower courts gave contradictory
understanding of this provision, thereby necessitating the intervention of the highest court of the
land.
Both the trial court and the Court of Appeals (CA) interpreted this provision to mean that the
respondents had obliged themselves to obtain a TCT in the name of petitioner-lessee. The trial
court held that this obligation was a condition precedent to petitioners purchase of the
property. Since respondents had not performed their obligation, they could not compel petitioner
to buy the parcel of land. The CA took the opposite view, holding that the property should be
purchased first before respondents may be obliged to obtain a TCT in the name of petitioner-lessee-
buyer.
As earlier noted, petitioner disagrees with the interpretation of the two courts and maintains
that respondents were obligated to procure a TCT in their names before he could be obliged to
purchase the property in question.
Basic is the rule in the interpretation of contracts that if some stipulation therein should admit
of several meanings, it shall be understood as bearing that import most adequate to render it
effectual.[9] Considering the antecedents of the ownership of the disputed lot, it appears that
petitioners interpretation renders clause nine most effectual.
The record shows that at the time the contract was executed, the land in question was still
registered in the name of Bernardina Calixto and Severo Cruz, respondents predecessors-in-
interest.There is no showing whether respondents were the only heirs of Severo Cruz or whether
the other half of the land in the name of Bernardina Calixto was adjudicated to them by any
means. In fact, they admit that extrajudicial proceedings were still ongoing. Hence, when the
Contract of Lease/Purchase was executed, there was no assurance that the respondents were indeed
the owners of the specific portion of the lot that petitioner wanted to buy, and if so, in what concept
and to what extent.
Thus, the clear intent of the ninth paragraph was for respondents to obtain a separate and
distinct TCT in their names. This was necessary to enable them to show their ownership of the
stipulated portion of the land and their concomitant right to dispose of it. Absent any title in their
names, they could not have sold the disputed parcel of land.
It is a well-settled principle in law that no one can give what one does not have -- nemo dat
quod non habet. Accordingly, one can sell only what one owns or is authorized to sell, and the
buyer can acquire no more than what the seller can transfer legally.[10]
Because the property remained registered in the names of their predecessors-in-interest,
private respondents could validly sell only their undivided interest in the estate of Severo Cruz,
the extent of which was however not shown in the records. There being no partition of the estate
thus far, there was no guarantee as to how much and which portion would be adjudicated to
respondents.
In a contract of sale, the title to the property passes to the vendee upon the delivery of the
thing sold.[11] In this case, the respondent could not deliver ownership or title to a specific portion
of the yet undivided property. True, they could have intended to sell their hereditary interest, but
in the context of the Contract of Lease/Purchase, the parties under paragraph nine wanted the
specific portion of the land to be segregated, identified and specifically titled. Hence, by the said
Contract, the respondents as sellers were given a maximum of four years within which to acquire
a separate TCT in their names, preparatory to the execution of the deed of sale and the payment of
the agreed price in the manner described in paragraph nine.
This interpretation is bolstered by the P50,000 petitioner advanced to respondents in order to
help them expedite the transfer of the TCT to their names. Ineluctably, the intention of the parties
was to have the title transferred first to respondents names as a condition for the completion of the
purchase.
In holding that clause nine was not a condition precedent to the purchase of the property, the
CA relied on a literal interpretation to the effect that the TCT should be obtained in the name of
the petitioner-vendee. It reasoned that the title could be transferred to the name of the buyer only
after the completion of the purchase. Thus, petitioner should first purchase the property before
respondents could be obliged to transfer the TCT to his name.
We disagree. The literal interpretation not only ignores the factual backdrop of the case; it
also utilizes a faulty parsing of paragraph nine, which should purportedly read as follows: The
lessors x x x shall undertake to obtain a separate and distinct TCT xxx to the LESSEE within a
reasonable period of time which shall not in any case exceed four (4) years x x x. Read in its
entirety, however, paragraph nine does not say that the TCT should be obtained in the name of the
lessee. In fact, paragraph nine requires respondents to obtain a TCT over the herein leased portion
to the LESSEE, thereby showing that the crucial phrase to the LESSEE adverts to the leased
portion and not to the name which should appear in the new TCT.
Furthermore, the CA interpretation ignores the other part of paragraph nine, stating that after
a separate TCT had been obtained, a new contract shall be executed by the herein parties which
shall be the same in all respects with this Contract of Lease/Purchase insofar as the terms and
conditions are concerned.
If, as the CA held, petitioner should purchase the property first before the title can be
transferred to his name, why should there be a waiting period of four years before the parties can
execute the new contract evidencing the sale? Why should the petitioner still be required to pay
rentals after it purchases and pays for the property? The Contract could not have envisioned this
absurd scenario.
Clearly, the appellate courts literal interpretation of the first portion of paragraph nine renders
the latter portion thereof ineffectual. In other words, that portion can only mean that the
respondents should first obtain a TCT in their names, after which petitioner is given time to
purchase and pay for the property.
Respondents insist that the obligation of petitioner to buy the disputed land immediately after
the termination of the one year lease period is explicit.[12] However, it is more reasonable to state
that the first paragraph was effectively modified by the ninth. To repeat, petitioner can be
compelled to perform his obligation under the first paragraph, only after respondents have
complied with the ninth. Unless and until respondents have done so, the first paragraph cannot be
enforced against petitioner.
In sum, we hold that the ninth provision was intended to ensure that respondents would have
a valid title over the specific portion they were selling to petitioner. Only after the title is assured
may the obligation to buy the land and to pay the sums stated in the Contract be enforced within
the period stipulated. Verily, the petitioners obligation to purchase has not yet ripened and cannot
be enforced until and unless respondents can prove their title to the property subject of the
Contract.

Secondary Issues
 Ninth Clause Was a Condition Precedent

Because the ninth clause required respondents to obtain a separate and distinct TCT in their
names and not in the name of petitioner, it logically follows that such undertaking was a condition
precedent to the latters obligation to purchase and pay for the land. Put differently, petitioners
obligation to purchase the land is a conditional one and is governed by Article 1181 of the Civil
Code.[13]
Condition has been defined as every future and uncertain event upon which an obligation or
provision is made to depend. It is a future and uncertain event upon which the acquisition or
resolution of rights is made to depend by those who execute the juridical act.[14] Without it, the sale
of the property under the Contract cannot be perfected, and petitioner cannot be obliged to purchase
the property. When the consent of a party to a contract is given subject to the fulfillment of a
suspensive condition, the contract is not perfected unless that condition is first complied with.[15]
The Court has held that [w]hen the obligation assumed by a party to a contract is expressly
subjected to a condition, the obligation cannot be enforced against him unless the condition is
complied with.[16] Furthermore, [t]he obligatory force of a conditional obligation is subordinated
to the happening of a future and uncertain event, so that if that event does not take place, the parties
would stand as if the conditional obligation had never existed.[17]
In this case, the obligation of the petitioner to buy the land cannot be enforced unless
respondents comply with the suspensive condition that they acquire first a separate and distinct
TCT in their names. The suspensive condition not having been fulfilled, then the obligation of the
petitioner to purchase the land has not arisen.

Respondents Cannot Rescind the Contract

In the same vein, respondents cannot rescind the contract, because they have not caused the
transfer of the TCT to their names, which is a condition precedent to petitioners obligation. This
Court has held that there can be no rescission (or more properly, resolution) of an obligation as yet
non-existent, because the suspensive condition has not happened.[18]
Since the reversal of the CA Decision is inevitable, the trial courts judgment should be
reinstated. However, we find no sufficient factual or legal justifications for the award of moral
damages and attorneys fees.
WHEREFORE, the petition is GRANTED and the appealed Decision
is REVERSED and SET ASIDE. The Decision of the trial court is REINSTATED, but the award of
moral damages and attorneys fees is DELETED for lack of basis. No costs.
SO ORDERED.
SYNOPSIS
On December 1, 1983, Paula Ano Cruz, together with the respondents, entered into
a contract of lease/purchase with the petitioner, of a half-portion of a parcel of land
containing an area of 12 hectares, more or less, and an accretion of 2 hectares more or
less, situated in Rodriguez town, Province of Rizal, and covered by Transfer Certificate
of Title 12111. Petitioner paid the p2,500.00 per hectare or P15,000.00 annual rental on
the half portion of the property covered by said title in accordance with the second
provision of the contract of lease purchase and thereafter took possession of the property
installing Jesus Sambrano as his caretaker. Petitioner did not, however, exercise his
option to purchase the property immediately after the expiration of the one-year lease
on November 30,1984, but remained in possession of the property without paying the
purchase price provided in the contract and without paying any further rentals thereon.
Due to this non-payment, demand letters were sent to petitioner demanding him to
vacate the premises, but the petitioner refused to vacate and continued possession
thereof. Alleging breach of the provisions of the contract of Lease/Purchase, the
respondents filed a complaint for recovery of possession of the property with damages.
After the termination of the pre-trial conference, the trial court proceeded to hear the
case on the merits and thereafter, rendered a decision declaring that the respondents
cannot terminate the contract of lease due to their failure to notify the petitioner in due
time of their intention to that effect. Nor can they rescind the contract of purchase
considering that there was a condition precedent which the respondents failed to fulfill.
The Court of Appeals reversed the decision of the trial court and ruled that the transfer
of title in the appellees name cannot be interpreted as a condition precedent to the
payment of the agreed purchase price because such interpretation not only run counter
to the explicit provisions of the contract but also was contrary to the normal course of
things anent the sale of real property. Hence, the petition.
The Court found the petition meritorious. The Court ruled that the respondents
cannot rescind the contract because they have not caused the transfer of the TCT to their
names, which is a condition precedent to petitioners obligations. Particularly, the ninth
provision was intended to ensure that respondents would have a valid title over the
specific portion they were selling to petitioner. Only after the title is assured may the
obligation to buy the land and to pay the sums stated in the contract be enforced within
the period stipulated. Verily, the petitioners obligation to purchase has not yet ripened
and cannot be enforced until and unless respondents can prove their title to the property
subject of the contract. Accordingly, the petition was granted and the appealed decision
was reversed and set aside.
SYLLABUS
1. CIVIL LAW; SALES; ONE CAN SELL ONLY WHAT ONE OWNS OR IS AUTHORIZED TO SELL,
AND THE BUYER CAN ACQUIRE NO MORE THAN WHAT THE SELLER CAN TRANSFER
LEGALLY; CASE AT BAR.- It is a well-settled principle in law that no one can give what one does not have
- nemo dat quod non habet. Accordingly, one can sell only what one owns or is authorized to sell, and the buyer
can acquire no more than what the seller can transfer legally. Because the property remained registered in the
names of their predecessors-in-interest, private respondents could validly sell only their undivided interest in the
estate of Severo Cruz, the extent of which was however not shown in the records. There being no partition of the
estate thus far, there was no guarantee as to how much and which portion would be adjudicated to respondents.
2. ID.; ID.; IN A CONTRACT OF SALE, TITLE TO THE PROPERTY PASSES TO THE VENDEE UPON
DELIVERY OF THING SOLD; CASE AT BAR.- In a contract of sale, the title to the property passes to the
vendee upon the delivery of the thing sold. In this case, the respondent could not deliver ownership or title to
a specific portion of the yet undivided property. True, they could have intended to sell their hereditary interest,
but in the context of the Contract of Lease/Purchase, the parties under paragraph nine wanted the specific portion
of the land to be segregated, identified and specifically titled. Hence, by the said Contract, the respondents as
sellers were given a maximum of four years within which to acquire a separate TCT in their names, preparatory
to the execution of the deed of sale and the payment of the agreed price in the manner described in paragraph
nine.
3. ID.; OBLIGATIONS AND CONTRACTS; CONDITION DEFINED; WHEN THE CONSENT
OF A PARTY TO A CONTRACT IS GIVEN SUBJECT TO THE FULFILLMENT OF A SUSPENSIVE
CONDITION, THE CONTRACT IS NOT PERFECTED UNLESS THAT CONDITION IS FIRST
COMPLIED WITH; CASE AT BAR.- Condition has been defined as every future and uncertain event upon
which an obligation or provision is made to depend. It is a future and uncertain event upon which the acquisition
or resolution of rights is made to depend by those who execute the juridical act. Without it, the sale of the property
under the Contract cannot be perfected, and petitioner cannot be obliged to purchase the property. When the
consent of a party to a contract is given subject to the fulfillment of a suspensive condition, the contract is not
perfected unless that condition is first complied with.
4. ID.; ID.; WHEN THE OBLIGATION ASSUMED BY A PARTY IS EXPRESSLY SUBJECTED TO A
CONDITION, THE OBLIGATION CANNOT BE ENFORCED AGAINST HIM UNLESS THE
CONDITION IS COMPLIED WITH; CASE AT BAR.- The Court has held that [w]hen the obligation
assumed by a party to a contract is expressly subjected to a condition, the obligation cannot be enforced against
him unless the condition is complied with. Furthermore, [t]he obligatory force of a conditional obligation is
subordinated to the happening of a future and uncertain event, so that if that event does not take place, the parties
would stand as if the conditional obligation had never existed. In this case, the obligation of the petitioner to buy
the land cannot be enforced unless respondents comply with the suspensive condition that they acquire first a
separate and distinct TCT in their names. The suspensive condition not having been fulfilled, then the obligation
of the petitioner to purchase the land has not arisen.
5. ID.; ID.; THERE CAN BE NO RESCISSION OF AN OBLIGATION AS YET NON-EXISTENT, BECAUSE
THE SUSPENSIVE CONDITION HAS NOT HAPPENED; CASE AT BAR.- Respondents cannot rescind
the contract, because they have not caused the transfer of the TCT to their names, which is a condition precedent
to petitioners obligation. This Court has held that there can be no rescission (or more properly, resolution) of an
obligation as yet non-existent, because the suspensive condition has not happened.
 THIRD DIVISION

[G.R. No. 103577. October 7, 1996]

ROMULO A. CORONEL, ALARICO A. CORONEL, ANNETTE A. CORONEL,

ANNABELLE C. GONZALES (for herself and on behalf of Floraida C. Tupper,
as attorney-in-fact), CIELITO A. CORONEL, FLORAIDA A. ALMONTE, and
CATALINA BALAIS MABANAG, petitioners, vs. THE COURT OF APPEALS,
CONCEPCION D. ALCARAZ and RAMONA PATRICIA ALCARAZ, assisted by
GLORIA F. NOEL as attorney-in-fact, respondents.

DECISION
MELO, J.:

The petition before us has its roots in a complaint for specific performance to compel
herein petitioners (except the last named, Catalina Balais Mabanag) to consummate the
sale of a parcel of land with its improvements located along Roosevelt Avenue in Quezon
City entered into by the parties sometime in January 1985 for the price of P1,240,000.00.
The undisputed facts of the case were summarized by respondent court in this wise:

On January 19, 1985, defendants-appellants Romulo Coronel, et. al. (hereinafter referred to as
Coronels) executed a document entitled Receipt of Down Payment (Exh. A) in favor of plaintiff
Ramona Patricia Alcaraz (hereinafter referred to as Ramona) which is reproduced hereunder:

RECEIPT OF DOWN PAYMENT

P1,240,000.00 - Total amount

50,000.00 - Down payment

------------------------------------------

P1,190,000.00 - Balance

Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum of Fifty
Thousand Pesos purchase price of our inherited house and lot, covered by TCT No. 119627 of
the Registry of Deeds of Quezon City, in the total amount of P1,240,000.00.

We bind ourselves to effect the transfer in our names from our deceased father, Constancio P.
Coronel, the transfer certificate of title immediately upon receipt of the down payment above-
stated.
On our presentation of the TCT already in or name, We will immediately execute the deed of
absolute sale of said property and Miss Ramona Patricia Alcaraz shall immediately pay the
balance of the P1,190,000.00.

Clearly, the conditions appurtenant to the sale are the following:

1. Ramona will make a down payment of Fifty Thousand (P50,000.00) pesos upon execution of
the document aforestated;

2. The Coronels will cause the transfer in their names of the title of the property registered in the
name of their deceased father upon receipt of the Fifty Thousand (P50,000.00) Pesos down
payment;

3. Upon the transfer in their names of the subject property, the Coronels will execute the deed of
absolute sale in favor of Ramona and the latter will pay the former the whole balance of One
Million One Hundred Ninety Thousand (P1,190,000.00) Pesos.

On the same date (January 15, 1985), plaintiff-appellee Concepcion D. Alcaraz (hereinafter
referred to as Concepcion), mother of Ramona, paid the down payment of Fifty Thousand
(P50,000.00) Pesos (Exh. B, Exh. 2).

On February 6, 1985, the property originally registered in the name of the Coronels father was
transferred in their names under TCT No. 327043 (Exh. D; Exh 4)

On February 18, 1985, the Coronels sold the property covered by TCT No. 327043 to intervenor-
appellant Catalina B. Mabanag (hereinafter referred to as Catalina) for One Million Five
Hundred Eighty Thousand (P1,580,000.00) Pesos after the latter has paid Three Hundred
Thousand (P300,000.00) Pesos (Exhs. F-3; Exh. 6-C)

For this reason, Coronels canceled and rescinded the contract (Exh. A) with Ramona by
depositing the down payment paid by Concepcion in the bank in trust for Ramona Patricia
Alcaraz.

On February 22, 1985, Concepcion, et. al., filed a complaint for a specific performance against
the Coronels and caused the annotation of a notice of lis pendens at the back of TCT No. 327403
(Exh. E; Exh. 5).

On April 2, 1985, Catalina caused the annotation of a notice of adverse claim covering the same
property with the Registry of Deeds of Quezon City (Exh. F; Exh. 6).

On April 25, 1985, the Coronels executed a Deed of Absolute Sale over the subject property in
favor of Catalina (Exh. G; Exh. 7).

On June 5, 1985, a new title over the subject property was issued in the name of Catalina under
TCT No. 351582 (Exh. H; Exh. 8).
 (Rollo, pp. 134-136)

In the course of the proceedings before the trial court (Branch 83, RTC, Quezon City)
the parties agreed to submit the case for decision solely on the basis of documentary
exhibits. Thus, plaintiffs therein (now private respondents) proffered their documentary
evidence accordingly marked as Exhibits A through J, inclusive of their corresponding
submarkings. Adopting these same exhibits as their own, then defendants (now
petitioners) accordingly offered and marked them as Exhibits 1 through 10, likewise
inclusive of their corresponding submarkings. Upon motion of the parties, the trial court
gave them thirty (30) days within which to simultaneously submit their respective
memoranda, and an additional 15 days within which to submit their corresponding
comment or reply thereto, after which, the case would be deemed submitted for
resolution.
On April 14, 1988, the case was submitted for resolution before Judge Reynaldo
Roura, who was then temporarily detailed to preside over Branch 82 of the RTC of
Quezon City. On March 1, 1989, judgment was handed down by Judge Roura from his
regular bench at Macabebe, Pampanga for the Quezon City branch, disposing as follows:

WHEREFORE, judgment for specific performance is hereby rendered ordering defendant to

execute in favor of plaintiffs a deed of absolute sale covering that parcel of land embraced in and
covered by Transfer Certificate of Title No. 327403 (now TCT No. 331582) of the Registry of
Deeds for Quezon City, together with all the improvements existing thereon free from all liens
and encumbrances, and once accomplished, to immediately deliver the said document of sale to
plaintiffs and upon receipt thereof, the plaintiffs are ordered to pay defendants the whole balance
of the purchase price amounting to P1,190,000.00 in cash. Transfer Certificate of Title No.
331582 of the Registry of Deeds for Quezon City in the name of intervenor is hereby canceled
and declared to be without force and effect. Defendants and intervenor and all other persons
claiming under them are hereby ordered to vacate the subject property and deliver possession
thereof to plaintiffs. Plaintiffs claim for damages and attorneys fees, as well as the counterclaims
of defendants and intervenors are hereby dismissed.

No pronouncement as to costs.

So Ordered.

Macabebe, Pampanga for Quezon City, March 1, 1989.

(Rollo, p. 106)

A motion for reconsideration was filed by petitioners before the new presiding judge
of the Quezon City RTC but the same was denied by Judge Estrella T. Estrada, thusly:

The prayer contained in the instant motion, i.e., to annul the decision and to render anew decision
by the undersigned Presiding Judge should be denied for the following reasons: (1) The instant
case became submitted for decision as of April 14, 1988 when the parties terminated the
presentation of their respective documentary evidence and when the Presiding Judge at that time
was Judge Reynaldo Roura. The fact that they were allowed to file memoranda at some future
date did not change the fact that the hearing of the case was terminated before Judge Roura and
therefore the same should be submitted to him for decision; (2) When the defendants and
intervenor did not object to the authority of Judge Reynaldo Roura to decide the case prior to the
rendition of the decision, when they met for the first time before the undersigned Presiding Judge
at the hearing of a pending incident in Civil Case No. Q-46145 on November 11, 1988, they
were deemed to have acquiesced thereto and they are now estopped from questioning said
authority of Judge Roura after they received the decision in question which happens to be
adverse to them; (3) While it is true that Judge Reynaldo Roura was merely a Judge-on-detail at
this Branch of the Court, he was in all respects the Presiding Judge with full authority to act on
any pending incident submitted before this Court during his incumbency. When he returned to
his Official Station at Macabebe, Pampanga, he did not lose his authority to decide or resolve
cases submitted to him for decision or resolution because he continued as Judge of the Regional
Trial Court and is of co-equal rank with the undersigned Presiding Judge. The standing rule and
supported by jurisprudence is that a Judge to whom a case is submitted for decision has the
authority to decide the case notwithstanding his transfer to another branch or region of the same
court (Sec. 9, Rule 135, Rule of Court).

Coming now to the twin prayer for reconsideration of the Decision dated March 1, 1989 rendered
in the instant case, resolution of which now pertains to the undersigned Presiding Judge, after a
meticulous examination of the documentary evidence presented by the parties, she is convinced
that the Decision of March 1, 1989 is supported by evidence and, therefore, should not be
disturbed.

IN VIEW OF THE FOREGOING, the Motion for Reconsideration and/or to Annul Decision and
Render Anew Decision by the Incumbent Presiding Judge dated March 20, 1989 is hereby
DENIED.

SO ORDERED.

Quezon City, Philippines, July 12, 1989.

(Rollo, pp. 108-109)

Petitioners thereupon interposed an appeal, but on December 16, 1991, the Court of
Appeals (Buena, Gonzaga-Reyes, Abad-Santos (P), JJ.) rendered its decision fully
agreeing with the trial court.
Hence, the instant petition which was filed on March 5, 1992. The last pleading,
private respondents Reply Memorandum, was filed on September 15, 1993. The case
was, however, re-raffled to undersigned ponente only on August 28, 1996, due to the
voluntary inhibition of the Justice to whom the case was last assigned.
While we deem it necessary to introduce certain refinements in the disquisition of
respondent court in the affirmance of the trial courts decision, we definitely find the instant
petition bereft of merit.
 The heart of the controversy which is the ultimate key in the resolution of the other
issues in the case at bar is the precise determination of the legal significance of the
document entitled Receipt of Down Payment which was offered in evidence by both
parties. There is no dispute as to the fact that the said document embodied the binding
contract between Ramona Patricia Alcaraz on the one hand, and the heirs of Constancio
P. Coronel on the other, pertaining to a particular house and lot covered by TCT No.
119627, as defined in Article 1305 of the Civil Code of the Philippines which reads as
follows:

Art. 1305. A contract is a meeting of minds between two persons whereby one binds himself,
with respect to the other, to give something or to render some service.

While, it is the position of private respondents that the Receipt of Down Payment
embodied a perfected contract of sale, which perforce, they seek to enforce by means of
an action for specific performance, petitioners on their part insist that what the document
signified was a mere executory contract to sell, subject to certain suspensive conditions,
and because of the absence of Ramona P. Alcaraz, who left for the United States of
America, said contract could not possibly ripen into a contract of absolute sale.
Plainly, such variance in the contending parties contention is brought about by the
way each interprets the terms and/or conditions set forth in said private instrument.Withal,
based on whatever relevant and admissible evidence may be available on record, this
Court, as were the courts below, is now called upon to adjudge what the real intent of the
parties was at the time the said document was executed.
The Civil Code defines a contract of sale, thus:

Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in
money or its equivalent.

Sale, by its very nature, is a consensual contract because it is perfected by mere

consent. The essential elements of a contract of sale are the following:

a) Consent or meeting of the minds, that is, consent to transfer ownership in exchange for the
price;

b) Determinate subject matter; and

c) Price certain in money or its equivalent.

Under this definition, a Contract to Sell may not be considered as a

Contract of Sale because the first essential element is lacking. In a contract to sell, the
prospective seller explicitly reserves the transfer of title to the prospective buyer,
meaning, the prospective seller does not as yet agree or consent to transfer ownership
of the property subject of the contract to sell until the happening of an event, which for
present purposes we shall take as the full payment of the purchase price. What the seller
agrees or obliges himself to do is to fulfill his promise to sell the subject property when
the entire amount of the purchase price is delivered to him. In other words the full payment
of the purchase price partakes of a suspensive condition, the non-fulfillment of which
prevents the obligation to sell from arising and thus, ownership is retained by the
prospective seller without further remedies by the prospective buyer. In Roque vs. Lapuz
(96 SCRA 741 [1980]), this Court had occasion to rule:

Hence, We hold that the contract between the petitioner and the respondent was a contract to sell
where the ownership or title is retained by the seller and is not to pass until the full payment of
the price, such payment being a positive suspensive condition and failure of which is not a
breach, casual or serious, but simply an event that prevented the obligation of the vendor to
convey title from acquiring binding force.

Stated positively, upon the fulfillment of the suspensive condition which is the full
payment of the purchase price, the prospective sellers obligation to sell the subject
property by entering into a contract of sale with the prospective buyer becomes
demandable as provided in Article 1479 of the Civil Code which states:

Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally
demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding
upon the promissor of the promise is supported by a consideration distinct from the price.

