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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
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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. (“It is undisputed fact that on February 25, 1932,
the defendant-appellant sold 4,000 palay cavans to the plaintiff at the price of P2.10 the
dig, of which said plaintiff only received 2,583 cavans; and also received 4,000 empty
bags for its packaging. It is provided that of said 4,000 empty bags were only delivered,
2,583 remaining in the hands of the defendant, and whose value is that of P0.24 each.

Filed the lawsuit against the defendants Antonio Vazquez and Fernando Busuego for
the payment of the amount of P4,702.70, with their legal interests from March 1, 1932
until full payment and costs, the Court of First Instance of Manila the matter
condemning Antonio Vazquez to pay the plaintiff the amount of P3,175.20, plus the
amount of P377.50, with his legal interests, absolving the defendant Fernando Busuego
of the lawsuit and the plaintiff of the defendants' reconsideration, without special
pronouncement as to the coasts. Of this decision, the defendant Antonio Vazquez
appealed, pointing out as the main error that he had been personally convicted, and not
the corporation represented.”)
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. (“According to the preponderance of the evidence, the sale
made by Antonio Vazquez in favor of Francisco de Borja of the 4,000 cavans of palay
was in his capacity as interim President and Manager of the Natividad-Vazquez Sabani
Development Co., Inc. corporation. Exh. 1, which is the carbon copy of the receipt
granted by the defendant Vazquez, and whose original was lost by the plaintiff,
according to him. This also appears in the books of the aforementioned corporation,
since the entry of the P8,400, price of the palay, as well as its delivery to the
government in payment of the rents of the Sabani Hacienda has been settled in them.
Francisco de Borja also admitted the lawyer Mr. Jacinto Tomacruz, later president of
the successor corporation in the lease of the Sabani Estate, when he requested his
good offices to collect the price of the undelivered palay. Likewise, I declare the one
who delivered part of the palay to Borja, Felipe Veneracion, whose testimony has not
been refuted. And so it follows from the same lawsuit, when Fernando Busuego,
treasurer of the Natividad-Vazquez Sabani Development Co., Inc. was included in it.”)
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
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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. (“This
being so, the main responsible should be the Natividad-Vazquez Sabani Development
Co., Inc., which became insolvent and ceased to exist. The sentencing judge, however,
declared the respondent Vazquez responsible for paying the amount claimed for his
negligence by selling the aforementioned 4,000 palay cavans without first finding out
whether or not such amount existed in the corporation's warehouses.”)
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. (“It results from Exh. 8 that after the sale of the 4,000
pallet cavans to Francisco de Borja, the same defendant sold 1,500 cavans to Kwong
Ah Phoy at the price of P2.00 the dig, and we say 'after' because this last sale appears
settled after the first. According to this, the appellant not only acts negligently, but
intervenes fault on his part, so according to arts. 1102, 1103 and 1902 of the Civil
Code, he must be subsidiaryly responsible for paying the object amount of the claim.”)
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. (“In merits of all the above, the decision appealed is
confirmed with the modification that the appellant must pay the appellant the sum of
P2,295.70 as a value of 1,417 palay cavans that I cease to deliver to the plaintiff, plus
the sum of P339. 08 as the amount of the 1,417 empty bags, which I cease to return, at
the rate of P0.24 the bag, total P3,314.78, with its legal interests since the filing of the
claim and the costs of both instances.”)
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. (“Considering the motion of reconsideration of

our decision dated October 13, 1942, and alleging in it that when the appellant sold
1,500 palay cavans to Ah Phoy, the corporation still had enough of that grain, and not
being said extreme sufficiently discussed and proven, and the outcome of the matter
may vary, we cease our aforementioned decision, and order the return of the case to
the Court of origin to receive evidence to that effect and then issue the corresponding
decision.”)
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
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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.
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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
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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
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6
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
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7
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.
Arellano, C.J., Torres, Araullo, Malcolm and Avanceña, JJ., concur.
THIRD DIVISION
G.R. No. 141258 April 9, 2003
TOMASA SARMIENTO, petitioner,
vs.
SPS. LUIS & ROSE SUN-CABRIDO and MARIA LOURDES SUN, respondents.
CORONA, J.:
This appeal by certiorari stems from the Decision1 of respondent Court of 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.2 Accordingly, petitioner sent a certain Tita Payag with the pair of earrings to
Dingding’s Jewelry Shop, owned and managed by respondent spouses Luis and Rose
Cabrido,3 which accepted the job order for P400.4
Petitioner provided 12 grams of gold to be used in crafting the pair of ring settings.5
After 3 days, Tita Payag delivered to the jewelry shop one of Dra. Lao’s diamond
earrings which was earlier appraised as worth .33 carat and almost perfect in cut and

clarity.6 Respondent Ma. Lourdes (Marilou) Sun went 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 Dingding’s 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.9
However, it was possible that Payag may have availed 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 Dingding’s 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 Dingding’s Jewelry
Shop.12
Attempts to settle the controversy before the barangay lupon proved futile.13
Consequently, petitioner filed a complaint for damages on June 28, 1994 with the
Municipal Trial Court in Cities (MTCC) of Tagbilaran City docketed as Civil Case No.
2339 which rendered a decision14 in favor of the 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 attorney’s fees; Two Thousand Pesos (P2,000.00) as
litigation expenses, with legal interest of 6% per annum from the date of this decision
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8
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.15 Finding no reversible error, the 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 COURT’S 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.17 Consequently, the crux of the instant
controversy is the scope of the 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 parties20 support the
version of the petitioner. Thus, when Tita Payag asked Marilou of Dingding’s 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 petitioner’s 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 Dingding’s Jewelry Shop, through Marilou.
Marilou’s subsequent actuations were even more revealing as regards the scope of
obligation assumed by the jewelry shop. After the new settings were completed in 3
days, she called up the petitioner to bring the diamond earrings to be reset.21 Having
initially examined one of them, Marilou went on to dismount the diamond from its
original setting. Unsuccessful, she then delegated the task to their goldsmith, Zenon
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9
Santos. Having acted the way she did, Marilou cannot now deny the shop’s obligation
to reset the pair of earrings.
Obligations arising from contracts have the force of law between the contracting
parties.22 Corollarily, 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.23 The fault or negligence 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.25 However, Santos employed a pair of 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 Dingding’s 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 Dingding’s Jewelry Shop as goldsmith
for about 6 months accepting job orders through referrals from private respondents.27
On the other hand, Payag stated that she had transacted with Dingding’s Jewelry Shop
on at least 10 previews occasions, always through Marilou.28 The preponderance of
evidence supports the view that Marilou and Zenon Santos were employed at
Dingding’s 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
Dingding’s 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.31 Moral damages may be awarded in a breach of contract only 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.32 Santos was a
goldsmith for more than 40 years.33 Given his long 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 respondent’s 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 attorney’s 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.
Puno, (Chairman), Panganiban, Sandoval-Gutierrez, and Carpio-Morales, JJ., concur.
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
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because petitioner’s niece, Meriam Menor, was respondent company’s ticketing
manager.
Pursuant to said contract, Menor went to her aunt’s residence on June 12, 1991 – a
Wednesday – to deliver petitioner’s 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
petitioner’s 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 petitioner’s 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 respondent’s 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 petitioner’s 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 attorney’s fees;
3. Dismissing the defendant’s 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
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OBLIGATIONS & CONTRACTS
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11
rebut petitioner’s 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 Menor’s
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 attorney’s 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, petitioner’s 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
employee’s gross negligence.
Petitioner’s 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. Respondent’s services as a travel agency include
procuring tickets and facilitating travel permits or visas as well as booking customers for
tours.
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12
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. Respondent’s 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 petitioner’s contractual relation with respondent is the latter’s service of
arranging and facilitating petitioner’s 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. Petitioner’s 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 latter’s 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. Petitioner’s testimony was accepted as
indubitable evidence of Menor’s 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 petitioner’s
uncontradicted testimony to be sufficient proof of her claim.

On the other hand, respondent has consistently denied that Menor was negligent and
maintains that petitioner’s 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.
Respondent’s failure to present Menor as witness to rebut petitioner’s 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 Menor’s testimony, the presumption under Rule 131,
Section 3(e) would still not apply. The opportunity and possibility for obtaining Menor’s
testimony belonged to both parties, considering that Menor was not just respondent’s
employee, but also petitioner’s 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 Menor’s negligence
concurred with the negligence of petitioner and resultantly caused damage to the latter.
Menor’s negligence was not sufficiently proved, considering that the only evidence
presented on this score was petitioner’s 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 petitioner’s 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 ticket19 issued to petitioner clearly reflected the departure date and
time, contrary to petitioner’s 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 petitioner’s hotel
13
OBLIGATIONS & CONTRACTS
AGHG
13
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 1âwphi1
The lower court declared that respondent’s 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.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Vitug, Carpio, and Azcuna, JJ., concur.
 14

FIRST DIVISION individual verbal leases were on a month-to month basis at the following rates: Ederlina
G.R. No. 77648 August 7, 1989 Navalta at the rate of P80.50; Ong Teng at the rate of P96.10; Jose Liwanag at the rate
CETUS DEVELOPMENT, INC., petitioner, of P40.35; Leandro Canlas at the rate of P80.55; Victoria Sudario at the rate of P50.45
vs. and Flora Nagbuya at the rate of P80.55. The payments of the rentals were paid by the
COURT OF APPEALS and ONG TENG, respondents. lessees to a collector of the Susana Realty who went to the premises monthly.

G.R. No. 77647 August 7, 1989 Sometime in March, 1984, the Susana Realty sold the leased premises to the
CETUS DEVELOPMENT, INC., petitioner, petitioner, Cetus Development, Inc., a corporation duly organized and existing under
vs. the laws of the Philippines. From April to June, 1984, the private respondents continued
COURT OF APPEALS and EDERLINA NAVALTA, respondents. 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
G.R. No. 77649 August 7, 1989 monthly individual rentals as no collector came.
CETUS DEVELOPMENT, INC., petitioner,
vs. On October 9, 1984, the petitioner sent a letter to each of the private respondents
COURT OF APPEALS and JOSE LIWANAG, 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
G.R. No. 77650 August 7, 1989 thereof. Immediately upon the receipt of the said demand letters on October 10, 1984,
CETUS DEVELOPMENT, INC., petitioner, the private respondents paid their respective arrearages in rent which were accepted by
vs. the petitioner subject to the unilateral condition that the acceptance was without
COURT OF APPEALS and LEANDRO CANLAS, respondents. prejudice to the filing of an ejectment suit. Subsequent monthly rental payments were
likewise accepted by the petitioner under the same condition.
G.R. No. 77651 August 7, 1989
CETUS DEVELOPMENT, INC., petitioner, For failure of the private respondents to vacate the premises as demanded in the letter
vs. dated October 9, 1984, the petitioner filed with the Metropolitan Trial Court of Manila
COURT OF APPEALS and VICTORIA SUDARIO respondents. 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
G.R. No.77652 August 7, 1989 Nagbuya; (4) 105975-CV, against Leandro Canlas; (5) 105976-CV, against Victoria
CETUS DEVELOPMENT, INC., petitioner, Sudario and (6) 105977-CV, against Ong Teng.
vs.
COURT OF APPEALS and FLORA NAGBUYA respondents. In their respective answers, the six (6) private respondents interposed a common
MEDIALDEA, J.: defense. They claimed that since the occupancy of the premises they paid their monthly
This is a petition for review on certiorari of the decision dated January 30, 1987 of the rental regularly through a collector of the lessor; that their non-payment of the rentals
Court of Appeals in CA-GR Nos. SP-07945-50 entitled, "Cetus Development, Inc., for the months of July, August and September, 1984, was due to the failure of the
Petitioner vs. Hon. Conrado T. Limcaoco, Presiding Judge, Regional Trial Court of petitioner (as the new owner) to send its collector; that they were at a loss as to where
Manila, Branch Ederlina Navalta, et. al., respondents. 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
The following facts appear in the records: 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
The private respondents, Ederlina Navalta, Ong Teng, Jose Liwanag, Leandro Canlas, October 9, 1984.
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
14
OBLIGATIONS & CONTRACTS
AGHG

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).lâwphî1.ñèt In its decision dated November 19, 1985, the Regional Trial Court
dismissed the appeal for lack of merit.
In due time, a petition for review of the decision of the Regional Trial Court was filed by
the petitioner with the Court of Appeals. Said petition was dismissed on January 30,
1987, for lack of merit.
15
OBLIGATIONS & CONTRACTS
AGHG
15
Aggrieved by the decision of the Court of Appeals, petitioner now comes to Us in this
petition, assigning the following errors:
ASSIGNMENT OF ERRORS
I
RESPONDENT COURT OF APPEALS COMMITTED A GRAVE ABUSE OF
DISCRETION, AMOUNTING TO LACK OF JURISDICTION, WHEN IT ERRED IN
HOLDING THAT THE CAUSE OF ACTION FOR UNLAWFUL DETAINER IN THESE
CASES DID NOT EXIST WHEN THE COMPLAINTS WERE FILED BECAUSE
PRIVATE RESPONDENTS TENDERED, AND PETITIONER ACCEPTED, THE
PAYMENT OF THE THREE (3) MONTHS RENTAL IN ARREARS WITHIN THE
FIFTEEN (15) DAY PERIOD FROM PRIVATE RESPONDENTS' RECEIPT OF
PETITIONER'S DEMAND LETTERS TO VACATE THE SUBJECT PREMISES AND
TO PAY THE RENTALS IN ARREARS.
II
RESPONDENT COURT OF APPEALS COMMITTED A GRAVEABUSE OF
DISCRETION, AMOUNTING TO LACK OF JURISDICTION COMMITTED A GRAVE
WHEN IT ERRED IN AFFIRMING THE DISMISSAL OF THE COMPLAINTS IN THESE
CASES NOTWITHSTANDING THE EXISTENCE OF VALID GROUNDS FOR THE
JUDICIAL EJECTMENT OF PRIVATE RESPONDENT.
III
RESPONDENT COURT OF APPEALS COMMITTED A GRAVE ABUSE OF
DISCRETION, AMOUNTING TO LACK OF JURISDICTION, WHEN IT ERRED IN
HOLDING THAT THESE CASES ARE CLASSIC EXAMPLES TO CIRCUMVENT THE
RENT CONTROL LAW. (pp. 164-165, Rollo, G.R. No. 77647)
The Court of Appeals defined the basic issue in this case as follows: whether or not
there exists a cause of action when the complaints for unlawful detainer were filed
considering the fact that upon demand by petitioner from private respondents for
payment of their back rentals, the latter immediately tendered payment which was
accepted by petitioner.
In holding that there was no cause of action, the respondent Court relied on Section 2,
Rule 70 of the Rules of Court, which provides:

Sec. 2. Landlord to proceed against tenant only after demand. — No landlord or his
legal representative or assign, shall be such action against a tenant for failure to pay
rent due or to comply with the conditions of his lease, unless the tenant shall have
failed to pay such rent or comply with such conditions for a period of fifteen (15) days or
five (5) days in case of building, after demand therefor, made upon qqqm personally, or
by serving written notice of such demand upon the person found on the premises, or by
posting such notice on the premises if no persons be found thereon.
It interpreted the said provision as follows:
.....the right to bring an action of ejectment or unlawful detainer must be counted from
the time the defendants failed to pay rent after the demand therefor. It is not the failure
per se to pay rent as agreed in the contract, but the failure to pay the rent after a
demand therefor is made, that entitles the lessor to bring an action for unlawful
detainer. In other words, the demand contemplated by the above-quoted provision is
not a demand to vacate, but a demand made by the landlord upon his tenant for the
latter to pay the rent due if the tenant fails to comply with the said demand with the
period provided, his possession becomes unlawful and the landlord may then bring the
action for ejectment. (p. 28, , G.R. No. 77647)
We hold that the demand required and contemplated in Section 2, aforequoted, is a
jurisdictional requirement for the purpose of bringing an unlawful detainer suit for failure
to pay rent or comply with the conditions of lease. It partakes of an extrajudicial remedy
that must be pursued before resorting for judicial action so much so that when there is
full compliance with the demand, there arises no necessity for court action.
As to whether this demand is merely a demand to pay rent or comply with the
conditions of the lease or also a demand to vacate, the answer can be gleaned from
said Section 2. This section presupposes the existence of a cause of action for unlawful
detainer as it speaks of "failure to pay rent due or comply with the conditions of the
lease." The existence of said cause of action gives the lessor the right under Article
1659 of the New Civil Code to ask for the rescission of the contract of lease and
indemnification for damages, or only the latter, allowing the contract to remain in force.
Accordingly, if the option chosen is for specific performance, then the demand referred
to is obviously to pay rent or to comply with the conditions of the lease violated.
However, if rescission is the option chosen, the demand must be for the lessee to pay
rents or to comply with the conditions of the lease and to vacate. Accordingly, the rule
that has been followed in our jurisprudence where rescission is clearly the option taken,
is that both demands to pay rent and to vacate are necessary to make a lessee a
deforciant in order that an ejectment suit may be filed (Casilan et al. vs. Tomassi, L-
16
OBLIGATIONS & CONTRACTS
AGHG
16
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.
17
OBLIGATIONS & CONTRACTS
AGHG
17
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, Resolution2 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 petitioner's 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 Agreement4
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 Foundation's 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 Decision6 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, petitioner's 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
18
OBLIGATIONS & CONTRACTS
AGHG
18
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
Damages7 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, attorney's 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 attorney's fees and
exemplary damages.
On October 4, 1996, the trial court rendered a Decision9 dismissing herein
respondents' complaint and ordering them to pay attorney's 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 attorney's
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 PARTIES10
The only issue to be resolved is whether the respondents are entitled to legal interest.
Petitioner SVHFI alleges that where a compromise agreement or compromise judgment
does not provide for the payment of interest, the legal interest by way of penalty on
account of fault or delay shall not be due and payable, considering that the obligation or
loan, on which the payment of legal interest could be based, has been superseded by
the compromise agreement.11 Furthermore, the petitioner argues that the respondents
are barred by res judicata from seeking legal interest on account of the waiver clause in
the duly approved compromise agreement.12 Article 4 of the compromise agreement
provides:
Plaintiff Santos waives and renounces any and all other claims that he and his family
may have on the defendant Foundation arising from and in connection with the
aforesaid civil cases, and defendant Foundation, on the other hand, also waives and
renounces any and all claims that it may have against plaintiff Santos in connection with
such cases.13 [Emphasis supplied.]
Lastly, petitioner alleges that since the compromise agreement did not provide for a
period within which the obligation will become due and demandable, it is incumbent
upon respondent Santos to ask for judicial intervention for purposes of fixing the period.
It is only when a fixed period exists that the legal interests can be computed.
19
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19
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 petitioner's failure to comply entitles them to damages, by way
of interest.14
The petition lacks merit.
A compromise is a contract whereby the parties, by making reciprocal concessions,
avoid a litigation or put an end to one already commenced.15 It is an agreement
between two or more persons, who, for preventing or putting an end to a lawsuit, adjust
their difficulties by mutual consent in the manner which they agree on, and which
everyone of them prefers in the hope of gaining, balanced by the danger of losing.16
The general rule is that a compromise has upon the parties the effect and authority of
res judicata, with respect to the matter definitely stated therein, or which by implication
from its terms should be deemed to have been included therein.17 This holds true even
if the agreement has not been judicially approved.18
In the case at bar, the Compromise Agreement was entered into by the parties on
October 26, 1990.19 It was judicially approved on September 30, 1991.20 Applying
existing jurisprudence, the compromise agreement as a consensual contract became
binding between the parties upon its execution and not upon its court approval. From
the time a compromise is validly entered into, it becomes the source of the rights and
obligations of the parties thereto. The purpose of the compromise is precisely to replace
and terminate controverted claims.21
In accordance with the compromise agreement, the respondents asked for the
dismissal of the pending civil cases. The petitioner, on the other hand, paid the initial
P1.5 million upon the execution of the agreement. This act of the petitioner showed that
it acknowledges that the agreement was immediately executory and enforceable upon
its execution.
As to the remaining P13 million, the terms and conditions of the compromise agreement
are clear and unambiguous. It provides:
...

b. The balance of P13 Million shall be paid, whether in one lump sum or in installments,
at the discretion of the Foundation, within a period of not more than two (2) years from
the execution of this agreement…22 [Emphasis supplied.]
...
The two-year period must be counted from October 26, 1990, the date of execution of
the compromise agreement, and not on the judicial approval of the compromise
agreement on September 30, 1991. When respondents wrote a demand letter to
petitioner on October 28, 1992, the obligation was already due and demandable. When
the petitioner failed to pay its due obligation after the demand was made, it incurred
delay.
Article 1169 of the New Civil Code provides:
Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.
[Emphasis supplied]
Delay as used in this article is synonymous to default or mora which means delay in the
fulfillment of obligations. It is the non-fulfillment of the obligation with respect to time.23
In order for the debtor to be in default, it is necessary that the following requisites be
present: (1) that the obligation be demandable and already liquidated; (2) that the
debtor delays performance; and (3) that the creditor requires the performance judicially
or extrajudicially.24
In the case at bar, the obligation was already due and demandable after the lapse of
the two-year period from the execution of the contract. The two-year period ended 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.
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OBLIGATIONS & CONTRACTS
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20
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 117025 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 annum29 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.
FIRST DIVISION
G.R. No. 165662 May 3, 2006
SELEGNA MANAGEMENT AND DEVELOPMENT CORPORATION; and Spouses
EDGARDO and ZENAIDA ANGELES, Petitioners,
vs.
UNITED COCONUT PLANTERS BANK,* Respondent.
DECISION
PANGANIBAN, CJ:
A writ of preliminary injunction is issued to prevent an extrajudicial foreclosure, only
upon a clear showing of a violation of the mortgagor’s unmistakable right.
Unsubstantiated allegations of denial of due process and prematurity of a loan are not
sufficient to defeat the mortgagee’s unmistakable right to an extrajudicial foreclosure.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the
May 4, 2004 Amended Decision2 and the October 12, 2004 Resolution3 of the Court of

Appeals (CA) in CA-GR SP No. 70966. The challenged Amended Decision disposed
thus:
"WHEREFORE, the Motion for Reconsideration is GRANTED. The July 18, 2003
Decision is hereby REVERSED and SET ASIDE and another one entered GRANTING
the petition and REVERSING and SETTING ASIDE the March 15, 2002 Order of the
Regional Trial Court, Branch 58, Makati City in Civil Case No. 99-1061."4
The assailed Resolution denied reconsideration.
The Facts
On September 19, 1995, Petitioners Selegna Management and Development
Corporation and Spouses Edgardo and Zenaida Angeles were granted a credit facility
in the amount of P70 million by Respondent United Coconut Planters Bank (UCPB). As
security for this credit facility, petitioners executed real estate mortgages over several
parcels of land located in the cities of Muntinlupa, Las Piñas, Antipolo and Quezon; and
over several condominium units in Makati. Petitioners were likewise required to execute
a promissory note in favor of respondent every time they availed of the credit facility. As
required in these notes, they paid the interest in monthly amortizations.
The parties stipulated in their Credit Agreement dated September 19, 1995,5 that
failure to pay "any availment of the accommodation or interest, or any sum due" shall
constitute an event of default,6 which shall consequently allow respondent bank to
"declare [as immediately due and payable] all outstanding availments
of the accommodation together with accrued interest and any other sum payable." 7
In need of further business capital, petitioners obtained from UCPB an increase in their
credit facility.8 For this purpose, they executed a Promissory Note for P103,909,710.82,
which was to mature on March 26, 1999.9 In the same note, they agreed to an interest
rate of 21.75 percent per annum, payable by monthly amortizations.
On December 21, 1998, respondent sent petitioners a demand letter, worded as
follows:
"Gentlemen:
"With reference to your loan with principal outstanding balance of [P103,909,710.82], it
appears from the records of United Coconut Planters Bank that you failed to pay
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AGHG
21
interest amortizations amounting to [P14,959,525.10] on the Promissory Note on its due
date, 30 May 1998.
"x x x xxx xxx
"Accordingly, formal demand is hereby made upon you to pay your outstanding
obligations in the total amount of P14,959,525.10, which includes unpaid interest and
penalties as of 21 December 1998 due on the promissory note, eight (8) days from date
hereof."10
Respondent decided to invoke the acceleration provision in their Credit Agreement.
Accordingly, through counsel, it relayed its move to petitioners on January 25, 1999 in a
letter, which we quote:
"Gentlemen:
"x x x xxx xxx
"It appears from the record of [UCPB] that you failed to pay the monthly interest due on
said obligation since May 30, 1998 as well as the penalty charges due thereon. Despite
repeated demands, you refused and continue to refuse to pay the same. Under the
Credit Agreements/Letter Agreements you executed, failure to pay when due any
installments of the loan or interest or any sum due thereunder, is an event of default.
"Consequently, we hereby inform you that our client has declared your principal
obligation in the amount of [P103,909,710.82], interest and sums payable under the
Credit Agreement/Letter Agreement/Promissory Note to be immediately due and
payable.
"Accordingly, formal demand is hereby made upon you to please pay within five (5)
days from date hereof or up to January 29, 1999 the principal amount of
[P103,909,710.82], with the interest, penalty and other charges due thereon, which as
of January 25, 1999 amounts to [P17,351,478.55]."11
Respondent sent another letter of demand on March 4, 1999. It contained a final
demand on petitioners "to settle in full [petitioners’] said past due obligation to [UCPB]
within five (5) days from [petitioners’] receipt of [the] letter."12
In response, petitioners paid respondent the amount of P10,199,473.96 as partial
payment of the accrued interests.13 Apparently unsatisfied, UCPB applied for
extrajudicial foreclosure of petitioners’ mortgaged properties.

When petitioners received the Notice of Extra Judicial Foreclosure Sale on May 18,
1999, they requested UCPB to give them a period of sixty (60) days to update their
accrued interest charges; and to restructure or, in the alternative, to negotiate for a
takeout of their account.14
On May 25, 1999, the Bank denied petitioners’ request in these words:
"This is to reply to your letter dated May 20, 1999, which confirms the request you
made the previous day when you paid us a visit.
"As earlier advised, your account has been referred to external counsel for appropriate
legal action. Demand has also been made for the full settlement of your account.
"We regret that the Bank is unable to grant your request unless a definite offer is made
for settlement."15
In order to forestall the extrajudicial foreclosure scheduled for May 31, 1999, petitioners
filed a Complaint16 (docketed as Civil Case No. 99-1061) for "Damages, Annulment of
Interest, Penalty Increase and Accounting with Prayer for Temporary Restraining
Order/Preliminary Injunction." All subsequent proceedings in the trial court and in the
CA involved only the propriety of issuing a TRO and a writ of preliminary injunction.
Judge Josefina G. Salonga,17 then executive judge of the Regional Trial Court (RTC)
of Makati City, denied the Urgent Ex-parte Motion for Immediate Issuance of a
Temporary Restraining Order (TRO), filed by petitioners. Judge Salonga denied their
motion on the ground that no great or irreparable injury would be inflicted on them if the
parties would first be heard.18 Unsatisfied, petitioners filed an Ex-Parte Motion for
Reconsideration, by reason of which the case was eventually raffled to Branch 148,
presided by Judge Oscar B. Pimentel.19
After due hearing, Judge Pimentel issued an Order dated May 31, 1999, granting a 20-
day TRO on the scheduled foreclosure of the Antipolo properties, on the ground that
the Notice of Foreclosure had indicated an inexistent auction venue.20 To resolve that
issue, respondent filed a Manifestation21 that it would withdraw all its notices relative to
the foreclosure of the mortgaged properties, and that it would re-post or re-publish a
new set of notices. Accordingly, in an Order dated September 6, 1999,22 Judge
Pimentel denied petitioners’ application for a TRO for having been rendered moot by
respondent’s Manifestation.23
Subsequently, respondent filed new applications for foreclosure in the cities where the
mortgaged properties were located. Undaunted, petitioners filed another Motion for the
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OBLIGATIONS & CONTRACTS
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22
Issuance of a TRO/Injunction and a Supplementary Motion for the Issuance of
TRO/Injunction with Motion to Clarify Order of September 6, 1999.24
On October 27, 1999, Judge Pimentel issued an Order25 granting a 20-day TRO in
favor of petitioners. After several hearings, he issued his November 26, 1999 Order,26
granting their prayer for a writ of preliminary injunction on the foreclosures, but only for
a period of twenty (20) days. The Order states:
"Admitted by defendant witness is the fact that in all the notices of foreclosure sale of
the properties of the plaintiffs x x x it is stated in each notice that the property will be
sold at public auction to satisfy the mortgage indebtedness of plaintiffs which as of
August 31, 1999 amounts to P131,854,773.98.
"x x x xxx xxx
"As the court sees it, this is the problem that should be addressed by the defendant in
this case and in the meantime, the notice of foreclosure sale should be held in
abeyance until such time as these matters are clarified and cleared by the defendants x
x x Should the defendant be able to remedy the situation this court will have no more
alternative but to allow the defendant to proceed to its intended action.
"x x x xxx xxx
"WHEREFORE, premises considered, and finding compelling reason at this point in
time to grant the application for preliminary injunction, the same is hereby granted upon
posting of a preliminary injunction bond in the amount of P3,500,000.00 duly approved
by the court, let a writ of preliminary injunction be issued."27
The corresponding Writ of Preliminary Injunction28 was issued on November 29, 1999.
Respondent moved for reconsideration. On the other hand, petitioners filed a Motion to
Clarify Order of November 26, 1999. Conceding that the November 26 Order had
granted an injunction during the pendency of the case, respondent contended that the
injunctive writ merely restrained it for a period of 20 (twenty) days.
On December 29, 2000, Judge Pimentel issued an Order29 granting respondent’s
Motion for Reconsideration and clarifying his November 26, 1999 Order in this manner:
"There may have been an error in the Writ of Preliminary Injunction issued dated
November 29, 1999 as the same [appeared to be actually] an extension of the TRO
issued by this Court dated 27 October 1999 for another 20 days period. Plaintiff’s seeks
to enjoin defendants for an indefinite period pending trial of the case.

"Be that as it may, the Court actually did not have any intention of restraining the
defendants from foreclosing plaintiff[s’] property for an indefinite period and during the
entire proceeding of the case x x x.
"x x x xxx xxx
"What the [c]ourt wanted the defendants to do was to merely modify the notice of [the]
auction sale in order that the amount of P131,854,773.98 x x x would not appear to be
the value of each property being sold on auction. x x x.30
"WHEREFORE, premises considered and after finding merit on the arguments raised
by herein defendants to be impressed with merit, and having stated in the Order dated
26 November 1999 that no other alternative recourse is available than to allow the
defendants to proceed with their intended action, the Court hereby rules:
"1.] To give due course to defendant[‘]s motion for reconsideration, as the same is
hereby GRANTED, however, with reservation that this Order shall take effect upon after
its[] finality[.]"31
Consequently, respondent proceeded with the foreclosure sale of some of the
mortgaged properties. On the other hand, petitioners filed an "[O]mnibus [M]otion [for
Reconsideration] and to [S]pecify the [A]pplication of the P92 [M]illion [R]ealized from
the [F]oreclosure [S]ale x x x."32 Before this Omnibus Motion could be resolved, Judge
Pimentel inhibited himself from hearing the case.33
The case was then re-raffled to Branch 58 of the RTC of Makati City, presided by Judge
Escolastico U. Cruz.34 The proceedings before him were, however, all nullified by the
Supreme Court in its En Banc Resolution dated September 18, 2001.35 He was
eventually dismissed from service.36
The case was re-raffled to the pairing judge of Branch 58, Winlove M. Dumayas. On
March 15, 2002, Judge Dumayas granted petitioners’ Omnibus Motion for
Reconsideration and Specification of the Foreclosure Proceeds, as follows:
"WHEREFORE, premises considered, the Motion to Reconsider the Order dated
December 29, 2000 is hereby granted and the Order of November 26, 1999 granting
the preliminary injunction is reinstated subject however to the condition that all
properties of plaintiffs which were extrajudicially foreclosed though public bidding are
subject to an accounting. [A]nd for this purpose defendant bank is hereby given fifteen
(15) days from notice hereof to render an accounting on the proceeds realized from the
foreclosure of plaintiffs’ mortgaged properties located in Antipolo, Makati, Muntinlupa
and Las Piñas."37
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OBLIGATIONS & CONTRACTS
AGHG
23
The aggrieved respondent filed before the Court of Appeals a Petition for Certiorari,
seeking the nullification of the RTC Order dated March 15, 2002, on the ground that it
was issued with grave abuse of discretion.38
The Special Fifteenth Division, speaking through Justice Rebecca de Guia-Salvador,
affirmed the ruling of Judge Dumayas. It held that petitioners had a clear right to an
injunction, based on the fact that respondent had kept them in the dark as to how and
why their principal obligation had ballooned to almost P132 million. The CA held that
respondent’s refusal to give them a detailed accounting had prevented the
determination of the maturity of the obligation and precluded the possibility of a
foreclosure of the mortgaged properties. Moreover, their payment of P10 million had the
effect of updating, and thereby averting the maturity of, the outstanding obligation.39
Respondent filed a Motion for Reconsideration, which was granted by a Special
Division of Five of the Former Special Fifteenth Division.
Ruling of the Court of Appeals
Citing China Banking Corporation v. Court of Appeals,40 the appellate court held in its
Amended Decision41 that the foreclosure proceedings should not be enjoined in the
light of the clear failure of petitioners to meet their obligations upon maturity.42
Also citing Zulueta v. Reyes,43 the CA, through Justice Jose Catral Mendoza, went on
to say that a pending question on accounting did not warrant an injunction on the
foreclosure.
Parenthetically, the CA added that petitioners were not without recourse or protection.
Further, it noted their pending action for annulment of interest, damages and
accounting. It likewise said that they could protect themselves by causing the
annotation of lis pendens on the titles of the mortgaged or foreclosed properties.
In his Separate Concurring Opinion,44 Justice Magdangal M. de Leon added that a
prior accounting was not essential to extrajudicial foreclosure. He cited Abaca
Corporation v. Garcia,45 which had ruled that Act No. 3135 did not require mortgaged
properties to be sold by lot or by only as much as would cover just the obligation. Thus,
he concluded that a request for accounting -- for the purpose of determining whether
the proceeds of the auction would suffice to cover the indebtedness -- would not justify
an injunction on the foreclosure.

Petitioners filed a Motion for Reconsideration dated May 31, 2004, which the appellate
court denied.46
Hence, this Petition.47
Issues
Petitioners raise the following issues for our consideration:
p align="center">"I
"Whether or not the Honorable Court of Appeals denied the petitioners of due process.
"II
"Whether or not the Honorable Court of Appeals supported its Amended Decision by
invoking jurisprudence not applicable and completely identical with the instant case.
"III
"Whether or not the Honorable Court of Appeals failed to establish its finding that RTC
Judge Winlove Dumayas has acted with grave abuse of discretion."48
The resolution of this case hinges on two issues: 1) whether petitioners are in default;
and 2) whether there is basis for preliminarily enjoining the extrajudicial foreclosure.
The other issues raised will be dealt with in the resolution of these two main questions.
The Court’s Ruling
The Petition has no merit.
First Issue:
Default
The resolution of the present controversy necessarily begins with a determination of
respondent’s right to foreclose the mortgaged properties extrajudicially.
It is a settled rule of law that foreclosure is proper when the debtors are in default of the
payment of their obligation. In fact, the parties stipulated in their credit agreements,
mortgage contracts and promissory notes that respondent was authorized to foreclose
24
OBLIGATIONS & CONTRACTS
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24
on the mortgages, in case of a default by petitioners. That this authority was granted is
not disputed.
Mora solvendi, or debtor’s default, is defined as a delay49 in the fulfillment of an
obligation, by reason of a cause imputable to the debtor.50 There are three requisites
necessary for a finding of default. First, the obligation is demandable and liquidated;
second, the debtor delays performance; third, the creditor judicially or extrajudicially
requires the debtor’s performance.51
Mortgagors’ Default of Monthly Interest Amortizations
In the present case, the Promissory Note executed on March 29, 1998, expressly states
that petitioners had an obligation to pay monthly interest on the principal obligation.
From respondent’s demand letter,52 it is clear and undisputed by petitioners that they
failed to meet those monthly payments since May 30, 1998. Their nonpayment is
defined as an "event of default" in the parties’ Credit Agreement, which we quote:
"Section 8.01. Events of Default. Each of the following events and occurrences shall
constitute an Event of Default of this AGREEMENT:
"1. The CLIENT shall fail to pay, when due, any availment of the Accommodation or
interest, or any other sum due thereunder in accordance with the terms
thereof;1avvphil.net
"x x x xxx x x x"
"Section 8.02. Consequences of Default. (a) If an Event of Default shall occur and be
continuing, the Bank may:
"1. By written notice to the CLIENT, declare all outstanding availments of the
Accommodation together with accrued interest and any other sum payable hereunder
to be immediately due and payable without presentment, demand or notice of any kind,
other than the notice specifically required by this Section, all of which are expressly
waived by the CLIENT[.]"53
Considering that the contract is the law between the parties,54 respondent is justified in
invoking the acceleration clause declaring the entire obligation immediately due and
payable.55 That clause obliged petitioners to pay the entire loan on January 29, 1999,
the date fixed by respondent.56
Petitioners’ failure to pay on that date set into effect Article IX of the Real Estate
Mortgage,57 worded thus:

"If, at any time, an event of default as defined in the credit agreements, promissory
notes and other related loan documents referred to in paragraph 5 of ARTICLE I hereof
(sic), or the MORTGAGOR and/or DEBTOR shall fail or refuse to pay the SECURED
OBLIGATIONS, or any of the amortization of such indebtedness when due, or to
comply any (sic) of the conditions and stipulations herein agreed, x x x then all the
obligations of the MORTGAGOR secured by this MORTGAGE and all the amortizations
thereof shall immediately become due, payable and defaulted and the MORTGAGEE
may immediately foreclose this MORTGAGE judicially in accordance with the Rules of
Court, or extrajudicially in accordance with Act No. 3135, as amended, and Presidential
Decree No. 385. For the purpose of extrajudicial foreclosure, the MORTGAGOR hereby
appoints the MORTGAGEE his/her/its attorney-in-fact to sell the property mortgaged
under Act No. 3135, as amended, to sign all documents and perform any act requisite
and necessary to accomplish said purpose and to appoint its substitutes as such
attorney-in-fact with the same powers as above specified. x x x[.]"58
The foregoing discussion satisfactorily shows that UCPB had every right to apply for
extrajudicial foreclosure on the basis of petitioners’ undisputed and continuing default.
Petitioners’ Debt Considered Liquidated Despite the Alleged
Lack of Accounting
Petitioners do not even attempt to deny the aforementioned matters. They assert,
though, that they have a right to a detailed accounting before they can be declared in
default. As regards the three requisites of default, they say that the first requisite --
liquidated debt -- is absent. Continuing with foreclosure on the basis of an unliquidated
obligation allegedly violates their right to due process. They also maintain that their
partial payment of P10 million averted the maturity of their obligation.59
On the other hand, respondent asserts that questions regarding the running balance of
the obligation of petitioners are not valid reasons for restraining the foreclosure.
Nevertheless, it maintains that it has furnished them a detailed monthly statement of
account.
A debt is liquidated when the amount is known or is determinable by inspection of the
terms and conditions of the relevant promissory notes and related documentation.60
Failure to furnish a debtor a detailed statement of account does not ipso facto result in
an unliquidated obligation.
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25
Petitioners executed a Promissory Note, in which they stated that their principal
obligation was in the amount of P103,909,710.82, subject to an interest rate of 21.75
percent per annum.61 Pursuant to the parties’ Credit Agreement, petitioners likewise
know that any delay in the payment of the principal obligation will subject them to a
penalty charge of one percent per month, computed from the due date until the
obligation is paid in full.62
It is in fact clear from the agreement of the parties that when the payment is
accelerated due to an event of default, the penalty charge shall be based on the total
principal amount outstanding, to be computed from the date of acceleration until the
obligation is paid in full.63 Their Credit Agreement even provides for the application of
payments.64 It appears from the agreements that the amount of total obligation is
known or, at the very least, determinable.
Moreover, when they made their partial payment, petitioners did not question the
principal, interest or penalties demanded from them. They only sought additional time to
update their interest payments or to negotiate a possible restructuring of their
account.65 Hence, there is no basis for their allegation that a statement of account was
necessary for them to know their obligation. We cannot impair respondent’s right to
foreclose the properties on the basis of their unsubstantiated allegation of a violation of
due process.
In Spouses Estares v. CA,66 we did not find any justification to grant a preliminary
injunction, even when the mortgagors were disputing the amount being sought from
them. We held in that case that "[u]pon the nonpayment of the loan, which was secured
by the mortgage, the mortgaged property is properly subject to a foreclosure sale."67
Compared with Estares, the denial of injunctive relief in this case is even more
imperative, because the present petitioners do not even assail the amounts due from
them. Neither do they contend that a detailed accounting would show that they are not
in default. A pending question regarding the due amount was not a sufficient reason to
enjoin the foreclosure in Estares. Hence, with more reason should injunction be denied
in the instant case, in which there is no dispute as to the outstanding obligation of
petitioners.
At any rate, whether respondent furnished them a detailed statement of account is a
question of fact that this Court need not and will not resolve in this instance. As held in
Zulueta v. Reyes,68 in which there was no genuine controversy as to the amounts due
and demandable, the foreclosure should not be restrained by the unnecessary question
of accounting.