A contract to sell may thus be defined as a bilateral contract whereby the prospective
seller, while expressly reserving the ownership of the subject property despite delivery
thereof to the prospective buyer, binds himself to sell the said property exclusively to the
prospective buyer upon fulfillment of the condition agreed upon, that is, full payment of
the purchase price.
A contract to sell as defined hereinabove, may not even be considered as a
conditional contract of sale where the seller may likewise reserve title to the property
subject of the sale until the fulfillment of a suspensive condition, because in a conditional
contract of sale, the first element of consent is present, although it is conditioned upon
the happening of a contingent event which may or may not occur. If the suspensive
condition is not fulfilled, the perfection of the contract of sale is completely abated
(cf. Homesite and Housing Corp. vs. Court of Appeals, 133 SCRA 777 [1984]). However,
if the suspensive condition is fulfilled, the contract of sale is thereby perfected, such that
if there had already been previous delivery of the property subject of the sale to the buyer,
ownership thereto automatically transfers to the buyer by operation of law without any
further act having to be performed by the seller.
In a contract to sell, upon the fulfillment of the suspensive condition which is the full
payment of the purchase price, ownership will not automatically transfer to the buyer
although the property may have been previously delivered to him. The prospective seller
still has to convey title to the prospective buyer by entering into a contract of absolute
sale.
 It is essential to distinguish between a contract to sell and a conditional contract of
sale specially in cases where the subject property is sold by the owner not to the party
the seller contracted with, but to a third person, as in the case at bench. In a contract to
sell, there being no previous sale of the property, a third person buying such property
despite the fulfillment of the suspensive condition such as the full payment of the purchase
price, for instance, cannot be deemed a buyer in bad faith and the prospective buyer
cannot seek the relief of reconveyance of the property. There is no double sale in such
case. Title to the property will transfer to the buyer after registration because there is no
defect in the owner-sellers title per se, but the latter, of course, may be sued for damages
by the intending buyer.
In a conditional contract of sale, however, upon the fulfillment of the suspensive
condition, the sale becomes absolute and this will definitely affect the sellers title
thereto. In fact, if there had been previous delivery of the subject property, the sellers
ownership or title to the property is automatically transferred to the buyer such that, the
seller will no longer have any title to transfer to any third person. Applying Article 1544 of
the Civil Code, such second buyer of the property who may have had actual or
constructive knowledge of such defect in the sellers title, or at least was charged with the
obligation to discover such defect, cannot be a registrant in good faith. Such second buyer
cannot defeat the first buyers title. In case a title is issued to the second buyer, the first
buyer may seek reconveyance of the property subject of the sale.
With the above postulates as guidelines, we now proceed to the task of deciphering
the real nature of the contract entered into by petitioners and private respondents.
It is a canon in the interpretation of contracts that the words used therein should be
given their natural and ordinary meaning unless a technical meaning was intended (Tan
vs. Court of Appeals, 212 SCRA 586 [1992]). Thus, when petitioners declared in the said
Receipt of Down Payment that they --

Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum of Fifty
Thousand Pesos purchase price of our inherited house and lot, covered by TCT No. 1199627
of the Registry of Deeds of Quezon City, in the total amount of P1,240,000.00.

without any reservation of title until full payment of the entire purchase price, the natural
and ordinary idea conveyed is that they sold their property.
When the Receipt of Down payment is considered in its entirety, it becomes more
manifest that there was a clear intent on the part of petitioners to transfer title to the buyer,
but since the transfer certificate of title was still in the name of petitioners father, they
could not fully effect such transfer although the buyer was then willing and able to
immediately pay the purchase price. Therefore, petitioners-sellers undertook upon receipt
of the down payment from private respondent Ramona P. Alcaraz, to cause the issuance
of a new certificate of title in their names from that of their father, after which, they
promised to present said title, now in their names, to the latter and to execute the deed
of absolute sale whereupon, the latter shall, in turn, pay the entire balance of the purchase
price.
 The agreement could not have been a contract to sell because the sellers herein
made no express reservation of ownership or title to the subject parcel of
land.Furthermore, the circumstance which prevented the parties from entering into an
absolute contract of sale pertained to the sellers themselves (the certificate of title was
not in their names) and not the full payment of the purchase price. Under the established
facts and circumstances of the case, the Court may safely presume that, had the
certificate of title been in the names of petitioners-sellers at that time, there would have
been no reason why an absolute contract of sale could not have been executed and
consummated right there and then.
Moreover, unlike in a contract to sell, petitioners in the case at bar did not merely
promise to sell the property to private respondent upon the fulfillment of the suspensive
condition. On the contrary, having already agreed to sell the subject property, they
undertook to have the certificate of title change to their names and immediately thereafter,
to execute the written deed of absolute sale.
Thus, the parties did not merely enter into a contract to sell where the sellers, after
compliance by the buyer with certain terms and conditions, promised to sell the property
to the latter. What may be perceived from the respective undertakings of the parties to
the contract is that petitioners had already agreed to sell the house and lot they inherited
from their father, completely willing to transfer ownership of the subject house and lot to
the buyer if the documents were then in order. It just so happened, however, that the
transfer certificate of title was then still in the name of their father. It was more expedient
to first effect the change in the certificate of title so as to bear their names. That is why
they undertook to cause the issuance of a new transfer of the certificate of title in their
names upon receipt of the down payment in the amount of P50,000.00. As soon as the
new certificate of title is issued in their names, petitioners were committed to immediately
execute the deed of absolute sale. Only then will the obligation of the buyer to pay the
remainder of the purchase price arise.
There is no doubt that unlike in a contract to sell which is most commonly entered
into so as to protect the seller against a buyer who intends to buy the property in
installment by withholding ownership over the property until the buyer effects full payment
therefor, in the contract entered into in the case at bar, the sellers were the ones who
were unable to enter into a contract of absolute sale by reason of the fact that the
certificate of title to the property was still in the name of their father. It was the sellers in
this case who, as it were, had the impediment which prevented, so to speak, the execution
of an contract of absolute sale.
What is clearly established by the plain language of the subject document is that when
the said Receipt of Down Payment was prepared and signed by petitioners Romulo A.
Coronel, et. al., the parties had agreed to a conditional contract of sale, consummation of
which is subject only to the successful transfer of the certificate of title from the name of
petitioners father, Constancio P. Coronel, to their names.
The Court significantly notes that this suspensive condition was, in fact, fulfilled on
February 6, 1985 (Exh. D; Exh. 4). Thus, on said date, the conditional contract of sale
between petitioners and private respondent Ramona P. Alcaraz became obligatory, the
only act required for the consummation thereof being the delivery of the property by
means of the execution of the deed of absolute sale in a public instrument, which
petitioners unequivocally committed themselves to do as evidenced by the Receipt of
Down Payment.
Article 1475, in correlation with Article 1181, both of the Civil Code, plainly applies to
the case at bench. Thus,

Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the
thing which is the object of the contract and upon the price.

From that moment, the parties may reciprocally demand performance, subject to the provisions
of the law governing the form of contracts.

Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or
loss of those already acquired, shall depend upon the happening of the event which constitutes
the condition.

Since the condition contemplated by the parties which is the issuance of a certificate
of title in petitioners names was fulfilled on February 6, 1985, the respective obligations
of the parties under the contract of sale became mutually demandable, that is, petitioners,
as sellers, were obliged to present the transfer certificate of title already in their names to
private respondent Ramona P. Alcaraz, the buyer, and to immediately execute the deed
of absolute sale, while the buyer on her part, was obliged to forthwith pay the balance of
the purchase price amounting to P1,190,000.00.
It is also significant to note that in the first paragraph in page 9 of their petition,
petitioners conclusively admitted that:
3. The petitioners-sellers Coronel bound themselves to effect the transfer in our
names from our deceased father Constancio P. Coronel, the transfer
certificate of title immediately upon receipt of the downpayment above-
stated". The sale was still subject to this suspensive condition. (Emphasis
supplied.)

(Rollo, p. 16)

Petitioners themselves recognized that they entered into a contract of sale subject to
a suspensive condition. Only, they contend, continuing in the same paragraph, that:

. . . Had petitioners-sellers not complied with this condition of first transferring the title to the
property under their names, there could be no perfected contract of sale. (Emphasis supplied.)

(Ibid.)

not aware that they have set their own trap for themselves, for Article 1186 of the Civil
Code expressly provides that:
Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its
fulfillment.

Besides, it should be stressed and emphasized that what is more controlling than
these mere hypothetical arguments is the fact that the condition herein referred to was
actually and indisputably fulfilled on February 6, 1985, when a new title was issued
in the names of petitioners as evidenced by TCT No. 327403 (Exh. D; Exh. 4).
The inevitable conclusion is that on January 19, 1985, as evidenced by the document
denominated as Receipt of Down Payment (Exh. A; Exh. 1), the parties entered into a
contract of sale subject to the suspensive condition that the sellers shall effect the
issuance of new certificate title from that of their fathers name to their names and that, on
February 6, 1985, this condition was fulfilled (Exh. D; Exh. 4).
We, therefore, hold that, in accordance with Article 1187 which pertinently provides -

Art. 1187. The effects of conditional obligation to give, once the condition has been fulfilled,
shall retroact to the day of the constitution of the obligation . . .

In obligations to do or not to do, the courts shall determine, in each case, the retroactive effect of
the condition that has been complied with.

the rights and obligations of the parties with respect to the perfected contract of sale
became mutually due and demandable as of the time of fulfillment or occurrence of the
suspensive condition on February 6, 1985. As of that point in time, reciprocal obligations
of both seller and buyer arose.
Petitioners also argue there could been no perfected contract on January 19, 1985
because they were then not yet the absolute owners of the inherited property.
We cannot sustain this argument.
Article 774 of the Civil Code defines Succession as a mode of transferring ownership
as follows:

Art. 774. Succession is a mode of acquisition by virtue of which the property, rights and
obligations to the extent and value of the inheritance of a person are transmitted through his
death to another or others by his will or by operation of law.

Petitioners-sellers in the case at bar being the sons and daughters of the decedent
Constancio P. Coronel are compulsory heirs who were called to succession by operation
of law. Thus, at the point their father drew his last breath, petitioners stepped into his
shoes insofar as the subject property is concerned, such that any rights or obligations
pertaining thereto became binding and enforceable upon them. It is expressly provided
that rights to the succession are transmitted from the moment of death of the decedent
(Article 777, Civil Code; Cuison vs. Villanueva, 90 Phil. 850 [1952]).
Be it also noted that petitioners claim that succession may not be declared unless the
creditors have been paid is rendered moot by the fact that they were able to effect the
transfer of the title to the property from the decedents name to their names on February
6, 1985.
Aside from this, petitioners are precluded from raising their supposed lack of capacity
to enter into an agreement at that time and they cannot be allowed to now take a posture
contrary to that which they took when they entered into the agreement with private
respondent Ramona P. Alcaraz. The Civil Code expressly states that:

Art. 1431. Through estoppel an admission or representation is rendered conclusive upon the
person making it, and cannot be denied or disproved as against the person relying thereon.

Having represented themselves as the true owners of the subject property at the time of
sale, petitioners cannot claim now that they were not yet the absolute owners thereof at
that time.
Petitioners also contend that although there was in fact a perfected contract of sale
between them and Ramona P. Alcaraz, the latter breach her reciprocal obligation when
she rendered impossible the consummation thereof by going to the United States of
America, without leaving her address, telephone number, and Special Power of Attorney
(Paragraphs 14 and 15, Answer with Compulsory Counterclaim to the Amended
Complaint, p. 2; Rollo, p. 43), for which reason, so petitioners conclude, they were correct
in unilaterally rescinding the contract of sale.
We do not agree with petitioners that there was a valid rescission of the contract of
sale in the instant case. We note that these supposed grounds for petitioners rescission,
are mere allegations found only in their responsive pleadings, which by express provision
of the rules, are deemed controverted even if no reply is filed by the plaintiffs (Sec. 11,
Rule 6, Revised Rules of Court). The records are absolutely bereft of any supporting
evidence to substantiate petitioners allegations. We have stressed time and again that
allegations must be proven by sufficient evidence (Ng Cho Cio vs. Ng Diong, 110 Phil.
882 [1961]; Recaro vs. Embisan, 2 SCRA 598 [1961]). Mere allegation is not an evidence
(Lagasca vs. De Vera, 79 Phil. 376 [1947]).
Even assuming arguendo that Ramona P. Alcaraz was in the United States of
America on February 6, 1985, we cannot justify petitioners-sellers act of unilaterally and
extrajudicially rescinding the contract of sale, there being no express stipulation
authorizing the sellers to extrajudicially rescind the contract of sale. (cf. Dignos vs. CA,
158 SCRA 375 [1988]; Taguba vs. Vda. De Leon, 132 SCRA 722 [1984])
Moreover, petitioners are estopped from raising the alleged absence of Ramona P.
Alcaraz because although the evidence on record shows that the sale was in the name
of Ramona P. Alcaraz as the buyer, the sellers had been dealing with Concepcion D.
Alcaraz, Ramonas mother, who had acted for and in behalf of her daughter, if not also in
her own behalf. Indeed, the down payment was made by Concepcion D. Alcaraz with her
own personal Check (Exh. B; Exh. 2) for and in behalf of Ramona P. Alcaraz. There is no
evidence showing that petitioners ever questioned Concepcions authority to represent
Ramona P. Alcaraz when they accepted her personal check. Neither did they raise any
objection as regards payment being effected by a third person. Accordingly, as far as
petitioners are concerned, the physical absence of Ramona P. Alcaraz is not a ground to
rescind the contract of sale.
Corollarily, Ramona P. Alcaraz cannot even be deemed to be in default, insofar as
her obligation to pay the full purchase price is concerned. Petitioners who are precluded
from setting up the defense of the physical absence of Ramona P. Alcaraz as above-
explained offered no proof whatsoever to show that they actually presented the new
transfer certificate of title in their names and signified their willingness and readiness to
execute the deed of absolute sale in accordance with their agreement. Ramonas
corresponding obligation to pay the balance of the purchase price in the amount
of P1,190,000.00 (as buyer) never became due and demandable and, therefore, she
cannot be deemed to have been in default.
Article 1169 of the Civil Code defines when a party in a contract involving reciprocal
obligations may be considered in default, to wit:

Art. 1169. Those obliged to deliver or to do something, incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.

xxx

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not
ready to comply in a proper manner with what is incumbent upon him. From the moment
one of the parties fulfill his obligation, delay by the other begins. (Emphasis supplied.)

There is thus neither factual nor legal basis to rescind the contract of sale between
petitioners and respondents.
With the foregoing conclusions, the sale to the other petitioner, Catalina B. Mabanag,
gave rise to a case of double sale where Article 1544 of the Civil Code will apply, to wit:

Art. 1544. If the same thing should have been sold to different vendees, the ownership shall be
transferred to the person who may have first taken possession thereof in good faith, if it should
be movable property.

Should it be immovable property, the ownership shall belong to the person acquiring it who in
good faith first recorded it in the Registry of Property.

Should there be no inscription, the ownership shall pertain to the person who in good faith was
first in the possession; and, in the absence thereof to the person who presents the oldest title,
provided there is good faith.

The record of the case shows that the Deed of Absolute Sale dated April 25, 1985 as
proof of the second contract of sale was registered with the Registry of Deeds of Quezon
City giving rise to the issuance of a new certificate of title in the name of Catalina B.
Mabanag on June 5, 1985. Thus, the second paragraph of Article 1544 shall apply.
 The above-cited provision on double sale presumes title or ownership to pass to the
buyer, the exceptions being: (a) when the second buyer, in good faith, registers the sale
ahead of the first buyer, and (b) should there be no inscription by either of the two buyers,
when the second buyer, in good faith, acquires possession of the property ahead of the
first buyer. Unless, the second buyer satisfies these requirements, title or ownership will
not transfer to him to the prejudice of the first buyer.
In his commentaries on the Civil Code, an accepted authority on the subject, now a
distinguished member of the Court, Justice Jose C. Vitug, explains:

The governing principle is prius tempore, potior jure (first in time, stronger in right). Knowledge
by the first buyer of the second sale cannot defeat the first buyers rights except when the second
buyer first registers in good faith the second sale (Olivares vs. Gonzales, 159 SCRA
33). Conversely, knowledge gained by the second buyer of the first sale defeats his rights even if
he is first to register, since knowledge taints his registration with bad faith (see also Astorga vs.
Court of Appeals, G.R. No. 58530, 26 December 1984). In Cruz vs. Cabana (G.R. No. 56232, 22
June 1984, 129 SCRA 656), it was held that it is essential, to merit the protection of Art. 1544,
second paragraph, that the second realty buyer must act in good faith in registering his deed of
sale (citing Carbonell vs. Court of Appeals, 69 SCRA 99, Crisostomo vs. CA, G.R. No. 95843, 02
September 1992).
(J. Vitug, Compendium of Civil Law and Jurisprudence, 1993 Edition, p. 604).
Petitioners point out that the notice of lis pendens in the case at bar was annotated
on the title of the subject property only on February 22, 1985, whereas, the second sale
between petitioners Coronels and petitioner Mabanag was supposedly perfected prior
thereto or on February 18, 1985. The idea conveyed is that at the time petitioner
Mabanag, the second buyer, bought the property under a clean title, she was unaware of
any adverse claim or previous sale, for which reason she is a buyer in good faith.
We are not persuaded by such argument.
In a case of double sale, what finds relevance and materiality is not whether or not
the second buyer in good faith but whether or not said second buyer registers such
second sale in good faith, that is, without knowledge of any defect in the title of the
property sold.
As clearly borne out by the evidence in this case, petitioner Mabanag could not have
in good faith, registered the sale entered into on February 18, 1985 because as early as
February 22, 1985, a notice of lis pendens had been annotated on the transfer certificate
of title in the names of petitioners, whereas petitioner Mabanag registered the said sale
sometime in April, 1985. At the time of registration, therefore, petitioner Mabanag knew
that the same property had already been previously sold to private respondents, or, at
least, she was charged with knowledge that a previous buyer is claiming title to the same
property. Petitioner Mabanag cannot close her eyes to the defect in petitioners title to the
property at the time of the registration of the property.
This Court had occasions to rule that:
If a vendee in a double sale registers the sale after he has acquired knowledge that there was a
previous sale of the same property to a third party or that another person claims said property in a
previous sale, the registration will constitute a registration in bad faith and will not confer upon
him any right. (Salvoro vs. Tanega, 87 SCRA 349 [1978]; citing Palarca vs. Director of Land,
43 Phil. 146; Cagaoan vs. Cagaoan, 43 Phil. 554; Fernandez vs. Mercader, 43 Phil. 581.)

Thus, the sale of the subject parcel of land between petitioners and Ramona P.
Alcaraz, perfected on February 6, 1985, prior to that between petitioners and Catalina B.
Mabanag on February 18, 1985, was correctly upheld by both the courts below.
Although there may be ample indications that there was in fact an agency between
Ramona as principal and Concepcion, her mother, as agent insofar as the subject
contract of sale is concerned, the issue of whether or not Concepcion was also acting in
her own behalf as a co-buyer is not squarely raised in the instant petition, nor in such
assumption disputed between mother and daughter. Thus, We will not touch this issue
and no longer disturb the lower courts ruling on this point.
WHEREFORE, premises considered, the instant petition is hereby DISMISSED and
the appealed judgment AFFIRMED.
SO ORDERED.

SYLLABUS

1. CIVIL LAW; SALES; ESSENTIAL ELEMENTS THEREOF. - Sale, by its very nature, is
a consensual contract because it is perfected by mere consent. The essential
elements of a contract of sale are the following: a) consent or meeting of the minds,
that is, consent to transfer ownership in exchange for the price; b) determinate subject
matter; and c) price certain in money or its equivalent.
2. ID.; ID.; CONTRACT TO SELL DISTINGUISHED FROM CONDITIONAL CONTRACT
OF SALE. - Under this definition, a Contract to Sell may not be considered as a
Contract of Sale because the first essential element is lacking. In a contract to sell,
the prospective seller explicitly reserves the transfer of title to the prospective buyer,
meaning, the prospective seller does not as yet agree or consent to transfer
ownership of the property subject of the contract to sell until the happening of an
event, which for present purposes we shall take as the full payment of the purchase
price. What the seller agrees or obliges himself to do is to fulfill his promise to sell the
subject property when the entire amount of the purchase price is delivered to him. x
x x In a contract to sell, upon the fulfillment of the suspensive condition which is the
full payment of the purchase price, ownership will not automatically transfer to the
buyer although the property may have been previously delivered to him. The
prospective seller still has to convey title to the prospective buyer by entering into a
contract of absolute sale. A contract to sell as defined hereinabove, may not even be
considered as a conditional contract of sale where the seller may likewise reserve
title to the property subject of the sale until the fulfillment of a suspensive condition,
because in a conditional contract of sale, the first element of consent is present,
 although it is conditioned upon the happening of a contingent event which may or
may not occur. If the suspensive condition is not fulfilled, the perfection of the contract
of sale is completely abated (cf. Homesite and Housing Corp. vs. Court of Appeals,
133 SCRA 777 [1984]). However, if the suspensive condition is fulfilled, the contract
of sale is thereby perfected, such that if there had already been previous delivery of
the property subject of the sale to the buyer, ownership thereto automatically transfers
to the buyer by operation of law without any further act having to be performed by the
seller.
3. ID.; ID.; ID.; SALE OF SUBJECT PROPERTY TO A THIRD PERSON; EFFECTS
THEREOF. - It is essential to distinguish between a contract to sell and a conditional
contract of sale specially in cases where the subject property is sold by the owner not
to the party the seller contracted with, but to a third person, as in the case at bench. In
a contract to sell, there being no previous sale of the property, a third person buying
such property despite the fulfillment of the suspensive condition such as the full
payment of the purchase price, for instance, cannot be deemed a buyer in bad faith
and the prospective buyer cannot seek the relief of reconveyance of the
property. There is no double sale in such case. Title to the property will transfer to the
buyer after registration because there is no defect in the owner-seller's title per se,
but the latter, of course, may be sued for damages by the intending buyer. In a
conditional contract of sale, however, upon the fulfillment of the suspensive condition,
the sale becomes absolute and this will definitely affect the seller's title thereto. In
fact, if there had been previous delivery of the subject property, the seller's ownership
or title to the property is automatically transfered to the buyer such that, the seller will
no longer have any title to transfer to any third person. Applying Article 1544 of the
Civil Code, such second buyer of the buyer of the property who may have had actual
or constructive knowledge of such defect, cannot be a registrant in good faith. Such
second buyer cannot defeat the first buyer's title. In case a title is issued to the second
buyer, the first buyer may seek reconveyance of the property subject of the sale.
4. ID.; ID.; CONTRACT OF SALE; INTERPRETATION OF WORDS USED THEREIN
SHOULD BE GIVEN ORDINARY MEANING; CASE AT BENCH. - It is a canon in the
interpretation of contracts that the words used therein should be given their natural
and ordinary meaning unless a technical meaning was intended (Tan vs. Court of
Appeals, 212 SCRA 586 [1992]). Thus, x x x When the "Receipt of Down Payment"
is considered in its entirety, it becomes more manifeest that there was a clear intent
on the part of petitioners to transfer title to the buyer, but since the transfer certificate
of title was still in the name of petitioner's father, they could not fully effect such
transfer although the buyer was then willing and able to immediately pay the purchase
price. Therefore, petitioners-sellers undertook upon receipt of the down payment from
rivate respondent Ramona P. Alcaraz, to cause the issuance of a new certificate of
title in their names from that of their father, after which, they promised to present said
title, now in their names, to the latter and to execute the deed of absolute sale
whereupon, the latter shall, in turn, pay the entire balance of the purchase price. The
agreement could not have been a contract to sell because the sellers herein made
no express reservation of ownership or title to the subject parcel of land. Furthermore,
the circumstance which prevented the parties from entering into an absolute contract
 of sale pertained to the sellers themselves (the certificate of title was not in their
names) and not the full payment of the purchase price. Under the established facts
and circumstances of the case, the Court may safely presume that, had the certificate
of title been in the names of petitioners-sellers at that time, there would have been
no reason why an absolute contract of sale could not have been executed and
consummated right there and then.
5. ID.; ID.; ID.; WHEN RECIPROCAL OBLIGATIONS OF SELLER AND BUYER AROSE
IN CASE AT BENCH. - On January 19, 1985, as evidenced by the document
denominated as "Receipt of Down Payment" (Exh. "A"; Exh. "1"), the parties entered
into a contract of sale subject only to the suspensive condition that the sellers shall
effect the issuance of new certificate of title from that of their father's name to their
names. x x x On February 6, 1985, this condition was fulfilled (Exh. "D"; Exh. "4"). We
therefore, hold that, in accordance with Article 1187 x x x the rights and obligations
of the parties with respect to the perfected contract of sale became mutually due and
demandable as of the time of fulfillment or occurence of the suspensive condition
on February 6, 1985. As of that point in time, reciprocal obligations of both seller and
buyer arose, that is, x x x petitioners, as sellers, were obliged to present the transfer
certificate of title already in their names to private respondent Ramona P. Alcaraz,
the buyer, and to immediately execute the deed of absolute sale, while the buyer on
her part, was obliged to forthwith pay the balance of the purchase price amounting to
P1,190,000.00
6. ID.; WILLS AND SUCCESSION; RIGHTS THERETO TRANSMITTED FROM
MOMENT OF DECEDENT'S DEATH; CASE AT BENCH. - Petitioners also argue
there could be no perfected contract on January 19, 1985 because they were then
not yet the absolute owners of the inherited property. We cannot sustain this
argument. Article 774 of the Civil Code defines Succession as a mode of transfering
ownership as follows: Art. 774. Succession is a mode of acquisition by virtue of which
the property, rights and obligations to the extent and value of the inheritance of a
person are transmitted through his death to another or others by his will or by
operation of law. Petitioners-sellers in the case at bar being the sons and daughters
of the decedent Constancio P. Coronel are compulsory heirs who were called to
succession by operation of law. Thus, at the point their father drew his last breath,
petitioners stepped into his shoes insofar as the subject property is conserned, such
that any rights or obligations pertaining thereto became binding and enforceable upon
them. It is expressly provided that rights to the succession are transmitted from the
moment of death of the decedent (Article 777, Civil Code; Cuison vs. Villanueva, 90
Phils. 850 [1952]).
7. ID.; SALES; CONTRACTS OF SALE; ESTOPPEL; PETITIONERS PRECLUDED
FROM DENYING OWNERSHIP OF SUBJECT PROPERTY AT TIME OF SALE;
CASE AT BENCH. - Aside from this, petitioners are precluded from raising their
supposed lack of capacity to enter into an agreement at that time and they cannot be
allowed to now take a posture contrary to that which they took when they entered into
the agreement with private respondent Ramona P. Alcaraz. x x x Having represented
themselves as the true owners of the subject property at the time of sale, petitioners
cannot claim now that they were not yet the absolute owners thereof at that time.
8. ID.; ID.; ID.; RESCISSION; PHYSICAL ABSENCE OF BUYER NOT A GROUND
THEREFOR IN CASE AT BENCH. - Petitioners also contend that although there was
in fact a perfected contract of sale between them and Ramona P. Alcaraz, the latter
breached her reciprocal obligation when she rendered impossible the consummation
thereof by going to the United States of America, without leaving her address,
telephone number, and Special Power of Attorney (Paragraphs 14 and 15, Answer
with Compulsory Counterclaim to the Amended Complaint, p.2; Rollo, p. 43), for
which reason, so petitioners conclude, they were correct in unilaterally rescinding the
contract of sale. We do not agree with petitioners that there was a valid rescission of
the contract of sale in the instant case. We note that these supposed grounds for
petitioners' rescission, are mere allegations found only in their responsive pleadings,
which by express provision of the rules, are deemed controverted even if no reply is
filed by the plaintiffs (Sec. 11, Rule 6, Revised Rules of Court). The records are
absolutely bereft of any supporting evidence to substantiate petitioners'
allegations. We had stressed time and again that allegations must be proven by
sufficient evidence (Ng Cho Cio vs. Ng Diong, 110 Phil. 882 [1961]; Recaro vs.
Embisan, 2 SCRA 598 [1961]). Mere allegation is not an evidence (Lagasca vs. De
Vera, 79 Phil. 376 [1947]). Even assuming arguendo that Ramona P. Alcaraz was in
the United States of America on February 6, 1985, we cannot justify petitioners-
sellers' act of unilaterally and extrajudicially rescinding the contract of sale, there
being no express stipulation authorizing the sellers to extrajudicially rescind the
contract of sale. (cf Dignos vs. CA, 158 SCRA 375 [1988]; Taguba vs. Vda. de Leon,
132 SCRA 722 [1984]). Moreover, petitioners are estoppedfrom raising the alleged
absence of Ramona P. Alcaraz because although the evidence on records shows
that the sale was in the name of Ramona P. Alcaraz as the buyer, the sellers had
been dealing with Concepcion D. Alcaraz, Ramona's mother, who had acted for and
in behalf of her daughter, if not also in her own behalf. Indeed, the down payment
was made by Concepcion D. Alcaraz with her own personal check (Exh. "B"; Exh.
"2") for and in behalf of Ramona P. Alcaraz. There is no evidence showing that
petitioners ever questioned Concepcion's authority to represent Ramona P. Alcaraz
when they accepted her personal check. Neither did they raise any objection as
regards payment being effected by a third person. Accordingly, as far as petitioners
are concerned, the physical absence of Ramona P. Alcaraz is not a ground to rescind
the contract of sale.
9. ID.; ID.; ID.; ID.; ID.; BUYER NOT CONSIDERED IN DEFAULT IN CASE AT BENCH.
- Corollarily, Ramona P. Alcaraz cannot even be deemed to be in default, insofar as
her obligation to pay the full purchase price is concerned. Petitioners who are
precluded from setting up the defense of the physical absence of Ramona P. Alcaraz
as above-explained offered no proof whatsoever to show that they actually presented
the new transfer certificate of title in their names and signified their willingness and
readiness to execute the deed of absolute sale in accordance with their
agreement. Ramona's corresponding obligation to pay the balance of the purchase
price in the amount of P1,190,000.00 ( as buyer) never became due and demandable
and, therefore, she cannot be deemed to have been in default. Article 1169 of the
Civil Code defines when a party in a contract involving reciprocal obligations may be
 considered in default, x x x There is thus neither factual nor legal basis to rescind the
cotract of sale between petitioners and respondents.
10. ID.; ID.; DOUBLE SALE; WHEN SECOND BUYER IS ENTITLED TO TITLE OR
OWNERSHIP OF PROPERTY. - With the foregoing conclusions, the sale to the other
petitioner, Catalina B. Mabanag, gave rise to a case of double sale where Article 1544
of the Civil Code will apply. x x x The record of the case shows that the Deed of
Absolute Sale dated April 25, 1985 as proof of the second contract of sale was
registered with the Registry of Deeds of Quezon City giving rise to the issuance of a
new certificate of title in the name of Catalina B. Mabanag on June 5, 1985. Thus, the
second paragraph of Article 1544 shall apply. The above-cited provision on double
sale presumes title or ownership to pass to the first buyer the exceptions being: (a)
when the second buyer, in good faith registers the sale ahead of the first buyer, and
(b) should there be no inscription by either of the two buyers, when the second buyer,
in good faith, acquires possession of the property ahead of the first buyer. Unless,
the second buyer satisfies these requirements, title or ownership will not transfer to
him to prejudice of the first buyer.
11. ID.; ID.; ID.; ID.; CASE AT BENCH. - Petitioners point out that the notice of lis pendens
in the case at bar was annotated on the title of the subject property only on February
22, 1985, whereas, the second sale between petitioners Coronels and
petitioner. Mabanag was supposedly perfected prior thereto or on February 18,
1985. The idea conveyed is that at the time petitioner Mabanag, the second buyer,
bought the property under a clean title, she was unaware of any adverse claim or
previous sale, for which reason she is a buyer in good faith. We are not persuaded
by such argument. In a case of double sale, what finds relevance and materially is
not whether or no the second buyer was a buyer in good faith but whether or not said
second buyer registers such second sale in good faith, that is, without knowledge of
any defect in the title of the property sold. As clearly borne out by the evidence in this
case, petitioner Mabanag could not have in good faith, registered the sale entered
into on February 18, 1985 because as early as February 22, 1985, a notice of lis
pendens had been annotated on the transfer certificate of title in the names of
petitioners, whereas petitioner Mabanag registered the said sale sometime in April,
1985. At the time of registration, therefore, petitioner Mabanag knew that the same
property had already been previously sold to private respondents, or, at least, she
was charged with knowledge that a previous buyer is claiming title to the same
property. Petitioner Mabanag cannot close her eyes to the defect in petitioners' title
to the property at the time of the registration of the property.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-24190 July 13, 1926

GEORGE L. PARKS, plaintiff-appellant,

vs.
PROVINCE OF TARLAC, MUNICIPALITY OF TARLAC, CONCEPCION CIRER, and JAMES HILL,
her husband,defendants-appellees.

Jos. N. Wolfson for appellant.

Provincial Fiscal Lopez de Jesus for the Province and Municipality of Tarlac.
No appearance for the other appellees.

AVANCEÑA, C. J.:

On October 18, 1910, Concepcion Cirer and James Hill, the owners of parcel of land No. 2 referred
to in the complaint, donated it perpetually to the municipality of Tarlac, Province of Tarlac, under
certain conditions specified in the public document in which they made this donation. The donation
was accepted by Mr. Santiago de Jesus in the same document on behalf of the municipal council of
Tarlac of which he was the municipal president. The parcel thus donated was later registered in the
name of the donee, the municipality of Tarlac. On January 15, 1921, Concepcion Cirer and James
Hill sold this parcel to the herein plaintiff George L. Parks. On August 24, 1923, the municipality of
Tarlac transferred the parcel to the Province of Tarlac which, by reason of this transfer, applied for
and obtained the registration thereof in its name, the corresponding certificate of title having been
issued to it.

The plaintiff, George L. Parks, alleging that the conditions of the donation had not been complied
with and invoking the sale of this parcel of land made by Concepcion Cirer and James Hill in his
favor, brought this action against the Province of Tarlac, the municipality of Tarlac, Concepcion Cirer
and James Hill and prayed that he be declared the absolute owner entitled to the possession of this
parcel, that the transfer of the same by the municipality of Tarlac to the Province of Tarlac be
annulled, and the transfer certificate issued to the Province of Tarlac cancelled.

The lower court dismissed the complaint.

The plaintiff has no right of action. If he has any, it is only by virtue of the sale of this parcel made by
Concepcion Cirer and James Hill in his favor on January 15, 1921, but that sale cannot have any
effect. This parcel having been donated by Concepcion Cirer and James Hill to the municipality of
Tarlac, which donation was accepted by the latter, the title to the property was transferred to the
municipality of Tarlac. It is true that the donation might have been revoked for the causes, if any,
provided by the law, but the fact is that it was not revoked when Concepcion Cirer and James Hill
made the sale of this parcel to the plaintiff. Even supposing that causes existed for the revocation of
this donation, still, it was necessary, in order to consider it revoked, either that the revocation had
been consented to by the donee, the municipality of Tarlac, or that it had been judicially decreed.
None of these circumstances existed when Concepcion Cirer and James Hill sold this parcel to the
plaintiff. Consequently, when the sale was made Concepcion Cirer and James Hill were no longer
the owners of this parcel and could not have sold it to the plaintiff, nor could the latter have acquired
it from them.
But the appellant contends that a condition precedent having been imposed in the donation and the
same not having been complied with, the donation never became effective. We find no merit in this
contention. The appellant refers to the condition imposed that one of the parcels donated was to be
used absolutely and exclusively for the erection of a central school and the other for a public park,
the work to commence in both cases within the period of six months from the date of the ratification
by the partes of the document evidencing the donation. It is true that this condition has not been
complied with. The allegation, however, that it is a condition precedent is erroneous. The
characteristic of a condition precedent is that the acquisition of the right is not effected while said
condition is not complied with or is not deemed complied with. Meanwhile nothing is acquired and
there is only an expectancy of right. Consequently, when a condition is imposed, the compliance of
which cannot be effected except when the right is deemed acquired, such condition cannot be a
condition precedent. In the present case the condition that a public school be erected and a public
park made of the donated land, work on the same to commence within six months from the date of
the ratification of the donation by the parties, could not be complied with except after giving effect to
the donation. The donee could not do any work on the donated land if the donation had not really
been effected, because it would be an invasion of another's title, for the land would have continued
to belong to the donor so long as the condition imposed was not complied with.

The appellant also contends that, in any event, the condition not having been complied with, even
supposing that it was not a condition precedent but subsequent, the non-compliance thereof is
sufficient cause for the revocation of the donation. This is correct. But the period for bringing an
action for the revocation of the donation has prescribed. That this action is prescriptible, there is no
doubt. There is no legal provision which excludes this class of action from the statute of limitations.
And not only this, — the law itself recognizes the prescriptibility of the action for the revocation of a
donation, providing a special period of five years for the revocation by the subsequent birth of
children (art. 646, Civil Code), and one year for the revocation by reason of ingratitude. If no special
period is provided for the prescription of the action for revocation for noncompliance of the conditions
of the donation (art. 647, Civil Code), it is because in this respect the donation is considered onerous
and is governed by the law of contracts and the general rules of prescription. Under the law in force
(sec. 43, Code of Civ. Proc.) the period of prescription of this class of action is ten years. The action
for the revocation of the donation for this cause arose on April 19, 1911, that is six months after the
ratification of the instrument of donation of October 18, 1910. The complaint in this action was
presented July 5, 1924, more than ten years after this cause accrued.

By virtue of the foregoing, the judgment appealed from is affirmed, with the costs against the
appellant. So ordered.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 112127 July 17, 1995

CENTRAL PHILIPPINE UNIVERSITY, petitioner,

vs.
COURT OF APPEALS, REMEDIOS FRANCO, FRANCISCO N. LOPEZ, CECILIA P. VDA. DE
LOPEZ, REDAN LOPEZ AND REMARENE LOPEZ, respondents.

BELLOSILLO, J.:

CENTRAL PHILIPPINE UNIVERSITY filed this petition for review on certiorari of the decision of the
Court of Appeals which reversed that of the Regional Trial Court of Iloilo City directing petitioner to
reconvey to private respondents the property donated to it by their predecessor-in-interest.

Sometime in 1939, the late Don Ramon Lopez, Sr., who was then a member of the Board of
Trustees of the Central Philippine College (now Central Philippine University [CPU]), executed a
deed of donation in favor of the latter of a parcel of land identified as Lot No. 3174-B-1 of the
subdivision plan Psd-1144, then a portion of Lot No. 3174-B, for which Transfer Certificate of Title
No. T-3910-A was issued in the name of the donee CPU with the following annotations copied from
the deed of donation —

1. The land described shall be utilized by the CPU exclusively for the establishment
and use of a medical college with all its buildings as part of the curriculum;

2. The said college shall not sell, transfer or convey to any third party nor in any way
encumber said land;

3. The said land shall be called "RAMON LOPEZ CAMPUS", and the said college
shall be under obligation to erect a cornerstone bearing that name. Any net income
from the land or any of its parks shall be put in a fund to be known as the "RAMON
LOPEZ CAMPUS FUND" to be used for improvements of said campus and erection
of a building thereon.1

On 31 May 1989, private respondents, who are the heirs of Don Ramon Lopez, Sr., filed an action
for annulment of donation, reconveyance and damages against CPU alleging that since 1939 up to
the time the action was filed the latter had not complied with the conditions of the donation. Private
respondents also argued that petitioner had in fact negotiated with the National Housing Authority
(NHA) to exchange the donated property with another land owned by the latter.

In its answer petitioner alleged that the right of private respondents to file the action had prescribed;
that it did not violate any of the conditions in the deed of donation because it never used the donated
property for any other purpose than that for which it was intended; and, that it did not sell, transfer or
convey it to any third party.

On 31 May 1991, the trial court held that petitioner failed to comply with the conditions of the
donation and declared it null and void. The court a quo further directed petitioner to execute a deed
of the reconveyance of the property in favor of the heirs of the donor, namely, private respondents
herein.

Petitioner appealed to the Court of Appeals which on 18 June 1993 ruled that the annotations at the
back of petitioner's certificate of title were resolutory conditions breach of which should terminate the
rights of the donee thus making the donation revocable.

The appellate court also found that while the first condition mandated petitioner to utilize the donated
property for the establishment of a medical school, the donor did not fix a period within which the
condition must be fulfilled, hence, until a period was fixed for the fulfillment of the condition,
petitioner could not be considered as having failed to comply with its part of the bargain. Thus, the
appellate court rendered its decision reversing the appealed decision and remanding the case to the
court of origin for the determination of the time within which petitioner should comply with the first
condition annotated in the certificate of title.

Petitioner now alleges that the Court of Appeals erred: (a) in holding that the quoted annotations in
the certificate of title of petitioner are onerous obligations and resolutory conditions of the donation
which must be fulfilled non-compliance of which would render the donation revocable; (b) in holding
that the issue of prescription does not deserve "disquisition;" and, (c) in remanding the case to the
trial court for the fixing of the period within which petitioner would establish a medical college.2

We find it difficult to sustain the petition. A clear perusal of the conditions set forth in the deed of
donation executed by Don Ramon Lopez, Sr., gives us no alternative but to conclude that his
donation was onerous, one executed for a valuable consideration which is considered the equivalent
of the donation itself, e.g., when a donation imposes a burden equivalent to the value of the
donation. A gift of land to the City of Manila requiring the latter to erect schools, construct a
children's playground and open streets on the land was considered an onerous donation.3 Similarly,
where Don Ramon Lopez donated the subject parcel of land to petitioner but imposed an obligation
upon the latter to establish a medical college thereon, the donation must be for an onerous
consideration.

Under Art. 1181 of the Civil Code, on conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the happening of the event
which constitutes the condition. Thus, when a person donates land to another on the condition that
the latter would build upon the land a school, the condition imposed was not a condition precedent or
a suspensive condition but a resolutory one.4 It is not correct to say that the schoolhouse had to be
constructed before the donation became effective, that is, before the donee could become the owner
of the land, otherwise, it would be invading the property rights of the donor. The donation had to be
valid before the fulfillment of the condition.5 If there was no fulfillment or compliance with the
condition, such as what obtains in the instant case, the donation may now be revoked and all rights
which the donee may have acquired under it shall be deemed lost and extinguished.

The claim of petitioner that prescription bars the instant action of private respondents is unavailing.

The condition imposed by the donor, i.e., the building of a medical school upon the land
donated, depended upon the exclusive will of the donee as to when this condition shall be
fulfilled. When petitioner accepted the donation, it bound itself to comply with the condition
 thereof. Since the time within which the condition should be fulfilled depended upon the
exclusive will of the petitioner, it has been held that its absolute acceptance and the
acknowledgment of its obligation provided in the deed of donation were sufficient to prevent
the statute of limitations from barring the action of private respondents upon the original
contract which was the deed of donation.6

Moreover, the time from which the cause of action accrued for the revocation of the donation and
recovery of the property donated cannot be specifically determined in the instant case. A cause of
action arises when that which should have been done is not done, or that which should not have
been done is done.7 In cases where there is no special provision for such computation, recourse
must be had to the rule that the period must be counted from the day on which the corresponding
action could have been instituted. It is the legal possibility of bringing the action which determines
the starting point for the computation of the period. In this case, the starting point begins with the
expiration of a reasonable period and opportunity for petitioner to fulfill what has been charged upon
it by the donor.

The period of time for the establishment of a medical college and the necessary buildings and
improvements on the property cannot be quantified in a specific number of years because of the
presence of several factors and circumstances involved in the erection of an educational institution,
such as government laws and regulations pertaining to education, building requirements and
property restrictions which are beyond the control of the donee.

Thus, when the obligation does not fix a period but from its nature and circumstances it can be
inferred that a period was intended, the general rule provided in Art. 1197 of the Civil Code applies,
which provides that the courts may fix the duration thereof because the fulfillment of the obligation
itself cannot be demanded until after the court has fixed the period for compliance therewith and
such period has arrived.8

This general rule however cannot be applied considering the different set of circumstances existing
in the instant case. More than a reasonable period of fifty (50) years has already been allowed
petitioner to avail of the opportunity to comply with the condition even if it be burdensome, to make
the donation in its favor forever valid. But, unfortunately, it failed to do so. Hence, there is no more
need to fix the duration of a term of the obligation when such procedure would be a mere technicality
and formality and would serve no purpose than to delay or lead to an unnecessary and expensive
multiplication of suits. 9 Moreover, under Art. 1191 of the Civil Code, when one of the obligors cannot
comply with what is incumbent upon him, the obligee may seek rescission and the court shall decree
the same unless there is just cause authorizing the fixing of a period. In the absence of any just
cause for the court to determine the period of the compliance, there is no more obstacle for the court
to decree the rescission claimed.

Finally, since the questioned deed of donation herein is basically a gratuitous one, doubts referring
to incidental circumstances of a gratuitous contract should be resolved in favor of the least
transmission of rights and interests. 10Records are clear and facts are undisputed that since the
execution of the deed of donation up to the time of filing of the instant action, petitioner has failed to
comply with its obligation as donee. Petitioner has slept on its obligation for an unreasonable length
of time. Hence, it is only just and equitable now to declare the subject donation already ineffective
and, for all purposes, revoked so that petitioner as donee should now return the donated property to
the heirs of the donor, private respondents herein, by means of reconveyance.

WHEREFORE, the decision of the Regional Trial Court of Iloilo, Br. 34, of 31 May 1991 is
REINSTATED and AFFIRMED, and the decision of the Court of Appeals of 18 June 1993 is
accordingly MODIFIED. Consequently, petitioner is directed to reconvey to private respondents Lot
No. 3174-B-1 of the subdivision plan Psd-1144 covered by Transfer Certificate of Title No. T-3910-A
within thirty (30) days from the finality of this judgment.

Costs against petitioner.

SO ORDERED.
 SECOND DIVISION

[G.R. No. 126444. December 4, 1998]

ALFONSO QUIJADA, CRESENTE QUIJADA, REYNELDA QUIJADA,

DEMETRIO QUIJADA, ELIUTERIA QUIJADA, EULALIO
QUIJADA, and WARLITO QUIJADA, petitioners, vs. COURT OF
APPEALS, REGALADO MONDEJAR, RODULFO GOLORAN,
ALBERTO ASIS, SEGUNDINO RAS, ERNESTO GOLORAN, CELSO
ABISO, FERNANDO BAUTISTA, ANTONIO MACASERO, and
NESTOR MAGUINSAY, respondents.

DECISION
MARTINEZ, J.:

Petitioners, as heirs of the late Trinidad Quijada, filed a complaint against private respondents
for quieting of title, recovery of possession and ownership of parcels of land with claim for
attorney's fees and damages. The suit was premised on the following facts found by the Court of
Appeals, which is materially the same as that found by the trial court:

"Plaintiffs-appellees (petitioners) are the children of the late Trinidad Corvera Vda. de
Quijada. Trinidad was one of the heirs of the late Pedro Corvera and inherited from
the latter the two-hectare parcel of land subject of the case, situated in the barrio of
San Agustin, Talacogon, Agusan del Sur. On April 5, 1956, Trinidad Quijada together
with her sisters Leonila Corvera Vda. de Sequea and Paz Corvera Cabiltes and brother
Epapiadito Corvera executed a conditional deed of donation (Exh. C) of the two-
hectare parcel of land subject of the case in favor of the Municipality of Talacogon,
the condition being that the parcel of land shall be used solely and exclusively as part
of the campus of the proposed provincial high school in Talacogon. Apparently,
Trinidad remained in possession of the parcel of land despite the donation. On July
29, 1962, Trinidad sold one (1) hectare of the subject parcel of land to defendant-
appellant Regalado Mondejar (Exh. 1). Subsequently, Trinidad verbally sold the
remaining one (1) hectare to defendant-appellant (respondent) Regalado Mondejar
without the benefit of a written deed of sale and evidenced solely by receipts of
payment. In 1980, the heirs of Trinidad, who at that time was already dead, filed a
complaint for forcible entry (Exh. E) against defendant-appellant (respondent)
Regalado Mondejar, which complaint was, however, dismissed for failure to
prosecute (Exh. F). In 1987, the proposed provincial high school having failed to
materialize, the Sangguniang Bayan of the municipality of Talacogon enacted a
resolution reverting the two (2) hectares of land donated back to the donors (Exh.
D). In the meantime, defendant-appellant (respondent) Regalado Mondejar sold
portions of the land to defendants-appellants (respondents) Fernando Bautista (Exh.
5), Rodolfo Goloran (Exh. 6), Efren Guden (Exh. 7) and Ernesto Goloran (Exh. 8).

"On July 5, 1988, plaintiffs-appellees (petitioners) filed this action against defendants-
appellants (respondents). In the complaint, plaintiffs-appellees (petitioners) alleged
that their deceased mother never sold, conveyed, transferred or disposed of the
property in question to any person or entity much less to Regalado Mondejar save the
donation made to the Municipality of Talacogon in 1956; that at the time of the
alleged sale to Regalado Mondejar by Trinidad Quijada, the land still belongs to the
Municipality of Talacogon, hence, the supposed sale is null and void.

"Defendants-appellants (respondents), on the other hand, in their answer claimed that

the land in dispute was sold to Regalado Mondejar, the one (1) hectare on July 29,
1962, and the remaining one (1) hectare on installment basis until fully paid. As
affirmative and/or special defense, defendants-appellants (respondents) alleged that
plaintiffs' action is barred by laches or has prescribed.

"The court a quo rendered judgment in favor of plaintiffs-appellees (petitioners): firstly because
'Trinidad Quijada had no legal title or right to sell the land to defendant Mondejar in 1962, 1966,
1967 and 1968, the same not being hers to dispose of because ownership belongs to the
Municipality of Talacogon' (Decision, p. 4; Rollo, p. 39) and, secondly, that the deed of sale
executed by Trinidad Quijada in favor of Mondejar did not carry with it the conformity and
acquiescence of her children, more so that she was already 63 years old at the time, and a widow
(Decision, p. 6;Rollo, p. 41)."[1]

The dispositive portion of the trial court's decision reads:

"WHEREFORE, viewed from the above perceptions, the scale of justice having
tilted in favor of the plaintiffs, judgment is, as it is hereby rendered:
1) ordering the Defendants to return and vacate the two (2) hectares of land to Plaintiffs as
described in Tax Declaration No. 1209 in the name of Trinidad Quijada;
2) ordering any person acting in Defendants' behalf to vacate and restore the peaceful possession
of the land in question to Plaintiffs;
3) ordering the cancellation of the Deed of Sale executed by the late Trinidad Quijada in favor of
Defendant Regalado Mondejar as well as the Deeds of Sale/Relinquishments executed by
Mondejar in favor of the other Defendants;
4) ordering Defendants to remove their improvements constructed on the questioned lot;
5) ordering the Defendants to pay Plaintiffs, jointly and severally, the amount of P10,000.00
representing attorney's fees;
 6) ordering Defendants to pays the amount of P8,000.00 as expenses of litigation; and
7) ordering Defendants to pay the sum of P30,000.00 representing moral damages.