Maturity of the Loan Not Averted by Partial Compliance with Respondent’s Demand
Petitioners allege that their partial payment of P10 million on March 25, 1999, had the
effect of forestalling the maturity of the loan;69 hence the foreclosure proceedings are
premature. 70 We disagree.
To be sure, their partial payment did not extinguish the obligation. The Civil Code states
that a debt is not paid "unless the thing x x x in which the obligation consists has been
completely delivered x x x."71 Besides, a late partial payment could not have possibly
forestalled a long-expired maturity date.
The only possible legal relevance of the partial payment was to evidence the
mortgagee’s amenability to granting the mortgagor a grace period. Because the partial
payment would constitute a waiver of the mortgagee’s vested right to foreclose, the
grant of a grace period cannot be casually assumed;72 the bank’s agreement must be
clearly shown. Without a doubt, no express agreement was entered into by the parties.
Petitioners only assumed that their partial payment had satisfied respondent’s demand
and obtained for them more time to update their account.73
Petitioners are mistaken. When creditors receive partial payment, they are not ipso
facto deemed to have abandoned their prior demand for full payment. Article 1235 of
the Civil Code provides:
"When the obligee accepts the performance, knowing its incompleteness or irregularity,
and without expressing any protest or objection, the obligation is deemed fully complied
with."
Thus, to imply that creditors accept partial payment as complete performance of their
obligation, their acceptance must be made under circumstances that indicate their
intention to consider the performance complete and to renounce their claim arising from
the defect.74
There are no circumstances that would indicate a renunciation of the right of
respondent to foreclose the mortgaged properties extrajudicially, on the basis of
petitioners’ continuing default. On the contrary, it asserted its right by filing an
application for extrajudicial foreclosure after receiving the partial payment. Clearly, it did
not intend to give petitioners more time to meet their obligation.
Parenthetically, respondent cannot be reproved for accepting their partial payment.
While Article 1248 of the Civil Code states that creditors cannot be compelled to accept
partial payments, it does not prohibit them from accepting such payments.
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OBLIGATIONS & CONTRACTS
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26
Second Issue:
Enjoining the Extrajudicial Foreclosure
A writ of preliminary injunction is a provisional remedy that may be resorted to by
litigants, only to protect or preserve their rights or interests during the pendency of the
principal action. To authorize a temporary injunction, the plaintiff must show, at least
prima facie, a right to the final relief.75 Moreover, it must show that the invasion of the
right sought to be protected is material and substantial, and that there is an urgent and
paramount necessity for the writ to prevent serious damage.76
In the absence of a clear legal right, the issuance of the injunctive writ constitutes grave
abuse of discretion. Injunction is not designed to protect contingent or future rights. It is
not proper when the complainant’s right is doubtful or disputed.77
As a general rule, courts should avoid issuing this writ, which in effect disposes of the
main case without trial.78 In Manila International Airport Authority v. CA,79 we urged
courts to exercise caution in issuing the writ, as follows:
"x x x. We remind trial courts that while generally the grant of a writ of preliminary
injunction rests on the sound discretion of the court taking cognizance of the case,
extreme caution must be observed in the exercise of such discretion. The discretion of
the court a quo to grant an injunctive writ must be exercised based on the grounds and
in the manner provided by law. Thus, the Court declared in Garcia v. Burgos:
‘It has been consistently held that there is no power the exercise of which is more
delicate, which requires greater caution, deliberation and sound discretion, or more
dangerous in a doubtful case, than the issuance of an injunction. It is the strong arm of
equity that should never be extended unless to cases of great injury, where courts of
law cannot afford an adequate or commensurate remedy in damages.
‘Every court should remember that an injunction is a limitation upon the freedom of
action of the defendant and should not be granted lightly or precipitately. It should be
granted only when the court is fully satisfied that the law permits it and the emergency
demands it.’"80 (Citations omitted)
Petitioners do not have any clear right to be protected. As shown in our earlier findings,
they failed to substantiate their allegations that their right to due process had been
violated and the maturity of their obligation forestalled. Since they indisputably failed to
meet their obligations in spite of repeated demands, we hold that there is no legal

justification to enjoin respondent from enforcing its undeniable right to foreclose the
mortgaged properties.
In any case, petitioners will not be deprived outrightly of their property. Pursuant to
Section 47 of the General Banking Law of 2000,81 mortgagors who have judicially or
extrajudicially sold their real property for the full or partial payment of their obligation
have the right to redeem the property within one year after the sale. They can redeem
their real estate by paying the amount due, with interest rate specified, under the
mortgage deed; as well as all the costs and expenses incurred by the bank.82
Moreover, in extrajudicial foreclosures, petitioners have the right to receive any surplus
in the selling price. This right was recognized in Sulit v. CA,83 in which the Court held
that "if the mortgagee is retaining more of the proceeds of the sale than he is entitled to,
this fact alone will not affect the validity of the sale but simply gives the mortgagor a
cause of action to recover such surplus."84
Petitioners failed to demonstrate the prejudice they would probably suffer by reason of
the foreclosure. Also, it is clear that they would be adequately protected by law. Hence,
we find no legal basis to reverse the assailed Amended Decision of the CA dated May
4, 2004.
WHEREFORE, the Petition is DENIED and the assailed Amended Decision and
Resolution AFFIRMED. Costs against petitioners.
SO ORDERED.
FIRST DIVISION
G.R. No. 126083 July 12, 2006
ANTONIO R. CORTES (in his capacity as Administrator of the estate of Claro S.
Cortes), petitioner,
vs.
HON. COURT OF APPEALS and VILLA ESPERANZA DEVELOPMENT
CORPORATION, respondents.
DECISION
YNARES-SANTIAGO, J.:
The instant petition for review seeks the reversal of the June 13, 1996 Decision1 of the
Court of Appeals in CA-G.R. CV No. 47856, setting aside the June 24, 1993 Decision2
of the Regional Trial Court of Makati, Branch 138, which rescinded the contract of sale
entered into by petitioner Antonio Cortes (Cortes) and private respondent Villa
Esperanza Development Corporation (Corporation).
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27
The antecedents show that for the purchase price of P3,700,000.00, the Corporation as
buyer, and Cortes as seller, entered into a contract of sale over the lots covered by
Transfer Certificate of Title (TCT) No. 31113-A, TCT No. 31913-A and TCT No. 32013-
A, located at Baclaran, Parañaque, Metro Manila. On various dates in 1983, the
Corporation advanced to Cortes the total sum of P1,213,000.00. Sometime in
September 1983, the parties executed a deed of absolute sale containing the following
terms:3
1. Upon execution of this instrument, the Vendee shall pay unto the Vendor sum of
TWO MILLION AND TWO HUNDRED THOUSAND (P2,200,000.00) PESOS,
Philippine Currency, less all advances paid by the Vendee to the Vendor in connection
with the sale;
2. The balance of ONE MILLION AND FIVE HUNDRED THOUSAND [P1,500,000.00]
PESOS, Phil. Currency shall be payable within ONE (1) YEAR from date of execution
of this instrument, payment of which shall be secured by an irrevocable standby letter of
credit to be issued by any reputable local banking institution acceptable to the Vendor.
xxxx
4. All expense for the registration of this document with the Register of Deeds
concerned, including the transfer tax, shall be divided equally between the Vendor and
the Vendee. Payment of the capital gains shall be exclusively for the account of the
Vendor; 5% commission of Marcosa Sanchez to be deducted upon signing of sale.4
Said Deed was retained by Cortes for notarization.
On January 14, 1985, the Corporation filed the instant case5 for specific performance
seeking to compel Cortes to deliver the TCTs and the original copy of the Deed of
Absolute Sale. According to the Corporation, despite its readiness and ability to pay the
purchase price, Cortes refused delivery of the sought documents. It thus prayed for the
award of damages, attorney's fees and litigation expenses arising from Cortes' refusal
to deliver the same documents.
In his Answer with counterclaim,6 Cortes claimed that the owner's duplicate copy of the
three TCTs were surrendered to the Corporation and it is the latter which refused to pay
in full the agreed down payment. He added that portion of the subject property is
occupied by his lessee who agreed to vacate the premises upon payment of
disturbance fee. However, due to the Corporation's failure to pay in full the sum of
P2,200,000.00, he in turn failed to fully pay the disturbance fee of the lessee who now
refused to pay monthly rentals. He thus prayed that the Corporation be ordered to pay

the outstanding balance plus interest and in the alternative, to cancel the sale and
forfeit the P1,213,000.00 partial down payment, with damages in either case.
On June 24, 1993, the trial court rendered a decision rescinding the sale and directed
Cortes to return to the Corporation the amount of P1,213,000.00, plus interest. It ruled
that pursuant to the contract of the parties, the Corporation should have fully paid the
amount of P2,200,000.00 upon the execution of the contract. It stressed that such is the
law between the parties because the Corporation failed to present evidence that there
was another agreement that modified the terms of payment as stated in the contract.
And, having failed to pay in full the amount of P2,200,000.00 despite Cortes' delivery of
the Deed of Absolute Sale and the TCTs, rescission of the contract is proper.
In its motion for reconsideration, the Corporation contended that the trial court failed to
consider their agreement that it would pay the balance of the down payment when
Cortes delivers the TCTs. The motion was, however, denied by the trial court holding
that the rescission should stand because the Corporation did not act on the offer of
Cortes' counsel to deliver the TCTs upon payment of the balance of the down payment.
Thus:
The Court finds no merit in the [Corporation's] Motion for Reconsideration. As stated in
the decision sought to be reconsidered, [Cortes'] counsel at the pre-trial of this case,
proposed that if [the Corporation] completes the down payment agreed upon and make
arrangement for the payment of the balances of the purchase price, [Cortes] would sign
the Deed of Sale and turn over the certificate of title to the [Corporation]. [The
Corporation] did nothing to comply with its undertaking under the agreement between
the parties.
WHEREFORE, in view of the foregoing considerations, the Motion for Reconsideration
is hereby DENIED.
SO ORDERED.7
On appeal, the Court of Appeals reversed the decision of the trial court and directed
Cortes to execute a Deed of Absolute Sale conveying the properties and to deliver the
same to the Corporation together with the TCTs, simultaneous with the Corporation's
payment of the balance of the purchase price of P2,487,000.00. It found that the parties
agreed that the Corporation will fully pay the balance of the down payment upon Cortes'
delivery of the three TCTs to the Corporation. The records show that no such delivery
was made, hence, the Corporation was not remiss in the performance of its obligation
and therefore justified in not paying the balance. The decretal portion thereof, provides:
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28
WHEREFORE, premises considered, [the Corporation's] appeal is GRANTED. The
decision appealed from is hereby REVERSED and SET ASIDE and a new judgment
rendered ordering [Cortes] to execute a deed of absolute sale conveying to [the
Corporation] the parcels of land subject of and described in the deed of absolute sale,
Exhibit D. Simultaneously with the execution of the deed of absolute sale and the
delivery of the corresponding owner's duplicate copies of TCT Nos. 31113-A, 31931-A
and 32013-A of the Registry of Deeds for the Province of Rizal, Metro Manila, District
IV, [the Corporation] shall pay [Cortes] the balance of the purchase price of
P2,487,000.00. As agreed upon in paragraph 4 of the Deed of Absolute Sale, Exhibit D,
under terms and conditions, "All expenses for the registration of this document (the
deed of sale) with the Register of Deeds concerned, including the transfer tax, shall be
divided equally between [Cortes and the Corporation]. Payment of the capital gains
shall be exclusively for the account of the Vendor; 5% commission of Marcosa Sanchez
to be deducted upon signing of sale." There is no pronouncement as to costs.
SO ORDERED.8
Cortes filed the instant petition praying that the decision of the trial court rescinding the
sale be reinstated.
There is no doubt that the contract of sale in question gave rise to a reciprocal
obligation of the parties. Reciprocal obligations are those which arise from the same
cause, and which each party is a debtor and a creditor of the other, such that the
obligation of one is dependent upon the obligation of the other. They are to be
performed simultaneously, so that the performance of one is conditioned upon the
simultaneous fulfillment of the other.9
Article 1191 of the Civil Code, states:
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.
xxxx
As to when said failure or delay in performance arise, Article 1169 of the same Code
provides that –
ART. 1169
xxxx

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. (Emphasis
supplied)
The issue therefore is whether there is delay in the performance of the parties'
obligation that would justify the rescission of the contract of sale. To resolve this issue,
we must first determine the true agreement of the parties.
The settled rule is that the decisive factor in evaluating an agreement is the intention of
the parties, as shown not necessarily by the terminology used in the contract but by
their conduct, words, actions and deeds prior to, during and immediately after executing
the agreement. As such, therefore, documentary and parol evidence may be submitted
and admitted to prove such intention.10
In the case at bar, the stipulation in the Deed of Absolute Sale was that the Corporation
shall pay in full the P2,200,000.00 down payment upon execution of the contract.
However, as correctly noted by the Court of Appeals, the transcript of stenographic
notes reveal Cortes' admission that he agreed that the Corporation's full payment of the
sum of P2,200,000.00 would depend upon his delivery of the TCTs of the three lots. In
fact, his main defense in the Answer is that, he performed what is incumbent upon him
by delivering to the Corporation the TCTs and the carbon duplicate of the Deed of
Absolute Sale, but the latter refused to pay in full the down payment.11 Pertinent
portion of the transcript, reads:
[Q] Now, why did you deliver these three titles to the plaintiff despite the fact that it has
not been paid in full the agreed down payment?
A Well, the broker told me that the down payment will be given if I surrender the titles.
Q Do you mean to say that the plaintiff agreed to pay in full the down payment of
P2,200,000.00 provided you surrender or entrust to the plaintiff the titles?
A Yes, sir.12
What further confirmed the agreement to deliver the TCTs is the testimony of Cortes
that the title of the lots will be transferred in the name of the Corporation upon full
payment of the P2,200,000.00 down payment. Thus –
ATTY. ANTARAN
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OBLIGATIONS & CONTRACTS
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29
Q Of course, you have it transferred in the name of the plaintiff, the title?
A Upon full payment.
xxxx
ATTY. SARTE
Q When you said upon full payment, are you referring to the agreed down payment of
P2,200,000.00?
A Yes, sir.13
By agreeing to transfer title upon full payment of P2,200,000.00, Cortes' impliedly
agreed to deliver the TCTs to the Corporation in order to effect said transfer. Hence, the
phrase "execution of this instrument" 14 as appearing in the Deed of Absolute Sale,
and which event would give rise to the Corporation's obligation to pay in full the amount
of P2,200,000.00, can not be construed as referring solely to the signing of the deed.
The meaning of "execution" in the instant case is not limited to the signing of a contract
but includes as well the performance or implementation or accomplishment of the
parties' agreement.15 With the transfer of titles as the corresponding reciprocal
obligation of payment, Cortes' obligation is not only to affix his signature in the Deed,
but to set into motion the process that would facilitate the transfer of title of the lots, i.e.,
to have the Deed notarized and to surrender the original copy thereof to the
Corporation together with the TCTs.
Having established the true agreement of the parties, the Court must now determine
whether Cortes delivered the TCTs and the original Deed to the Corporation. The Court
of Appeals found that Cortes never surrendered said documents to the Corporation.
Cortes testified that he delivered the same to Manny Sanchez, the son of the broker,
and that Manny told him that her mother, Marcosa Sanchez, delivered the same to the
Corporation.
Q Do you have any proof to show that you have indeed surrendered these titles to the
plaintiff?
A Yes, sir.
Q I am showing to you a receipt dated October 29, 1983, what relation has this receipt
with that receipt that you have mentioned?
 30

A That is the receipt of the real estate broker when she received the titles. Q Did she not show you any receipt that she delivered to [Mr.] Dragon17 the title
without any receipt?
Q On top of the printed name is Manny Sanchez, there is a signature, do you know who
is that Manny Sanchez? A I have not seen any receipt.

A That is the son of the broker. Q So, therefore, you are not sure whether the title has been delivered to the plaintiff or
not. It is only upon the allegation of the broker?
xxxx
A Yes, sir.18
Q May we know the full name of the real estate broker?
However, Marcosa Sanchez's unrebutted testimony is that, she did not receive the
A Marcosa Sanchez TCTs. She also denied knowledge of delivery thereof to her son, Manny, thus:

xxxx Q The defendant, Antonio Cortes testified during the hearing on March 11, 1986 that he
allegedly gave you the title to the property in question, is it true?
Q Do you know if the broker or Marcosa Sanchez indeed delivered the titles to the
plaintiff? A I did not receive the title.

A That is what [s]he told me. She gave them to the plaintiff. Q He likewise said that the title was delivered to your son, do you know about that?

x x x x.16 A I do not know anything about that.19

ATTY. ANTARAN What further strengthened the findings of the Court of Appeals that Cortes did not
surrender the subject documents was the offer of Cortes' counsel at the pre-trial to
Q Are you really sure that the title is in the hands of the plaintiff? deliver the TCTs and the Deed of Absolute Sale if the Corporation will pay the balance
of the down payment. Indeed, if the said documents were already in the hands of the
xxxx Corporation, there was no need for Cortes' counsel to make such offer.

Q It is in the hands of the broker but there is no showing that it is in the hands of the Since Cortes did not perform his obligation to have the Deed notarized and to surrender
plaintiff? the same together with the TCTs, the trial court erred in concluding that he performed
his part in the contract of sale and that it is the Corporation alone that was remiss in the
A Yes, sir. performance of its obligation. Actually, both parties were in delay. Considering that their
obligation was reciprocal, performance thereof must be simultaneous. The mutual
COURT inaction of Cortes and the Corporation therefore gave rise to a compensation morae or
default on the part of both parties because neither has completed their part in their
Q How do you know that it was delivered to the plaintiff by the son of the broker? reciprocal obligation.20 Cortes is yet to deliver the original copy of the notarized Deed
and the TCTs, while the Corporation is yet to pay in full the agreed down payment of
A The broker told me that she delivered the title to the plaintiff. P2,200,000.00. This mutual delay of the parties cancels out the effects of default,21
such that it is as if no one is guilty of delay.22
ATTY. ANTARAN

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OBLIGATIONS & CONTRACTS
AGHG

We find no merit in Cortes' contention that the failure of the Corporation to act on the
proposed settlement at the pre-trial must be construed against the latter. Cortes argued
that with his counsel's offer to surrender the original Deed and the TCTs, the
Corporation should have consigned the balance of the down payment. This argument
would have been correct if Cortes actually surrendered the Deed and the TCTs to the
Corporation. With such delivery, the Corporation would have been placed in default if it
chose not to pay in full the required down payment. Under Article 1169 of the Civil
Code, from the moment one of the parties fulfills his obligation, delay by the other
begins. Since Cortes did not perform his part, the provision of the contract requiring the
Corporation to pay in full the down payment never acquired obligatory force. Moreover,
the Corporation could not be faulted for not automatically heeding to the offer of Cortes.
For one, its complaint has a prayer for damages which it may not want to waive by
agreeing to the offer of Cortes' counsel. For another, the previous representation of
Cortes that the TCTs were already delivered to the Corporation when no such delivery
was in fact made, is enough reason for the Corporation to be more cautious in dealing
with him.
The Court of Appeals therefore correctly ordered the parties to perform their respective
obligation in the contract of sale, i.e., for Cortes to, among others, deliver the necessary
documents to the Corporation and for the latter to pay in full, not only the down
payment, but the entire purchase price. And since the Corporation did not question the
Court of Appeal's decision and even prayed for its affirmance, its payment should
rightfully consist not only of the amount of P987,000.00, representing the balance of the
P2,200,000.00 down payment, but the total amount of P2,487,000.00, the remaining
balance in the P3,700,000.00 purchase price.
WHEREFORE, the petition is DENIED and the June 13, 1996 Decision of the Court of
Appeals in CA-G.R. CV No. 47856, is AFFIRMED.
SO ORDERED.
Panganiban, C.J., Austria-Martinez, Callejo, Sr., Chico-Nazario, J.J., concur.
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31
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;
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OBLIGATIONS & CONTRACTS
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32
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.
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33
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.
Makasiar (Chairman), Concepcion Jr., Guerrero and A bad Santos, JJ., concur.
Aquino, J., is on leave.
De Castro, J., took no part,
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.
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.
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34
On 14 March 1988, due to the refusal and failure of respondent to pay the balance,
petitioner filed a complaint to collect the amount. In his Answer before the trial court
respondent denied the claim saying that he had already paid this amount to the San
Pedro General Merchandising Inc. (SPGMI) which constructed the deep well to which
the windmill system was to be connected. According to respondent, since the deep well
formed part of the system the payment he tendered to SPGMI should be credited to his
account by petitioner. Moreover, assuming that he owed petitioner a balance of
P15,000.00, this should be offset by the defects in the windmill system which caused
the structure to collapse after a strong wind hit their place.1
Petitioner denied that the construction of a deep well was included in the agreement to
build the windmill system, for the contract price of P60,000.00 was solely for the
windmill assembly and its installation, exclusive of other incidental materials needed for
the project. He also disowned any obligation to repair or reconstruct the system and
insisted that he delivered it in good and working condition to respondent who accepted
the same without protest. Besides, its collapse was attributable to a typhoon, a force
majeure, which relieved him of any liability.
In finding for plaintiff, the trial court held that the construction of the deep well was not
part of the windmill project as evidenced clearly by the letter proposals submitted by
petitioner to respondent.2 It noted that "[i]f the intention of the parties is to include the
construction of the deep well in the project, the same should be stated in the proposals.
In the absence of such an agreement, it could be safely concluded that the construction
of the deep well is not a part of the project undertaken by the plaintiff."3 With respect to
the repair of the windmill, the trial court found that "there is no clear and convincing
proof that the windmill system fell down due to the defect of the construction."4
The Court of Appeals reversed the trial court. It ruled that the construction of the deep
well was included in the agreement of the parties because the term "deep well" was
mentioned in both proposals. It also gave credence to the testimony of respondent's
witness Guillermo Pili, the proprietor of SPGMI which installed the deep well, that
petitioner Tanguilig told him that the cost of constructing the deep well would be
deducted from the contract price of P60,000.00. Upon these premises the appellate
court concluded that respondent's payment of P15,000.00 to SPGMI should be applied
to his remaining balance with petitioner thus effectively extinguishing his contractual
obligation. However, it rejected petitioner's claim of force majeure and ordered the latter
to reconstruct the windmill in accordance with the stipulated one-year guaranty.
His motion for reconsideration having been denied by the Court of Appeals, petitioner
now seeks relief from this Court. He raises two issues: firstly, whether the agreement to

construct the windmill system included the installation of a deep well and, secondly,
whether petitioner is under obligation to reconstruct the windmill after it collapsed.
We reverse the appellate court on the first issue but sustain it on the second.
The preponderance of evidence supports the finding of the trial court that the
installation of a deep well was not included in the proposals of petitioner to construct a
windmill system for respondent. There were in fact two (2) proposals: one dated 19 May
1987 which pegged the contract price at P87,000.00 (Exh. "1"). This was rejected by
respondent. The other was submitted three days later, i.e., on 22 May 1987 which
contained more specifications but proposed a lower contract price of P60,000.00 (Exh.
"A"). The latter proposal was accepted by respondent and the construction immediately
followed. The pertinent portions of the first letter-proposal (Exh. "1") are reproduced
hereunder —
In connection with your Windmill System and Installation, we would like to quote to you
as follows:
One (1) Set — Windmill suitable for 2 inches diameter deepwell, 2 HP, capacity, 14 feet
in diameter, with 20 pieces blade, Tower 40 feet high, including mechanism which is not
advisable to operate during extra-intensity wind. Excluding cylinder pump.
UNIT CONTRACT PRICE P87,000.00
The second letter-proposal (Exh. "A") provides as follows:
In connection with your Windmill system, Supply of Labor Materials and Installation,
operated water pump, we would like to quote to you as
follows —
One (1) set — Windmill assembly for 2 inches or 3 inches deep-well pump, 6 Stroke, 14
feet diameter, 1-lot blade materials, 40 feet Tower complete with standard
appurtenances up to Cylinder pump, shafting U.S. adjustable International Metal.
One (1) lot — Angle bar, G.I. pipe, Reducer Coupling, Elbow Gate valve, cross Tee
coupling.
One (1) lot — Float valve.
One (1) lot — Concreting materials foundation.
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35
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 consideration5 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 the obligation
has been constituted, or his successor in interest, or any person authorized to receive
it,"9 it does not appear from the record that Pili and/or SPGMI was so authorized.
Respondent cannot claim the benefit of the law concerning "payments made by a third
person."10 The Civil Code provisions do not apply in the instant case because no
creditor-debtor relationship between petitioner and Guillermo Pili and/or SPGMI has
been established regarding the construction of the deep well. Specifically, witness Pili
did not testify that he entered into a contract with petitioner for the construction of
respondent's deep well. If SPGMI was really commissioned by petitioner to construct
the deep well, an agreement particularly to this effect should have been entered into.
The contemporaneous and subsequent acts of the parties concerned effectively belie
respondent's assertions. These circumstances only show that the construction of the
well by SPGMI was for the sole account of respondent and that petitioner merely
supervised the installation of the well because the windmill was to be connected to it.
There is no legal nor factual basis by which this Court can impose upon petitioner an
obligation he did not expressly assume nor ratify.
The second issue is not a novel one. In a long line of cases 11 this Court has
consistently held that in order for a party to claim exemption from liability by reason of
fortuitous event under Art. 1174 of the Civil Code the event should be the sole and
proximate cause of the loss or destruction of the object of the contract. In Nakpil vs.
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36
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.
Padilla, Vitug, Kapunan and Hermosisima, Jr., JJ., concur.