SO ORDERED."[2]

On appeal, the Court of Appeals reversed and set aside the judgment a quo[3] ruling that the
sale made by Trinidad Quijada to respondent Mondejar was valid as the4 former retained an
inchoate interest on the lots by virtue of the automatic reversion clause in the deed of
donation.[4] Thereafter, petitioners filed a motion for reconsideration. When the CA denied their
motion,[5]petitioners instituted a petition for review to this Court arguing principally that the sale
of the subject property made by Trinidad Quijada to respondent Mondejar is void, considering that
at that time, ownership was already transferred to the Municipality of Talacogon. On the contrary,
private respondents contend that the sale was valid, that they are buyers in good faith, and that
petitioners' case is barred by laches.[6]
We affirm the decision of the respondent court.
The donation made on April 5, 1956 by Trinidad Quijada and her brother and sisters[7] was
subject to the condition that the donated property shall be "used solely and exclusively as a part of
the campus of the proposed Provincial High School in Talacogon."[8] The donation further provides
that should "the proposed Provincial High School be discontinued or if the same shall be opened
but for some reason or another, the same may in the future be closed" the donated property shall
automatically revert to the donor.[9] Such condition, not being contrary to law, morals, good
customs, public order or public policy was validly imposed in the donation.[10]
When the Municipality's acceptance of the donation was made known to the donor, the former
became the new owner of the donated property -- donation being a mode of acquiring and
transmitting ownership[11] - notwithstanding the condition imposed by the donee. The donation is
perfected once the acceptance by the donee is made known to the donor.[12] Accordingly, ownership
is immediately transferred to the latter and that ownership will only revert to the donor if the
resolutory condition is not fulfilled.
In this case, that resolutory condition is the construction of the school. It has been ruled that
when a person donates land to another on the condition that the latter would build upon the land a
school, the condition imposed is not a condition precedent or a suspensive condition but a
resolutory one.[13] Thus, at the time of the sales made in 1962 towards 1968, the alleged seller
(Trinidad) could not have sold the lots since she had earlier transferred ownership thereof by virtue
of the deed of donation. So long as the resolutory condition subsists and is capable of fulfillment,
the donation remains effective and the donee continues to be the owner subject only to the rights
of the donor or his successors-in-interest under the deed of donation. Since no period was imposed
by the donor on when must the donee comply with the condition, the latter remains the owner so
long as he has tried to comply with the condition within a reasonable period. Such period, however,
became irrelevant herein when the donee-Municipality manifested through a resolution that it
cannot comply with the condition of building a school and the same was made known to the
donor. Only then - when the non-fulfillment of the resolutory condition was brought to the donor's
knowledge - that ownership of the donated property reverted to the donor as provided in the
automatic reversion clause of the deed of donation.
 The donor may have an inchoate interest in the donated property during the time that
ownership of the land has not reverted to her. Such inchoate interest may be the subject of contracts
including a contract of sale. In this case, however, what the donor sold was the land itself which
she no longer owns. It would have been different if the donor-seller sold her interests over the
property under the deed of donation which is subject to the possibility of reversion of ownership
arising from the non-fulfillment of the resolutory condition.
As to laches, petitioners' action is not yet barred thereby. Laches presupposes failure or neglect
for an unreasonable and unexplained length of time, to do that which, by exercising due diligence,
could or should have been done earlier;[14] "it is negligence or omission to assert a right within a
reasonable time, thus, giving rise to a presumption that the party entitled to assert it either has
abandoned or declined to assert it."[15] Its essential elements of:
a) Conduct on the part of the defendant, or of one under whom he claims, giving rise to the
situation complained of;
b) Delay in asserting complainant's right after he had knowledge of the defendant's conduct and
after he has an opportunity to sue;
c) Lack of knowledge or notice on the part of the defendant that the complainant would assert the
right on which he bases his suit; and,
d) Injury or prejudice to the defendant in the event relief is accorded to the complainant." [16]
are absent in this case. Petitioners' cause of action to quiet title commenced only when the property
reverted to the donor and/or his successors-in-interest in 1987. Certainly, when the suit was
initiated the following year, it cannot be said that petitioners had slept on their rights for a long
time. The 1960's sales made by Trinidad Quijada cannot be the reckoning point as to when
petitioners' cause of action arose. They had no interest over the property at that time except under
the deed of donation to which private respondents were not privy. Moreover, petitioners had
previously filed an ejectment suit against private respondents only that it did not prosper on a
technicality.
Be that at it may, there is one thing which militates against the claim of petitioners. Sale, being
a consensual contract, is perfected by mere consent, which is manifested the moment there is a
meeting of the minds[17] as to the offer and acceptance thereof on three (3) elements: subject matter,
price and terms of payment of the price.[18] ownership by the seller on the thing sold at the time of
the perfection of the contract of sale is not an element for its perfection. What the law requires is
that the seller has the right to transfer ownership at the time the thing sold is
delivered.[19] Perfection per se does not transfer ownership which occurs upon the actual or
constructive delivery of the thing sold.[20] A perfected contract of sale cannot be challenged on the
ground of non-ownership on the part of the seller at the time of its perfection; hence, the sale is
still valid.
The consummation, however, of the perfected contract is another matter. It occurs upon the
constructive or actual delivery of the subject matter to the buyer when the seller or her successors-
in-interest subsequently acquires ownership thereof. Such circumstance happened in this case
when petitioners -- who are Trinidad Quijada's heirs and successors-in-interest -- became the
owners of the subject property upon the reversion of the ownership of the land to
them. Consequently, ownership is transferred to respondent Mondejar ands those who claim their
right from him. Article 1434 of the New Civil Code supports the ruling that the seller's "title passes
by operation of law to the buyer."[21] This rule applies not only when the subject matter of the
contract of sale is goods,[22] but also to other kinds of property, including real property.[23]
There is also no merit in petitioners' contention that since the lots were owned by the
municipality at the time of the sale, they were outside the commerce of men under Article 1409
(4) of the NCC;[24] thus, the contract involving the same is inexistent and void from the
beginning. However, nowhere in Article 1409 (4) is it provided that the properties of a
municipality, whether it be those for public use or its patrimonial property[25] are outside the
commerce of men. Besides, the lots in this case were conditionally owned by the municipality. To
rule that the donated properties are outside the commerce of men would render nugatory the
unchallenged reasonableness and justness of the condition which the donor has the right to impose
as owner thereof.Moreover, the objects referred to as outsides the commerce of man are those
which cannot be appropriated, such as the open seas and the heavenly bodies.
With respect to the trial courts award of attorneys fees, litigation expenses and moral damages,
there is neither factual nor legal basis thereof. Attorneys fees and expenses of litigation cannot,
following the general rule in Article 2208 of the New Civil Code, be recovered in this case, there
being no stipulation to that effect and the case does not fall under any of the exceptions.[26] It cannot
be said that private respondents had compelled petitioners to litigate with third persons. Neither
can it be ruled that the former acted in gross and evident bad faith in refusing to satisfy the latters
claims considering that private respondents were under an honest belief that they have a legal right
over the property by virtue of the deed of sale. Moral damages cannot likewise be justified as none
of the circumstances enumerated under Articles 2219[27] and 2220[28] of the New Civil Code concur
in this case.
WHEREFORE, by virtue of the foregoing, the assailed decision of the Court of Appeals is
AFFIRMED.
SO ORDERED.
Melo (Acting Chairman), Puno, and Mendoza, JJ., concur.
 FIRST DIVISION

[G.R. No. 102784. February 28, 1996]

ROSA LIM, petitioner, vs. COURT OF APPEALS and PEOPLE OF THE

PHILIPPINES, respondents.
SYLLABUS
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONTRACTS ARE OBLIGATORY
IN WHATEVER FORM ENTERED; PLACE OF SIGNATURE IMMATERIAL; PARTY
BOUND THEREON THE MOMENT SHE AFFIXED HER SIGNATURE. - Rosa Lims
signature indeed appears on the upper portion of the receipt immediately below the
description of the items taken. We find that this fact does not have the effect of
altering the terms of the transaction from a contract of agency to sell on commission
basis to a contract of sale. Neither does it indicate absence or vitiation of consent
thereto on the part of Rosa Lim which would make the contract void or voidable. The
moment she affixed her signature thereon, petitioner became bound by all the terms
stipulated in the receipt. She, thus, opened herself to all the legal obligations that may
arise from their breach. This is clear from Article 1356 of the New Civil Code which
provides: Contracts shall be obligatory in whatever form they may have been entered
into, provided all the essential requisites for their validity are present. In the case
before us, the parties did not execute a notarial will but a simple contract of agency
to sell on commission basis, thus making the position of petitioners signature thereto
immaterial.
2. ID.; ID.; CONTRACT OF AGENCY; NO FORMALITIES REQUIRED. - There are some
provisions of the law which require certain formalities for particular contracts. The first
is when the form is required for the validity of the contract; the second is when it is
required to make the contract effective as against the third parties such as those
mentioned in Articles 1357 and 1358; and the third is when the form is required for
the purppose of proving the existence of the contract, such as those provided in the
Statute of Frauds in Article 1403. A contract of agency to sell on commission basis
does not belong to any of these three categories, hence, it is valid and enforceable
in whatever form it may be entered into.
3. REMEDIAL LAW; EVIDENCE; WEIGHT THEREOF NOT DETERMINED BY
SUPERIORITY IN NUMBERS OF WITNESSES. - Weight of evidence is not
determined mathematically by the numerical superiority of the witnesses testifying to
a given fact. It depends upon its practical effect in inducing belief on the part of the
judge trying the case.
4. ID.; ID.; CREDIBILITY; FINDINGS OF THE TRIAL AND APPELLATE COURTS
GENERALLY NOT INTERFERED WITH ON APPEAL. - In the case at bench, both
the trial court and the Court of Appeals gave weight to the testimony of Vicky Suarez
 that she did not authorize Rosa Lim to return the pieces of jewelry to Nadera. We
shall not disturb this finding of the respondent court. It is well settled that we should
not interfere with the judgment of the trial court in determining the credibility of
witnesses, unless there appears in the record some fact or circumstances of weight
and influence which has been overlooked or the significance of which has been
misinterpreted. The reason is that the trial court is in a better position to determine
questions involving credibility having heard the witnesses and having observed their
deportment and manner of testifying during the trial.
5. CRIMINAL LAW; ESTAFA WITH ABUSE OF CONFIDENCE; ELEMENTS. - The
elements of estafa with abuse of confidence under this subdivision are as follows: (1)
That money, goods, or other personal property be received by the offender in trust,
or on commission, or for administration, or under any other obligation involving the
duty to make delivery of, or to return, the same; (2) That there be misappropriation or
conversion of such money or property by the offender or denial on his part of such
receipt; (3) That such misappropriation or conversion or denial is to the prejudice of
another; and (4) That there is a demand made by the offended party to the offender
(Note: The 4th element is not necessary when there is evidence of misappropriation
of the goods by the defendant).
6. ID.; ID.; ID.; PRESENT IN CASE AT BAR. All the elements of estafa under Article
315, Paragraph 1(b) of the Revised Penal Code, are present in the case at
bench. First, the receipt marked as Exhibit A proves that petitioner Rosa Lim received
the pieces of jewelry in trust from Vicky Suarez to be sold on commission
basis. Second, petitioner misappropriated or converted the jewelry to her own use;
and, third, such misappropriation obviously caused damaged and prejudice to the
private respondent.
APPEARANCES OF COUNSEL
Zosa & Quijano Law Offices for petitioner.
The Solicitor General for respondents.

DECISION
HERMOSISIMA, JR., J.:

This is a petition to review the Decision of the Court of Appeals in CA-G.R. CR No.
10290, entitled People v. Rosa Lim, promulgated on August 30, 1991.
On January 26, 1989, an Information for Estafa was filed against petitioner Rosa Lim
before Branch 92 of the Regional Trial Court of Quezon City.[1] The Information reads:

That on or about the 8th day of October 1987, in Quezon City, Philippines and within
the jurisdiction of this Honorable Court, the said accused with intent to gain, with
unfaithfulness and/or abuse of confidence, did, then and there, wilfully, unlawfully
and feloniously defraud one VICTORIA SUAREZ, in the following manner, to wit:
on the date and place aforementioned said accused got and received in trust from said
complainant one (1) ring 3.35 solo worth P169,000.00, Philippine Currency, with the
obligation to sell the same on commission basis and to turn over the proceeds of the
sale to said complainant or to return said jewelry if unsold, but the said accused once
in possession thereof and far from complying with her obligation despite repeated
demands therefor, misapplied, misappropriated and converted the same to her own
personal use and benefit, to the damage and prejudice of the said offended party in the
amount aforementioned and in such other amount as may be awarded under the
provisions of the Civil Code.

CONTRARY TO LAW. [2]

After arraignment and trial on the merits, the trial court rendered judgment, the
dispositive portion of which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered:

1. Finding accused Rosa Lim GUILTY beyond reasonable doubt of the offense of
estafa as defined and penalized under Article 315, paragraph 1(b) of the Revised Penal
Code;

2. Sentencing her to suffer the Indeterminate penalty of FOUR (4) YEARS and TWO
(2) MONTHS of prision correccional as minimum, to TEN (10) YEARS of prision
mayor as maximum;

3. Ordering her to return to the offended party Mrs. Victoria Suarez the ring or its
value in the amount of P169,000 without subsidiary imprisonment in case of
insolvency; and

4. To pay costs. [3]

On appeal, the Court of Appeals affirmed the Judgment of conviction with the
modification that the penalty imposed shall be six (6) years, eight (8) months and twenty-
one (21) days to twenty (20) years in accordance with Article 315, paragraph 1 of the
Revised Penal Code.[4]
Petitioner filed a motion for reconsideration before the appellate court on September
20, 1991, but the motion was denied in a Resolution dated November 11, 1991.
In her final bid to exonerate herself, petitioner filed the instant petition for review
alleging the following grounds:
I

THE RESPONDENT COURT VIOLATED THE CONSTITUTION, THE RULES

OF COURT AND THE DECISION OF THIS HONORABLE COURT IN NOT
PASSING UPON THE FIRST AND THIRD ASSIGNED ERRORS IN
PETITIONERS BRIEF;

II

THE RESPONDENT COURT FAILED TO APPLY THE PRINCIPLE THAT THE

PAROL EVIDENCE RULE WAS WAIVED WHEN THE PRIVATE
PROSECUTOR CROSS-EXAMINED THE PETITIONER AND AURELIA
NADERA AND WHEN COMPLAINANT WAS CROSS-EXAMINED BY THE
COUNSEL FOR THE PETITIONER AS TO THE TRUE NATURE OF THE
AGREEMENT BETWEEN THE PARTIES WHEREIN IT WAS DISCLOSED
THAT THE TRUE AGREEMENT OF THE PARTIES WAS A SALE OF
JEWELRIES AND NOT WHAT WAS EMBODIED IN THE RECEIPT MARKED
AS EXHIBIT A WHICH WAS RELIED UPON BY THE RESPONDENT COURT
IN AFFIRMING THE JUDGMENT OF CONVICTION AGAINST HEREIN
PETITIONER; and

III

THE RESPONDENT COURT FAILED TO APPLY IN THIS CASE THE

PRINCIPLE ENUNCIATED BY THIS HONORABLE COURT TO THE EFFECT
THAT ACCUSATION IS NOT, ACCORDING TO THE FUNDAMENTAL LAW,
SYNONYMOUS WITH GUILT: THE PROSECUTION MUST OVERTHROW THE
PRESUMPTION OF INNOCENCE WITH PROOF OF GUILT BEYOND
REASONABLE DOUBT. TO MEET THIS STANDARD, THERE IS NEED FOR
THE MOST CAREFUL SCRUTINY OF THE TESTIMONY OF THE STATE,
BOTH ORAL AND DOCUMENTARY, INDEPENDENTLY OF WHATEVER
DEFENSE IS OFFERED BY THE ACCUSED. ONLY IF THE JUDGE BELOW
AND THE APPELLATE TRIBUNAL COULD ARRIVE AT A CONCLUSION
THAT THE CRIME HAD BEEN COMMITTED PRECISELY BY THE PERSON
ON TRIAL UNDER SUCH AN EXACTING TEST SHOULD SENTENCE THUS
REQUIRED THAT EVERY INNOCENCE BE DULY TAKEN INTO
ACCOUNT. THE PROOF AGAINST HIM MUST SURVIVE THE TEST OF
REASON, THE STRONGEST SUSPICION MUST NOT BE PERMITTED TO
SWAY JUDGMENT. (People v. Austria, 195 SCRA 700) [5]

Herein the pertinent facts as alleged by the prosecution.

On or about October 8, 1987, petitioner Rosa Lim who had come from Cebu received
from private respondent Victoria Suarez the following two pieces of jewelry: one (1) 3.35
carat diamond ring worth P169,000.00 and one (1) bracelet worth P170,000.00, to be
sold on commission basis. The agreement was reflected in a receipt marked as Exhibit
A[6] for the prosecution. The transaction took place at the Sir Williams Apartelle in Timog
Avenue, Quezon City, where Rosa Lim was temporarily billeted.
On December 15, 1987, petitioner returned the bracelet to Vicky Suarez, but failed to
return the diamond ring or to turn over the proceeds thereof if sold. As a result, private
complainant, aside from making verbal demands, wrote a demand letter[7] to petitioner
asking for the return of said ring or the proceeds of the sale thereof. In response,
petitioner, thru counsel, wrote a letter[8] to private respondents counsel alleging that Rosa
Lim had returned both ring and bracelet to Vicky Suarez sometime in September, 1987,
for which reason, petitioner had no longer any liability to Mrs. Suarez insofar as the pieces
of jewelry were concerned. Irked, Vicky Suarez filed a complaint for estafa under Article
315, par. 1(b) of the Revised Penal Code for which the petitioner herein stands convicted.
Petitioner has a different version.
Rosa Lim admitted in court that she arrived in Manila from Cebu sometime in October
1987, together with one Aurelia Nadera, who introduced petitioner to private respondent,
and that they were lodged at the Williams Apartelle in Timog, Quezon City. Petitioner
denied that the transaction was for her to sell the two pieces of jewelry on commission
basis. She told Mrs. Suarez that she would consider buying the pieces of jewelry for her
own use and that she would inform the private complainant of such decision before she
goes back to Cebu. Thereafter, the petitioner took the pieces of jewelry and told Mrs.
Suarez to prepare the necessary paper for me to sign because I was not yet prepare(d)
to buy it.[9] After the document was prepared, petitioner signed it. To prove that she did
not agree to the terms of the receipt regarding the sale on commission basis, petitioner
insists that she signed the aforesaid document on the upper portion thereof and not at the
bottom where a space is provided for the signature of the person(s) receiving the
jewelry.[10]
On October 12, 1987 before departing for Cebu, petitioner called up Mrs. Suarez by
telephone in order to inform her that she was no longer interested in the ring and
bracelet. Mrs. Suarez replied that she was busy at the time and so, she instructed the
petitioner to give the pieces of jewelry to Aurelia Nadera who would in turn give them back
to the private complainant. The petitioner did as she was told and gave the two pieces of
jewelry to Nadera as evidenced by a handwritten receipt, dated October 12, 1987.[11]
Two issues need to be resolved: First, what was the real transaction between Rosa
Lim and Vicky Suarez - a contract of agency to sell on commission basis as set out in the
receipt or a sale on credit; and, second, was the subject diamond ring returned to Mrs.
Suarez through Aurelia Nadera?
Petitioner maintains that she cannot be liable for estafa since she never received the
jewelries in trust or on commission basis from Vicky Suarez. The real agreement between
her and the private respondent was a sale on credit with Mrs. Suarez as the owner-seller
and petitioner as the buyer, as indicated by the fact that petitioner did not sign on the
blank space provided for the signature of the person receiving the jewelry but at the upper
portion thereof immediately below the description of the items taken. [12]
The contention is far from meritorious.
 The receipt marked as Exhibit A which establishes a contract of agency to sell on
commission basis between Vicky Suarez and Rosa Lim is herein reproduced in order to
come to a proper perspective:

THIS IS TO CERTIFY, that I received from Vicky Suarez PINATUTUNAYAN KO

na aking tinanggap kay _______________ the following jewelries:
ang mga alahas na sumusunod:

Description Price
Mga Uri Halaga

1 ring 3.35 dolo P 169,000.00

1 bracelet 170.000.00
total Kabuuan P 339.000.00

in good condition, to be sold in CASH ONLY within . . .days from date of signing this
receipt na nasa mabuting kalagayan upang ipagbili ng KALIWAAN (ALCONTADO)
lamang sa loob ng. . . araw mula ng ating pagkalagdaan:

if I could not sell, I shall return all the jewelry within the period mentioned above; if I
would be able to sell, I shall immediately deliver and account the whole proceeds of
sale thereof to the owner of the jewelries at his/her residence; my compensation or
commission shall be the over-price on the value of each jewelry quoted above. I am
prohibited to sell any jewelry on credit or by installment; deposit, give for
safekeeping; lend, pledge or give as security or guaranty under any circumstance or
manner, any jewelry to other person or persons.

kung hindi ko maipagbili ay isasauli ko ang lahat ng alahas sa loob ng taning na

panahong nakatala sa itaas; kung maipagbili ko naman ay dagli kong isusulit at
ibibigay ang buong pinagbilhan sa may-ari ng mga alahas sa kanyang bahay tahanan;
ang aking gantimpala ay ang mapapahigit na halaga sa nakatakdang halaga sa itaas ng
bawat alahas HIND I ko ipinahihintulutang ipa-u-u-tang o ibibigay na hulugan ang
alin mang alahas, ilalagak, ipagkakatiwala; ipahihiram; isasangla o ipananagot kahit
sa anong paraan ang alin mang alahas sa ibang mga tao o tao.

I sign my name this . . . day of. . . 19 . . . at Manila, NILALAGDAAN ko ang

kasunduang ito ngayong ika____ ng dito sa Maynila.

Signature of Persons who

received jewelries (Lagda
ng Tumanggap ng mga
Alahas)
Address: . . . . . . . . . . .

Rosa Lims signature indeed appears on the upper portion of the receipt immediately
below the description of the items taken. We find that this fact does not have the effect of
altering the terms of the transaction from a contract of agency to sell on commission basis
to a contract of sale. Neither does it indicate absence or vitiation of consent thereto on
the part of Rosa Lim which would make the contract void or voidable. The moment she
affixed her signature thereon, petitioner became bound by all the terms stipulated in the
receipt. She, thus, opened herself to all the legal obligations that may arise from their
breach. This is clear from Article 1356 of the New Civil Code which provides:

Contracts shall be obligatory in whatever form they may have been entered into,
provided all the essential requisites for their validity are present. x x x.

However, there are some provisions of the law which require certain formalities for
particular contracts. The first is when the form is required for the validity of the contract;
the second is when it is required to make the contract effective as against third parties
such as those mentioned in Articles 1357 and 1358; and the third is when the form is
required for the purpose of proving the existence of the contract, such as those provided
in the Statute of Frauds in Article 1403.[13] A contract of agency to sell on commission basis
does not belong to any of these three categories, hence it is valid and enforceable in
whatever form it may be entered into.
Furthermore, there is only one type of legal instrument where the law strictly
prescribes the location of the signature of the parties thereto. This is in the case of notarial
wills found in Article 805 of the Civil Code, to wit:

Every will, other than a holographic will, must be subscribed at the end thereof by the
testator himself x x x.

The testator or the person requested by him to write his name and the instrumental
witnesses of the will, shall also sign, as aforesaid, each and every page thereof, except
the last, on the left margin x x x.

In the case before us, the parties did not execute a notarial will but a simple contract
of agency to sell on commission basis, thus making the position of petitioners signature
thereto immaterial.
Petitioner insists, however, that the diamond ring had been returned to Vicky Suarez
through Aurelia Nadera, thus relieving her of any liability. Rosa Lim testified to this effect
on direct examination by her counsel:
Q: And when she left the jewelries with you, what did you do thereafter?
A: On October 12, I was bound for Cebu. So I called up Vicky through telephone and
informed her that I am no longer interested in the bracelet and ring and that 1 will
just return it.
 Q: And what was the reply of Vicky Suarez?
A: She told me that she could not come to the apartelle since she was very busy. So,
she asked me if Aurelia was there and when I informed her that Aurelia was there,
she instructed me to give the pieces of jewelry to Aurelia who in turn will give it back
to Vicky.
Q: And you gave the two (2) pieces of jewelry to Aurelia Nadera?
A: Yes, Your Honor.[14]
This was supported by Aurelia Nadera in her direct examination by petitioners
counsel:
Q: Do you know if Rosa Lim in fact returned the jewelries ?
A: She gave the jewelries to me.
Q: Why did Rosa Lim give the jewelries to you?
A: Rosa Lim called up Vicky Suarez the following morning and told Vicky Suarez that
she was going home to Cebu and asked if she could give the jewelries to me.
Q: And when did Rosa Lim give to you the jewelries?
A: Before she left for Cebu.[15]
On rebuttal, these testimonies were belied by Vicky Suarez herself:
Q: It has been testified to here also by both Aurelia Nadera and Rosa Lim that you gave
authorization to Rosa Lim to turn over the two (2) pieces of jewelries mentioned in
Exhibit A to Aurelia Nadera, what can you say about that?
A:. That is not true sir, because at that time Aurelia Nadera is highly indebted to me in
the amount of P 140,000.00, so if I gave it to Nadera, I will be exposing myself to a
high risk.[16]
The issue as to the return of the ring boils down to one of credibility. Weight of
evidence is not determined mathematically by the numerical superiority of the witnesses
testifying to a given fact. It depends upon its practical effect in inducing belief on the part
of the judge trying the case.[17] In the case at bench, both the trial court and the Court of
Appeals gave weight to the testimony of Vicky Suarez that she did not authorize Rosa
Lim to return the pieces of jewelry to Nadera. The respondent court, in affirming the trial
court, said:

x x x This claim (that the ring had been returned to Suarez thru Nadera) is
disconcerting. It contravenes the very terms of Exhibit A. The instruction by the
complaining witness to appellant to deliver the ring to Aurelia Nadera is vehemently
denied by the complaining witness, who declared that she did not authorize and/or
instruct appellant to do so. And thus, by delivering the ring to Aurelia without the
express authority and consent of the complaining witness, appellant assumed the right
to dispose of the jewelry as if it were hers, thereby committing conversion, a clear
breach of trust, punishable under Article 315, par. 1(b), Revised Penal Code.
 We shall not disturb this finding of the respondent court. It is well settled that we
should not interfere with the judgment of the trial court in determining the credibility of
witnesses, unless there appears in the record some fact or circumstance of weight and
influence which has been overlooked or the significance of which has been
misinterpreted. The reason is that the trial court is in a better position to determine
questions involving credibility having heard the witnesses and having observed their
deportment and manner of testifying during the trial.[18]
Article 315, par. 1(b) of the Revised Penal Code provides:

ART. 315. Swindling (estafa). - Any person who shall defraud another by any of the
means mentioned hereinbelow shall be punished by:

xxx xxx xxx

(b) By misappropriating or converting, to the prejudice of another, money, goods, or

any other personal property received by the offender in trust or on commission, or for
administration, or under any other obligation involving the duty to make delivery of or
to return the same, even though such obligation be totally or partially guaranteed by a
bond; or by denying having received such money, goods, or other property.

xxx xxx xxx

The elements of estafa with abuse of confidence under this subdivision are as follows:
(1) That money, goods, or other personal property be received by the offender in trust, or
on commission, or for administration, or under any other obligation involving the duty to
make delivery of, or to return, the same; (2) That there be misappropriation or conversion
of such money or property by the offender or denial on his part of such receipt; (3) That
such misappropriation or conversion or denial is to the prejudice of another; and (4) That
there is a demand made by the offended party to the offender (Note: The 4th element is
not necessary when there is evidence of misappropriation of the goods by the
defendant).[19]
All the elements of estafa under Article 315, Paragraph 1(b) of the Revised Penal
Code, are present in the case at bench. First, the receipt marked as Exhibit A proves that
petitioner Rosa Lim received the pieces of jewelry in trust from Vicky Suarez to be sold
on commission basis. Second, petitioner misappropriated or converted the jewelry to her
own use; and, third, such misappropriation obviously caused damage and prejudice to
the private respondent.
WHEREFORE, the petition is DENIED and the Decision of the Court of Appeals is
hereby AFFIRMED.
Costs against petitioner.
SO ORDERED.
Padilla (Chairman), Bellosillo, and Kapunan, JJ., concur.
Vitug, J., In the results.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 107112 February 24, 1994

NAGA TELEPHONE CO., INC. (NATELCO) AND LUCIANO M. MAGGAY, petitioners,

vs.
THE COURT OF APPEALS AND CAMARINES SUR II ELECTRIC COOPERATIVE,
INC. (CASURECO II), respondents.

Ernesto P. Pangalangan for petitioners.

Luis General, Jr. for private respondent.

NOCON, J.:

The case of Reyes v. Caltex (Philippines), Inc.1 enunciated the doctrine that where a
person by his contract charges himself with an obligation possible to be performed, he
must perform it, unless its performance is rendered impossible by the act of God, by the
law, or by the other party, it being the rule that in case the party desires to be excused
from performance in the event of contingencies arising thereto, it is his duty to provide
the basis therefor in his contract.

With the enactment of the New Civil Code, a new provision was included therein,
namely, Article 1267 which provides:

When the service has become so difficult as to be manifestly beyond the

contemplation of the parties, the obligor may also be released therefrom,
in whole or in part.

In the report of the Code Commission, the rationale behind this innovation was
explained, thus:

The general rule is that impossibility of performance releases the obligor.

However, it is submitted that when the service has become so difficult as
to be manifestly beyond the contemplation of the parties, the court should
be authorized to release the obligor in whole or in part. The intention of the
parties should govern and if it appears that the service turns out to be so
difficult as to have been beyond their contemplation, it would be doing
 violence to that intention to hold their contemplation, it would be doing
violence to that intention to hold the obligor still responsible. 2

In other words, fair and square consideration underscores the legal precept therein.

Naga Telephone Co., Inc. remonstrates mainly against the application by the Court of
Appeals of Article 1267 in favor of Camarines Sur II Electric Cooperative, Inc. in the
case before us. Stated differently, the former insists that the complaint should have
been dismissed for failure to state a cause of action.

The antecedent facts, as narrated by respondent Court of Appeals are, as follows:

Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company rendering

local as well as long distance telephone service in Naga City while private respondent
Camarines Sur II Electric Cooperative, Inc. (CASURECO II) is a private corporation
established for the purpose of operating an electric power service in the same city.

On November 1, 1977, the parties entered into a contract (Exh. "A") for the use by
petitioners in the operation of its telephone service the electric light posts of private
respondent in Naga City. In consideration therefor, petitioners agreed to install, free of
charge, ten (10) telephone connections for the use by private respondent in the
following places:

(a) 3 units — The Main Office of (private respondent);

(b) 2 Units — The Warehouse of (private respondent);

(c) 1 Unit — The Sub-Station of (private respondent) at Concepcion

Pequeña;

(d) 1 Unit — The Residence of (private respondent's) President;

(e) 1 Unit — The Residence of (private respondent's) Acting General

Manager; &

(f) 2 Units — To be determined by the General Manager.3

Said contract also provided:

(a) That the term or period of this contract shall be as long as the party of
the first part has need for the electric light posts of the party of the second
part it being understood that this contract shall terminate when for any
reason whatsoever, the party of the second part is forced to stop,
abandoned [sic] its operation as a public service and it becomes
necessary to remove the electric lightpost; (sic)4
It was prepared by or with the assistance of the other petitioner, Atty. Luciano M.
Maggay, then a member of the Board of Directors of private respondent and at the
same time the legal counsel of petitioner.

After the contract had been enforced for over ten (10) years, private respondent filed on
January 2, 1989 with the Regional Trial Court of Naga City (Br. 28) C.C. No. 89-1642
against petitioners for reformation of the contract with damages, on the ground that it is
too one-sided in favor of petitioners; that it is not in conformity with the guidelines of the
National Electrification Administration (NEA) which direct that the reasonable
compensation for the use of the posts is P10.00 per post, per month; that after eleven
(11) years of petitioners' use of the posts, the telephone cables strung by them thereon
have become much heavier with the increase in the volume of their subscribers,
worsened by the fact that their linemen bore holes through the posts at which points
those posts were broken during typhoons; that a post now costs as much as P2,630.00;
so that justice and equity demand that the contract be reformed to abolish the inequities
thereon.

As second cause of action, private respondent alleged that starting with the year 1981,
petitioners have used 319 posts in the towns of Pili, Canaman, Magarao and Milaor,
Camarines Sur, all outside Naga City, without any contract with it; that at the rate of
P10.00 per post, petitioners should pay private respondent for the use thereof the total
amount of P267,960.00 from 1981 up to the filing of its complaint; and that petitioners
had refused to pay private respondent said amount despite demands.

And as third cause of action, private respondent complained about the poor servicing by
petitioners of the ten (10) telephone units which had caused it great inconvenience and
damages to the tune of not less than P100,000.00

In petitioners' answer to the first cause of action, they averred that it should be
dismissed because (1) it does not sufficiently state a cause of action for reformation of
contract; (2) it is barred by prescription, the same having been filed more than ten (10)
years after the execution of the contract; and (3) it is barred by estoppel, since private
respondent seeks to enforce the contract in the same action. Petitioners further alleged
that their utilization of private respondent's posts could not have caused their
deterioration because they have already been in use for eleven (11) years; and that the
value of their expenses for the ten (10) telephone lines long enjoyed by private
respondent free of charge are far in excess of the amounts claimed by the latter for the
use of the posts, so that if there was any inequity, it was suffered by them.

Regarding the second cause of action, petitioners claimed that private respondent had
asked for telephone lines in areas outside Naga City for which its posts were used by
them; and that if petitioners had refused to comply with private respondent's demands
for payment for the use of the posts outside Naga City, it was probably because what is
due to them from private respondent is more than its claim against them.
And with respect to the third cause of action, petitioners claimed, inter alia, that their
telephone service had been categorized by the National Telecommunication
Corporation (NTC) as "very high" and of "superior quality."

During the trial, private respondent presented the following witnesses:

(1) Dioscoro Ragragio, one of the two officials who signed the contract in its behalf,
declared that it was petitioner Maggay who prepared the contract; that the
understanding between private respondent and petitioners was that the latter would only
use the posts in Naga City because at that time, petitioners' capability was very limited
and they had no expectation of expansion because of legal squabbles within the
company; that private respondent agreed to allow petitioners to use its posts in Naga
City because there were many subscribers therein who could not be served by them
because of lack of facilities; and that while the telephone lines strung to the posts were
very light in 1977, said posts have become heavily loaded in 1989.

(2) Engr. Antonio Borja, Chief of private respondent's Line Operation and Maintenance
Department, declared that the posts being used by petitioners totalled 1,403 as of April
17, 1989, 192 of which were in the towns of Pili, Canaman, and Magarao, all outside
Naga City (Exhs. "B" and "B-1"); that petitioners' cables strung to the posts in 1989 are
much bigger than those in November, 1977; that in 1987, almost 100 posts were
destroyed by typhoon Sisang: around 20 posts were located between Naga City and the
town of Pili while the posts in barangay Concepcion, Naga City were broken at the
middle which had been bored by petitioner's linemen to enable them to string bigger
telephone lines; that while the cost per post in 1977 was only from P700.00 to
P1,000.00, their costs in 1989 went up from P1,500.00 to P2,000.00, depending on the
size; that some lines that were strung to the posts did not follow the minimum vertical
clearance required by the National Building Code, so that there were cases in 1988
where, because of the low clearance of the cables, passing trucks would accidentally
touch said cables causing the posts to fall and resulting in brown-outs until the electric
lines were repaired.

(3) Dario Bernardez, Project Supervisor and Acting General Manager of private
respondent and Manager of Region V of NEA, declared that according to NEA
guidelines in 1985 (Exh. "C"), for the use by private telephone systems of electric
cooperatives' posts, they should pay a minimum monthly rental of P4.00 per post, and
considering the escalation of prices since 1985, electric cooperatives have been
charging from P10.00 to P15.00 per post, which is what petitioners should pay for the
use of the posts.

(4) Engineer Antonio Macandog, Department Head of the Office of Services of private
respondent, testified on the poor service rendered by petitioner's telephone lines, like
the telephone in their Complaints Section which was usually out of order such that they
could not respond to the calls of their customers. In case of disruption of their telephone
lines, it would take two to three hours for petitioners to reactivate them notwithstanding
their calls on the emergency line.
(5) Finally, Atty. Luis General, Jr., private respondent's counsel, testified that the Board
of Directors asked him to study the contract sometime during the latter part of 1982 or in
1983, as it had appeared very disadvantageous to private respondent. Notwithstanding
his recommendation for the filing of a court action to reform the contract, the former
general managers of private respondent wanted to adopt a soft approach with
petitioners about the matter until the term of General Manager Henry Pascual who, after
failing to settle the matter amicably with petitioners, finally agreed for him to file the
present action for reformation of contract.

On the other hand, petitioner Maggay testified to the following effect:

(1) It is true that he was a member of the Board of Directors of private respondent and
at the same time the lawyer of petitioner when the contract was executed, but Atty.
Gaudioso Tena, who was also a member of the Board of Directors of private
respondent, was the one who saw to it that the contract was fair to both parties.

(2) With regard to the first cause of action:

(a) Private respondent has the right under the contract to use ten (10) telephone units of
petitioners for as long as it wishes without paying anything therefor except for long
distance calls through PLDT out of which the latter get only 10% of the charges.

(b) In most cases, only drop wires and not telephone cables have been strung to the
posts, which posts have remained erect up to the present;

(c) Petitioner's linemen have strung only small messenger wires to many of the posts
and they need only small holes to pass through; and

(d) Documents existing in the NTC show that the stringing of petitioners' cables in Naga
City are according to standard and comparable to those of PLDT. The accidents
mentioned by private respondent involved trucks that were either overloaded or had
loads that protruded upwards, causing them to hit the cables.

(3) Concerning the second cause of action, the intention of the parties when they
entered into the contract was that the coverage thereof would include the whole area
serviced by petitioners because at that time, they already had subscribers outside Naga
City. Private respondent, in fact, had asked for telephone connections outside Naga City
for its officers and employees residing there in addition to the ten (10) telephone units
mentioned in the contract. Petitioners have not been charging private respondent for the
installation, transfers and re-connections of said telephones so that naturally, they use
the posts for those telephone lines.

(4) With respect to the third cause of action, the NTC has found petitioners' cable
installations to be in accordance with engineering standards and practice and
comparable to the best in the country.
On the basis of the foregoing countervailing evidence of the parties, the trial court
found, as regards private respondent's first cause of action, that while the contract
appeared to be fair to both parties when it was entered into by them during the first year
of private respondent's operation and when its Board of Directors did not yet have any
experience in that business, it had become disadvantageous and unfair to private
respondent because of subsequent events and conditions, particularly the increase in
the volume of the subscribers of petitioners for more than ten (10) years without the
corresponding increase in the number of telephone connections to private respondent
free of charge. The trial court concluded that while in an action for reformation of
contract, it cannot make another contract for the parties, it can, however, for reasons of
justice and equity, order that the contract be reformed to abolish the inequities therein.
Thus, said court ruled that the contract should be reformed by ordering petitioners to
pay private respondent compensation for the use of their posts in Naga City, while
private respondent should also be ordered to pay the monthly bills for the use of the
telephones also in Naga City. And taking into consideration the guidelines of the NEA
on the rental of posts by telephone companies and the increase in the costs of such
posts, the trial court opined that a monthly rental of P10.00 for each post of private
respondent used by petitioners is reasonable, which rental it should pay from the filing
of the complaint in this case on January 2, 1989. And in like manner, private respondent
should pay petitioners from the same date its monthly bills for the use and transfers of
its telephones in Naga City at the same rate that the public are paying.

On private respondent's second cause of action, the trial court found that the contract
does not mention anything about the use by petitioners of private respondent's posts
outside Naga City. Therefore, the trial court held that for reason of equity, the contract
should be reformed by including therein the provision that for the use of private
respondent's posts outside Naga City, petitioners should pay a monthly rental of P10.00
per post, the payment to start on the date this case was filed, or on January 2, 1989,
and private respondent should also pay petitioners the monthly dues on its telephone
connections located outside Naga City beginning January, 1989.

And with respect to private respondent's third cause of action, the trial court found the
claim not sufficiently proved.

Thus, the following decretal portion of the trial court's decision dated July 20, 1990:

WHEREFORE, in view of all the foregoing, decision is hereby rendered

ordering the reformation of the agreement (Exh. A); ordering the
defendants to pay plaintiff's electric poles in Naga City and in the towns of
Milaor, Canaman, Magarao and Pili, Camarines Sur and in other places
where defendant NATELCO uses plaintiff's electric poles, the sum of TEN
(P10.00) PESOS per plaintiff's pole, per month beginning January, 1989
and ordering also the plaintiff to pay defendant NATELCO the monthly
dues of all its telephones including those installed at the residence of its
officers, namely; Engr. Joventino Cruz, Engr. Antonio Borja, Engr. Antonio
Macandog, Mr. Jesus Opiana and Atty. Luis General, Jr. beginning
 January, 1989. Plaintiff's claim for attorney's fees and expenses of
litigation and defendants' counterclaim are both hereby ordered dismissed.
Without pronouncement as to costs.

Disagreeing with the foregoing judgment, petitioners appealed to respondent Court of

Appeals. In the decision dated May 28, 1992, respondent court affirmed the decision of
the trial court,5 but based on different grounds to wit: (1) that Article 1267 of the New
Civil Code is applicable and (2) that the contract was subject to a potestative condition
which rendered said condition void. The motion for reconsideration was denied in the
resolution dated September 10, 1992.6 Hence, the present petition.

Petitioners assign the following pertinent errors committed by respondent court:

1) in making a contract for the parties by invoking Article 1267 of the New
Civil Code;

2) in ruling that prescription of the action for reformation of the contract in

this case commenced from the time it became disadvantageous to private
respondent; and

3) in ruling that the contract was subject to a potestative condition in favor

of petitioners.

Petitioners assert earnestly that Article 1267 of the New Civil Code is not applicable
primarily because the contract does not involve the rendition of service or a personal
prestation and it is not for future service with future unusual change. Instead, the ruling
in the case of Occeña, et al. v. Jabson, etc., et al.,7 which interpreted the article, should
be followed in resolving this case. Besides, said article was never raised by the parties
in their pleadings and was never the subject of trial and evidence.

In applying Article 1267, respondent court rationalized:

We agree with appellant that in order that an action for reformation of

contract would lie and may prosper, there must be sufficient allegations as
well as proof that the contract in question failed to express the true
intention of the parties due to error or mistake, accident, or fraud. Indeed,
in embodying the equitable remedy of reformation of instruments in the
New Civil Code, the Code Commission gave its reasons as follows:

Equity dictates the reformation of an instrument in order that

the true intention of the contracting parties may be
expressed. The courts by the reformation do not attempt to
make a new contract for the parties, but to make the
instrument express their real agreement. The rationale of the
doctrine is that it would be unjust and inequitable to allow the
enforcement of a written instrument which does not reflect or
 disclose the real meeting of the minds of the parties. The
rigor of the legalistic rule that a written instrument should be
the final and inflexible criterion and measure of the rights
and obligations of the contracting parties is thus tempered to
forestall the effects of mistake, fraud, inequitable conduct, or
accident. (pp. 55-56, Report of Code Commission)

Thus, Articles 1359, 1361, 1362, 1363 and 1364 of the New Civil Code
provide in essence that where through mistake or accident on the part of
either or both of the parties or mistake or fraud on the part of the clerk or
typist who prepared the instrument, the true intention of the parties is not
expressed therein, then the instrument may be reformed at the instance of
either party if there was mutual mistake on their part, or by the injured
party if only he was mistaken.

Here, plaintiff-appellee did not allege in its complaint, nor does its
evidence prove, that there was a mistake on its part or mutual mistake on
the part of both parties when they entered into the agreement Exh. "A",
and that because of this mistake, said agreement failed to express their
true intention. Rather, plaintiff's evidence shows that said agreement was
prepared by Atty. Luciano Maggay, then a member of plaintiff's Board of
Directors and its legal counsel at that time, who was also the legal counsel
for defendant-appellant, so that as legal counsel for both companies and
presumably with the interests of both companies in mind when he
prepared the aforesaid agreement, Atty. Maggay must have considered
the same fair and equitable to both sides, and this was affirmed by the
lower court when it found said contract to have been fair to both parties at
the time of its execution. In fact, there were no complaints on the part of
both sides at the time of and after the execution of said contract, and
according to 73-year old Justino de Jesus, Vice President and General
manager of appellant at the time who signed the agreement Exh. "A" in its
behalf and who was one of the witnesses for the plaintiff (sic), both parties
complied with said contract "from the very beginning" (p. 5, tsn, April 17,
1989).

That the aforesaid contract has become inequitous or unfavorable or

disadvantageous to the plaintiff with the expansion of the business of
appellant and the increase in the volume of its subscribers in Naga City
and environs through the years, necessitating the stringing of more and
bigger telephone cable wires by appellant to plaintiff's electric posts
without a corresponding increase in the ten (10) telephone connections
given by appellant to plaintiff free of charge in the agreement Exh. "A" as
consideration for its use of the latter's electric posts in Naga City, appear,
however, undisputed from the totality of the evidence on record and the
lower court so found. And it was for this reason that in the later (sic) part of
1982 or 1983 (or five or six years after the subject agreement was entered
into by the parties), plaintiff's Board of Directors already asked Atty. Luis
General who had become their legal counsel in 1982, to study said
agreement which they believed had become disadvantageous to their
company and to make the proper recommendation, which study Atty.
General did, and thereafter, he already recommended to the Board the
filing of a court action to reform said contract, but no action was taken on
Atty. General's recommendation because the former general managers of
plaintiff wanted to adopt a soft approach in discussing the matter with
appellant, until, during the term of General Manager Henry Pascual, the
latter, after failing to settle the problem with Atty. Luciano Maggay who
had become the president and general manager of appellant, already
agreed for Atty. General's filing of the present action. The fact that said
contract has become inequitous or disadvantageous to plaintiff as the
years went by did not, however, give plaintiff a cause of action for
reformation of said contract, for the reasons already pointed out earlier.
But this does not mean that plaintiff is completely without a remedy, for we
believe that the allegations of its complaint herein and the evidence it has
presented sufficiently make out a cause of action under Art. 1267 of the
New Civil Code for its release from the agreement in question.

xxx xxx xxx

The understanding of the parties when they entered into the Agreement
Exh. "A" on November 1, 1977 and the prevailing circumstances and
conditions at the time, were described by Dioscoro Ragragio, the
President of plaintiff in 1977 and one of its two officials who signed said
agreement in its behalf, as follows:

Our understanding at that time is that we will allow

NATELCO to utilize the posts of CASURECO II only in the
City of Naga because at that time the capability of
NATELCO was very limited, as a matter of fact we do [sic]
not expect to be able to expand because of the legal
squabbles going on in the NATELCO. So, even at that time
there were so many subscribers in Naga City that cannot be
served by the NATELCO, so as a mater of public service we
allowed them to sue (sic) our posts within the Naga City. (p.
8, tsn April 3, 1989)

Ragragio also declared that while the telephone wires strung to the
electric posts of plaintiff were very light and that very few telephone lines
were attached to the posts of CASURECO II in 1977, said posts have
become "heavily loaded" in 1989 (tsn, id.).

In truth, as also correctly found by the lower court, despite the increase in
the volume of appellant's subscribers and the corresponding increase in
the telephone cables and wires strung by it to plaintiff's electric posts in
Naga City for the more 10 years that the agreement Exh. "A" of the parties
has been in effect, there has been no corresponding increase in the ten
(10) telephone units connected by appellant free of charge to plaintiff's
offices and other places chosen by plaintiff's general manager which was
the only consideration provided for in said agreement for appellant's use of
plaintiffs electric posts. Not only that, appellant even started using
plaintiff's electric posts outside Naga City although this was not provided
for in the agreement Exh. "A" as it extended and expanded its telephone
services to towns outside said city. Hence, while very few of plaintiff's
electric posts were being used by appellant in 1977 and they were all in
the City of Naga, the number of plaintiff's electric posts that appellant was
using in 1989 had jumped to 1,403,192 of which are outside Naga City
(Exh. "B"). Add to this the destruction of some of plaintiff's poles during
typhoons like the strong typhoon Sisang in 1987 because of the heavy
telephone cables attached thereto, and the escalation of the costs of
electric poles from 1977 to 1989, and the conclusion is indeed ineluctable
that the agreement Exh. "A" has already become too one-sided in favor of
appellant to the great disadvantage of plaintiff, in short, the continued
enforcement of said contract has manifestly gone far beyond the
contemplation of plaintiff, so much so that it should now be released
therefrom under Art. 1267 of the New Civil Code to avoid appellant's
unjust enrichment at its (plaintiff's) expense. As stated by Tolentino in his
commentaries on the Civil Code citing foreign civilist Ruggiero, "equity
demands a certain economic equilibrium between the prestation and the
counter-prestation, and does not permit the unlimited impoverishment of
one party for the benefit of the other by the excessive rigidity of the
principle of the obligatory force of contracts (IV Tolentino, Civil Code of the
Philippines, 1986 ed.,
pp. 247-248).

We therefore, find nothing wrong with the ruling of the trial court, although
based on a different and wrong premise (i.e., reformation of contract), that
from the date of the filing of this case, appellant must pay for the use of
plaintiff's electric posts in Naga City at the reasonable monthly rental of
P10.00 per post, while plaintiff should pay appellant for the telephones in
the same City that it was formerly using free of charge under the terms of
the agreement Exh. "A" at the same rate being paid by the general public.
In affirming said ruling, we are not making a new contract for the parties
herein, but we find it necessary to do so in order not to disrupt the basic
and essential services being rendered by both parties herein to the public
and to avoid unjust enrichment by appellant at the expense of plaintiff,
said arrangement to continue only until such time as said parties can re-
negotiate another agreement over the same
subject-matter covered by the agreement Exh. "A". Once said agreement
is reached and executed by the parties, the aforesaid ruling of the lower
 court and affirmed by us shall cease to exist and shall be substituted and
superseded by their new agreement. . . ..8

Article 1267 speaks of "service" which has become so difficult. Taking into consideration
the rationale behind this provision,9 the term "service" should be understood as referring
to the "performance" of the obligation. In the present case, the obligation of private
respondent consists in allowing petitioners to use its posts in Naga City, which is the
service contemplated in said article. Furthermore, a bare reading of this article reveals
that it is not a requirement thereunder that the contract be for future service with future
unusual change. According to Senator Arturo M. Tolentino,10 Article 1267 states in our
law the doctrine of unforseen events. This is said to be based on the discredited theory
of rebus sic stantibus in public international law; under this theory, the parties stipulate
in the light of certain prevailing conditions, and once these conditions cease to exist the
contract also ceases to exist. Considering practical needs and the demands of equity
and good faith, the disappearance of the basis of a contract gives rise to a right to relief
in favor of the party prejudiced.