FIRST DIVISION
G.R. No. 144169 March 28, 200
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.
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 ERlC, 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.1âwphi1.nêt
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
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37
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 attorney's 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 party suffering damage has no other legal means to obtain reparation for the same.
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
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38
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
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
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39
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 Bareg's 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 Philam's claims not yet
exhausted at the time the needs of donation were executed and registered.
Respondent Philam would also not have been able to prove then that petitioner Khe
Hong Cheng 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
A final point. Petitioners now belatedly raise on appeal the defense of improper venue
claiming that respondent Philam's complaint is a real action and should have been filed
with the RTC of Butuan City since the property subject matter or the donations are
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40
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., Puno, Pardo, and Ynares-Santiago, JJ., concur.
FIRST DIVISION
G.R. No. 134685 November 19, 1999
MARIA ANTONIA SIGUAN, petitioner,
vs.
ROSA LIM, LINDE LIM, INGRID LIM and NEIL LIM, respondents.
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 petitioner's 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
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41
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 attorney's 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 petitioner's 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 LIM's 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 petitioner's contention that assuming that the Deed of Donation was not
antedated it was nevertheless in fraud of creditors because Victoria Suarez became
LIM's 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
LIM's 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, attorney's fees and
expenses of litigation because there is no factual basis therefor in the body of the trial
court's 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, attorney's 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.
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Art. 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 petitioner's 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.
Petitioner's 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 docum/ents. — 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. Petitioner's 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.
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43
Art. 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, petitioner's 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. Niño 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. Niño 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. Niño 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
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44
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, petitioner's 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
creditor's 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 court's awards of moral damages, attorney's 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.
Puno, Kapunan, Pardo and Ynares-Santiago, JJ., concur.
 45

SECOND DIVISION (e) Ordering defendant United Construction Co., Inc. and third-party defendants (except
G.R. No. L-47851 October 3, 1986 Roman Ozaeta) to pay the costs in equal shares.
JUAN F. NAKPIL & SONS, and JUAN F. NAKPIL, petitioners,
vs. SO ORDERED. (Record on Appeal p. 521; Rollo, L- 47851, p. 169).
THE COURT OF APPEALS, UNITED CONSTRUCTION COMPANY, INC., JUAN J.
CARLOS, and the PHILIPPINE BAR ASSOCIATION, respondents. The dispositive portion of the decision of the Court of Appeals reads:
G.R. No. L-47863 October 3, 1986
THE UNITED CONSTRUCTION CO., INC., petitioner, WHEREFORE, the judgment appealed from is modified to include an award of
vs. P200,000.00 in favor of plaintiff-appellant Philippine Bar Association, with interest at the
COURT OF APPEALS, ET AL., respondents. legal rate from November 29, 1968 until full payment to be paid jointly and severally by
G.R. No. L-47896 October 3, 1986 defendant United Construction Co., Inc. and third party defendants (except Roman
PHILIPPINE BAR ASSOCIATION, ET AL., petitioners, Ozaeta). In all other respects, the judgment dated September 21, 1971 as modified in
vs. the December 8, 1971 Order of the lower court is hereby affirmed with COSTS to be
COURT OF APPEALS, ET AL., respondents. paid by the defendant and third party defendant (except Roman Ozaeta) in equal
PARAS, J.: shares.
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 SO ORDERED.
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 Petitioners Juan F. Nakpil & Sons in L-47851 and United Construction Co., Inc. and
Appeals in modifying the decision of the lower court included an award of an additional Juan J. Carlos in L-47863 seek the reversal of the decision of the Court of Appeals,
amount of P200,000.00 to the Philippine Bar Association to be paid jointly and severally among other things, for exoneration from liability while petitioner Philippine Bar
by the defendant United Construction Co. and by the third-party defendants Juan F. Association in L-47896 seeks the modification of aforesaid decision to obtain an award
Nakpil and Sons and Juan F. Nakpil. 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
The dispositive portion of the modified decision of the lower court reads: damages; and P100,000.00 as attorney's fees.

WHEREFORE, judgment is hereby rendered: 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
(a) Ordering defendant United Construction Co., Inc. and third-party defendants (except respective respondents to comment. (Rollo, L-47851, p. 172).
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 The facts as found by the lower court (Decision, C.C. No. 74958; Record on Appeal, pp.
until full payment; 269-348; pp. 520-521; Rollo, L-47851, p. 169) and affirmed by the Court of Appeals are
as follows:
(b) Dismissing the complaint with respect to defendant Juan J. Carlos;
The plaintiff, Philippine Bar Association, a civic-non-profit association, incorporated
(c) Dismissing the third-party complaint; 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.
(d) Dismissing the defendant's and third-party defendants' counterclaims for lack of The construction was undertaken by the United Construction, Inc. on an
merit; "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
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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
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46
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.
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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 construction alone (and not in the plans and design)
caused the damage to the building, still the deficiency in the original design and jack of
specific provisions against torsion in the original plans and the overload on the ground
floor columns (found by an the experts including the original designer) certainly
contributed to the damage which occurred. (Ibid, p. 174).
In their respective briefs petitioners, among others, raised the following assignments of
errors: Philippine Bar Association claimed that the measure of damages should not be
limited to P1,100,000.00 as estimated cost of repairs or to the period of six (6) months
for loss of rentals while United Construction Co., Inc. and the Nakpils claimed that it
was an act of God that caused the failure of the building which should exempt them
from responsibility and not the defective construction, poor workmanship, deviations
from plans and specifications and other imperfections in the case of United
Construction Co., Inc. or the deficiencies in the design, plans and specifications
prepared by petitioners in the case of the Nakpils. Both UCCI and the Nakpils object to
the payment of the additional amount of P200,000.00 imposed by the Court of Appeals.
UCCI also claimed that it should be reimbursed the expenses of shoring the building in
the amount of P13,661.28 while the Nakpils opposed the payment of damages jointly
and solidarity with UCCI.

The pivotal issue in this case is whether or not an act of God-an unusually strong
earthquake-which caused the failure of the building, exempts from liability, parties who
are otherwise liable because of their negligence.
The applicable law governing the rights and liabilities of the parties herein is Article
1723 of the New Civil Code, which provides:
Art. 1723. The engineer or architect who drew up the plans and specifications for a
building is liable for damages if within fifteen years from the completion of the structure
the same should collapse by reason of a defect in those plans and specifications, or
due to the defects in the ground. The contractor is likewise responsible for the damage
if the edifice fags within the same period on account of defects in the construction or
the use of materials of inferior quality furnished by him, or due to any violation of the
terms of the contract. If the engineer or architect supervises the construction, he shall
be solidarily liable with the contractor.
Acceptance of the building, after completion, does not imply waiver of any of the causes
of action by reason of any defect mentioned in the preceding paragraph.
The action must be brought within ten years following the collapse of the building.
On the other hand, the general rule is that no person shall be responsible for events
which could not be foreseen or which though foreseen, were inevitable (Article 1174,
New Civil Code).
An act of God has been defined as an accident, due directly and exclusively to natural
causes without human intervention, which by no amount of foresight, pains or care,
reasonably to have been expected, could have been prevented. (1 Corpus Juris 1174).
There is no dispute that the earthquake of August 2, 1968 is a fortuitous event or an act
of God.
To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of
an obligation due to an "act of God," the following must concur: (a) the cause of the
breach of the obligation must be independent of the will of the debtor; (b) the event
must be either unforseeable or unavoidable; (c) the event must be such as to render it
impossible for the debtor to fulfill his obligation in a normal manner; and (d) the debtor
must be free from any participation in, or aggravation of the injury to the creditor.
(Vasquez v. Court of Appeals, 138 SCRA 553; Estrada v. Consolacion, 71 SCRA 423;
Austria v. Court of Appeals, 39 SCRA 527; Republic of the Phil. v. Luzon Stevedoring
Corp., 21 SCRA 279; Lasam v. Smith, 45 Phil. 657).
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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,
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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
 50

to its argument that the August 2, 1968 earthquake was of such an overwhelming and Commissioner's Answer, Defendants' Reply to the Commissioner's Answer, Counter-
destructive character that by its own force and independent of the particular negligence Reply to Defendants' Reply, and Third-Party Defendants' Reply to the Commissioner's
alleged, the injury would have been produced. If we follow this line of speculative Report not to mention the exhibits and the testimonies show that the main arguments
reasoning, we will be forced to conclude that under such a situation scores of buildings raised on appeal were already raised during the trial and fully considered by the lower
in the vicinity and in other parts of Manila would have toppled down. Following the Court. A reiteration of these same arguments on appeal fails to convince us that we
same line of reasoning, Nakpil and Sons alleges that the designs were adequate in should reverse or disturb the lower Court's factual findings and its conclusions drawn
accordance with pre-August 2, 1968 knowledge and appear inadequate only in the light from the facts, among them:
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 The Commissioner also found merit in the allegations of the defendants as to the
building must have been designed and constructed by architects and contractors physical evidence before and after the earthquake showing the inadequacy of design,
whose knowledge and foresight were unexplainably auspicious and prophetic. to wit:
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 Physical evidence before the earthquake providing (sic) inadequacy of design;
or comparison to other buildings, to weather the severe earthquake forces was traced
to design deficiencies and defective construction, factors which are neither mysterious 1. inadequate design was the cause of the failure of the building.
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 2. Sun-baffles on the two sides and in front of the building;
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. a. Increase the inertia forces that move the building laterally toward the Manila Fire
It was a result of the imperfections in the work of the architects and the people in the Department.
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 b. Create another stiffness imbalance.
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 3. The embedded 4" diameter cast iron down spout on all exterior columns reduces the
descended and man which built his house the floods came, and the winds blew, and cross-sectional area of each of the columns and the strength thereof.
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 4. Two front corners, A7 and D7 columns were very much less reinforced.
natural forces is precisely the reason why we have professional experts like architects,
and engineers. Designs and constructions vary under varying circumstances and Physical Evidence After the Earthquake, Proving Inadequacy of design;
conditions but the requirement to design and build well does not change.
1. Column A7 suffered the severest fracture and maximum sagging. Also D7.
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 2. There are more damages in the front part of the building than towards the rear, not
earthquake, it also examined the ability of the PBA building, as designed and only in columns but also in slabs.
constructed, to withstand and successfully weather those forces.
3. Building leaned and sagged more on the front part of the building.
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 4. Floors showed maximum sagging on the sides and toward the front corner parts of
responsible for the damages. The Report of the Commissioner, Plaintiff's Objections to the building.
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
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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
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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.
 52

(4) Reinforcement assembly is not concentric with the column, eccentricity being 3" off (8) Column B7 — Spirals not tied to vertical reinforcing bars, Spirals are uneven 2" to
when on one face the main bars are only 1 1/2' from the surface. 4",

(5) Prevalence of honeycombs, (9) Column A3 — Lack of lateral ties,

(6) Contraband construction joints, (10) Column A4 — Spirals cut off and welded to two separate clustered vertical bars,

(7) Absence, or omission, or over spacing of spiral hoops, (11) Column A4 — (second floor Column is completely hollow to a height of 30"

(8) Deliberate severance of spirals into semi-circles in noted on Col. A-5, ground floor, (12) Column A5 — Spirals were cut from the floor level to the bottom of the spandrel
beam to a height of 6 feet,
(9) Defective construction joints in Columns A-3, C-7, D-7 and D-4, ground floor,
(13) Column A6 — No spirals up to a height of 30' above the ground floor level,
(10) Undergraduate concrete is evident,
(14) Column A7— Lack of lateralties or spirals,
(11) Big cavity in core of Column 2A-4, second floor,
c. Summary of alleged defects as reported by the experts of the Third-Party
(12) Columns buckled at different planes. Columns buckled worst where there are no defendants.
spirals or where spirals are cut. Columns suffered worst displacement where the
eccentricity of the columnar reinforcement assembly is more acute. Ground floor columns.

b. Summary of alleged defects as reported by Engr. Antonio Avecilla. (1) Column A4 — Spirals are cut,

Columns are first (or ground) floor, unless otherwise stated. (2) Column A5 — Spirals are cut,

(1) Column D4 — Spacing of spiral is changed from 2" to 5" on centers, (3) Column A6 — At lower 18" spirals are absent,

(2) Column D5 — No spiral up to a height of 22" from the ground floor, (4) Column A7 — Ties are too far apart,

(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,
(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.

(6) Column B6 — Lack of spiral on 2 feet below the floor beams, (8) Column C7— Spirals are absent at lowest 18"

(7) Column B5 — Lack of spirals at a distance of 26' below the beam, (9) Column D5 — At lowest 2 feet spirals are absent,

(10) Column D6 — Spirals are too far apart and apparently improperly spliced,
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(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
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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
54
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54
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.
Feria (Chairman), Fernan, Alampay and Cruz, JJ., concur.
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
55
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55
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:
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56
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.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee, Barredo, Villamor
and Makasiar, JJ., concur.
Castro, J., took no part.

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.
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, bearded 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
attorney's 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 driver's 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 o'clock 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.
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57
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
driver's license and clearances from the barangay, the fiscal and the police.
On August 29, 1991, the lower court rendered a decision2 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
Jesus3 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 11744 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 Decision7 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
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OBLIGATIONS & CONTRACTS
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58
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 obliger
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
 59

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 not negligent
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 vehicle's parts. As the late Justice J.B.L. Reyes said:
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
176419 in relation to Article 220620 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.
Narvasa, C.J., Melo, Francisco and Panganiban, JJ., concur.

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 carrier's 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

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SECOND DIVISION
G.R. No. 147324 May 25, 2004
PHILIPPINE COMMUNICATIONS SATELLITE CORPORATION, petitioner,
vs.
GLOBE TELECOM, INC. (formerly Globe Mckay Cable and Radio Corporation),
respondents.
x-----------------------------
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
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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 attorney’s fees. However,
Globe refused to heed Philcomsat’s 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, attorney’s 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:
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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 attorney’s fees;
3. Ordering the DISMISSAL of defendant’s counterclaim for lack of merit; and
4. With costs against the defendant.
SO ORDERED.9
Both parties appealed the trial court’s 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 attorney’s fees. It explained that it
terminated Philcomsat’s 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
Philcomsat’s appeal for lack of merit and affirming the trial court’s 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 Government’s 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
Philcomsat’s 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
COURT’S AWARD OF ATTORNEY’S 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,
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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 court’s pronouncement
that Globe is liable to pay rentals for December 1992 even though it terminated
Philcomsat’s 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 4.114 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 court’s findings, it is entitled to
attorney’s fees and exemplary damages.16
In its Comment to Philcomsat’s 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 attorney’s 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 Philcomsat’s services were actually terminated on 08 November
1992.20
In its Comment, Philcomsat claims that Globe’s 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 Philcomsat’s
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 attorney’s 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 Philcomsat’s 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:
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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 130626 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 former’s
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
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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…. 32 (Emphasis in the original.)
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 PHILCOMSAT’s 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 GLOBE’s 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 court’s 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 court’s 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 attorney’s fees and exemplary damages.
The award of attorney’s 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 attorney’s fees where a party acted in gross and evident bad faith in
refusing to satisfy the other party’s 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 attorney’s 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 Philcomsat’s 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.
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SO ORDERED.
Puno*, Quisumbing, Austria-Martinez, and Callejo, Sr., JJ., concur.
FIRST DIVISION
G.R. No. 147561 June 22, 2006
STRONGHOLD INSURANCE COMPANY, INC., Petitioner,
vs.
REPUBLIC-ASAHI GLASS CORPORATION, Respondent.
DECISION
PANGANIBAN, CJ:
Asurety company’s liability under the performance bond it issues is solidary. The death
of the principal obligor does not, as a rule, extinguish the obligation and the solidary
nature of that liability.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to
reverse the March 13, 2001 Decision2 of the Court of Appeals (CA) in CA-GR CV No.
41630. The assailed Decision disposed as follows:
"WHEREFORE, the Order dated January 28, 1993 issued by the lower court is
REVERSED and SET ASIDE. Let the records of the instant case be REMANDED to the
lower court for the reception of evidence of all parties."3
The Facts
The facts of the case are narrated by the CA in this wise:
"On May 24, 1989, [respondent] Republic-Asahi Glass Corporation (Republic-Asahi)
entered into a contract with x x x Jose D. Santos, Jr., the proprietor of JDS Construction
(JDS), for the construction of roadways and a drainage system in Republic-Asahi’s
compound in Barrio Pinagbuhatan, Pasig City, where [respondent] was to pay x x x
JDS five million three hundred thousand pesos (P5,300,000.00) inclusive of value
added tax for said construction, which was supposed to be completed within a period of
two hundred forty (240) days beginning May 8, 1989. In order ‘to guarantee the faithful
and satisfactory performance of its undertakings’ x x x JDS, shall post a performance
bond of seven hundred ninety five thousand pesos (P795,000.00). x x x JDS executed,
jointly and severally with [petitioner] Stronghold Insurance Co., Inc. (SICI) Performance
Bond No. SICI-25849/g(13)9769.

"On May 23, 1989, [respondent] paid to x x x JDS seven hundred ninety five thousand
pesos (P795,000.00) by way of downpayment.
"Two progress billings dated August 14, 1989 and September 15, 1989, for the total
amount of two hundred seventy four thousand six hundred twenty one pesos and one
centavo (P274,621.01) were submitted by x x x JDS to [respondent], which the latter
paid. According to [respondent], these two progress billings accounted for only 7.301%
of the work supposed to be undertaken by x x x JDS under the terms of the contract.
"Several times prior to November of 1989, [respondent’s] engineers called the attention
of x x x JDS to the alleged alarmingly slow pace of the construction, which resulted in
the fear that the construction will not be finished within the stipulated 240-day period.
However, said reminders went unheeded by x x x JDS.
"On November 24, 1989, dissatisfied with the progress of the work undertaken by x x x
JDS, [respondent] Republic-Asahi extrajudicially rescinded the contract pursuant to
Article XIII of said contract, and wrote a letter to x x x JDS informing the latter of such
rescission. Such rescission, according to Article XV of the contract shall not be
construed as a waiver of [respondent’s] right to recover damages from x x x JDS and
the latter’s sureties.
"[Respondent] alleged that, as a result of x x x JDS’s failure to comply with the
provisions of the contract, which resulted in the said contract’s rescission, it had to hire
another contractor to finish the project, for which it incurred an additional expense of
three million two hundred fifty six thousand, eight hundred seventy four pesos
(P3,256,874.00).
"On January 6, 1990, [respondent] sent a letter to [petitioner] SICI filing its claim under
the bond for not less than P795,000.00. On March 22, 1991, [respondent] again sent
another letter reiterating its demand for payment under the aforementioned bond. Both
letters allegedly went unheeded.
"[Respondent] then filed [a] complaint against x x x JDS and SICI. It sought from x x x
JDS payment of P3,256,874.00 representing the additional expenses incurred by
[respondent] for the completion of the project using another contractor, and from x x x
JDS and SICI, jointly and severally, payment of P750,000.00 as damages in
accordance with the performance bond; exemplary damages in the amount of
P100,000.00 and attorney’s fees in the amount of at least P100,000.00.
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"According to the Sheriff’s Return dated June 14, 1991, submitted to the lower court by
Deputy Sheriff Rene R. Salvador, summons were duly served on defendant-appellee
SICI. However, x x x Jose D. Santos, Jr. died the previous year (1990), and x x x JDS
Construction was no longer at its address at 2nd Floor, Room 208-A, San Buena Bldg.
Cor. Pioneer St., Pasig, Metro Manila, and its whereabouts were unknown.
"On July 10, 1991, [petitioner] SICI filed its answer, alleging that the [respondent’s]
money claims against [petitioner and JDS] have been extinguished by the death of
Jose D. Santos, Jr. Even if this were not the case, [petitioner] SICI had been released
from its liability under the performance bond because there was no liquidation, with the
active participation and/or involvement, pursuant to procedural due process, of herein
surety and contractor Jose D. Santos, Jr., hence, there was no ascertainment of the
corresponding liabilities of Santos and SICI under the performance bond. At this point
in time, said liquidation was impossible because of the death of Santos, who as such
can no longer participate in any liquidation. The unilateral liquidation on the party (sic)
of [respondent] of the work accomplishments did not bind SICI for being violative of
procedural due process. The claim of [respondent] for the forfeiture of the performance
bond in the amount of P795,000.00 had no factual and legal basis, as payment of said
bond was conditioned on the payment of damages which [respondent] may sustain in
the event x x x JDS failed to complete the contracted works. [Respondent] can no
longer prove its claim for damages in view of the death of Santos. SICI was not
informed by [respondent] of the death of Santos. SICI was not informed by [respondent]
of the unilateral rescission of its contract with JDS, thus SICI was deprived of its right to
protect its interests as surety under the performance bond, and therefore it was
released from all liability. SICI was likewise denied due process when it was not notified
of plaintiff-appellant’s process of determining and fixing the amount to be spent in the
completion of the unfinished project. The procedure contained in Article XV of the
contract is against public policy in that it denies SICI the right to procedural due
process. Finally, SICI alleged that [respondent] deviated from the terms and conditions
of the contract without the written consent of SICI, thus the latter was released from all
liability. SICI also prayed for the award of P59,750.00 as attorney’s fees, and P5,000.00
as litigation expenses.
"On August 16, 1991, the lower court issued an order dismissing the complaint of
[respondent] against x x x JDS and SICI, on the ground that the claim against JDS did
not survive the death of its sole proprietor, Jose D. Santos, Jr. The dispositive portion of
the [O]rder reads as follows:
‘ACCORDINGLY, the complaint against the defendants Jose D. Santos, Jr., doing
business under trade and style, ‘JDS Construction’ and Stronghold Insurance
Company, Inc. is ordered DISMISSED.