In a nutshell, private respondent in the Occeña case filed a complaint against petitioner
before the trial court praying for modification of the terms and conditions of the contract
that they entered into by fixing the proper shares that should pertain to them out of the
gross proceeds from the sales of subdivided lots. We ordered the dismissal of the
complaint therein for failure to state a sufficient cause of action. We rationalized that the
Court of Appeals misapplied Article 1267 because:

. . . respondent's complaint seeks not release from the subdivision

contract but that the court "render judgment modifying the terms and
conditions of the contract . . . by fixing the proper shares that
should pertain to the herein parties out of the gross proceeds from the
sales of subdivided lots of subject subdivision". The cited article (Article
1267) does not grant the courts (the) authority to remake, modify or revise
the contract or to fix the division of shares between the parties as
contractually stipulated with the force of law between the parties, so as to
substitute its own terms for those covenanted by the parties themselves.
Respondent's complaint for modification of contract manifestly has no
basis in law and therefore states no cause of action. Under the particular
allegations of respondent's complaint and the circumstances therein
averred, the courts cannot even in equity grant the relief sought.11

The ruling in the Occeña case is not applicable because we agree with respondent
court that the allegations in private respondent's complaint and the evidence it has
presented sufficiently made out a cause of action under Article 1267. We, therefore,
release the parties from their correlative obligations under the contract. However, our
disposition of the present controversy does not end here. We have to take into account
the possible consequences of merely releasing the parties therefrom: petitioners will
remove the telephone wires/cables in the posts of private respondent, resulting in
disruption of their service to the public; while private respondent, in consonance with the
contract12 will return all the telephone units to petitioners, causing prejudice to its
business. We shall not allow such eventuality. Rather, we require, as ordered by the
trial court: 1) petitioners to pay private respondent for the use of its posts in Naga City
and in the towns of Milaor, Canaman, Magarao and Pili, Camarines Sur and in other
places where petitioners use private respondent's posts, the sum of ten (P10.00) pesos
per post, per month, beginning January, 1989; and 2) private respondent to pay
petitioner the monthly dues of all its telephones at the same rate being paid by the
public beginning January, 1989. The peculiar circumstances of the present case, as
distinguished further from the Occeña case, necessitates exercise of our equity
jurisdiction.13 By way of emphasis, we reiterate the rationalization of respondent court
that:

. . . In affirming said ruling, we are not making a new contract for the
parties herein, but we find it necessary to do so in order not to disrupt the
basic and essential services being rendered by both parties herein to the
public and to avoid unjust enrichment by appellant at the expense of
plaintiff . . . .14

Petitioners' assertion that Article 1267 was never raised by the parties in their pleadings
and was never the subject of trial and evidence has been passed upon by respondent
court in its well reasoned resolution, which we hereunder quote as our own:

First, we do not agree with defendant-appellant that in applying Art. 1267

of the New Civil Code to this case, we have changed its theory and
decided the same on an issue not invoked by plaintiff in the lower court.
For basically, the main and pivotal issue in this case is whether the
continued enforcement of the contract Exh. "A" between the parties has,
through the years (since 1977), become too inequitous or
disadvantageous to the plaintiff and too one-sided in favor of defendant-
appellant, so that a solution must be found to relieve plaintiff from the
continued operation of said agreement and to prevent defendant-appellant
from further unjustly enriching itself at plaintiff's expense. It is indeed
unfortunate that defendant had turned deaf ears to plaintiffs requests for
renegotiation, constraining the latter to go to court. But although plaintiff
cannot, as we have held, correctly invoke reformation of contract as a
proper remedy (there having been no showing of a mistake or error in said
contract on the part of any of the parties so as to result in its failure to
express their true intent), this does not mean that plaintiff is absolutely
without a remedy in order to relieve itself from a contract that has gone far
beyond its contemplation and has become so highly inequitous and
disadvantageous to it through the years because of the expansion of
defendant-appellant's business and the increase in the volume of its
subscribers. And as it is the duty of the Court to administer justice, it must
do so in this case in the best way and manner it can in the light of the
proven facts and the law or laws applicable thereto.
It is settled that when the trial court decides a case in favor of a party on a
certain ground, the appellant court may uphold the decision below upon
some other point which was ignored or erroneously decided by the trial
court (Garcia Valdez v. Tuazon, 40 Phil. 943; Relativo v. Castro, 76 Phil.
563; Carillo v. Salak de Paz, 18 SCRA 467). Furthermore, the appellate
court has the discretion to consider an unassigned error that is closely
related to an error properly assigned (Paterno v. Jao Yan, 1 SCRA 631;
Hernandez v. Andal, 78 Phil. 196). It has also been held that the Supreme
Court (and this Court as well) has the authority to review matters, even if
they are not assigned as errors in the appeal, if it is found that their
consideration is necessary in arriving at a just decision of the case (Saura
Import & Export Co., Inc. v. Phil. International Surety Co. and PNB, 8
SCRA 143). For it is the material allegations of fact in the complaint, not
the legal conclusion made therein or the prayer, that determines the relief
to which the plaintiff is entitled, and the plaintiff is entitled to as much relief
as the facts warrant although that relief is not specifically prayed for in the
complaint (Rosales v. Reyes and Ordoveza, 25 Phil. 495; Cabigao v. Lim,
50 Phil. 844; Baguioro v. Barrios, 77 Phil. 120). To quote an old but very
illuminating decision of our Supreme Court through the pen of American
jurist Adam C. Carson:

"Under our system of pleading it is the duty of the courts to

grant the relief to which the parties are shown to be entitled
by the allegations in their pleadings and the facts proven at
the trial, and the mere fact that they themselves misconstrue
the legal effect of the facts thus alleged and proven will not
prevent the court from placing the just construction thereon
and adjudicating the issues accordingly." (Alzua v. Johnson,
21 Phil. 308)

And in the fairly recent case of Caltex Phil., Inc. v IAC, 176 SCRA 741, the
Honorable Supreme Court also held:

We rule that the respondent court did not commit any error in
taking cognizance of the aforesaid issues, although not
raised before the trial court. The presence of strong
consideration of substantial justice has led this Court to relax
the well-entrenched rule that, except questions on
jurisdiction, no question will be entertained on appeal unless
it has been raised in the court below and it is within the
issues made by the parties in their pleadings (Cordero v.
Cabral, L-36789, July 25, 1983, 123 SCRA 532). . . .

We believe that the above authorities suffice to show that this Court did
not err in applying Art. 1267 of the New Civil Code to this case.
Defendant-appellant stresses that the applicability of said provision is
 a question of fact, and that it should have been given the opportunity to
present evidence on said question. But defendant-appellant cannot
honestly and truthfully claim that it (did) not (have) the opportunity to
present evidence on the issue of whether the continued operation of the
contract Exh. "A" has now become too one-sided in its favor and too
inequitous, unfair, and disadvantageous to plaintiff. As held in our
decision, the abundant and copious evidence presented by both parties in
this case and summarized in said decision established the following
essential and vital facts which led us to apply Art. 1267 of the New Civil
Code to this case:

xxx xxx xxx 15

On the issue of prescription of private respondent's action for reformation of contract,

petitioners allege that respondent court's ruling that the right of action "arose only after
said contract had already become disadvantageous and unfair to it due to subsequent
events and conditions, which must be sometime during the latter part of 1982 or in 1983
. . ." 16 is erroneous. In reformation of contracts, what is reformed is not the contract
itself, but the instrument embodying the contract. It follows that whether the contract is
disadvantageous or not is irrelevant to reformation and therefore, cannot be an element
in the determination of the period for prescription of the action to reform.

Article 1144 of the New Civil Code provides, inter alia, that an action upon a written
contract must be brought within ten (10) years from the time the right of action accrues.
Clearly, the ten (10) year period is to be reckoned from the time the right of action
accrues which is not necessarily the date of execution of the contract. As correctly ruled
by respondent court, private respondent's right of action arose "sometime during the
latter part of 1982 or in 1983 when according to Atty. Luis General, Jr. . . ., he was
asked by (private respondent's) Board of Directors to study said contract as it already
appeared disadvantageous to (private respondent) (p. 31, tsn, May 8, 1989). (Private
respondent's) cause of action to ask for reformation of said contract should thus be
considered to have arisen only in 1982 or 1983, and from 1982 to January 2, 1989
when the complaint in this case was filed, ten (10) years had not yet elapsed." 17

Regarding the last issue, petitioners allege that there is nothing purely potestative about
the prestations of either party because petitioner's permission for free use of telephones
is not made to depend purely on their will, neither is private respondent's permission for
free use of its posts dependent purely on its will.

Apart from applying Article 1267, respondent court cited another legal remedy available
to private respondent under the allegations of its complaint and the preponderant
evidence presented by it:

. . . we believe that the provision in said agreement —

 (a) That the term or period of this contract shall be as long
as the party of the first part [herein appellant] has need for
the electric light posts of the party of the second part [herein
plaintiff] it being understood that this contract shall terminate
when for any reason whatsoever, the party of the second
part is forced to stop, abandoned [sic] its operation as a
public service and it becomes necessary to remove the
electric light post [sic]"; (Emphasis supplied)

is invalid for being purely potestative on the part of appellant as it leaves

the continued effectivity of the aforesaid agreement to the latter's sole and
exclusive will as long as plaintiff is in operation. A similar provision in a
contract of lease wherein the parties agreed that the lessee could stay on
the leased premises "for as long as the defendant needed the premises
and can meet and pay said increases" was recently held by the Supreme
Court in Lim v. C.A., 191 SCRA 150, citing the much earlier case of
Encarnacion v. Baldomar, 77 Phil. 470, as invalid for being "a purely
potestative condition because it leaves the effectivity and enjoyment of
leasehold rights to the sole and exclusive will of the lessee." Further held
the High Court in the Lim case:

The continuance, effectivity and fulfillment of a contract of

lease cannot be made to depend exclusively upon the free
and uncontrolled choice of the lessee between continuing
the payment of the rentals or not, completely depriving the
owner of any say in the matter. Mutuality does not obtain in
such a contract of lease of no equality exists between the
lessor and the lessee since the life of the contract is dictated
solely by the lessee.

The above can also be said of the agreement Exh. "A" between the
parties in this case. There is no mutuality and equality between them
under the afore-quoted provision thereof since the life and continuity of
said agreement is made to depend as long as appellant needs plaintiff's
electric posts. And this is precisely why, since 1977 when said agreement
was executed and up to 1989 when this case was finally filed by plaintiff, it
could do nothing to be released from or terminate said agreement
notwithstanding that its continued effectivity has become very
disadvantageous and inequitous to it due to the expansion and increase of
appellant's telephone services within Naga City and even outside the
same, without a corresponding increase in the ten (10) telephone units
being used by plaintiff free of charge, as well as the bad and inefficient
service of said telephones to the prejudice and inconvenience of plaintiff
and its customers. . . . 18
Petitioners' allegations must be upheld in this regard. A potestative condition is a
condition, the fulfillment of which depends upon the sole will of the debtor, in which
case, the conditional obligation is void. 19 Based on this definition, respondent court's
finding that the provision in the contract, to wit:

(a) That the term or period of this contract shall be as long as the party of
the first part (petitioner) has need for the electric light posts of the party of
the second part (private respondent) . . ..

is a potestative condition, is correct. However, it must have overlooked the other

conditions in the same provision, to wit:

. . . it being understood that this contract shall terminate when for any
reason whatsoever, the party of the second part (private respondent) is
forced to stop, abandoned (sic) its operation as a public service and it
becomes necessary to remove the electric light post (sic);

which are casual conditions since they depend on chance, hazard, or the will of a third
person. 20 In sum, the contract is subject to mixed conditions, that is, they depend partly
on the will of the debtor and partly on chance, hazard or the will of a third person, which
do not invalidate the aforementioned provision. 21 Nevertheless, in view of our
discussions under the first and second issues raised by petitioners, there is no reason
to set aside the questioned decision and resolution of respondent court.

WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals
dated May 28, 1992 and its resolution dated September 10, 1992 are AFFIRMED.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. 4437 September 9, 1909

TOMAS OSMEÑA, plaintiff-appellee,

vs.
CENONA RAMA, defendant-appellant.

Filemon Sotto for appellant.

J. H. Junquera for appellee.

JOHNSON, J.:

It appears from the record that upon the 15th day of November, 1890, the defendant
herein executed and delivered to Victoriano Osmeña the following contract:

EXHIBIT A.

P200.00.

CEBU, November 15, 1890.

I, Doña Cenona Rama, a resident of this city, and of legal age, have received
from Don Victoriano Osmeña the sum of two hundred pesos in cash which I will
pay in sugar in the month of January or February of the coming year, at the price
ruling on the day of delivering the sugar into his warehouse, and I will pay him
interest at the rate of half a cuartillo per month on each peso, beginning on this
date until the day of the settlement; and if I can not pay in full, a balance shall be
struck, showing the amount outstanding at the end of each June, including
interest, and such as may be outstanding against me shall be considered as
capital which I will always pay in sugar, together with the interest mentioned
above. I further promise that I will sell to the said Señor Osmeña all the sugar
that I may harvest, and as a guarantee, pledge as security all of my present and
future property, and as special security the house with tile roof and ground floor
of stone in which I live in Pagina; in proof whereof, I sign this document, and he
shall be entitled to make claim against me at the expiration of the term stated in
this document.

(Signed) CENON RAMA.

Witnesses:
 FAUSTO PEÑALOSA.
FRANCISCO MEDALLE.

On the 27th day of October, 1891, the defendant executed and delivered to the said
Victoriano Osmeña the following contract:

EXHIBIT B.

CEBU, October 27, 1891.

On this date I have asked for further loan and have received from Don Victoriano
Osmeña the sum of seventy pesos in cash, fifty pesos of which I have loaned to
Don Evaristo Peñares, which we will pay in sugar in the month of January of the
coming year according to the former conditions.

(Signed) CENONA RAMA.

From Don Evaristo P50

Peñares
Doña Cenona Rama 20
P70

Received — Evaristo Peñares.

Some time after the execution and delivery of the above contracts, the said Victoriano
Osmeña died. In the settlement and division of the property of his estate the above
contracts became the property of one of his estate the above contracts became the
property of one of his heirs, Agustina Rafols. Later, the date does not appear, the said
Agustina Rafols ceded to the present plaintiff all of her right and interest in said
contracts.

On the 15th day of March, 1902 the plaintiff presented the contracts to the defendant for
payment and she acknowledged her responsibility upon said contracts by an
indorsement upon them in the following language:

EXHIBIT C.

CEBU, March 15, 1902.

On this date I hereby promise, in the presence of two witness, that if the house of
strong materials in which I live in Pagina is sold, I will pay my indebtedness to
Don Tomas Osmeña as set forth in this document.

(Signed) CENONA RAMA.

The defendant not having paid the amount due on said contracts; the plaintiff, upon the
26th day of June, 1906, commenced the present action in the Court of First Instance of
the Province of Cebu. The complaint filed in said cause alleged the execution and
delivery of the above contracts, the demand for payment, and the failure to pay on the
part of the defendant, and the prayer for a judgment for the amount due on the said
contracts. The defendant answered by filing a general denial and setting up the special
defense of prescription.

The case was finally brought on to trial in the Court of First Instance, and the only
witness produced during the trial was the plaintiff himself. The defendant did not offer
any proof whatever in the lower court.

After hearing the evidence adduced during the trial, the lower court rendered a
judgment in favor of the plaintiff and against the defendant for the sum of P200 with
interest at the rate of 18 3/4 per cent per annum, from the 15th day of November, 1890,
and for the sum of P20 with interest at the rate of 18 3/4 per cent per annum, from the
27th day of October, 1891, until the said sums were paid. From this judgment the
defendant appealed.

The lower court found that P50 of the P70 mentioned in Exhibit B had been borrowed by
the defendant, but by one Evaristo Peñares; therefore the defendant had no
responsibility for the payment of the said P50.

The only questions raised by the appellant were questions of fact. The appellant alleges
that the proof adduced during the trial of the cause was not sufficient to support the
findings of the lower court. It was suggested during the discussion of the case in this
court that, in the acknowledgment above quoted of the indebtedness made by the
defendant, she imposed the condition that she would pay the obligation if she sold her
house. If that statement found in her acknowledgment of the indebtedness should be
regarded as a condition, it was a condition which depended upon her exclusive will, and
is therefore, void. (Art. 1115, Civil Code.) The acknowledgment, therefore, was an
absolute acknowledgment of the obligation and was sufficient to prevent the statute of
limitation from barring the action upon the original contract.

We are satisfied, from all of the evidence adduced during the trial, that the judgment of
the lower court should be affirmed. So ordered.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-5267 October 27, 1953

LUZ HERMOSA, as administratrix of the Intestate Estate of Fernando Hermosa, Sr.,

and FERNANDO HERMOSA, JR., petitioners,
vs.
EPIFANIO M. LONGARA, respondent.

Manuel O. Chan for petitioners.

Jacinto R. Bohol for respondent.

LABRADOR, J.:

This is an appeal by way of certiorari against a decision of the Court of Appeals, fourth
division, approving certain claims presented by Epifanio M. Longara against the testate
estate of Fernando Hermosa, Sr. The claims are of three kinds, namely, P2,341.41
representing credit advances made to the intestate from 1932 to 1944, P12,924.12
made to his son Francisco Hermosa, and P3,772 made to his grandson, Fernando
Hermosa, Jr. from 1945 to 1947, after the death of the intestate, which occurred in
December, 1944. The claimant presented evidence and the Court of Appeals found, in
accordance therewith, that the intestate had asked for the said credit advances for
himself and for the members of his family "on condition that their payment should be
made by Fernando Hermosa, Sr. as soon as he receive funds derived from the sale of
his property in Spain." Claimant had testified without opposition that the credit advances
were to be "payable as soon as Fernando Hermosa, Sr.'s property in Spain was sold
and he receive money derived from the sale." The Court of Appeals held that payment
of the advances did not become due until the administratrix received the sum of
P20,000 from the buyer of the property. Upon authorization of the probate court in
October, 1947, and the same was paid for subsequently. The Claim was filed on
October 2, 1948.

It is contended on this appeal that the obligation contracted by the intestate was subject
to a condition exclusively dependent upon the will of the debtor (a condicion potestativa)
and therefore null and void, in accordance with article 1115 of the old Civil Code. The
case of Osmeña vs. Rama, (14 Phil. 99) is cited to support appellants contention. In this
case, this court seems to have filed that a promise to pay an indebtedness "if a house of
strong materials is sold" is an obligation the performance of which depended on the will
of the debtor. We have examined this case and we find that the supposed ruling was
merely an assumption and the same was not the actual ruling of the case.
A careful consideration of the condition upon which payment of the sums advanced was
made to depend, "as soon as he (intestate) receive funds derived from the sale of his
property in Spain," discloses the fact that the condition in question does not depend
exclusively upon the will of the debtor, but also upon other circumstances beyond his
power or control. If the condition were "if he decides to sell his house." or "if he likes to
pay the sums advanced," or any other condition of similar import implying that upon him
(the debtor) alone payment would depend, the condition would be protestativa,
dependent exclusively upon his will or discretion. In the form that the condition was
found by the Court of Appeals however the condition implies that the intestate had
already decided to sell his house, or at least that he had made his creditors believe that
he had done so, and that all that we needed to make his obligation (to pay his
indebtedness) demandable is that the sale be consummated and the price thereof
remitted to the islands. Note that if the intestate would prevent or would have prevented
the consummation of the sale voluntarily, the condition would be or would have been
deemed or considered complied with (article 1119, old Civil Code).The will to sell on the
part of the intestate was, therefore, present in fact, or presumed legally to exist,
although the price and other conditions thereof were still within his discretion and final
approval. But in addition of the sale to him (the intestate-vendor), there were still other
conditions that had no concur to effect the sale, mainly that of the presence of a buyer,
ready, able and willing to purchase the property under the conditions demanded by the
intestate. Without such a buyer the sale could not be carried out or the proceeds thereof
sent to the islands. It is evident, therefore sent to the islands. It is evident, therefore, that
the condition of the obligation was not a purely protestative one, depending exclusively
upon the will of the intestate, but a mixed one, depending partly upon the will of
intestate and partly upon chance, i.e., the presence of a buyer of the property for the
price and under the conditions desired by the intestate. The obligation is clearly
governed by the second sentence of article 1115 of the old Civil Code (8 Manresa, 126).
The condition is, besides, a suspensive condition, upon the happening of which the
obligation to pay is made dependent. And upon the happening of the condition, the debt
became immediately due and demandable. (Article 1114, old Civil Code; 8 Manresa,
119).

One other point needs to be considered, and this is the fact that the sale was not
effected in the lifetime of the debtor (the intestate), but after his death and by his
administrator, the very wife of the claimant. On this last circumstance we must bear in
mind that the Court of Appeals found no evidence to show that the claim was the
product of a collusion or connivance between the administratrix and the claimant. That
there was really a promise made by the intestate to pay for the credit advances maybe
implied from the fact that the receipts thereof had been preserved. Had the advances
been made without intention of demanding their payment later, said receipts would not
have been preserved. Regularity of the advances and the close relationship between
the intestate and the claimant also support this conclusion.

As to the fact that the suspensive condition took place after the death of the debtor, and
that advances were made more than ten years before the sale, we supported in our
conclusion that the same is immaterial by Sanchez Roman, who says, among other
things, as to conditional obligations:

1a La obligacion contractual afectada por condicion suspensiva. no es exigible

hasta que se cumpla la condicion, . . .

2 a El cumplimiento de la condicion suspensiva retrotae los efectos del acto

juridico originario de la obligacion a que aquella afecta, al tiempo de
lacelebracion de este;

3 a La referida retroaccion, no solo tiene lugar cuando el cumplimiento de la

condicion se verifica en vida de los contrayentes, que tambien se produce
cuando aquel se realiza despues de la muerte de estos. (4 Sanchez Roman, p.
122) (Emphasis supplied.)

As the obligation retroacts to the date when the contract was entered into, all amounts
advanced from the time of the agreement became due, upon the happening of the
suspensive condition. As the obligation to pay became due and demandable only when
the house was sold and the proceeds received in the islands, the action to recover the
same only accrued, within the meaning of the statute of limitations, on date the money
became available here hence the action to recover the advances has not yet
prescribed.

The above considerations dispose of the most important questions raised on this
appeal. It is also contended that the third group of claims, i.e., credits furnished the
intestate's grandson after his (intestate's) death in 1944, should have been allowed. We
find merit in this contention. Even if authorization to furnish necessaries to his grandson
may have been given, this authorization could not be made to extend after his death, for
two obvious reasons. First because the obligation to furnish support is personal and is
extinguished upon the death of the person obliged to give support(article 150, old Civil
Code), and second because upon the death of a principal (the intestate in this case), his
agent's authority or authorization is deemed terminated (article 1732, old Civil Code).
That part of the decision allowing this group of claims, amounting to P3,772 should be
reversed.

One last contention of the appellant is that the claims are barred by the statute of non-
claims. It does not appear from the record that this question was ever raised in any of
the courts below. We are, therefore, without authority under our rules to consider this
issue at this stage of the proceedings.

The judgment appealed from is hereby affirmed in so far as it approves the claims of
appellee in the amounts of P2,341 and P12,942.12, and reversed as to that of P3,772.
Without costs.

Bengzon, Padilla, Tuason, Montemayor, Reyes, Jugo, and Bautista Angelo, JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-16109 October 2, 1922

M. D. TAYLOR, plaintiff-appellant,
vs.
UY TIENG PIAO and TAN LIUAN, doing business under the firm name and style of Tan
Liuan & Company,defendants.
Uy TIENG PIAO, defendant-appellant.

Cohn, Fisher and DeWitt and William C. Brady for plaintiff-appellant.

Gabriel La O for defendant-appellant Uy Tieng Piao.
Crossfield and O'Brien for Tan Liuan and Tan Liyan and Co.

STREET, J.:

This case comes by appeal from the Court of First Instance of the city of Manila, in a case
where the court awarded to the plaintiff the sum of P300, as damages for breach of contract.
The plaintiff appeals on the ground that the amount of damages awarded is inadequate; while
the defendant Uy Tieng Piao appeals on the ground that he is not liable at all. The judgment
having been heretofore affirmed by us in a brief opinion, we now avail ourselves of the occasion
of the filing of a motion to rehear by the attorneys for the plaintiff to modify the judgment in a
slight measure and to state more fully the reasons underlying our decision.

It appears that on December 12, 1918, the plaintiff contracted his services to Tan Liuan and
Co., as superintendent of an oil factory which the latter contemplated establishing in this city.
The period of the contract extended over two years from the date mentioned; and the salary
was to be at the rate of P600 per month during the first year and P700 per month during the
second, with electric light and water for domestic consumption, and a residence to live in, or in
lieu thereof P60 per month.

At the time this agreement was made the machinery for the contemplated factory had not been
acquired, though ten expellers had been ordered from the United States; and among the
stipulations inserted in the contract with the plaintiff was a provision to the following effect:

It is understood and agreed that should the machinery to be installed in the said factory
fail, for any reason, to arrive in the city of Manila within a period of six months from date
hereof, this contract may be cancelled by the party of the second part at its option, such
cancellation, however, not to occur before the expiration of such six months.

The machinery above referred to did not arrive in the city of Manila within the six months
succeeding the making of the contract; nor was other equipment necessary for the
establishment of the factory at any time provided by the defendants. The reason for this does
not appear with certainty, but a preponderance of the evidence is to the effect that the
defendants, in the first months of 1919, seeing that the oil business no longer promised large
returns, either cancelled the order for the machinery from choice or were unable to supply the
capital necessary to finance the project. At any rate on June 28, 1919, availing themselves in
part of the option given in the clause above quoted, the defendants communicated in writing to
the plaintiff the fact that they had decided to rescind the contract, effective June 30th then
current, upon which date he was discharged. The plaintiff thereupon instituted this action to
recover damages in the amount of P13,000, covering salary and perquisites due and to become
due under the contract.

The case for the plaintiff proceeds on the idea that the stipulation above quoted, giving to the
defendants the right to cancel the contract upon the contingency of the nonarrival of the
machinery in Manila within six months, must be understood as applicable only in those cases
where such nonarrival is due to causes not having their origin in the will or act of the
defendants, as delays caused by strikes or unfavorable conditions of transporting by land or
sea; and it is urged that the right to cancel cannot be admitted unless the defendants
affirmatively show that the failure of the machinery to arrive was due to causes of that character,
and that it did not have its origin in their own act or volition. In this connection the plaintiff relies
on article 1256 of the Civil Code, which is to the effect that the validity and fulfillment of
contracts cannot be left to the will of one of the contracting parties, and to article 1119, which
says that a condition shall be deemed fulfilled if the obligor intentially impedes its fulfillment.