‘SO ORDERED.’
"On September 4, 1991, [respondent] filed a Motion for Reconsideration seeking
reconsideration of the lower court’s August 16, 1991 order dismissing its complaint.
[Petitioner] SICI field its ‘Comment and/or Opposition to the Motion for
Reconsideration.’ On October 15, 1991, the lower court issued an Order, the dispositive
portion of which reads as follows:
‘WHEREFORE, premises considered, the Motion for Reconsideration is hereby given
due course. The Order dated 16 August 1991 for the dismissal of the case against
Stronghold Insurance Company, Inc., is reconsidered and hereby reinstated (sic).
However, the case against defendant Jose D. Santos, Jr. (deceased) remains
undisturbed.
‘Motion for Preliminary hearing and Manifestation with Motion filed by [Stronghold]
Insurance Company Inc., are set for hearing on November 7, 1991 at 2:00 o’clock in the
afternoon.
‘SO ORDERED.’
"On June 4, 1992, [petitioner] SICI filed its ‘Memorandum for Bondsman/Defendant
SICI (Re: Effect of Death of defendant Jose D. Santos, Jr.)’ reiterating its prayer for the
dismissal of [respondent’s] complaint.
"On January 28, 1993, the lower court issued the assailed Order reconsidering its
Order dated October 15, 1991, and ordered the case, insofar as SICI is concerned,
dismissed. [Respondent] filed its motion for reconsideration which was opposed by
[petitioner] SICI. On April 16, 1993, the lower court denied [respondent’s] motion for
reconsideration. x x x."4
Ruling of the Court of Appeals
The CA ruled that SICI’s obligation under the surety agreement was not extinguished
by the death of Jose D. Santos, Jr. Consequently, Republic-Asahi could still go after
SICI for the bond.
The appellate court also found that the lower court had erred in pronouncing that the
performance of the Contract in question had become impossible by respondent’s act of
rescission. The Contract was rescinded because of the dissatisfaction of respondent
with the slow pace of work and pursuant to Article XIII of its Contract with JDS.
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The CA ruled that "[p]erformance of the [C]ontract was impossible, not because of
[respondent’s] fault, but because of the fault of JDS Construction and Jose D. Santos,
Jr. for failure on their part to make satisfactory progress on the project, which amounted
to non-performance of the same. x x x [P]ursuant to the [S]urety [C]ontract, SICI is
liable for the non-performance of said [C]ontract on the part of JDS Construction."5
Hence, this Petition.6
Issue
Petitioner states the issue for the Court’s consideration in the following manner:
"Death is a defense of Santos’ heirs which Stronghold could also adopt as its defense
against obligee’s claim."7
More precisely, the issue is whether petitioner’s liability under the performance bond
was automatically extinguished by the death of Santos, the principal.
The Court’s Ruling
The Petition has no merit.
Sole Issue:
Effect of Death on the Surety’s Liability
Petitioner contends that the death of Santos, the bond principal, extinguished his
liability under the surety bond. Consequently, it says, it is automatically released from
any liability under the bond.
As a general rule, the death of either the creditor or the debtor does not extinguish the
obligation.8 Obligations are transmissible to the heirs, except when the transmission is
prevented by the law, the stipulations of the parties, or the nature of the obligation.9
Only obligations that are personal10 or are identified with the persons themselves are
extinguished by death.11
Section 5 of Rule 8612 of the Rules of Court expressly allows the prosecution of money
claims arising from a contract against the estate of a deceased debtor. Evidently, those
claims are not actually extinguished.13 What is extinguished is only the obligee’s action
or suit filed before the court, which is not then acting as a probate court.14

In the present case, whatever monetary liabilities or obligations Santos had under his
contracts with respondent were not intransmissible by their nature, by stipulation, or by
provision of law. Hence, his death did not result in the extinguishment of those
obligations or liabilities, which merely passed on to his estate.15 Death is not a defense
that he or his estate can set up to wipe out the obligations under the performance bond.
Consequently, petitioner as surety cannot use his death to escape its monetary
obligation under its performance bond.
The liability of petitioner is contractual in nature, because it executed a performance
bond worded as follows:
"KNOW ALL MEN BY THESE PRESENTS:
"That we, JDS CONSTRUCTION of 208-A San Buena Building, contractor, of Shaw
Blvd., Pasig, MM Philippines, as principal and the STRONGHOLD INSURANCE
COMPANY, INC. a corporation duly organized and existing under and by virtue of the
laws of the Philippines with head office at Makati, as Surety, are held and firmly bound
unto the REPUBLIC ASAHI GLASS CORPORATION and to any individual, firm,
partnership, corporation or association supplying the principal with labor or materials in
the penal sum of SEVEN HUNDRED NINETY FIVE THOUSAND (P795,000.00),
Philippine Currency, for the payment of which sum, well and truly to be made, we bind
ourselves, our heirs, executors, administrators, successors and assigns, jointly and
severally, firmly by these presents.
"The CONDITIONS OF THIS OBLIGATION are as follows;
"WHEREAS the above bounden principal on the ___ day of __________, 19__ entered
into a contract with the REPUBLIC ASAHI GLASS CORPORATION represented by
_________________, to fully and faithfully. Comply with the site preparation works
road and drainage system of Philippine Float Plant at Pinagbuhatan, Pasig, Metro
Manila.
"WHEREAS, the liability of the Surety Company under this bond shall in no case
exceed the sum of PESOS SEVEN HUNDRED NINETY FIVE THOUSAND
(P795,000.00) Philippine Currency, inclusive of interest, attorney’s fee, and other
damages, and shall not be liable for any advances of the obligee to the principal.
"WHEREAS, said contract requires the said principal to give a good and sufficient bond
in the above-stated sum to secure the full and faithfull performance on its part of said
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contract, and the satisfaction of obligations for materials used and labor employed upon
the work;
"NOW THEREFORE, if the principal shall perform well and truly and fulfill all the
undertakings, covenants, terms, conditions, and agreements of said contract during the
original term of said contract and any extension thereof that may be granted by the
obligee, with notice to the surety and during the life of any guaranty required under the
contract, and shall also perform well and truly and fulfill all the undertakings, covenants,
terms, conditions, and agreements of any and all duly authorized modifications of said
contract that may hereinafter be made, without notice to the surety except when such
modifications increase the contract price; and such principal contractor or his or its sub-
contractors shall promptly make payment to any individual, firm, partnership,
corporation or association supplying the principal of its sub-contractors with labor and
materials in the prosecution of the work provided for in the said contract, then, this
obligation shall be null and void; otherwise it shall remain in full force and effect. Any
extension of the period of time which may be granted by the obligee to the contractor
shall be considered as given, and any modifications of said contract shall be
considered as authorized, with the express consent of the Surety.
"The right of any individual, firm, partnership, corporation or association supplying the
contractor with labor or materials for the prosecution of the work hereinbefore stated, to
institute action on the penal bond, pursuant to the provision of Act No. 3688, is hereby
acknowledge and confirmed."16
As a surety, petitioner is solidarily liable with Santos in accordance with the Civil Code,
which provides as follows:
"Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do so.
"If a person binds himself solidarily with the principal debtor, the provisions of Section
4,17 Chapter 3, Title I of this Book shall be observed. In such case the contract is called
a suretyship."
xxxxxxxxx
"Art. 1216. The creditor may proceed against any one of the solidary debtors or some
or all of them simultaneously. The demand made against one of them shall not be an
obstacle to those which may subsequently be directed against the others, so long as
the debt has not been fully collected."

Elucidating on these provisions, the Court in Garcia v. Court of Appeals18 stated thus:
"x x x. The surety’s obligation is not an original and direct one for the performance of
his own act, but merely accessory or collateral to the obligation contracted by the
principal. Nevertheless, although the contract of a surety is in essence secondary only
to a valid principal obligation, his liability to the creditor or promisee of the principal is
said to be direct, primary and absolute; in other words, he is directly and equally bound
with the principal. x x x."19
Under the law and jurisprudence, respondent may sue, separately or together, the
principal debtor and the petitioner herein, in view of the solidary nature of their liability.
The death of the principal debtor will not work to convert, decrease or nullify the
substantive right of the solidary creditor. Evidently, despite the death of the principal
debtor, respondent may still sue petitioner alone, in accordance with the solidary nature
of the latter’s liability under the performance bond.
WHEREFORE, the Petition is DENIED and the Decision of the Court of Appeals
AFFIRMED. Costs against petitioner.
SO ORDERED.
SECOND DIVISION
G.R. No. 178610 November 17, 2010
HONGKONG AND SHANGHAI BANKING CORP., LTD. STAFF RETIREMENT PLAN,
Retirement Trust Fund, Inc.) Petitioner,
vs.
SPOUSES BIENVENIDO AND EDITHA BROQUEZA, Respondents.
DECISION
CARPIO, J.:
G.R. No. 178610 is a petition for review1 assailing the Decision2 promulgated on 30
March 2006 by the Court of Appeals (CA) in CA-G.R. SP No. 62685. The appellate
court granted the petition filed by Fe Gerong (Gerong) and Spouses Bienvenido and
Editha Broqueza (spouses Broqueza) and dismissed the consolidated complaints filed
by Hongkong and Shanghai Banking Corporation, Ltd. - Staff Retirement Plan (HSBCL-
SRP) for recovery of sum of money. The appellate court reversed and set aside the
Decision3 of Branch 139 of the Regional Trial Court of Makati City (RTC) in Civil Case
No. 00-787 dated 11 December 2000, as well as its Order4 dated 5 September 2000.
The RTC’s decision affirmed the Decision5 dated 28 December 1999 of Branch 61 of
the Metropolitan Trial Court (MeTC) of Makati City in Civil Case No. 52400 for Recovery
of a Sum of Money.
The Facts
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The appellate court narrated the facts as follows:
Petitioners Gerong and [Editha] Broqueza (defendants below) are employees of
Hongkong and Shanghai Banking Corporation (HSBC). They are also members of
respondent Hongkong Shanghai Banking Corporation, Ltd. Staff Retirement Plan
(HSBCL-SRP, plaintiff below). The HSBCL-SRP is a retirement plan established by
HSBC through its Board of Trustees for the benefit of the employees.
On October 1, 1990, petitioner [Editha] Broqueza obtained a car loan in the amount of
Php175,000.00. On December 12, 1991, she again applied and was granted an
appliance loan in the amount of Php24,000.00. On the other hand, petitioner Gerong
applied and was granted an emergency loan in the amount of Php35,780.00 on June 2,
1993. These loans are paid through automatic salary deduction.
Meanwhile [in 1993], a labor dispute arose between HSBC and its employees. Majority
of HSBC’s employees were terminated, among whom are petitioners Editha Broqueza
and Fe Gerong. The employees then filed an illegal dismissal case before the National
Labor Relations Commission (NLRC) against HSBC. The legality or illegality of such
termination is now pending before this appellate Court in CA G.R. CV No. 56797,
entitled Hongkong Shanghai Banking Corp. Employees Union, et al. vs. National Labor
Relations Commission, et al.
Because of their dismissal, petitioners were not able to pay the monthly amortizations
of their respective loans. Thus, respondent HSBCL-SRP considered the accounts of
petitioners delinquent. Demands to pay the respective obligations were made upon
petitioners, but they failed to pay.6
HSBCL-SRP, acting through its Board of Trustees and represented by Alejandro L.
Custodio, filed Civil Case No. 52400 against the spouses Broqueza on 31 July 1996.
On 19 September 1996, HSBCL-SRP filed Civil Case No. 52911 against Gerong. Both
suits were civil actions for recovery and collection of sums of money.
The Metropolitan Trial Court’s Ruling
On 28 December 1999, the MeTC promulgated its Decision7 in favor of HSBCL-SRP.
The MeTC ruled that the nature of HSBCL-SRP’s demands for payment is civil and has
no connection to the ongoing labor dispute. Gerong and Editha Broqueza’s termination
from employment resulted in the loss of continued benefits under their retirement plans.
Thus, the loans secured by their future retirement benefits to which they are no longer

entitled are reduced to unsecured and pure civil obligations. As unsecured and pure
obligations, the loans are immediately demandable.
The dispositive portion of the MeTC’s decision reads:
WHEREFORE, premises considered and in view of the foregoing, the Court finds that
the plaintiff was able to prove by a preponderance of evidence the existence and
immediate demandability of the defendants’ loan obligations as judgment is hereby
rendered in favor of the plaintiff and against the defendants in both cases, ordering the
latter:
1. In Civil Case No. 52400, to pay the amount of Php116,740.00 at six percent interest
per annum from the time of demand and in Civil Case No. 52911, to pay the amount of
Php25,344.12 at six percent per annum from the time of the filing of these cases, until
the amount is fully paid;
2. To pay the amount of Php20,000.00 each as reasonable attorney’s fees;
3. Cost of suit.
SO ORDERED.8
Gerong and the spouses Broqueza filed a joint appeal of the MeTC’s decision before
the RTC. Gerong’s case was docketed Civil Case No. 00-786, while the spouses
Broqueza’s case was docketed as Civil Case No. 00-787.
The Regional Trial Court’s Ruling
The RTC initially denied the joint appeal because of the belated filing of Gerong and the
spouses Broqueza’s memorandum. The RTC later reconsidered the order of denial and
resolved the issues in the interest of justice.
On 11 December 2000, the RTC affirmed the MeTC’s decision in toto.9
The RTC ruled that Gerong and Editha Broqueza’s termination from employment
disqualified them from availing of benefits under their retirement plans. As a
consequence, there is no longer any security for the loans. HSBCL-SRP has a legal
right to demand immediate settlement of the unpaid balance because of Gerong and
Editha Broqueza’s continued default in payment and their failure to provide new
security for their loans. Moreover, the absence of a period within which to pay the loan
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allows HSBCL-SRP to demand immediate payment. The loan obligations are
considered pure obligations, the fulfillment of which are demandable at once.
Gerong and the spouses Broqueza then filed a Petition for Review under Rule 42
before the CA.
The Ruling of the Court of Appeals
On 30 March 2006, the CA rendered its Decision10 which reversed the 11 December
2000 Decision of the RTC. The CA ruled that the HSBCL-SRP’s complaints for
recovery of sum of money against Gerong and the spouses Broqueza are premature as
the loan obligations have not yet matured. Thus, no cause of action accrued in favor of
HSBCL-SRP. The dispositive portion of the appellate court’s Decision reads as follows:
WHEREFORE, the assailed Decision of the RTC is REVERSED and SET ASIDE. A
new one is hereby rendered DISMISSING the consolidated complaints for recovery of
sum of money.
SO ORDERED.11
HSBCL-SRP filed a motion for reconsideration which the CA denied for lack of merit in
its Resolution12 promulgated on 19 June 2007.
On 6 August 2007, HSBCL-SRP filed a manifestation withdrawing the petition against
Gerong because she already settled her obligations. In a Resolution13 of this Court
dated 10 September 2007, this Court treated the manifestation as a motion to withdraw
the petition against Gerong, granted the motion, and considered the case against
Gerong closed and terminated.
Issues
HSBCL-SRP enumerated the following grounds to support its Petition:
I. The Court of Appeals has decided a question of substance in a way not in accord
with law and applicable decisions of this Honorable Court; and
II. The Court of Appeals has departed from the accepted and usual course of judicial
proceedings in reversing the decision of the Regional Trial Court and the Metropolitan
Trial Court.14
The Court’s Ruling

The petition is meritorious. We agree with the rulings of the MeTC and the RTC.
The Promissory Notes uniformly provide:
PROMISSORY NOTE
P_____ Makati, M.M. ____ 19__
FOR VALUE RECEIVED, I/WE _____ jointly and severally promise to pay to THE
HSBC RETIREMENT PLAN (hereinafter called the "PLAN") at its office in the
Municipality of Makati, Metro Manila, on or before until fully paid the sum of PESOS ___
(P___) Philippine Currency without discount, with interest from date hereof at the rate of
Six per cent (6%) per annum, payable monthly.
I/WE agree that the PLAN may, upon written notice, increase the interest rate stipulated
in this note at any time depending on prevailing conditions.
I/WE hereby expressly consent to any extensions or renewals hereof for a portion or
whole of the principal without notice to the other(s), and in such a case our liability shall
remain joint and several.1avvphi1
In case collection is made by or through an attorney, I/WE jointly and severally agree to
pay ten percent (10%) of the amount due on this note (but in no case less than
P200.00) as and for attorney’s fees in addition to expenses and costs of suit.
In case of judicial execution, I/WE hereby jointly and severally waive our rights under
the provisions of Rule 39, Section 12 of the Rules of Court.15
In ruling for HSBCL-SRP, we apply the first paragraph of Article 1179 of the Civil Code:
Art. 1179. Every obligation whose performance does not depend upon a future or
uncertain event, or upon a past event unknown to the parties, is demandable at once.
x x x. (Emphasis supplied.)
We affirm the findings of the MeTC and the RTC that there is no date of payment
indicated in the Promissory Notes. The RTC is correct in ruling that since the
Promissory Notes do not contain a period, HSBCL-SRP has the right to demand
immediate payment. Article 1179 of the Civil Code applies. The spouses Broqueza’s
obligation to pay HSBCL-SRP is a pure obligation. The fact that HSBCL-SRP was
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71
content with the prior monthly check-off from Editha Broqueza’s salary is of no moment.
Once Editha Broqueza defaulted in her monthly payment, HSBCL-SRP made a
demand to enforce a pure obligation.
In their Answer, the spouses Broqueza admitted that prior to Editha Broqueza’s
dismissal from HSBC in December 1993, she "religiously paid the loan amortizations,
which HSBC collected through payroll check-off."16 A definite amount is paid to
HSBCL-SRP on a specific date. Editha Broqueza authorized HSBCL-SRP to make
deductions from her payroll until her loans are fully paid. Editha Broqueza, however,
defaulted in her monthly loan payment due to her dismissal. Despite the spouses
Broqueza’s protestations, the payroll deduction is merely a convenient mode of
payment and not the sole source of payment for the loans. HSBCL-SRP never agreed
that the loans will be paid only through salary deductions. Neither did HSBCL-SRP
agree that if Editha Broqueza ceases to be an employee of HSBC, her obligation to pay
the loans will be suspended. HSBCL-SRP can immediately demand payment of the
loans at anytime because the obligation to pay has no period. Moreover, the spouses
Broqueza have already incurred in default in paying the monthly installments.
Finally, the enforcement of a loan agreement involves "debtor-creditor relations
founded on contract and does not in any way concern employee relations. As such it
should be enforced through a separate civil action in the regular courts and not before
the Labor Arbiter."17
WHEREFORE, we GRANT the petition. The Decision of the Court of Appeals in CA-
G.R. SP No. 62685 promulgated on 30 March 2006 is REVERSED and SET ASIDE.
The decision of Branch 139 of the Regional Trial Court of Makati City in Civil Case No.
00-787, as well as the decision of Branch 61 of the Metropolitan Trial Court of Makati
City in Civil Case No. 52400 against the spouses Bienvenido and Editha Broqueza, are
AFFIRMED. Costs against respondents.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice

THIRD DIVISION
G.R. No. 131784 September 16, 1999
FELIX I. GONZALES, petitioner,
vs.
THE HEIRS OF THOMAS and PAULA CRUZ, herein represented by ELENA C.
TALENS, respondents.
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. P5,000.00 as attorney's fees; and
3. Costs of suit. 3
On the other hand, the trial court 4 Decision, 5 which was 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 attorney's fees; and
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(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 Año 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 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.
xxx xxx xxx
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.
xxx xxx xxx

(Exhibits A, A-1; pp. 157-158. Records)
The defendant Gonzales paid the P2,500.00 per hectare of 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 defendant's 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 Año 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 Año 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
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73
damages, both moral and compensatory and attorney's 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 obligers 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. . . ." 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
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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 appellee's brief as per the Court's
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 appellee's name. The Court
finds this interpretation of the provision strained if not altogether absurd. The transfer of
title to the property in the appellee's 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 first be payment of the agreed purchase price before
transfer of title to the vendee's name can be made.
This was precisely what the appellants and Paula Año 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 appellee's 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.
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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 Court's 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 petitioner's
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 petitioner's 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.
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It is well-settled principle in law that no one can five 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 . . . shall undertake to obtain a separate and distinct TCT . . . to
the LESSEE within a reasonable period of time which shall not in any case exceed four
(4) years . . .. " Read in its entirety, however, paragraph nine does not say that the TCT
should be obtain 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 court's 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 the 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 petitioner's 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
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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 latter's obligation to purchase and pay for the land.
Put differently, petitioner's 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, they have not caused the
transfer of the TCT to their names, which is a condition precedent to petitioner's
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 court's judgment should be
reinstated. However, we find no sufficient factual or legal justifications for the award of
moral damages and attorney's 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 attorney's fees is DELETED for lack of basis. No costs.
SO ORDERED.
Melo, Purisima and Gonzaga-Reyes, JJ., concur.
Vitug, J., took no part.
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.
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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.
Street, Villamor, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur.
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;
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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
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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. 10 Records 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.
Quiason and Kapunan, JJ., concur.
SECOND DIVISION
G.R. No. 87047 October 31, 1990
FRANCISCO LAO LIM, petitioner,
vs.
COURT OF APPEALS and BENITO VILLAVICENCIO DY, respondents.
Gener E. Asuncion for petitioner.
Natividad T. Perez for private respondent.
REGALADO, J.:
Respondent Court of Appeals having affirmed in toto on June 30, 1988 in CA-G.R. SP
No. 13925, 1 the decision of the Regional Trial Court of Manila, Branch XLVI in Civil
Case No. 87-42719, entitled "Francisco Lao Lim vs. Benito Villavicencio Dy," petitioner
seeks the reversal of such affirmance in the instant petition.
The records show that private respondent entered into a contract of lease with
petitioner for a period of three (3) years, that is, from 1976 to 1979. After the stipulated
term expired, private respondent refused to vacate the premises, hence, petitioner filed
an ejectment suit against the former in the City Court of Manila, docketed therein as
Civil Case No. 051063-CV. The case was terminated by a judicially approved
compromise agreement of the parties providing in part:
3. That the term of the lease shall be renewed every three years retroacting from
October 1979 to October 1982; after which the abovenamed rental shall be raised
automatically by 20% every three years for as long as defendant needed the premises
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and can meet and pay the said increases, the defendant to give notice of his intent to
renew sixty (60) days before the expiration of the term; 2
By reason of said compromise agreement the lease continued from 1979 to 1982, then
from 1982 to 1985. On April 17, 1985, petitioner advised private respondent that he
would no longer renew the contract effective October, 1985.3 However, on August 5,
1985, private respondent informed petitioner in writing of his intention to renew the
contract of lease for another term, commencing November, 1985 to October, 1988. 4 In
reply to said letter, petitioner advised private respondent that he did not agree to a
renewal of the lease contract upon its expiration in October, 1985. 5
On January 15, 1986, because of private respondent's refusal to vacate the premises,
petitioner filed another ejectment suit, this time with the Metropolitan Trial Court of
Manila in Civil Case No. 114659-CV. In its decision of September 24, 1987, said court
dismissed the complaint on the grounds that (1) the lease contract has not expired,
being a continuous one the period whereof depended upon the lessee's need for the
premises and his ability to pay the rents; and (2) the compromise agreement entered
into in the aforesaid Civil Case No. 051063-CV constitutes res judicata to the case
before it. 6
Petitioner appealed to the Regional Trial Court of Manila which, in its decision of
January 28, 1988 in Civil Case No. 87-42719, affirmed the decision of the lower court. 7
As stated at the outset, respondent Court of Appeals affirmed in full said decision of the
Regional Trial Court and held that (1) the stipulation in the compromise agreement
which, in its formulation, allows the lessee to stay on the premises as long as he needs
it and can pay rents is valid, being a resolutory condition and, therefore, beyond the
ambit of Article 1308 of the Civil Code; and (2) that a compromise has the effect of res
judicata. 8
Petitioner's motion for reconsideration having been denied by respondent Court of
Appeals, this present petition is now before us. We find the same to be meritorious.
Contrary to the ruling of respondent court, the disputed stipulation "for as long as the
defendant needed the premises and can meet and pay said increases" is a purely
potestative condition because it leaves the effectivity and enjoyment of leasehold rights
to the sole and exclusive will of the lessee. It is likewise a suspensive condition
because the renewal of the lease, which gives rise to a new lease, depends upon said
condition. It should be noted that a renewal constitutes a new contract of lease
although with the same terms and conditions as those in the expired lease. It should
also not be overlooked that said condition is not resolutory in nature because it is not a

condition that terminates the lease contract. The lease contract is for a definite period of
three (3) years upon the expiration of which the lease automatically terminates.
The invalidity of a condition in a lease contract similar to the one at bar has been
resolved in Encarnacion vs. Baldomar, et al. 9 where we ruled that in an action for
ejectment, the defense interposed by the lessees that the contract of lease authorized
them to continue occupying the premises as long as they paid the rents is untenable,
because it would leave to the lessees the sole power to determine whether the lease
should continue or not. As stated therein, "(i)f this defense were to be allowed, so long
as defendants elected to continue the lease by continuing the payment of the rentals,
the owner would never be able to discontinue it; conversely, although the owner should
desire the lease to continue, the lessees could effectively thwart his purpose if they
should prefer to terminate the contract by the simple expedient of stopping payment of
the rentals. This, of course, is prohibited by the aforesaid article of the Civil Code. (8
Manresa, 3rd ed., pp. 626, 627; Cuyugan vs. Santos, 34 Phil. 100.)
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 and no equality
exists between the lessor and the lessee since the life of the contract is dictated solely
by the lessee.
The interpretation made by respondent court cannot, therefore, be upheld. Paragraph 3
of the compromise agreement, read and interpreted in its entirety, is actually to the
effect that the last portion thereof, which gives the private respondent sixty (60) days
before the expiration of the term the right to give notice of his intent to renew, is subject
to the first portion of said paragraph that "the term of the lease shall be renewed every
three (3) years," thereby requiring the mutual agreement of the parties. The use of the
word "renew" and the designation of the period of three (3) years clearly confirm that
the contract of lease is limited to a specific period and that it is not a continuing lease.
The stipulation provides for a renewal of the lease every three (3) years; there could not
be a renewal if said lease did not expire, otherwise there is nothing to renew.
Resultantly, the contract of lease should be and is hereby construed as providing for a
definite period of three (3) years and that the automatic increase of the rentals by
twenty percent (20%) will take effect only if the parties decide to renew the lease. A
contrary interpretation will result in a situation where the continuation and effectivity of
the contract will depend only upon the will of the lessee, in violation of Article 1308 of
the Civil Code and the aforesaid doctrine in Encarnacion. The compromise agreement
should be understood as bearing that import which is most adequate to render it
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effectual. 10 Where the instrument is susceptible of two interpretations, one which will
make it invalid and illegal and another which will make it valid and legal, the latter
interpretation should be adopted. 11
Moreover, perpetual leases are not favored in law, nor are covenants for continued
renewals tending to create a perpetuity, and the rule of construction is well settled that
a covenant for renewal or for an additional term should not be held to create a right to
repeated grants in perpetuity, unless by plain and unambiguous terms the parties have
expressed such intention. 12 A lease will not be construed to create a right to perpetual
renewals unless the language employed indicates dearly and unambiguously that it
was the intention and purpose of the parties to do so. 13 A portion in a lease giving the
lessee and his assignee the right to perpetual renewals is not favored by the courts,
and a lease will be construed as not making such a provision unless it does so clearly.
14
As we have further emphasized:
It is also important to bear in mind that in a reciprocal contract like a lease, the period of
the lease must be deemed to have been agreed upon for the benefit of both parties,
absent language showing that the term was deliberately set for the benefit of the lessee
or lessor alone. We are not aware of any presumption in law that the term of a lease is
designed for the benefit of the lessee alone. Koh and Cruz in effect rested upon such a
presumption. But that presumption cannot reasonably be indulged in casually in an era
of rapid economic change, marked by, among other things, volatile costs of living and
fluctuations in the value of the domestic currency. The longer the period the more
clearly unreasonable such a presumption would be. In an age like that we live in, very
specific language is necessary to show an intent to grant a unilateral faculty to extend
or renew a contract of lease to the lessee alone, or to the lessor alone for that matter.
We hold that the above-quoted rulings in Koh v. Ongsiaco and Cruz v. Alberto should
be and are overruled. 15
In addition, even assuming that the clause "for as long as the defendant needed the
premises and can meet and pay, said increases" gives private respondent an option to
renew the lease, the same will be construed as providing for but one renewal or
extension and, therefore, was satisfied when the lease was renewed in 1982 for
another three (3) years. A general covenant to renew is satisfied by one renewal and
will not be construed to confer the right to more than one renewal unless provision is
clearly and expressly made for further renewals.16 Leases which may have been
intended to be renewable in perpetuity will nevertheless be construed as importing but
one renewal if there is any uncertainty in that regard. 17

The case of Buccat vs. Dispo et al., 18 relied upon by responddent court, to support its
holding that respondent lessee can legally stay on the premises for as long as he
needs it and can pay the rents, is not in point. In said case, the lease contract provides
for an indefinite period since it merely stipulates "(t)hat the lease contract shall remain
in full force and effect as long as the land will serve the purpose for which it is intended
as a school site of the National Business Institute, but the rentals now stipulated shall
be subject to review every after ten (10) years by mutual agreement of the parties."
This is in clear contrast to the case at bar wherein, to repeat, the lease is fixed at a
period of three (3) years although subject to renewal upon agreement of the parties,
and the clause "for as long as defendant needs the premises and can meet and pay the
rents" is not an independent stipulation but is controlled by said fixed term and the
option for renewal upon agreement of both parties.
On the second issue, we agree with petitioner that respondent court erred in holding
that the action for ejectment is barred by res judicata. While it is true that a compromise
agreement has the effect of res judicata this doctrine does not apply in the present
case. It is elementary that for a judgment to be a bar to a subsequent case, (1) it must
be a final judgment, (2) the court which rendered it had jurisdiction over the subject
matter and the parties, (3) it must be a judgment on the merits, and (4) there must be
identity between the two cases as to parties, subject matter and cause of action. 19
In the case at bar, the fourth requisite is lacking. Although there is identity of parties,
there is no identity of subject matter and cause of action. The subject matter in the first
ejectment case is the original lease contract while the subject matter in the case at bar
is the lease created under the terms provided in the subsequent compromise
agreement. The lease executed in 1978 is one thing; the lease constituted in 1982 by
the compromise agreement is another.
There is also no identity, in the causes of action. The test generally applied to
determine the identity of causes of action is to consider the identity of facts essential to
their maintenance, or whether the same evidence would sustain both causes of action.
20 In the case at bar, the delict or the wrong in the first case is different from that in the
second, and the evidence that will support and establish the cause of action in the
former will not suffice to support and establish that in the latter.
In the first ejectment case, the cause of action was private respondent's refusal to
comply with the lease contract which expired on December 31, 1978. In the present
case, the cause of action is a similar refusal but with respect to the lease which expired
in October, 1985 under the compromise agreement. While the compromise agreement
may be res judicata as far as the cause of action and issues in the first ejectment case
is concerned, any cause of action that arises from the application or violation of the
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compromise agreement cannot be said to have been settled in said first case. The
compromise agreement was meant to settle, as it did only settle, the first case. It did
not, as it could not, cover any cause of action that might arise thereafter, like the
present case which was founded on the expiration of the lease in 1985, which
necessarily requires a different set of evidence. The fact that the compromise
agreement was judicially approved does not foreclose any cause of action arising from
a violation of the terms thereof.
WHEREFORE, the decision of respondent Court of Appeals is REVERSED and SET
ASIDE. Private respondent is hereby ordered to immediately vacate and return the
possession of the leased premises subject of the present action to petitioner and to pay
the monthly rentals due thereon in accordance with the compromise agreement until he
shall have actually vacated the same. This judgment is immediately executory.
SO ORDERED.
Melencio-Herrera (Chairperson), Paras, Padilla and Sarmiento, JJ., Concur.
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
 84

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.
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.

(Signed) CENON RAMA. 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
Witnesses: indorsement upon them in the following language:

FAUSTO PEÑALOSA. EXHIBIT C.

FRANCISCO MEDALLE.
CEBU, March 15, 1902.
On the 27th day of October, 1891, the defendant executed and delivered to the said
Victoriano Osmeña the following contract: 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
EXHIBIT B. Tomas Osmeña as set forth in this document.

CEBU, October 27, 1891. (Signed) CENONA RAMA.

On this date I have asked for further loan and have received from Don Victoriano The defendant not having paid the amount due on said contracts; the plaintiff, upon the
Osmeña the sum of seventy pesos in cash, fifty pesos of which I have loaned to Don 26th day of June, 1906, commenced the present action in the Court of First Instance of
Evaristo Peñares, which we will pay in sugar in the month of January of the coming the Province of Cebu. The complaint filed in said cause alleged the execution and
year according to the former conditions. 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
(Signed) CENONA RAMA. contracts. The defendant answered by filing a general denial and setting up the special
defense of prescription.
From Don Evaristo Peñares
The case was finally brought on to trial in the Court of First Instance, and the only
P50 witness produced during the trial was the plaintiff himself. The defendant did not offer
any proof whatever in the lower court.
Doña Cenona Rama
After hearing the evidence adduced during the trial, the lower court rendered a
20 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,
P70 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
Received — Evaristo Peñares. defendant appealed.

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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.
Arellano, C. J., Torres, Carson, and Moreland, JJ., concur.
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
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85
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.)
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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 P50,000.002 from 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
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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. 10 It 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 obligation of 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
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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.
Feliciano, Romero, Melo and Panganiban, JJ., concur.
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
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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.
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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 vivos shall 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
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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.1âwphi1 Under 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.
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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.
Melencio-Herrera and Paras, JJ., concur.
Padilla, J., took no part.
Sarmiento, J., is on leave.
THIRD DIVISION
G.R. No. 212686, September 28, 2015
SERGIO R. OSMENA III, Petitioner, v. POWER SECTOR ASSETS AND LIABILITIES
MANAGEMENT CORPORATION, EMMANUEL R. LEDESMA, JR., SPC POWER
CORPORATION AND THERMA POWER VISAYAS, INC., Respondents.
DECISION
VILLARAMA, JR., J.:
In a direct recourse to this Court, Senator Sergio R. Osmeña III (petitioner) seeks to
enjoin the sale of the Naga Power Plant Complex (NPPC) to respondent SPC Power
Corporation (SPC) resulting from the latter's exercise of the right to top the winning bid
of respondent Therma Power Visayas, Inc. (TPVI), and to declare such stipulation in
the Lease Agreement as void for being contrary to public policy.
Antecedents
Respondent Power Sector Assets and Liabilities Management Corporation (PSALM) is
a government-owned and controlled corporation created by virtue of Republic Act (R.A.)
No. 9136, otherwise known as the Electric Power Industry Reform Act (EPIRA) of 2001.
Its principal purpose is to manage the orderly sale, disposition, and privatization of the
National Power Corporation's (NPC's) generation assets, real estate and other
disposable assets, and Independent Power Producer (IPP) contracts, with the objective
of liquidating all NPC financial obligations and stranded contract costs in an optimal
manner.1 Respondent Emmanuel R. Ledesma, Jr. (Ledesma) is the incumbent
President and Chief Executive Officer of PSALM.
SPC is a joint venture corporation between Salcon Power Corporation and Korea
Power Corporation (Kepco).2 TPVI is a subsidiary of AboitizPower, the power
generation company of the Aboitiz Group.

PSALM provided the following brief description of the two (2) facilities subject of the
present controversy:
The Naga Land-Based Gas Turbine (LBGT) is located inside the same compound as
the NPPC.4
On October 16, 2009, PSALM privatized the 55-MW Naga Power Plant (LBGT) by way
of negotiated sale after a failed bidding in accordance with the LBGT Bidding
Procedures.5 The land underlying the LBGT was also leased out for a period of 10
years. This bidding resulted in SPC's acquisition of the LBGT through an Asset
Purchase Agreement (LBGT-APA) and lease of the land under a Land Lease
Agreement (LBGT-LLA). The LBGT-LLA would expire on January 29, 2020. The LBGT-
LLA contained a provision for SPC's right to top in the event of lease or sale of property
which is not part of the leased premises.
On December 27, 2013, the Board of Directors of PSALM approved the
commencement of the 3rd Round of Bidding for the sale of the 153.1-MW NPPC. Only
SPC and TPVI submitted bids. On March 31, 2014, TPVI was declared as the highest
bidder. Consequently, a Notice of Award6 was issued to TPVI on April 30, 2014,
subject to SPC's right under Section 3.02 of the LBGT-LLA, as previously stated in
Section 1B-20 of the Bidding Procedures.
The results of the NPPC bidding are as follows:
In a letter dated April 29, 2014, PSALM notified SPC of TPVI's winning bid which
covers the purchase of the NPPC and lease of the land. It also advised SPC that under
the terms of LBGT-LLA (Sections 2.01 and 3.02), the lease of the land (as governed by
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the LBGT-LLA) will likewise expire on January 29, 2020.8 In a letter-reply dated May 7,
2014, SPC confirmed that it is exercising the right to top the winning bid of TPVI and
will pay the amount of Php1,143,240,000.00 on the understanding that the term of the
lease is 25 years from Closing Date. SPC argued that -
As SPC also participated in the bidding, the bid for the lease component clearly
computed on the basis of, and was for twenty-five (25) years. However, by now stating
in your letter that the "lease has a Term often (10) years and will expire on 29 January
2020," SPC would effectively have less than six (6) years from today to use the
property, which is extremely short for the lease component computed and based on the
twenty-five (25) year term that was offered during the bidding. While we are aware that
the second paragraph of Section 3.02 of the LLA-LBGT provides that the property
covered by the right to top will be "governed" by the LLA-LBGT, we are of the
reasonable belief that this does not include "Term" under Section 2.01 thereof
considering that the "Draft Land Lease Agreement for the 153.1-MW Naga Power
Plant," which formed part of the bid documents, specifically provided for a "Term" of
twenty-five (25) years.9
PSALM then wrote the Office of the Government Corporate Counsel (OGCC)
requesting for legal opinion or confirmation of its position that the term of the lease of
the NPPC upon SPC's exercise of its right to top would be for the remaining period of
the lease of the land of the Naga LBGT Power Plant, which will expire in 2020.10
On May 21, 2014, the OGCC rendered Opinion No. 098, Series of 2014 which upheld
PSALM's position that SPC may exercise the right to top under the LBGT-LLA
provisions, the source of such right. It explained that the NPPC-LLA is a separate and
distinct transaction which is inapplicable with respect to SPC's right to top.11
However, upon re-evaluation of the arguments in the position papers submitted by SPC
and PSALM, the OGCC submitted its study and recommendation to Secretary of
Justice Leila M. De Lima. The study concluded that the right to top exercised by SPC in
the NPPC bidding is a right to top on a sale, which must then be separately governed
by the NPPC-APA, and implemented in accordance with the NPPC-APA and LLA
provisions.12
On June 16, 2014, the present petition was filed in this Court praying that (1) a
temporary restraining order (TRO) be issued ex parte, and after hearing the parties, a
writ of preliminary injunction be issued enjoining PSALM from implementing SPC's
exercise of its right to top in connection with the NPPC bidding; (2) SPC's right to top as
provided in Section 3.02 of the LBGT-LLA be declared void; and (3) a permanent

injunction be issued enjoining respondents Ledesma and PSALM from committing any
act in furtherance of SPC's exercise of the right to top.13
SPC, TPVI and PSALM filed their respective Comments on the petition, while SPC filed
a Reply to TPVI's Comment and petitioner his Reply to PSALM's Comment.
On August 7, 2014, SPC filed a Manifestation with Motion informing this Court that on
July 28, 2014, PSALM advised that PSALM's Board of Directors has already declared
SPC as the winning bidder for the privatization of NPPC. It thus contended that with this
development, the present petition had become moot.14
On August 11, 2014, petitioner filed a Supplemental Petition with Motion for Early
Resolution of the Application for Temporary Restraining Order and/or Writ of
Preliminary Injunction.15 According to petitioner, the transfer and possession to SPC of
the NPPC and of the land on which it is built should be deferred until after this Court
has ruled on his petition due to the following reasons: (1) there seems to be no urgency
for PSALM to rush the award of the NPPC; (2) by the execution of the subject NPPC-
APA and LLA in favor of SPC, PSALM has invalidly awarded a government property
without the requisite public bidding; and (3) there are practical difficulties and expense
that will be incurred in order to reverse acts that are committed before any provisional
or preventive relief is issued, such as transfer of ownership and/or possession of the
properties in SPC's name or to third parties, and potential liability of the Government
under suit for damages to be filed by any interested party.
On November 11, 2014, PSALM filed a Manifestation in Lieu of Comment to the
Supplemental Petition,16 stating that: (1) PSALM's Board of Directors, in a meeting
held on July 25, 2014, taking into consideration the OGCC's letter dated June 13, 2014
and the DOJ's opinion-letter dated June 23, 2014, declared SPC as the winning bidder
for the sale of 153.1-MW NPPC; (2) PSALM issued on July 28, 2014 the Notice of
Award and Certificate of Effectivity in favor of SPC; (3) the NPPC-APA and LLA were
already signed and delivered to SPC; and (4) PSALM turned over the properties to SPC
last September 25, 2014.
Petitioner's Arguments
Petitioner asserts that the right to top provision in the LBGT-LLA is an option contract
which must be supported by a consideration separate from the lease contract and may
be withdrawn at any time by PSALM in the absence of such consideration. He submits
that SPC's preferential right to buy or lease "any property in the vicinity of the Leased
Premises which is not part of the Leased Premises" was a gratuitous concession to
SPC, and most likely was part of a scheme to bar any competition to SPC and to
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restrict the production of energy. Citing Power Sector Assets and Liabilities
Management Corporation v. Pozzolanic Philippines Incorporated,17 petitioner argues
that the right of first refusal is upheld only in cases where the holder of such right holds
an existing, or at least, a vested interest in the object for which the right is to be
exercised. Thus, even if SPC has a legal interest in the vicinity lots, its right to top can
no longer be exercised because it is not operating the Naga LBGT itself.
Another legal ground for the nullity of the option raised by petitioner pertains to the
policy requiring competitive public bidding in all government contracts. Petitioner
contends that by granting SPC the right to top, PSALM violated the express provisions
of R.A. No. 9136 (EPIRA Law) and R.A. No. 9184 (Procurement Law) on public bidding
by failing to maintain bidders on equal footing in order to give the government the best
possible and available offer for public assets being sold or leased. He posits that SPC's
exercise of its right to top is disadvantageous to the Government and that the provision
enables SPC to skirt around eligibility requirements for a qualified bidder.
Alleging an anomalous track record for SPC since 1994 when as then Salcon Power
Corporation it entered into a 15-year contract to "Rehabilitate, Operate, Maintain and
Manage" a coal plant, petitioner argues that the 2009 Naga LBGT contract should have
been terminated for SPC's failure to comply with its obligations. Under the 2009 Naga
LBGT, not only does SPC enjoy an invalid option or preferential right unsupported by
any consideration, such right to top is also without a determinate object and founded on
illegal cause considering that it was merely intended to maintain SPC's dominance and
to assist SPC in restricting competition.
Respondents' Arguments
At the outset, SPC questions petitioner's legal standing to file the present petition,
having failed to establish any personal benefit in the event relief is granted, and there
being no expenditure of public funds involved that would impress upon the petition the
character of a taxpayer's suit. Neither could petitioner invoke his office as a Senator
because legislators may only be accorded standing to sue if there is a claim that official
action complained of infringes upon their prerogative as legislators. Petitioner could
also not have anchored his standing upon his status as a citizen as he failed to
demonstrate how he would suffer personal injury as a result of respondents' acts and
erroneously invoked this Court's jurisdiction to rule on a policy issue relating to the
manner PSALM carries out its mandate, even as he failed to cite specific provision in
the law and in EPIRA which was supposedly violated by the petitioner.
On procedural grounds, SPC seeks the dismissal of the petition as there is no basis for
annulling PSALM's acts by way of a petition for certiorari or prohibition, and said