It will be noted that the language conferring the right of cancellation upon the defendants is
broad enough to cover any case of the nonarrival of the machinery, due to whatever cause; and
the stress in the expression "for any reason" should evidently fall upon the word "any." It must
follow of necessity that the defendants had the right to cancel the contract in the contingency
that occurred, unless some clear and sufficient reason can be adduced for limiting the operation
of the words conferring the right of cancellation. Upon this point it is our opinion that the
language used in the stipulation should be given effect in its ordinary sense, without technicality
or circumvention; and in this sense it is believed that the parties to the contract must have
understood it.

Article 1256 of the Civil Code in our opinion creates no impediment to the insertion in a contract
for personal service of a resolutory condition permitting the cancellation of the contract by one of
the parties. Such a stipulation, as can be readily seen, does not make either the validity or the
fulfillment of the contract dependent upon the will of the party to whom is conceded the privilege
of cancellation; for where the contracting parties have agreed that such option shall exist, the
exercise of the option is as much in the fulfillment of the contract as any other act which may
have been the subject of agreement. Indeed, the cancellation of a contract in accordance with
conditions agreed upon beforehands is fulfillment.

In this connection, we note that the commentator Manresa has the following observation with
respect to article 1256 of the Civil Code. Says he: "It is entirely licit to leave fulfillment to the will
of either of the parties in the negative form of rescission, a case frequent in certain contracts
(the letting of service for hire, the supplying of electrical energy, etc.), for in such supposed case
neither is the article infringed, nor is there any lack of equality between the persons contracting,
since they remain with the same faculties in respect to fulfillment." (Manresa, 2d ed., vol. 8, p.
610.) 1awph!l.net
Undoubtedly one of the consequences of this stipulation was that the employers were left in a
position where they could dominate the contingency, and the result was about the same as if
they had been given an unqualified option to dispense with the services of the plaintiff at the end
of six months. But this circumstance does not make the stipulation illegal.

The case of Hall vs. Hardaker (61 Fla., 267) cited by the appellant Taylor, though superficially
somewhat analogous, is not precisely in point. In that case one Hardaker had contracted to
render competent and efficient service as manager of a corporation, to which position it was
understood he was to be appointed. In the same contract it was stipulated that if "for any
reason" Hardaker should not be given that position, or if he should not be permitted to act in that
capacity for a stated period, certain things would be done by Hall. Upon being installed in the
position aforesaid, Hardaker failed to render efficient service and was discharged. It was held
that Hall was released from the obligation to do the things that he had agreed to perform. Some
of the judges appear to have thought that the case turned on the meaning of the phrase "for any
reason," and the familiar maxim was cited that no man shall take advantage of his own wrong.
The result of the case must have been the same from whatever point of view, as there was an
admitted failure on the part of Hardaker to render competent service. In the present case there
was no breach of contract by the defendants; and the argument to the contrary apparently
suffers from the logical defect of assuming the very point at issue.

But it will be said that the question is not so much one concerning the legality of the clause
referred to as one concerning the interpretation of the resolutory clause as written, the idea
being that the court should adjust its interpretation of said clause to the supposed precepts of
article 1256, by restricting its operation exclusively to cases where the nonarrival of the
machinery may be due to extraneous causes not referable to the will or act of the defendants.
But even when the question is viewed in this aspect their result is the same, because the
argument for the restrictive interpretation evidently proceeds on the assumption that the clause
in question is illegal in so far as it purports to concede to the defendants the broad right to
cancel the contract upon nonarrival of the machinery due to any cause; and the debate returns
again to the point whether in a contract for the prestation of service it is lawful for the parties to
insert a provision giving to the employer the power to cancel the contract in a contingency which
may be dominated by himself. Upon this point what has already been said must suffice.

As we view the case, there is nothing in article 1256 which makes it necessary for us to warp
the language used by the parties from its natural meaning and thereby in legal effect to restrict
the words "for any reason," as used in the contract, to mean "for any reason not having its origin
in the will or acts of the defendants." To impose this interpretation upon those words would in
our opinion constitute an unjustifiable invasion of the power of the parties to establish the terms
which they deem advisable, a right which is expressed in article 1255 of the Civil Code and
constitutes one of the most fundamental conceptions of contract right enshrined in the Code.

The view already expressed with regard to the legality and interpretation of the clause under
consideration disposes in a great measure of the argument of the appellant in so far as the
same is based on article 1119 of the Civil Code. This provision supposes a case where the
obligor intentionally impedes the fulfillment of a condition which would entitle the obligee to
exact performance from the obligor; and an assumption underlying the provision is that the
obligor prevents the obligee from performing some act which the obligee is entitled to perform
as a condition precedent to the exaction of what is due to him. Such an act must be considered
unwarranted and unlawful, involving per se a breach of the implied terms of the contract. The
article can have no application to an external contingency which, like that involved in this case,
is lawfully within the control of the obligor.

In Spanish jurisprudence a condition like that here under discussion is designated by Manresa a
facultative condition (vol. 8, p. 611), and we gather from his comment on articles 1115 and 1119
of the Civil Code that a condition, facultative as to the debtor, is obnoxious to the first sentence
contained in article 1115 and renders the whole obligation void (vol. 8, p. 131). That statement
is no doubt correct in the sense intended by the learned author, but it must be remembered that
he evidently has in mind the suspensive condition, such as is contemplated in article 1115. Said
article can have no application to the resolutory condition, the validity of which is recognized in
article 1113 of the Civil Code. In other words, a condition at once facultative and resolutory may
be valid even though the condition is made to depend upon the will of the obligor.

If it were apparent, or could be demonstrated, that the defendants were under a positive
obligation to cause the machinery to arrive in Manila, they would of course be liable, in the
absence of affirmative proof showing that the nonarrival of the machinery was due to some
cause not having its origin in their own act or will. The contract, however, expresses no such
positive obligation, and its existence cannot be implied in the fact of stipulation, defining the
conditions under which the defendants can cancel the contract.

Our conclusion is that the Court of First Instance committed no error in rejecting the plaintiff's
claim in so far as damages are sought for the period subsequent to the expiration of the first six
months, but in assessing the damages due for the six-month period, the trial judge evidently
overlooked the item of P60, specified in the plaintiff's fourth assignment of error, which
represents commutation of house rent for the month of June, 1919. This amount the plaintiff is
clearly entitled to recover, in addition to the P300 awarded in the court below.

We note that Uy Tieng Piao, who is sued as a partner with Tan Liuan, appealed from the
judgment holding him liable as a member of the firm of Tan Liuan and Co.; and it is insisted in
his behalf that he was not bound by the act of Tan Liuan as manager of Tan Liuan and Co. in
employing the plaintiff. Upon this we will merely say that the conclusion stated by the trial court
in the next to the last paragraph of the decision with respect to the liability of this appellant in our
opinion in conformity with the law and facts.

The judgment appealed from will be modified by declaring that the defendants shall pay to the
plaintiff the sum of P360, instead of P300, as allowed by the lower court, and as thus modified
the judgment will be affirmed with interest from November 4, 1919, as provided in section 510 of
the Code of Civil Procedure, and with costs. So ordered.
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 70789 October 19, 1992

RUSTAN PULP & PAPER MILLS, INC., BIENVENIDO R. TANTOCO, SR., and ROMEO S.
VERGARA, petitioners,
vs.
THE INTERMEDIATE APPELLATE COURT and ILIGAN DIVERSIFIED PROJECTS, INC.,
ROMEO A. LLUCH and ROBERTO G. BORROMEO, respondents.

MELO, J.:

When petitioners informed herein private respondents to stop the delivery of pulp wood supplied by
the latter pursuant to a contract of sale between them, private respondents sued for breach of their
covenant. The court of origin dismissed the complaint but at the same time enjoined petitioners to
respect the contract of sale if circumstances warrant the full operation in a commercial scale of
petitioners' Baloi plant and to continue accepting and paying for deliveries of pulp wood products
from Romeo Lluch (page 14, Petition; page 20, Rollo). On appeal to the then Intermediate Appellate
Court, Presiding Justice Ramon G. Gaviola, Jr., who spoke for the First Civil Cases Division, with
Justices Caguioa, Quetulio-Losa, and Luciano, concurring, modified the judgment by directing herein
petitioners to pay private respondents, jointly and severally, the sum of P30,000.00 as moral
damages and P15,000.00 as attorney's fees (pages 48-58, Rollo).

In the petition at bar, it is argued that the Appellate Court erred;

A. . . . IN HOLDING PERSONALLY LIABLE UNDER THE CONTRACT OF SALE

PETITIONER TANTOCO WHO SIGNED MERELY AS REPRESENTATIVE OF
PETITIONER RUSTAN, AND PETITIONER VERGARA WHO DID NOT SIGN AT
ALL;

B. . . . IN HOLDING THAT PETITIONER RUSTAN'S DECISION TO SUSPEND

TAKING DELIVERY OF PULP WOOD FROM RESPONDENT LLUCH, WHICH WAS
PROMPTED BY SERIOUS AND UNFORESEEN DEFECTS IN THE MILL, WAS
NOT IN THE LAWFUL EXERCISE OF ITS RIGHTS UNDER THE CONTRACT OF
SALE; and

C. . . . IN AWARDING MORAL DAMAGES AND ATTORNEY'S FEES IN THE

ABSENCE OF FRAUD OR BAD FAITH.

(page 18, Petition; page 24, Rollo)

The generative facts of the controversy, as gathered from the pleadings, are fairly simple.
Sometime in 1966, petitioner Rustan established a pulp and paper mill in Baloi, Lano del Norte. On
March 20, 1967, respondent Lluch, who is a holder of a forest products license, transmitted a letter
to petitioner Rustan for the supply of raw materials by the former to the latter. In response thereto,
petitioner Rustan proposed, among other things, in the letter-reply:

2. That the contract to supply is not exclusive because Rustan shall have the option
to buy from other suppliers who are qualified and holder of appropriate government
authority or license to sell and dispose pulp wood.

These prefatory business proposals culminated in the execution, during the month of April, 1968, of
a contract of sale whereby Romeo A. Lluch agreed to sell, and Rustan Pulp and Paper Mill, Inc.
undertook to pay the price of P30.00 per cubic meter of pulp wood raw materials to be delivered at
the buyer's plant in Baloi, Lanao del Norte. Of pertinent significance to the issue at hand are the
following stipulations in the bilateral undertaking:

3. That BUYER shall have the option to buy from other SELLERS who are equally
qualified and holders of appropriate government authority or license to sell or
dispose, that BUYER shall not buy from any other seller whose pulp woods being
sold shall have been established to have emanated from the SELLER'S lumber
and/or firewood concession. . . .

And that SELLER has the priority to supply the pulp wood materials requirement of
the BUYER;

xxx xxx xxx

7. That the BUYER shall have the right to stop delivery of the said raw materials by
the seller covered by this contract when supply of the same shall become sufficient
until such time when need for said raw materials shall have become necessarily
provided, however, that the SELLER is given sufficient notice.

(pages 8-9, Petition; pages 14-15, Rollo)

In the installation of the plant facilities, the technical staff of Rustan Pulp and Paper Mills, Inc.
recommended the acceptance of deliveries from other suppliers of the pulp wood materials for which
the corresponding deliveries were made. But during the test run of the pulp mill, the machinery line
thereat had major defects while deliveries of the raw materials piled up, which prompted the
Japanese supplier of the machinery to recommend the stoppage of the deliveries. The suppliers
were informed to stop deliveries and the letter of similar advice sent by petitioners to private
respondents reads:
Iligan Diversified Projects, Inc.
Iligan City

Attention: Mr. Romeo A. Lluch

Dear Mr. Lluch:

This is to inform you that the supply of raw materials to us has become sufficient and
we will not be needing further delivery from you. As per the terms of our contract,
please stop delivery thirty (30) days from today.

V
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r
y
t
r
u
l
y
y
o
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s
,

RUSTAN
PULP AND
PAPER
MILLS, INC.

By:

D
R
.
R
O
M
E
O
S
.
V
E
 R
G
A
R
A
R
e
s
i
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e
n
t
M
a
n
a
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e
r

Private respondent Romeo Lluch sought to clarify the tenor of the letter as to whether stoppage of
delivery or termination of the contract of sale was intended, but the query was not answered by
petitioners. This alleged ambiguity notwithstanding, Lluch and the other suppliers resumed deliveries
after the series of talks between Romeo S. Vergara and Romeo Lluch.

On January 23, 1969, the complaint for contractual breach was filed which, as earlier noted, was
dismissed. In the process of discussing the merits of the appeal interposed therefrom, respondent
Court clarified the eleven errors assigned below by herein petitioners and it seems that petitioners
were quite satisfied with the Appellate Court's in seriatim response since petitioners trimmed down
their discourse before this Court to three basic matters, relative to the nature of liability, the propriety
of the stoppage, and the feasibility of awarding moral damages including attorney's fees.

Respondent Court found it ironic that petitioners had to exercise the prerogative regarding the
stoppage of deliveries via the letter addressed to Iligan Diversified Project, Inc. on September 30,
1968 because petitioners never really stopped accepting deliveries from private respondents until
December 23, 1968. Petitioner's paradoxial stance portrayed in this manner:

. . . We cannot accept the reasons given by appellees as to why they were stopping
deliveries of pulp wood materials. First, We find it preposterous for a business
company like the appellee to accumulate stockpiles of cut wood even after its letter
to appellants dated September 30, 1968 stopping the deliveries because the supply
of raw materials has become sufficient. The fact that appellees were buying and
accepting pulp wood materials from other sources other than the appellants even
after September 30, 1968 belies that they have more than sufficient supply of pulp
wood materials, or that they are unable to go into full commercial operation or that
their machineries are defective or even that the pulp wood materials coming from
appellants are sub-standard. Second, We likewise find the court a quo's finding that
"even with one predicament in which defendant Rustan found itself wherein
commercial operation was delayed, it accommodated all its suppliers of raw
materials, including plaintiff, Romeo Lluch, by allowing them to deliver all its
stockpiles of cut wood" (Decision, page 202, Record on Appeal) to be both illogical
and inconsistent. Illogical, because as appellee Rustan itself claimed "if the plant
 could not be operated on a commercial scale, it would then be illogical for defendant
Rustan to continue accepting deliveries of raw materials." Inconsistent because this
kind of "concern" or "accommodation" is not usual or consistent with ordinary
business practice considering that this would mean adequate losses to the company.
More so, if We consider that appellee is a new company and could not therefore
afford to absorb more losses than it already allegedly incurred by the consequent
defects in the machineries.

Clearly therefore, this is a breach of the contract entered into by and between
appellees and appellants which warrants the intervention of this Court.

xxx xxx xxx

. . . The letter of September 30, 1968, Exh. "D" shows that defendants were
terminating the contract of sale (Exh. "A"), and refusing any future or further delivery
— whether on the ground that they had sufficient supply of pulp wood materials or
that appellants cannot meet the standard of quality of pulp wood materials that
Rustan needs or that there were defects in appellees' machineries resulting in an
inability to continue full commercial operations.

Furthermore, there is evidence on record that appellees have been accepting

deliveries of pulp wood materials from other sources, i.e. Salem Usman, Fermin
Villanueva and Pacasum even after September 30, 1968.

Lastly, it would be unjust for the court a quo to rule that the contract of sale be
temporarily suspended until Rustan, et al., are ready to accept deliveries from
appellants. This would make the resumption of the contract purely dependent on the
will of one party — the appellees, and they could always claim, as they did in the
instant case, that they have more than sufficient supply of pulp wood when in fact
they have been accepting the same from other sources. Added to this, the court a
quo was imposing a new condition in the contract, one that was not agreed upon by
the parties.

(Pages B-10, Decision; Pages 55-57, Rollo)

The matter of Tantoco's and Vergara's joint and several liability as a result of the alleged breach of
the contract is dependent, first of all, on whether Rustan Pulp and Paper Mills may legally exercise
the right of stoppage should there be a glut of raw materials at its plant.

And insofar as the express discretion on the part of petitioners is concerned regarding the right of
stoppage, We feel that there is cogent basis for private respondent's apprehension on the illusory
resumption of deliveries inasmuch as the prerogative suggests a condition solely dependent upon
the will of petitioners. Petitioners can stop delivery of pulp wood from private respondents if the
supply at the plant is sufficient as ascertained by petitioners, subject to re-delivery when the need
arises as determined likewise by petitioners. This is Our simple understanding of the literal import of
paragraph 7 of the obligation in question. A purely potestative imposition of this character must be
obliterated from the face of the contract without affecting the rest of the stipulations considering that
the condition relates to the fulfillment of an already existing obligation and not to its inception (Civil
Code Annotated, by Padilla, 1987 Edition, Volume 4, Page 160). It is, of course, a truism in legal
jurisprudence that a condition which is both potestative (or facultative) and resolutory may be valid,
even though the saving clause is left to the will of the obligor like what this Court, through Justice
Street, said in Taylor vs. Uy Tieng Piao and Tan Liuan (43 Phil. 873; 879; cited in Commentaries and
Jurisprudence on the Civil Code, by Tolentino, Volume 4, 1991 edition, page 152). But the
conclusion drawn from the Taylor case, which allowed a condition for unilateral cancellation of the
contract when the machinery to be installed on the factory did not arrive in Manila, is certainly
inappropriate for application to the case at hand because the factual milieu in the legal tussle
dissected by Justice Street conveys that the proviso relates to the birth of the undertaking and not to
the fulfillment of an existing obligation.

In support of the second ground for allowance of the petition, petitioners are of the impression that
the letter dated September 30, 1968 sent to private respondents is well within the right of stoppage
guaranteed to them by paragraph 7 of the contract of sale which was construed by petitioners to be
a temporary suspension of deliveries. There is no doubt that the contract speaks loudly about
petitioners' prerogative but what diminishes the legal efficacy of such right is the condition attached
to it which, as aforesaid, is dependent exclusively on their will for which reason, We have no
alternative but to treat the controversial stipulation as inoperative (Article 1306, New Civil Code). It is
for this same reason that We are not inclined to follow the interpretation of petitioners that the
suspension of delivery was merely temporary since the nature of the suspension itself is again
conditioned upon petitioner's determination of the sufficiency of supplies at the plant.

Neither are We prepared to accept petitioners' exculpation grounded on frustration of the commercial
object under Article 1267 of the New Civil Code, because petitioners continued accepting deliveries
from the suppliers. This conduct will estop petitioners from claiming that the breakdown of the
machinery line was an extraordinary obstacle to their compliance to the prestation. It was indeed
incongruous for petitioners to have sent the letters calling for suspension and yet, they in effect
disregarded their own advice by accepting the deliveries from the suppliers. The demeanor of
petitioners along this line was sought to be justified as an act of generous accommodation, which
entailed greater loss to them and "was not motivated by the usual businessman's obsession with
profit" (Page 34, Petition; Page 40, Rollo). Altruism may be a noble gesture but petitioners' stance in
this respect hardly inspires belief for such an excuse is inconsistent with a normal business
enterprise which takes ordinary care of its concern in cutting down on expenses (Section 3, (d), Rule
131, Revised Rules of Court). Knowing fully well that they will encounter difficulty in producing output
because of the defective machinery line, petitioners opted to open the plant to greater loss, thus
compounding the costs by accepting additional supply to the stockpile. Verily, the petitioner's action
when they acknowledged that "if the plant could not be operated on a commercial scale, it would
then be illogical for defendant Rustan to continue accepting deliveries of raw materials." (Page 202,
Record on Appeal; Page 8, Decision; Page 55, Rollo).

Petitioners argue next that Tantoco and Vergara should not have been adjudged to pay moral
damages and attorney's fees because Tantoco merely represented the interest of Rustan Pulp and
Paper Mills, Inc. while Romeo S. Vergara was not privy to the contract of sale. On this score, We
have to agree with petitioners' citation of authority to the effect that the President and Manager of a
corporation who entered into and signed a contract in his official capacity, cannot be made liable
thereunder in his individual capacity in the absence of stipulation to that effect due to the personality
of the corporation being separate and distinct from the person composing it (Bangued Generale
Belge vs. Walter Bull and Co., Inc., 84 Phil. 164). And because of this precept, Vergara's supposed
non-participation in the contract of sale although he signed the letter dated September 30, 1968 is
completely immaterial. The two exceptions contemplated by Article 1897 of the New Civil Code
where agents are directly responsible are absent and wanting.WHEREFORE, the decision appealed
from is hereby MODIFIED in the sense that only petitioner Rustan Pulp and Paper Mills is ordered to
pay moral damages and attorney's fees as awarded by respondent Court.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 107207 November 23, 1995

VIRGILIO R. ROMERO, petitioner,

vs.
HON. COURT OF APPEALS and ENRIQUETA CHUA VDA. DE ONGSIONG, respondents.

VITUG, J.:

The parties pose this question: May the vendor demand the rescission of a contract for the sale
of a parcel of land for a cause traceable to his own failure to have the squatters on the subject
property evicted within the contractually-stipulated period?

Petitioner Virgilio R. Romero, a civil engineer, was engaged in the business of production,
manufacture and exportation of perlite filter aids, permalite insulation and processed perlite ore.
In 1988, petitioner and his foreign partners decided to put up a central warehouse in Metro
Manila on a land area of approximately 2,000 square meters. The project was made known to
several freelance real estate brokers.

A day or so after the announcement, Alfonso Flores and his wife, accompanied by a broker,
offered a parcel of land measuring 1,952 square meters. Located in Barangay San Dionisio,
Parañaque, Metro Manila, the lot was covered by TCT No. 361402 in the name of private
respondent Enriqueta Chua vda. de Ongsiong. Petitioner visited the property and, except for the
presence of squatters in the area, he found the place suitable for a central warehouse.

Later, the Flores spouses called on petitioner with a proposal that should he advance the
amount of P50,000.00 which could be used in taking up an ejectment case against the
squatters, private respondent would agree to sell the property for only P800.00 per square
meter. Petitioner expressed his concurrence. On 09 June 1988, a contract, denominated "Deed
of Conditional Sale," was executed between petitioner and private respondent. The simply-
drawn contract read:

DEED OF CONDITIONAL SALE

KNOW ALL MEN BY THESE PRESENTS:

This Contract, made and executed in the Municipality of Makati, Philippines this
9th day of June, 1988 by and between:
 ENRIQUETA CHUA VDA. DE ONGSIONG, of legal age, widow,
Filipino and residing at 105 Simoun St., Quezon City, Metro
Manila, hereinafter referred to as the VENDOR;

-and-

VIRGILIO R. ROMERO, married to Severina L. Lat, of Legal age,

Filipino, and residing at 110 San Miguel St., Plainview Subd.,
Mandaluyong Metro Manila, hereinafter referred to as the
VENDEE:

W I T N E S S E T H : That

WHEREAS, the VENDOR is the owner of One (1) parcel of land with a total area
of ONE THOUSAND NINE HUNDRED FIFTY TWO (1,952) SQUARE METERS,
more or less, located in Barrio San Dionisio, Municipality of Parañaque, Province
of Rizal, covered by TCT No. 361402 issued by the Registry of Deeds of Pasig
and more particularly described as follows:

xxx xxx xxx

WHEREAS, the VENDEE, for (sic) has offered to buy a parcel of land and the
VENDOR has accepted the offer, subject to the terms and conditions hereinafter
stipulated:

NOW, THEREFORE, for and in consideration of the sum of ONE MILLION FIVE
HUNDRED SIXTY ONE THOUSAND SIX HUNDRED PESOS (P1,561,600.00)
ONLY, Philippine Currency, payable by VENDEE to in to (sic) manner set forth,
the VENDOR agrees to sell to the VENDEE, their heirs, successors,
administrators, executors, assign, all her rights, titles and interest in and to the
property mentioned in the FIRST WHEREAS CLAUSE, subject to the following
terms and conditions:

1. That the sum of FIFTY THOUSAND PESOS (P50,000.00)

ONLY Philippine Currency, is to be paid upon signing and
execution of this instrument.

2. The balance of the purchase price in the amount of ONE

MILLION FIVE HUNDRED ELEVEN THOUSAND SIX HUNDRED
PESOS (P1,511,600.00) ONLY shall be paid 45 days after the
removal of all squatters from the above described property.

3. Upon full payment of the overall purchase price as aforesaid,

VENDOR without necessity of demand shall immediately sign,
execute, acknowledged (sic) and deliver the corresponding deed
of absolute sale in favor of the VENDEE free from all liens and
encumbrances and all Real Estate taxes are all paid and updated.

It is hereby agreed, covenanted and stipulated by and between the parties hereto
that if after 60 days from the date of the signing of this contract the VENDOR
 shall not be able to remove the squatters from the property being purchased, the
downpayment made by the buyer shall be returned/reimbursed by the VENDOR
to the VENDEE.

That in the event that the VENDEE shall not be able to pay the VENDOR the
balance of the purchase price of ONE MILLION FIVE HUNDRED ELEVEN
THOUSAND SIX HUNDRED PESOS (P1,511,600.00) ONLY after 45 days from
written notification to the VENDEE of the removal of the squatters from the
property being purchased, the FIFTY THOUSAND PESOS (P50,000.00)
previously paid as downpayment shall be forfeited in favor of the VENDOR.

Expenses for the registration such as registration fees, documentary stamp,

transfer fee, assurances and such other fees and expenses as may be
necessary to transfer the title to the name of the VENDEE shall be for the
account of the VENDEE while capital gains tax shall be paid by the VENDOR.

IN WITNESS WHEREOF, the parties hereunto signed those (sic) presents in the
City of Makati MM, Philippines on this 9th day of June, 1988.