petition was not filed within the 60-day reglementary period from the time the Naga
LBGT contract incorporating the right to top was awarded to SPC in 2009 and the
issuance of DOJ opinion dated January 9, 2013 wherein SPC's right to top was held to
be valid and not disallowed by law.
SPC asserts that even on substantive grounds, the petition should still be dismissed as
the right to top is clearly not an option contract and the Naga LBGT was validly
awarded to SPC through a public bidding. Citing JG Summit Holdings, Inc. v. Court of
Appeals.,18 SPC maintains that the right to top granted under the LBGT-LLA and
exercised by it did not violate the rules of competitive bidding. The implementation of
such right to top, moreover, does not place the Government in a disadvantaged
position but rather assures the Government of an additional 5% of the highest
reasonable bid. SPC thus argues that the right to top provision in the LBGT-LLA is
consistent with public policy and there is no law that invalidates such provision, such
that SPC's vested right should not be disregarded.
On its part, PSALM notes that similar right to top provisions are found in several other
land lease agreements in its privatization undertakings. In the 2013 Bidding Procedures
for the 3rd Round of Bidding for the NPPC, PSALM duly disclosed to the potential
bidders the right to top provision under the LBGT-LLA (Sections 1B-05 and 1B-20 and
Form of Certificate Closing for Seller). PSALM avers that it simply complied with the
opinions rendered by the DOJ and the second opinion of the OGCC, which have been
held persuasive and hence it acted in good faith in subsequently allowing SPC to
exercise its right to top the winning bid for the purchase of NPPC and lease of the land.
TPVI concurs with the allegations in the petition which it said are sufficient to vest
standing upon petitioner as citizen, taxpayer, Senator and Chairman of the Joint
Congressional Power Committee (Committee). It likewise finds the petition for certiorari
as the proper remedy in view of the grave abuse of discretion committed by PSALM in
determining the terms of reference of the public bidding to be conducted, as well as in
determining the qualifications of the bidders. As to the timeliness of the petition, TPVI
points out that SPC exercised its right to top only on May 29, 2014 and therefore the
60-day period within which to file a petition for certiorari under Rule 65 started only from
that date.
Citing LTFRB v. Stronghold Insurance Company, Inc.,19 TPVI argues that the right of
first refusal and right to top provisions contravene the public policy on competitive
public bidding and are valid only in specific cases. In this case, SPC owns a power
generation asset (LBGT) and has interest only over the land on which the LBGT is
located. TPVI underscores that the right to top in the LBGT does not stand in the same
footing as the right to top granted under the other Land Lease Agreements entered into
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by PSALM, considering the nature of the gas turbine facility it owns. TPVI further
contends that aside from SPC's continuous breach of its obligation to operate the Naga
LBGT, the right to top provision in the LBGT-LLA provides SPC with the ability to
prevent any entity from successfully bidding for and ultimately owning the LBGT and
leasing the land. Hence, the Government does not stand to benefit from the right to top
provision in the LBGT-LLA.
Assuming the right to top is valid, still TPVI maintains that SPC failed to timely exercise
the same within the period provided therefor, or until May 30, 2014. Moreover, SPC's
letter dated May 7, 2014 and subsequent deposit in PSALM's account of the amount to
cover the right to top is not the exercise sanctioned under the LBGT-LLA, and SPC's
insistence on a 25-year term instead of the remaining term of the LBGT-LLA is an
erroneous and invalid exercise of such right to top.
Replying to TPVI's arguments, SPC contends that the right to top is valid and its validity
was upheld by the DOJ in its Opinion dated January 9, 2013. Contrary to the averment
that the right to top was a gratuitous concession, SPC clarified that it participated and
won in the bidding conducted for the sale of LBGT and lease of the land which included
the right to top provision, of which TPVI was well aware. During the bidding for the
NPPC, all bidders were given an equal chance of winning and none of them challenged
SPC's right to top which was duly disclosed to them. SPC further asserts that the right
to top is more advantageous to the Government considering that the bidders tend to
offer only competitive bids knowing that their bids can be "topped out" by SPC, and
hence the Government is assured of receiving an offer even better than the best bid
tendered during the bidding proper.
As to the alleged lack of interest over the object of the right to top, SPC points out that it
was the bidders' concern that the buyer of the power plant obtain reasonable access to
properties or lands in close proximity to the power plant for purposes of security, right of
way or other operational requirements. SPC further avers that it has timely exercised
the right to top as can be gleaned from its May 20, 2014 letter informing PSALM that
SPC already wired to PSALM the winning bid of Php 1,143,240,000.00, which is
equivalent to the amount tendered by the winning bidder plus 5%.
Issues
From the foregoing, the issues may be summarized as follows: (1) Is certiorari the
proper remedy and was it timely filed?; (2) Does petitioner possess legal standing to
institute the present action questioning the validity of SPC's right to top?; (3) Do right to
top provisions in the land lease agreements entered into by PSALM contravene public

policy on competitive bidding?; and (4) Did PSALM gravely abuse its discretion in
allowing SPC's exercise of the right to top under the LBGT-LLA?
Our Ruling
The petition is meritorious.
Propriety of Certiorari
The Constitution under Section 1, Article VIII expressly directs the Judiciary, as a
matter of power and duty, not only to settle actual controversies involving rights which
are legally demandable and enforceable but, to determine whether or not there has
been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part
of any branch or instrumentality of the Government. We thus have the duty to take
cognizance of allegations of grave abuse of discretion in this case,20 involving the sale
by PSALM of a power plant, which supposedly contravenes the policy on competitive
public bidding.
R.A. No. 9136 created PSALM for the principal purpose of undertaking the mandated
privatization of all disposable assets of the NPC as well as IPP contracts in an optimal
manner.21 Such disposition is made subject to all existing laws, rules and regulations.
Thus, the implementing rules of R.A. No. 9136 provided guidelines in the privatization
to be conducted by PSALM, among which are:
(a) The Privatization value to the National Government of the NPC generation assets,
real estate, other disposable assets as well as IPP contracts shall be
optimized;cralawlawlibrary
xxxx
(d) All assets of NPC shall be sold in an open and transparent manner through public
bidding, and the same shall apply to the disposition of IPP contracts;cralawlawlibrary
x x x x22 (Emphasis supplied)ChanRoblesVirtualawlibrary
Specifically Section 51 (m) of the EPIRA empowered PSALM "[t]o restructure the sale,
privatization or disposition of NPC assets and IPP contracts and/or their energy output
based on such terms and conditions which shall optimize the value and sale prices of
said assets." Any act of PSALM that violates these provisions and other applicable laws
may constitute grave abuse of discretion. There is grave abuse of discretion (1) when
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an act is done contrary to the Constitution, the law or jurisprudence; or (2) when it is
executed whimsically, capriciously or arbitrarily out of malice, ill will or personal bias.23
However, the implementation of EPIRA may not be restrained or enjoined except by
order issued by this Court.24 Petitioner's resort to this Court to obtain an order
enjoining PSALM's privatization of the NPPC through SPC's invalid exercise of its right
to option, was therefore proper and justified.
Legal Standing
We have held that legislators have the standing to maintain inviolate the prerogatives,
powers and privileges vested by the Constitution in their office and are allowed to sue
to question the validity of any official action which they claim infringes their prerogatives
as legislators.25 In this case, there was no allegation of usurpation of legislative
function as petitioner is suing in his capacity as Chairperson of the Committee created
pursuant to Section 62 of R.A. No. 9136. Such position by itself is not sufficient to vest
petitioner with standing to institute the present suit. Notably, the enumerated functions
of the Committee under the aforesaid provision are basically "in aid of legislation."
Notwithstanding, the Court leans on the doctrine that "the rule on standing is a matter of
procedure, hence, can be relaxed for nontraditional plaintiffs like ordinary citizens,
taxpayers, and legislators when the public interest so requires, such as when the matter
is of transcendental importance, of overreaching significance to society, or of
paramount public interest."26 When the proceeding involves the assertion of a public
right, the mere fact that the petitioner is a citizen satisfies the requirement of personal
interest.27
The privatization of power plants in a manner that ensures the reliability and
affordability of electricity in our country pursuant to the EPIRA is an issue of paramount
public interest. Petitioner has underscored the effect of the right to top provision in
preventing a competitive public bidding for the NPPC. While the alleged detrimental
result referred to the severe power shortage that occurred in only one region, PSALM
had admitted that the right to top provisions are also found in several other land lease
agreements.
In the light of the foregoing considerations, we hold that petitioner possesses the
requisite legal standing to file this case.
Validity of Right to
Top provision in LBGT-LLA

The provision in the LBGT-LLA which is assailed in the present petition reads:
3.02 Exclusive Right of LESSOR
Nothing in this Agreement shall limit the right of the LESSOR to sell, lease, alienate or
encumber any property in the vicinity of the Leased Premises which is not part of the
Leased Premises to any Person; provided, the LESSEE shall have the right to top the
price of the winning bidder for the sale or lease of such property. In exercising the right
to top, the LESSEE must exceed the bid of the winning bidder by five percent (5%). The
right to top granted to the LESSEE must be exercised and paid within a period of thirty
(30) days from the receipt of written notice from the LESSOR notifying the LESSEE of
the result of the bidding or negotiation and the price of the winning bid.
In the event of a lease, upon the exercise by the LESSEE of the right to top granted
herein, the property covered by it shall form part of the Leased Premises and shall be
governed by this Agreement. In the event of a sale, upon the exercise by the LESSEE
of the right to top granted herein, the property covered by the sale shall not form part of
the Leased Premises.28
A right to top is a variation of the right of first refusal often incorporated in lease
contracts. When a lease contract contains a right of first refusal, the lessor is under a
legal duty to the lessee not to sell to anybody at any price until after he has made an
offer to sell to the latter at a certain price and the lessee has failed to accept it. The
lessee has a right that the lessor's first offer shall be in his favor.29 While sometimes
referred to as a "first option to buy" or "option of first refusal," a right of first refusal is
not an option contract. We explained the distinction between a right of first refusal and
option to purchase in Spouses Vasquez v. Ayala Corporation,30 to wit:
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.
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 grantor's eventual intention
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to enter into a binding juridical relation with another but also on terms, including the
price, that are yet to be firmed up.31
We disagree with petitioner's theory that SPC's right of first refusal should be declared
void as it was not supported by a separate consideration. As we held in Polytechnic
University of the Philippines v. Golden Horizon Realty Corporation32:
Indeed, basic is the rule that a party to a contract cannot unilaterally withdraw a right of
first refusal that stands upon valuable consideration. We have categorically ruled that it
is not correct to say that there is no consideration for the grant of the right of first refusal
if such grant is embodied in the same contract of lease. Since the stipulation forms part
of the entire lease contract, the consideration for the lease includes the consideration
for the grant of the right of first refusal. In entering into the contract, the lessee is in
effect stating that it consents to lease the premises and to pay the price agreed upon
provided the lessor also consents that, should it sell the leased property, then, the
lessee shall be given the right to match the offered purchase price and to buy the
property at that price.33 (Emphasis supplied)
Stipulations on right of first refusal over the leased premises have been held to be valid
as they are commonly inserted in contracts of lease for the benefit of lessees who
wanted to be assured that they shall be given the first crack or the first option to buy the
property at the price which the owner is willing to accept. Where such right of first
refusal is incorporated in lease contracts involving public assets, however, courts go
beyond ascertaining and giving effect to the intent of the contracting parties. For in this
jurisdiction, public bidding is the established procedure in the grant of government
contracts. The award of public contracts, through public bidding, is a matter of public
policy.34
In the award of government contracts, the law requires a competitive public bidding,
which aims to protect the public interest by giving the public the best possible
advantages thru open competition. It is a mechanism that enables the government
agency to avoid or preclude anomalies in the execution of public contracts.35
In JG Summit Holdings, Inc. v. Court of Appeals,36 this Court was presented with the
issue of validity of right of first refusal granted to both parties under a joint venture
agreement between a government corporation (National Investment and Development
Corporation) and private firm (Kawasaki Heavy Industries, Ltd. of Kobe, Japan) should
either of them decide to sell, assign or transfer its interest in the joint venture. In the
subsequent negotiations for the sale of the government's interest, it was agreed that
Kawasaki's right of first refusal be exchanged for the right to top by five percent (5%)
the highest bid for the subject shares. We initially granted the petition for review on

certiorari and reversed the Court of Appeals' dismissal of the petition for mandamus
questioning the aforesaid right to top which was held illegal not only because it violates
the rules on competitive bidding but more so because it allows foreign corporations to
own more than 40% equity in the shipyard.
On motions for reconsideration filed by the parties, we ruled that the right to top granted
to and exercised by Kawasaki did not violate the rules on competitive bidding, viz:
We also hold that the right to top granted to KAWASAKI and exercised by private
respondent did not violate the rules of competitive bidding.
The word "bidding" in its comprehensive sense means making an offer or an invitation
to prospective contractors whereby the government manifests its intention to make
proposals for the purpose of supplies, materials and equipment for official business or
public use, or for public works or repair. The three principles of public bidding are: (1)
the offer to the public; (2) an opportunity for competition; and (3) a basis for comparison
of bids. As long as these three principles are complied with, the public bidding can be
considered valid and legal, x x x
xxxx
In the instant case, the sale of the Government shares in PHILSECO was publicly
known. All interested bidders were welcomed. The basis for comparing the bids were
laid down. All bids were accepted sealed and were opened and read in the presence of
the COA's official representative and before all interested bidders. The only question
that remains is whether or not the existence of KAWASAKI's right to top destroys the
essence of competitive bidding so as to say that the bidders did not have an
opportunity for competition. We hold that it does not.
The essence of competition in public bidding is that the bidders are placed on equal
footing. This means that all qualified bidders have an equal chance of winning the
auction through their bids. In the case at bar, all of the bidders were exposed to the
same risk and were subjected to the same condition, i.e., the existence of KAWASAKI's
right to top. Under the ASBR, the Government expressly reserved the right to reject any
or all bids, and manifested its intention not to accept the highest bid should KAWASAKI
decide to exercise its right to top under the ABSR. This reservation or qualification was
made known to the bidders in a pre-bidding conference held on September 28, 1993.
They all expressly accepted this condition in writing without any qualification.
Furthermore, when the Committee on Privatization notified petitioner of the approval of
the sale of the National Government shares of stock in PHILSECO, it specifically stated
that such approval was subject to the right of KAWASAKI Heavy Industries,
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Inc./Philyards Holdings, Inc. to top JGSMI's bid by 5% as specified in the bidding rules.
Clearly, the approval of the sale was a conditional one. Since Philyards eventually
exercised its right to top petitioner's bid by 5%, the sale was not consummated.
Parenthetically, it cannot be argued that the existence of the right to top "set for naught
the entire public bidding." Had Philyards Holdings, Inc. failed or refused to exercise its
right to top, the sale between the petitioner and the National Government would have
been consummated. In like manner, the existence of the right to top cannot be likened
to a second bidding, which is countenanced, except when there is failure to bid as
when there is only one bidder or none at all. A prohibited second bidding presupposes
that based on the terms and conditions of the sale, there is already a highest bidder
with the right to demand that the seller accept its bid. In the instant case, the highest
bidder was well aware that the acceptance of its bid was conditioned upon the non-
exercise of the right to top.
To be sure, respondents did not circumvent the requirements for bidding by granting
KAWASAKI, a non-bidder, the right to top the highest bidder. The fact that
KAWASAKI's nominee to exercise the right to top has among its stockholders some
losing bidders cannot also be deemed "unfair."
It must be emphasized that none of the parties questions the existence of KAWASAKI's
right of first refusal, which is concededly the basis for the grant of the right to top. Under
KAWASAKI's right of first refusal, the National Government is under the obligation to
give preferential right to KAWASAKI in the event it decides to sell its shares in
PHILSECO. It has to offer to KAWASAKI the shares and give it the option to buy or
refuse under the same terms for which it is willing to sell the said shares to third parties.
KAWASAKI is not a mere non-bidder. It is a partner in the joint venture; the incidents of
which are governed by the law on contracts and on partnership.
It is true that properties of the National Government, as a rule, may be sold only after a
public bidding is held. Public bidding is the accepted method in arriving at a fair and
reasonable price and ensures that overpricing, favoritism and other anomalous
practices are eliminated or minimized. But the requirement for public bidding does not
negate the exercise of the right of first refusal. In fact, public bidding is an essential first
step in the exercise of the right of first refusal because it is only after the public bidding
that the terms upon which the Government may be said to be willing to sell its shares to
third parties may be known. It is only after the public bidding that the Government will
have a basis with which to offer KAWASAKI the option to buy or forego the shares.37
(Emphasis supplied)ChanRoblesVirtualawlibrary
The above-cited case involved a right of first refusal in favor of a contracting party
which did not participate in the bidding conducted for the sale of the subject shares. In

Power Sector Assets and Liabilities Management Corporation v. Pozzolanic Philippines
Incorporated,38 the right of first refusal was held invalid for being contrary to public
policy, as it dispensed with public bidding for future sale of waste products by the NPC.
Respondent therein had earlier won the public bidding for the purchase of the fly ash
generated by NPC's power plant in Batangas. Subsequently, after negotiations, NPC
entered into a long-term contract with respondent for the purchase of fly ash to be
produced by NPC's future coal-fired plants. The provision granting the right of first
refusal to respondent reads:
PURCHASER has first option to purchase Fly Ash under similar terms and conditions
as herein contained from the second unit of Batangas Coal-Fired Thermal Plant that the
CORPORATION may construct. PURCHASER may also exercise the right of first
refusal to purchase fly ash from any new coal-fired plants which will be put up by
CORPORATION.39
We held that the grant of first refusal to respondent constitutes an unauthorized
provision in the contract that was entered into pursuant to the bidding, having been
contractually bargained for by respondent after it won the public bidding for the
purchase of fly ash from NPC's Batangas Power Plant. We noted that not only did the
provision substantially amended the terms of the contract bidded upon — so that
resultantly, the other bidders were deprived of the terms and opportunities granted to
respondent after it won the public auction -- it so altered the bid terms by effectively
barring any and a true biddings in the future. The right of first refusal being contrary to
public policy that government contracts must be awarded through public bidding, it was
therefore invalid and have no binding effect nor does it confer a preferential right upon
respondent to the fly ash of NPC's power plants.
Relevantly, we also held that the grant of right of first refusal to respondent has no
basis whatsoever considering that the bidding subject was still inexistent. Thus:
Two: The right to buy fly ash precedes and is the basis of the right of first refusal, and
the consequent right cannot be acquired together with and at the same time as the
precedent right.
The right of first refusal has long been recognized, both legally and jurisprudentially, as
valid in our jurisdiction. It is significant to note, however, that in those cases where the
right of refusal is upheld by both law and jurisprudence, the party in whose favor the
right is granted has an interest on the object over which the right of first refusal is to be
exercised. In those instances, the grant of the right of first refusal is a means to protect
such interest.
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Thus, Presidential Decree (P.D.) No. 1517, as amended by P.D. No. 2016, grants to
qualified tenants of land in areas declared as urban land reform zones, the right of first
refusal to purchase the same within a reasonable time and at a reasonable price. The
same right is accorded by Republic Act No. 7279 (Urban Development and Housing Act
of 1992) to qualified beneficiaries of socialized housing, with respect to the land they
are occupying. Accordingly, in Valderama v. Macalde, Paranaque Kings Enterprises,
Inc. v. Court of Appeals, and Conculada v. Court of Appeals, the Supreme Court
sustained the tenant's right of first refusal pursuant to P.D. 1517.
In Polytechnic University of the Philippines v. Court of Appeals and Polytechnic
University of the Philippines v. Golden Horizon Realty Corporation, this Court upheld
the right of refusal of therein respondent private corporations concerning lots they are
leasing from the government.
In the case of Republic v. Sandiganbayan, the Presidential Commission on Good
Government (PCGG) sought to exercise its right of first refusal as a stockholder of
Eastern Telecommunications Philippines, Inc. (ETPI), a corporation sequestered by the
PCGG, to purchase ETPI shares being sold by another stockholder to a non-
stockholder. While the Court recognized that PCGG had a right of first refusal with
respect to ETPI's shares, it nevertheless did not sustain such right on the ground that
the same was not seasonably exercised.
Finally, in Litonjua v. L & R Corporation, the Supreme Court recognized the validity and
enforceability of a stipulation in a mortgage contract granting the mortgagee the right of
first refusal should the mortgagor decide to sell the property subject of the mortgage.
In all the foregoing cases, the party seeking to exercise the right has a vested interest
in, if not a right to, the subject of the right of first refusal. Thus, on account of such
interest, a tenant (with respect to the land occupied), a lessee (vis-a-vis the property
leased), a stockholder (as regards shares of stock), and a mortgagor (in relation to the
subject of the mortgage), are all granted first priority to buy the property over which they
have an interest in the event of its sale. Even in the JG Summit Case, which case was
heavily relied upon by the lower court in its decision and by respondent in support of its
arguments, the right of first refusal to the corporation's shares of stock - later
exchanged for the right to top - granted to KAWASAKI was based on the fact that it was
a shareholder in the joint venture for the construction, operation, and management of
the Philippine Shipyard and Engineering Corporation (PHILSECO).
In the case at bar, however, there is no basis whatsoever for the grant to respondent of
the right of first refusal with respect to the fly ash of NPC power plants since the right to
purchase at the time of bidding is that which is precisely the bidding subject, not yet

existent much more vested in respondent.40 (Emphasis and underscoring supplied;
citations omitted)
In this case, all potential bidders were aware of the existence of SPC's right to top as
duly disclosed in the Bidding Procedures for the 3rd Round of Bidding for the NPPC.41
TPVI did not question the said right to top and participated in the bidding where SPC
was also a bidder. Emerging as the winning bidder, TPVI nevertheless knew that the
acceptance of its bid was subject to SPC's exercise of the right to top by confirming its
exercise of the right of first refusal and paying the amount of the winning bid plus five
percent (5%).
Notwithstanding compliance with the conduct of bidding and procedures, we hold that
SPC's right to top under the LBGT-LLA is void for lack of a valid interest or right to the
object over which the right of first refusal is to be exercised. First, the property subject
of the right of first refusal is outside the leased premises covered by the LBGT-LLA.
Second, the right of first refusal refers not only to land but to any property within the
vicinity of the leased premises, as in this case, an entire power plant complex (NPPC)
and the land on which it is built. And third, while SPC cited concerns regarding security,
right of way or other operational requirements, these are clearly not analogous to a
lessee's legitimate interest on the property being leased. Indeed, acquisition of a three
coal-fired thermal plants with far greater generating capacity than the gas turbine plant
currently owned by SPC will not be merely for purposes of the latter's reasonable
access, security or present operational needs. Besides, no such right or interest may be
invoked by SPC because, as confirmed by PSALM itself, SPC never operated the Naga
LBGT.
More recently, in LTFRB v. Stronghold Insurance Company,42 we declared as void the
right to match clause in a memorandum of agreement which was being invoked by
respondent after it failed to meet capitalization requirements and was consequently
excluded by the petitioner from the pool of qualified bidders for the third round of
bidding to accredit providers of accident insurance to operators of passenger public
utility vehicles. The CA granted respondent's petition for prohibition and nullified the
said bidding proceedings. On appeal, we reversed the CA and found no grave abuse of
discretion committed by the LTFRB, viz:
The Matching Clause in the First MOA, which Stronghold invokes as basis for its right
to participate in the third round of bidding, provides:chanRoblesvirtualLawlibrary
[T]he two management groups herein shall be given the right to match the best
bid/proposal in event another management group qualifies at the end of the term of this
agreement[.]ChanRoblesVirtualawlibrary
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The Court of Appeals sustained Stronghold's claim, effectively reading the Matching
Clause to vest in Stronghold not only "the right to match the best bid/proposal in event
another management group qualifies at the end of the term of this agreement," but also
the prerogative not to comply with the terms of the succeeding bidding. We find it
unnecessary to pass upon the correctness of the Court of Appeals' construction of the
Matching Clause. It is, in the first place, void.
The Matching Clause contains what is referred to in contract law as the right of first
refusal or the "right to match." Such stipulations grant to a party the right to offer the
same amount as the highest bid to beat the highest bidder. "Right to match" stipulations
are different from agreements granting to a party the so-called "right to top." Under the
latter arrangement, a party is accorded the right to offer a higher amount, usually a
fixed sum or percentage, to beat the highest bid.
In the field of public contracts, these stipulations are weighed with the taint of invalidity
for contravening the policy requiring government contracts to be awarded through
public bidding. Unless clearly falling under statutory exceptions, government contracts
for the procurement of goods or services are required to undergo public bidding "to
protect the public interest by giving the public the best possible advantages thru open
competition." The inclusion of a right of first refusal in a government contract executed
post-bidding, as here, negates the essence of public bidding because the stipulation
"gives the winning bidder an x x x advantage over the other bidders who participated in
the bidding x x x." Moreover, a "right of first refusal", " or "right to top," whether granted
to a bidder or non-bidder, discourages other parties from submitting bids, narrowing the
number of possible bidders and thus preventing the government from securing the best
bid.
These clauses escape the taint of invalidity only in the narrow instance where the right
of first refusal (or "right to top") is founded on the beneficiary's "interest on the object
over which the right of first refusal is to be exercised" (such as a "tenant with respect to
the land occupied, a lessee vis-a-vis the property leased, a stockholder as regards
shares of stock, and a mortgagor in relation to the subject of the mortgage") and the
government stands to benefit from the stipulation. Thus, we upheld the validity of a
"right to top" clause allowing a private stockholder in a corporation to top by 5% the
highest bid for the shares disposed by the government in that corporation. Under the
joint venture agreement creating the corporation, a party had the right of first refusal in
case the other party disposed its shares. The government, the disposing party in the
joint venture agreement, benefitted from the 5% increase in price under the "right to
top," on outcome better than the right of first refusal.