(Sgd.) (Sgd.)

VIRGILIO R. ROMERO ENRIQUETA CHUA VDA.

DE ONGSIONG

Vendee Vendor

SIGNED IN THE PRESENCE OF:

(Sgd.) (Sgd.)

Rowena C. Ongsiong Jack M. Cruz1

Alfonso Flores, in behalf of private respondent, forthwith received and acknowledged a

check for P50,000.002from petitioner.3

Pursuant to the agreement, private respondent filed a complaint for ejectment (Civil Case No.
7579) against Melchor Musa and 29 other squatter families with the Metropolitan Trial Court of
Parañaque. A few months later, or on 21 February 1989, judgment was rendered ordering the
defendants to vacate the premises. The decision was handed down beyond the 60-day period
(expiring 09 August 1988) stipulated in the contract. The writ of execution of the judgment was
issued, still later, on 30 March 1989.

In a letter, dated 07 April 1989, private respondent sought to return the P50,000.00 she received
from petitioner since, she said, she could not "get rid of the squatters" on the lot. Atty. Sergio
A.F. Apostol, counsel for petitioner, in his reply of 17 April 1989, refused the tender and stated:.

Our client believes that with the exercise of reasonable diligence considering the
favorable decision rendered by the Court and the writ of execution issued
 pursuant thereto, it is now possible to eject the squatters from the premises of
the subject property, for which reason, he proposes that he shall take it upon
himself to eject the squatters, provided, that expenses which shall be incurred by
reason thereof shall be chargeable to the purchase price of the land.4

Meanwhile, the Presidential Commission for the Urban Poor ("PCUD"), through its Regional
Director for Luzon, Farley O. Viloria, asked the Metropolitan Trial Court of Parañaque for a
grace period of 45 days from 21 April 1989 within which to relocate and transfer the squatter
families. Acting favorably on the request, the court suspended the enforcement of the writ of
execution accordingly.

On 08 June 1989, Atty. Apostol reminded private respondent on the expiry of the 45-day grace
period and his client's willingness to "underwrite the expenses for the execution of the judgment
and ejectment of the occupants."5

In his letter of 19 June 1989, Atty. Joaquin Yuseco, Jr., counsel for private respondent, advised
Atty. Apostol that the Deed of Conditional Sale had been rendered null and void by virtue of his
client's failure to evict the squatters from the premises within the agreed 60-day period. He
added that private respondent had "decided to retain the property."6

On 23 June 1989, Atty. Apostol wrote back to explain:

The contract of sale between the parties was perfected from the very moment
that there was a meeting of the minds of the parties upon the subject lot and the
price in the amount of P1,561,600.00. Moreover, the contract had already been
partially fulfilled and executed upon receipt of the downpayment of your client.
Ms. Ongsiong is precluded from rejecting its binding effects relying upon her
inability to eject the squatters from the premises of subject property during the
agreed period. Suffice it to state that, the provision of the Deed of Conditional
Sale do not grant her the option or prerogative to rescind the contract and to
retain the property should she fail to comply with the obligation she has assumed
under the contract. In fact, a perusal of the terms and conditions of the contract
clearly shows that the right to rescind the contract and to demand the
return/reimbursement of the downpayment is granted to our client for his
protection.

Instead, however, of availing himself of the power to rescind the contract and
demand the return, reimbursement of the downpayment, our client had opted to
take it upon himself to eject the squatters from the premises. Precisely, we refer
you to our letters addressed to your client dated April 17, 1989 and June 8, 1989.

Moreover, it is basic under the law on contracts that the power to rescind is given
to the injured party. Undoubtedly, under the circumstances, our client is the
injured party.

Furthermore, your client has not complied with her obligation under their contract
in good faith. It is undeniable that Ms. Ongsiong deliberately refused to exert
efforts to eject the squatters from the premises of the subject property and her
decision to retain the property was brought about by the sudden increase in the
value of realties in the surrounding areas.
 Please consider this letter as a tender of payment to your client and a demand to
execute the absolute Deed of Sale.7

A few days later (or on 27 June 1989), private respondent, prompted by petitioner's continued
refusal to accept the return of the P50,000.00 advance payment, filed with the Regional Trial
Court of Makati, Branch 133, Civil Case No. 89-4394 for rescission of the deed of "conditional"
sale, plus damages, and for the consignation of P50,000.00 cash.

Meanwhile, on 25 August 1989, the Metropolitan Trial Court issued an alias writ of execution in
Civil Case No. 7579 on motion of private respondent but the squatters apparently still stayed on.

Back to Civil Case No. 89-4394, on 26 June 1990, the Regional Trial Court of Makati8 rendered
decision holding that private respondent had no right to rescind the contract since it was she
who "violated her obligation to eject the squatters from the subject property" and that petitioner,
being the injured party, was the party who could, under Article 1191 of the Civil Code, rescind
the agreement. The court ruled that the provisions in the contract relating to (a) the
return/reimbursement of the P50,000.00 if the vendor were to fail in her obligation to free the
property from squatters within the stipulated period or (b), upon the other hand, the sum's
forfeiture by the vendor if the vendee were to fail in paying the agreed purchase price,
amounted to "penalty clauses". The court added:

This Court is not convinced of the ground relied upon by the plaintiff in seeking
the rescission, namely: (1) he (sic) is afraid of the squatters; and (2) she has
spent so much to eject them from the premises (p. 6, tsn, ses. Jan. 3, 1990).
Militating against her profession of good faith is plaintiffs conduct which is not in
accord with the rules of fair play and justice. Notably, she caused the issuance of
an alias writ of execution on August 25, 1989 (Exh. 6) in the ejectment suit which
was almost two months after she filed the complaint before this Court on June
27, 1989. If she were really afraid of the squatters, then she should not have
pursued the issuance of an alias writ of execution. Besides, she did not even
report to the police the alleged phone threats from the squatters. To the mind of
the Court, the so-called squatter factor is simply factuitous (sic).9

The lower court, accordingly, dismissed the complaint and ordered, instead, private
respondent to eject or cause the ejectment of the squatters from the property and to
execute the absolute deed of conveyance upon payment of the full purchase price by
petitioner.

Private respondent appealed to the Court of Appeals. On 29 May 1992, the appellate court
rendered its decision. 10It opined that the contract entered into by the parties was subject to a
resolutory condition, i.e., the ejectment of the squatters from the land, the non-occurrence of
which resulted in the failure of the object of the contract; that private respondent substantially
complied with her obligation to evict the squatters; that it was petitioner who was not ready to
pay the purchase price and fulfill his part of the contract, and that the provision requiring a
mandatory return/reimbursement of the P50,000.00 in case private respondent would fail to
eject the squatters within the 60-day period was not a penal clause. Thus, it concluded.

WHEREFORE, the decision appealed from is REVERSED and SET ASIDE, and
a new one entered declaring the contract of conditional sale dated June 9, 1988
cancelled and ordering the defendant-appellee to accept the return of the
 downpayment in the amount of P50,000.00 which was deposited in the court
below. No pronouncement as to costs.11

Failing to obtain a reconsideration, petitioner filed this petition for review on certiorari raising
issues that, in fine, center on the nature of the contract adverted to and the P50,000.00
remittance made by petitioner.

A perfected contract of sale may either be absolute or conditional12 depending on whether the
agreement is devoid of, or subject to, any condition imposed on the passing of title of the thing
to be conveyed or on the obligation of a party thereto. When ownership is retained until the
fulfillment of a positive condition the breach of the condition will simply prevent the duty to
convey title from acquiring an obligatory force. If the condition is imposed on an obligationof a
party which is not complied with, the other party may either refuse to proceed or waive said
condition (Art. 1545, Civil Code). Where, of course, the condition is imposed upon
the perfection of the contract itself, the failure of such condition would prevent the juridical
relation itself from coming into existence.13

In determining the real character of the contract, the title given to it by the parties is not as much
significant as its substance. For example, a deed of sale, although denominated as a deed of
conditional sale, may be treated as absolute in nature, if title to the property sold is not reserved
in the vendor or if the vendor is not granted the right to unilaterally rescind the contract
predicated
on the fulfillment or non-fulfillment, as the case may be, of the prescribed condition.14

The term "condition" in the context of a perfected contract of sale pertains, in reality, to the
compliance by one party of an undertaking the fulfillment of which would beckon, in turn, the
demandability of the reciprocal prestation of the other party. The reciprocal obligations referred
to would normally be, in the case of vendee, the payment of the agreed purchase price and, in
the case of the vendor, the fulfillment of certain express warranties (which, in the case at bench
is the timely eviction of the squatters on the property).

It would be futile to challenge the agreement here in question as not being a duly perfected
contract. A sale is at once perfected when a person (the seller) obligates himself, for a price
certain, to deliver and to transfer ownership of a specified thing or right to another (the buyer)
over which the latter agrees.15

The object of the sale, in the case before us, was specifically identified to be a 1,952-square
meter lot in San Dionisio, Parañaque, Rizal, covered by Transfer Certificate of Title No. 361402
of the Registry of Deeds for Pasig and therein technically described. The purchase price was
fixed at P1,561,600.00, of which P50,000.00 was to be paid upon the execution of the document
of sale and the balance of P1,511,600.00 payable "45 days after the removal of all squatters
from the above described property."

From the moment the contract is perfected, the parties are bound not only to the fulfillment of
what has been expressly stipulated but also to all the consequences which, according to their
nature, may be in keeping with good faith, usage and law. Under the agreement, private
respondent is obligated to evict the squatters on the property. The ejectment of the squatters is
a condition the operative act of which sets into motion the period of compliance by petitioner of
his own obligation, i.e., to pay the balance of the purchase price. Private respondent's failure "to
remove the squatters from the property" within the stipulated period gives petitioner the right to
either refuse to proceed with the agreement or waive that condition in consonance with Article
1545 of the Civil Code.16 This option clearly belongs to petitioner and not to private respondent.

We share the opinion of the appellate court that the undertaking required of private respondent
does not constitute a "potestative condition dependent solely on his will" that might, otherwise,
be void in accordance with Article 1182 of the Civil Code17 but a "mixed" condition "dependent
not on the will of the vendor alone but also of third persons like the squatters and government
agencies and personnel concerned."18 We must hasten to add, however, that where the so-
called "potestative condition" is imposed not on the birth of the obligation but on its fulfillment,
only the obligation is avoided, leaving unaffected the obligation itself.19

In contracts of sale particularly, Article 1545 of the Civil Code, aforementioned, allows the
obligee to choose between proceeding with the agreement or waiving the performance of the
condition. It is this provision which is the pertinent rule in the case at bench. Here, evidently,
petitioner has waived the performance of the condition imposed on private respondent to free
the property from squatters.20

In any case, private respondent's action for rescission is not warranted. She is not the injured
party.21 The right of resolution of a party to an obligation under Article 1191 of the Civil Code is
predicated on a breach of faith by the other party that violates the reciprocity between them.22 It
is private respondent who has failed in her obligation under the contract. Petitioner did not
breach the agreement. He has agreed, in fact, to shoulder the expenses of the execution of the
judgment in the ejectment case and to make arrangements with the sheriff to effect such
execution. In his letter of 23 June 1989, counsel for petitioner has tendered payment and
demanded forthwith the execution of the deed of absolute sale. Parenthetically, this offer to pay,
having been made prior to the demand for rescission, assuming for the sake of argument that
such a demand is proper under Article 159223 of the Civil Code, would likewise suffice to defeat
private respondent's prerogative to rescind thereunder.

There is no need to still belabor the question of whether the P50,000.00 advance payment is
reimbursable to petitioner or forfeitable by private respondent, since, on the basis of our
foregoing conclusions, the matter has ceased to be an issue. Suffice it to say that petitioner
having opted to proceed with the sale, neither may petitioner demand its reimbursement from
private respondent nor may private respondent subject it to forfeiture.

WHEREFORE, the questioned decision of the Court of Appeals is hereby REVERSED AND
SET ASIDE, and another is entered ordering petitioner to pay private respondent the balance of
the purchase price and the latter to execute the deed of absolute sale in favor of petitioner. No
costs.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 77425 June 19, 1991

THE ROMAN CATHOLIC ARCHBISHOP OF MANILA, THE ROMAN CATHOLIC BISHOP OF

IMUS, and the SPOUSES FLORENCIO IGNAO and SOLEDAD C. IGNAO, petitioners,
vs.
HON. COURT OF APPEALS, THE ESTATE OF DECEASED SPOUSES EUSEBIO DE
CASTRO and MARTINA RIETA, represented by MARINA RIETA GRANADOS and
THERESA RIETA TOLENTINO, respondents.

G.R. No. 77450 June 19, 1991

THE ROMAN CATHOLIC ARCHBISHOP OF MANILA, THE ROMAN CATHOLIC BISHOP OF

IMUS, and the SPOUSES FLORENCIO IGNAO and SOLEDAD C. IGNAO, petitioners,
vs.
HON. COURT OF APPEALS, THE ESTATE OF DECEASED SPOUSES EUSEBIO DE
CASTRO and MARTINA RIETA, represented by MARINA RIETA GRANADOS and
THERESA RIETA TOLENTINO, respondents.

Severino C. Dominguez for petitioner Roman Catholic Bishop of Imus, Cavite.

Dolorfino and Dominguez Law Offices for Sps. Ignao.
Joselito R. Enriquez for private respondents.

REGALADO, J.:

These two petitions for review on certiorari1 seek to overturn the decision of the Court of
Appeals in CA-G.R. CV No. 054562 which reversed and set aside the order of the Regional Trial
Court of Imus, Cavite dismissing Civil Case No. 095-84, as well as the order of said respondent
court denying petitioner's motions for the reconsideration of its aforesaid decision.

On November 29, 1984, private respondents as plaintiffs, filed a complaint for nullification of
deed of donation, rescission of contract and reconveyance of real property with damages
against petitioners Florencio and Soledad C. Ignao and the Roman Catholic Bishop of Imus,
Cavite, together with the Roman Catholic Archbishop of Manila, before the Regional Trial Court,
Branch XX, Imus, Cavite and which was docketed as Civil Case No. 095-84 therein.3

In their complaint, private respondents alleged that on August 23, 1930, the spouses Eusebio
de Castro and Martina Rieta, now both deceased, executed a deed of donation in favor of
therein defendant Roman Catholic Archbishop of Manila covering a parcel of land (Lot No. 626,
Cadastral Survey of Kawit), located at Kawit, Cavite, containing an area of 964 square meters,
more or less. The deed of donation allegedly provides that the donee shall not dispose or sell
the property within a period of one hundred (100) years from the execution of the deed of
donation, otherwise a violation of such condition would render ipso facto null and void the deed
of donation and the property would revert to the estate of the donors.

It is further alleged that on or about June 30, 1980, and while still within the prohibitive period to
dispose of the property, petitioner Roman Catholic Bishop of Imus, in whose administration all
properties within the province of Cavite owned by the Archdiocese of Manila was allegedly
transferred on April 26, 1962, executed a deed of absolute sale of the property subject of the
donation in favor of petitioners Florencio and Soledad C. Ignao in consideration of the sum of
P114,000. 00. As a consequence of the sale, Transfer Certificate of Title No. 115990 was
issued by the Register of Deeds of Cavite on November 15, 1980 in the name of said petitioner
spouses.

What transpired thereafter is narrated by respondent court in its assailed decision.4

On December 17, 1984, petitioners Florencio Ignao and Soledad C. Ignao filed a motion to
dismiss based on the grounds that (1) herein private respondents, as plaintiffs therein, have no
legal capacity to sue; and (2) the complaint states no cause of action.

On December 19, 1984, petitioner Roman Catholic Bishop of Imus also filed a motion to dismiss
on three (3) grounds, the first two (2) grounds of which were identical to that of the motion to
dismiss filed by the Ignao spouses, and the third ground being that the cause of action has
prescribed.

On January 9, 1985, the Roman Catholic Archbishop of Manila likewise filed a motion to dismiss
on the ground that he is not a real party in interest and, therefore, the complaint does not state a
cause of action against him.

After private respondents had filed their oppositions to the said motions to dismiss and the
petitioners had countered with their respective replies, with rejoinders thereto by private
respondents, the trial court issued an order dated January 31, 1985, dismissing the complaint
on the ground that the cause of action has prescribed.5

Private respondents thereafter appealed to the Court of Appeals raising the issues on (a)
whether or not the action for rescission of contracts (deed of donation and deed of sale) has
prescribed; and (b) whether or not the dismissal of the action for rescission of contracts (deed of
donation and deed of sale) on the ground of prescription carries with it the dismissal of the main
action for reconveyance of real property.6

On December 23, 1986, respondent Court of Appeals, holding that the action has not yet
prescibed, rendered a decision in favor of private respondents, with the following dispositive
portion:

WHEREFORE, the Order of January 31, 1985 dismissing appellants' complaint is SET
ASIDE and Civil Case No. 095-84 is hereby ordered REINSTATED and REMANDED to
the lower court for further proceedings. No Costs.7

Petitioners Ignao and the Roman Catholic Bishop of Imus then filed their separate motions for
reconsideration which were denied by respondent Court of Appeals in its resolution dated
February 6, 1987,8 hence, the filing of these appeals by certiorari.
It is the contention of petitioners that the cause of action of herein private respondents has
already prescribed, invoking Article 764 of the Civil Code which provides that "(t)he donation
shall be revoked at the instance of the donor, when the donee fails to comply with any of the
conditions which the former imposed upon the latter," and that "(t)his action shall prescribe after
four years from the non-compliance with the condition, may be transmitted to the heirs of the
donor, and may be exercised against the donee's heirs.

We do not agree.

Although it is true that under Article 764 of the Civil Code an action for the revocation of a
donation must be brought within four (4) years from the non-compliance of the conditions of the
donation, the same is not applicable in the case at bar. The deed of donation involved herein
expressly provides for automatic reversion of the property donated in case of violation of the
condition therein, hence a judicial declaration revoking the same is not necessary, As aptly
stated by the Court of Appeals:

By the very express provision in the deed of donation itself that the violation of the
condition thereof would render ipso facto null and void the deed of donation, WE are of
the opinion that there would be no legal necessity anymore to have the donation
judicially declared null and void for the reason that the very deed of donation itself
declares it so. For where (sic) it otherwise and that the donors and the donee
contemplated a court action during the execution of the deed of donation to have the
donation judicially rescinded or declared null and void should the condition be violated,
then the phrase reading "would render ipso facto null and void"would not appear in the
deed of donation.9

In support of its aforesaid position, respondent court relied on the rule that a judicial action for
rescission of a contract is not necessary where the contract provides that it may be revoked and
cancelled for violation of any of its terms and conditions.10 It called attention to the holding that
there is nothing in the law that prohibits the parties from entering into an agreement that a
violation of the terms of the contract would cause its cancellation even without court
intervention, and that it is not always necessary for the injured party to resort to court for
rescission of the contract.11 It reiterated the doctrine that a judicial action is proper only when
there is absence of a special provision granting the power of cancellation.12

It is true that the aforesaid rules were applied to the contracts involved therein, but we see no
reason why the same should not apply to the donation in the present case. Article 732 of the
Civil Code provides that donations inter vivosshall be governed by the general provisions on
contracts and obligations in all that is not determined in Title III, Book III on donations. Now, said
Title III does not have an explicit provision on the matter of a donation with a resolutory
condition and which is subject to an express provision that the same shall be considered ipso
facto revoked upon the breach of said resolutory condition imposed in the deed therefor, as is
the case of the deed presently in question. The suppletory application of the foregoing doctrinal
rulings to the present controversy is consequently justified.

The validity of such a stipulation in the deed of donation providing for the automatic reversion of
the donated property to the donor upon non-compliance of the condition was upheld in the
recent case of De Luna, et al. vs. Abrigo, et al.13 It was held therein that said stipulation is in the
nature of an agreement granting a party the right to rescind a contract unilaterally in case of
breach, without need of going to court, and that, upon the happening of the resolutory condition
or non-compliance with the conditions of the contract, the donation is automatically revoked
without need of a judicial declaration to that effect. While what was the subject of that case was
an onerous donation which, under Article 733 of the Civil Code is governed by the rules on
contracts, since the donation in the case at bar is also subject to the same rules because of its
provision on automatic revocation upon the violation of a resolutory condition, from parity of
reasons said pronouncements in De Luna pertinently apply.

The rationale for the foregoing is that in contracts providing for automatic revocation, judicial
intervention is necessary not for purposes of obtaining a judicial declaration rescinding a
contract already deemed rescinded by virtue of an agreement providing for rescission even
without judicial intervention, but in order to determine whether or not the rescission was
proper.14

When a deed of donation, as in this case, expressly provides for automatic revocation and
reversion of the property donated, the rules on contract and the general rules on prescription
should apply, and not Article 764 of the Civil Code. Since Article 1306 of said Code authorizes
the parties to a contract to establish such stipulations, clauses, terms and conditions not
contrary to law, morals, good customs, public order or public policy, we are of the opinion that,
at the very least, that stipulation of the parties providing for automatic revocation of the deed of
donation, without prior judicial action for that purpose, is valid subject to the determination of the
propriety of the rescission sought. Where such propriety is sustained, the decision of the court
will be merely declaratory of the revocation, but it is not in itself the revocatory act.

On the foregoing ratiocinations, the Court of Appeals committed no error in holding that the
cause of action of herein private respondents has not yet prescribed since an action to enforce
a written contract prescribes in ten (10) years.15 It is our view that Article 764 was intended to
provide a judicial remedy in case of non-fulfillment or contravention of conditions specified in the
deed of donation if and when the parties have not agreed on the automatic revocation of such
donation upon the occurrence of the contingency contemplated therein. That is not the situation
in the case at bar.

Nonetheless, we find that although the action filed by private respondents may not be dismissed
by reason of prescription, the same should be dismissed on the ground that private respondents
have no cause of action against petitioners.

The cause of action of private respondents is based on the alleged breach by petitioners of the
resolutory condition in the deed of donation that the property donated should not be sold within
a period of one hundred (100) years from the date of execution of the deed of donation. Said
condition, in our opinion, constitutes an undue restriction on the rights arising from ownership of
petitioners and is, therefore, contrary to public policy.

Donation, as a mode of acquiring ownership, results in an effective transfer of title over the
property from the donor to the donee. Once a donation is accepted, the donee becomes the
absolute owner of the property donated. Although the donor may impose certain conditions in
the deed of donation, the same must not be contrary to law, morals, good customs, public order
and public policy. The condition imposed in the deed of donation in the case before us
constitutes a patently unreasonable and undue restriction on the right of the donee to dispose of
the property donated, which right is an indispensable attribute of ownership. Such a prohibition
against alienation, in order to be valid, must not be perpetual or for an unreasonable period of
time.
Certain provisions of the Civil Code illustrative of the aforesaid policy may be considered
applicable by analogy.1âwphi1Under the third paragraph of Article 494, a donor or testator may
prohibit partition for a period which shall not exceed twenty (20) years. Article 870, on its part,
declares that the dispositions of the testator declaring all or part of the estate inalienable for
more than twenty (20) years are void.

It is significant that the provisions therein regarding a testator also necessarily involve, in the
main, the devolution of property by gratuitous title hence, as is generally the case of donations,
being an act of liberality, the imposition of an unreasonable period of prohibition to alienate the
property should be deemed anathema to the basic and actual intent of either the donor or
testator. For that reason, the regulatory arm of the law is or must be interposed to prevent an
unreasonable departure from the normative policy expressed in the aforesaid Articles 494 and
870 of the Code.

In the case at bar, we hold that the prohibition in the deed of donation against the alienation of
the property for an entire century, being an unreasonable emasculation and denial of an integral
attribute of ownership, should be declared as an illegal or impossible condition within the
contemplation of Article 727 of the Civil Code. Consequently, as specifically stated in said
statutory provision, such condition shall be considered as not imposed. No reliance may
accordingly be placed on said prohibitory paragraph in the deed of donation. The net result is
that, absent said proscription, the deed of sale supposedly constitutive of the cause of action for
the nullification of the deed of donation is not in truth violative of the latter hence, for lack of
cause of action, the case for private respondents must fail.

It may be argued that the validity of such prohibitory provision in the deed of donation was not
specifically put in issue in the pleadings of the parties. That may be true, but such oversight or
inaction does not prevent this Court from passing upon and resolving the same.

It will readily be noted that the provision in the deed of donation against alienation of the land for
one hundred (100) years was the very basis for the action to nullify the deed of d donation. At
the same time, it was likewise the controverted fundament of the motion to dismiss the case a
quo, which motion was sustained by the trial court and set aside by respondent court, both on
the issue of prescription. That ruling of respondent court interpreting said provision was
assigned as an error in the present petition. While the issue of the validity of the same provision
was not squarely raised, it is ineluctably related to petitioner's aforesaid assignment of error
since both issues are grounded on and refer to the very same provision.

This Court is clothed with ample authority to review matters, even if they are not assigned as
errors on appeal, if it finds that their consideration is necessary in arriving at a just decision of
the case:16 Thus, we have held that an unassigned error closely related to an error properly
assigned,17 or upon which the determination of the question properly assigned is dependent, will
be considered by the appellate court notwithstanding the failure to assign it as error.18

Additionally, we have laid down the rule that the remand of the case to the lower court for further
reception of evidence is not necessary where the Court is in a position to resolve the dispute
based on the records before it. On many occasions, the Court, in the public interest and for the
expeditious administration of justice, has resolved actions on the merits instead of remanding
them to the trial court for further proceedings, such as where the ends of justice, would not be
subserved by the remand of the case.19 The aforestated considerations obtain in and apply to
the present case with respect to the matter of the validity of the resolutory condition in question.
WHEREFORE, the judgment of respondent court is SET ASIDE and another judgment is
hereby rendered DISMISSING Civil Case No. 095-84 of the Regional Trial Court, Branch XX,
Imus, Cavite.

SO ORDERED.