The Matching Clause in this case does not fall under this narrow exception. The First
MOA (and for that matter the Second MOA) was a contract for the procurement of
services; hence, there is no "object" over which Stronghold can claim an interest which
the Matching Clause protects. Nor did the government benefit from the inclusion of the
Matching Clause in the First MOA. The Matching Clause was added in the First MOA
"in consideration, x x x of the initial investment and the assumption of initial risk" of the
two accredited management groups. These "initial investment" and "initial risk,"
however, are inherent in the business of providing accident insurance to public utility
vehicle operators, which the bidders for the First MOA, including Stronghold's group
UNITRANS, logically took into account when they submitted their bids to LTFRB. The
government was under no obligation to reward the accredited insurers' investment and
risk-taking with a right of first refusal stipulation at the expense of denying the public the
benefits public bidding brings, and did bring, to select the insurance providers in the
Second MOA.43 (Emphasis supplied)
In the light of the foregoing, we hold that the grant of right to top to SPC under the
LBGT-LLA is void as it is not founded on the said lessee's legitimate interest over the
leased premises. SPC's argument that the privatization of NPPC was even more
advantageous to the Government, simply because it resulted in a higher price (Php54
million more) than TPVI's winning bid, is likewise untenable. Whatever initial gain from
the higher price obtained for the NPPC compared to the original bid price of TPVI is
negated by the fact that SPC's right to top had discouraged more potential buyers from
submitting their bids, knowing that even their most reasonable bid can be defeated by
SPC's exercise of its right to top. In fact, only SPC and TPVI participated in the 3rd
Round of Bidding. Attracting as many bidders to participate in the bidding for public
assets is still the better means to secure the best bid for the Government, and achieve
the objective under the EPIRA to private NPC's assets in the most optimal manner.
WHEREFORE, the petition is hereby GIVEN DUE COURSE and the writ prayed for
accordingly GRANTED. The right of first refusal (right to top) granted to Salcon Power
Corporation under the 2009 Naga LBGT-LLA is hereby declared NULL and VOID.
Consequently, the Asset Purchase Agreement (NPPC-APA) and Land Lease
Agreement (NPPC-LLA) executed by the Power Sector Assets and Liabilities
Management Corporation and SPC are ANNULLED and SET ASIDE.
No costs.
SO ORDERED.
Peralta, Perez,* and Jardeleza, JJ., concur.
Velasco, Jr., (Chairperson), J., please see concurring opinion.
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FIRST DIVISION
G.R. No. 158361 April 10, 2013
INTERNATIONAL HOTEL CORPORATION, Petitioner,
vs.
FRANCISCO B. JOAQUIN, JR. and RAFAEL SUAREZ, Respondents.
DECISION
BERSAMIN, J.:
To avoid unjust enrichment to a party from resulting out of a substantially performed
contract, the principle of quantum meruit may be used to determine his compensation in
the absence of a written agreement for that purpose. The principle of quantum meruit
justifies the payment of the reasonable value of the services rendered by him.
The Case
Under review is the decision the Court of Appeals (CA) promulgated on November 8,
2002,1 disposing:
WHEREFORE, premises considered, the decision dated August 26, 1993 of the
Regional Trial Court, Branch 13, Manila in Civil Case No. R-82-2434 is AFFIRMED with
Modification as to the amounts awarded as follows: defendant-appellant IHC is ordered
to pay plaintiff-appellant Joaquin ₱700,000.00 and plaintiff-appellant Suarez
₱200,000.00, both to be paid in cash.
SO ORDERED.
Antecedents
On February 1, 1969, respondent Francisco B. Joaquin, Jr. submitted a proposal to the
Board of Directors of the International Hotel Corporation (IHC) for him to render
technical assistance in securing a foreign loan for the construction of a hotel, to be
guaranteed by the Development Bank of the Philippines (DBP).2 The proposal
encompassed nine phases, namely: (1) the preparation of a new project study; (2) the
settlement of the unregistered mortgage prior to the submission of the application for
guaranty for processing by DBP; (3) the preparation of papers necessary to the
application for guaranty; (4) the securing of a foreign financier for the project; (5) the
securing of the approval of the DBP Board of Governors; (6) the actual follow up of the
application with DBP3; (7) the overall coordination in implementing the projections of
the project study; (8) the preparation of the staff for actual hotel operations; and (9) the
actual hotel operations.4

The IHC Board of Directors approved phase one to phase six of the proposal during the
special board meeting on February 11, 1969, and earmarked ₱2,000,000.00 for the
project.5 Anent the financing, IHC applied with DBP for a foreign loan guaranty. DBP
processed the application,6 and approved it on October 24, 1969 subject to several
conditions.7
On July 11, 1969, shortly after submitting the application to DBP, Joaquin wrote to IHC
to request the payment of his fees in the amount of ₱500,000.00 for the services that
he had provided and would be providing to IHC in relation to the hotel project that were
outside the scope of the technical proposal. Joaquin intimated his amenability to
receive shares of stock instead of cash in view of IHC’s financial situation.8
On July 11, 1969, the stockholders of IHC met and granted Joaquin’s request, allowing
the payment for both Joaquin and Rafael Suarez for their services in implementing the
proposal.9
On June 20, 1970, Joaquin presented to the IHC Board of Directors the results of his
negotiations with potential foreign financiers. He narrowed the financiers to Roger Dunn
& Company and Materials Handling Corporation. He recommended that the Board of
Directors consider Materials Handling Corporation based on the more beneficial terms it
had offered. His recommendation was accepted.10
Negotiations with Materials Handling Corporation and, later on, with its principal,
Barnes International (Barnes), ensued. While the negotiations with Barnes were
ongoing, Joaquin and Jose Valero, the Executive Director of IHC, met with another
financier, the Weston International Corporation (Weston), to explore possible
financing.11 When Barnes failed to deliver the needed loan, IHC informed DBP that it
would submit Weston for DBP’s consideration.12 As a result, DBP cancelled its
previous guaranty through a letter dated December 6, 1971.13
On December 13, 1971, IHC entered into an agreement with Weston, and
communicated this development to DBP on June 26, 1972. However, DBP denied the
application for guaranty for failure to comply with the conditions contained in its
November 12, 1971 letter.14
Due to Joaquin’s failure to secure the needed loan, IHC, through its President Bautista,
canceled the 17,000 shares of stock previously issued to Joaquin and Suarez as
payment for their services. The latter requested a reconsideration of the cancellation,
but their request was rejected.
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Consequently, Joaquin and Suarez commenced this action for specific performance,
annulment, damages and injunction by a complaint dated December 6, 1973 in the
Regional Trial Court in Manila (RTC), impleading IHC and the members of its Board of
Directors, namely, Felix Angelo Bautista, Sergio O. Rustia, Ephraim G. Gochangco,
Mario B. Julian, Benjamin J. Bautista, Basilio L. Lirag, Danilo R. Lacerna and
Hermenegildo R. Reyes.15 The complaint alleged that the cancellation of the shares
had been illegal, and had deprived them of their right to participate in the meetings and
elections held by IHC; that Barnes had been recommended by IHC President Bautista,
not by Joaquin; that they had failed to meet their obligation because President Bautista
and his son had intervened and negotiated with Barnes instead of Weston; that DBP
had canceled the guaranty because Barnes had failed to release the loan; and that IHC
had agreed to compensate their services with 17,000 shares of the common stock plus
cash of ₱1,000,000.00.16
IHC, together with Felix Angelo Bautista, Sergio O. Rustia, Mario B. Julian and
Benjamin J. Bautista, filed an answer claiming that the shares issued to Joaquin and
Suarez as compensation for their "past and future services" had been issued in
violation of Section 16 of the Corporation Code; that Joaquin and Suarez had not
provided a foreign financier acceptable to DBP; and that they had already received
₱96,350.00 as payment for their services.17
On their part, Lirag and Lacerna denied any knowledge of or participation in the
cancellation of the shares.18
Similarly, Gochangco and Reyes denied any knowledge of or participation in the
cancellation of the shares, and clarified that they were not directors of IHC.19 In the
course of the proceedings, Reyes died and was substituted by Consorcia P. Reyes, the
administratrix of his estate.20
Ruling of the RTC
Under its decision rendered on August 26, 1993, the RTC held IHC liable pursuant to
the second paragraph of Article 1284 of the Civil Code, disposing thusly:
WHEREFORE, in the light of the above facts, law and jurisprudence, the Court hereby
orders the defendant International Hotel Corporation to pay plaintiff Francisco B.
Joaquin, the amount of Two Hundred Thousand Pesos (₱200,000.00) and to pay
plaintiff Rafael Suarez the amount of Fifty Thousand Pesos (₱50,000.00); that the said
defendant IHC likewise pay the co-plaintiffs, attorney’s fees of ₱20,000.00, and costs of
suit.

IT IS SO ORDERED.21
The RTC found that Joaquin and Suarez had failed to meet their obligations when IHC
had chosen to negotiate with Barnes rather than with Weston, the financier that Joaquin
had recommended; and that the cancellation of the shares of stock had been proper
under Section 68 of the Corporation Code, which allowed such transfer of shares to
compensate only past services, not future ones.
Ruling of the CA
Both parties appealed.22
Joaquin and Suarez assigned the following errors, to wit:
DESPITE HAVING CORRECTLY ACKNOWLEDGED THAT PLAINTIFFS-
APPELLANTS FULLY PERFORMED ALL THAT WAS INCUMBENT UPON THEM,
THE HONORABLE JUDGE ERRED IN NOT ORDERING THAT:
A. DEFENDANTS WERE UNJUSTIFIED IN CANCELLING THE SHARES OF STOCK
PREVIOUSLY ISSUED TO PLAINTIFFS-APPELLANTS; AND
B. DEFENDANTS PAY PLAINTIFFS-APPELLANTS TWO MILLION SEVEN
HUNDRED PESOS (sic) (₱2,700,000.00), INCLUDING INTEREST THEREON FROM
1973, REPRESENTING THE TOTAL OBLIGATION DUE PLAINTIFFS-
APPELLANTS.23
On the other hand, IHC attributed errors to the RTC, as follows:
I.
THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFFS-APPELLANTS HAVE
NOTBEEN COMPLETELY PAID FOR THEIR SERVICES, AND IN ORDERING THE
DEFENDANT-APPELLANT TO PAY TWO HUNDRED THOUSAND PESOS
(₱200,000.00) AND FIFTY THOUSAND PESOS (₱50,000.00) TO PLAINTIFFS-
APPELLANTS FRANCISCO B. JOAQUIN AND RAFAEL SUAREZ, RESPECTIVELY.
II.
THE LOWER COURT ERRED IN AWARDING PLAINTIFFS-APPELLANTS
ATTORNEY’S FEES AND COSTS OF SUIT.24
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In its questioned decision promulgated on November 8, 2002, the CA concurred with
the RTC, upholding IHC’s liability under Article 1186 of the Civil Code. It ruled that in
the context of Article 1234 of the Civil Code, Joaquin had substantially performed his
obligations and had become entitled to be paid for his services; and that the issuance
of the shares of stock was ultra vires for having been issued as consideration for future
services.
Anent how much was due to Joaquin and Suarez, the CA explained thusly:
This Court does not subscribe to plaintiffs-appellants’ view that defendant-appellant IHC
agreed to pay them ₱2,000,000.00. Plaintiff-appellant Joaquin’s letter to defendant-
appellee F.A. Bautista, quoting defendant-appellant IHC’s board resolutions which
supposedly authorized the payment of such amount cannot be sustained. The
resolutions are quite clear and when taken together show that said amount was only
the "estimated maximum expenses" which defendant-appellant IHC expected to incur in
accomplishing phases 1 to 6, not exclusively to plaintiffs-appellants’ compensation.This
conclusion finds support in an unnumbered board resolution of defendant-appellant IHC
dated July 11, 1969:
"Incidentally, it was also taken up the necessity of giving the Technical Group a portion
of the compensation that was authorized by this corporation in its Resolution of
February 11, 1969 considering that the assistance so far given the corporation by said
Technical Group in continuing our project with the DBP and its request for guaranty for
a foreign loan is 70% completed leaving only some details which are now being
processed. It is estimated that ₱400,000.00 worth of Common Stock would be
reasonable for the present accomplishments and to this effect, the President is
authorized to issue the same in the name of the Technical Group, as follows:
₱200,000.00 in common stock to Rafael Suarez, as associate in the Technical Group,
and ₱200,000.00 in common stock to Francisco G. Joaquin, Jr., also a member of the
Technical Group.
It is apparent that not all of the ₱2,000,000.00 was allocated exclusively to compensate
plaintiffs-appellants. Rather, it was intended to fund the whole undertaking including
their compensation. On the same date, defendant-appellant IHC also authorized its
president to pay-appellant Joaquin ₱500,000.00 either in cash or in stock or both.
The amount awarded by the lower court was therefore less than what defendant-
appellant IHC agreed to pay plaintiffs-appellants. While this Court cannot decree that
the cancelled shares be restored, for they are without a doubt null and void, still and all,
defendant-appellant IHC cannot now put up its own ultra vires act as an excuse to

escape obligation to plaintiffs-appellants. Instead of shares of stock, defendant-
appellant IHC is ordered to pay plaintiff-appellant Joaquin a total of ₱700,000.00 and
plaintiff-appellant Suarez ₱200,000.00, both to be paid in cash.
Although the lower court failed to explain why it was granting the attorney’s fees, this
Court nonetheless finds its award proper given defendant-appellant IHC’s actions.25
Issues
In this appeal, the IHC raises as issues for our consideration and resolution the
following:
I probative value of the evidence presented by the litigants or by any of them; the
WHETHER OR NOT THE COURT OF APPEALS IS CORRECT IN AWARDING
COMPENSATION AND EVEN MODIFYING THE PAYMENT TO HEREIN
RESPONDENTS DESPITE NON-FULFILLMENT OF THEIR OBLIGATION TO HEREIN
PETITIONER
II
WHETHER OR NOT THE COURT OF APPEALS IS CORRECT IN AWARDING
ATTORNEY’S FEES TO RESPONDENTS26
IHC maintains that Article 1186 of the Civil Code was erroneously applied; that it had no
intention of preventing Joaquin from complying with his obligations when it adopted his
recommendation to negotiate with Barnes; that Article 1234 of the Civil Code applied
only if there was a merely slight deviation from the obligation, and the omission or
defect was technical and unimportant; that substantial compliance was unacceptable
because the foreign loan was material and was, in fact, the ultimate goal of its contract
with Joaquin and Suarez; that because the obligation was indivisible and subject to a
suspensive condition, Article 1181 of the Civil Code27 applied, under which a partial
performance was equivalent to non-performance; and that the award of attorney’s fees
should be deleted for lack of legal and factual bases.
On the part of respondents, only Joaquin filed a comment,28 arguing that the petition
was fatally defective for raising questions of fact; that the obligation was divisible and
capable of partial performance; and that the suspensive condition was deemed fulfilled
through IHC’s own actions.29
Ruling
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We deny the petition for review on certiorari subject to the ensuing disquisitions.
1.
IHC raises questions of law
We first consider and resolve whether IHC’s petition improperly raised questions of fact.
A question of law exists when there is doubt as to what the law is on a certain state of
facts, but, in contrast, a question of fact exists when the doubt arises as to the truth or
falsity of the facts alleged. A question of law does not involve an examination of the
resolution of the issue must rest solely on what the law provides on the given set of
circumstances.30 When there is no dispute as to the facts, the question of whether or
not the conclusion drawn from the facts is correct is a question of law.31
Considering that what IHC seeks to review is the CA’s application of the law on the
facts presented therein, there is no doubt that IHC raises questions of law. The basic
issue posed here is whether the conclusions drawn by the CA were correct under the
pertinent laws.
2.
Article 1186 and Article 1234 of the Civil Code cannot be the source of IHC’s obligation
to pay respondents IHC argues that it should not be held liable because: (a) it was
Joaquin who had recommended Barnes; and (b) IHC’s negotiation with Barnes had
been neither intentional nor willfully intended to prevent Joaquin from complying with
his obligations.
IHC’s argument is meritorious.
Article 1186 of the Civil Code reads:
Article 1186. The condition shall be deemed fulfilled when the obligor voluntarily
prevents its fulfillment.
This provision refers to the constructive fulfillment of a suspensive condition,32 whose
application calls for two requisites, namely: (a) the intent of the obligor to prevent the
fulfillment of the condition, and (b) the actual prevention of the fulfillment. Mere intention

of the debtor to prevent the happening of the condition, or to place ineffective obstacles
to its compliance, without actually preventing the fulfillment, is insufficient.33
The error lies in the CA’s failure to determine IHC’s intent to pre-empt Joaquin from
meeting his obligations. The June 20, 1970 minutes of IHC’s special board meeting
discloses that Joaquin impressed upon the members of the Board that Materials
Handling was offering more favorable terms for IHC, to wit:
xxxx
At the meeting all the members of the Board of Directors of the International Hotel
Corporation were present with the exception of Directors Benjamin J. Bautista and
Sergio O. Rustia who asked to be excused because of previous engagements. In that
meeting, the President called on Mr. Francisco G. Joaquin, Jr. to explain the different
negotiations he had conducted relative to obtaining the needed financing for the hotel
project in keeping with the authority given to him in a resolution approved by the Board
of Directors.
Mr. Joaquin presently explained that he contacted several local and foreign financiers
through different brokers and after examining the different offers he narrowed down his
choice to two (2), to wit: the foreign financier recommended by George Wright of the
Roger Dunn & Company and the offer made by the Materials Handling Corporation.
After explaining the advantages and disadvantages to our corporation of the two (2)
offers specifically with regard to the terms and repayment of the loan and the rate of
interest requested by them, he concluded that the offer made by the Materials Handling
Corporation is much more advantageous because the terms and conditions of payment
as well as the rate of interest are much more reasonable and would be much less
onerous to our corporation. However, he explained that the corporation accepted, in
principle, the offer of Roger Dunn, per the corporation’s telegrams to Mr. Rudolph Meir
of the Private Bank of Zurich, Switzerland, and until such time as the corporation’s
negotiations with Roger Dunn is terminated, we are committed, on one way or the
other, to their financing.
It was decided by the Directors that, should the negotiations with Roger Dunn
materialize, at the same time as the offer of Materials Handling Corporation, that the
funds committed by Roger Dunn may be diverted to other borrowers of the
Development Bank of the Philippines. With this condition, Director Joaquin showed the
advantages of the offer of Materials Handling Corporation. Mr. Joaquin also informed
the corporation that, as of this date, the bank confirmation of Roger Dunn & Company
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has not been received. In view of the fact that the corporation is racing against time in
securing its financing, he recommended that the corporation entertain other offers.
After a brief exchange of views on the part of the Directors present and after hearing
the clarification and explanation made by Mr. C. M. Javier who was present and who
represented the Materials Handling Corporation, the Directors present approved
unanimously the recommendation of Mr. Joaquin to entertain the offer of Materials
Handling Corporation.34
Evidently, IHC only relied on the opinion of its consultant in deciding to transact with
Materials Handling and, later on, with Barnes. In negotiating with Barnes, IHC had no
intention, willful or otherwise, to prevent Joaquin and Suarez from meeting their
undertaking. Such absence of any intention negated the basis for the CA’s reliance on
Article 1186 of the Civil Code.
Nor do we agree with the CA’s upholding of IHC’s liability by virtue of Joaquin and
Suarez’s substantial performance. In so ruling, the CA applied Article 1234 of the Civil
Code, which states:
Article 1234. If the obligation has been substantially performed in good faith, the obligor
may recover as though there had been a strict and complete fulfillment, less damages
suffered by the obligee.
It is well to note that Article 1234 applies only when an obligor admits breaching the
contract35 after honestly and faithfully performing all the material elements thereof
except for some technical aspects that cause no serious harm to the obligee.36 IHC
correctly submits that the provision refers to an omission or deviation that is slight, or
technical and unimportant, and does not affect the real purpose of the contract.
Tolentino explains the character of the obligor’s breach under Article 1234 in the
following manner, to wit:
In order that there may be substantial performance of an obligation, there must have
been an attempt in good faith to perform, without any willful or intentional departure
therefrom. The deviation from the obligation must be slight, and the omission or defect
must be technical and unimportant, and must not pervade the whole or be so material
that the object which the parties intended to accomplish in a particular manner is not
attained. The non-performance of a material part of a contract will prevent the
performance from amounting to a substantial compliance.

The party claiming substantial performance must show that he has attempted in good
faith to perform his contract, but has through oversight, misunderstanding or any
excusable neglect failed to completely perform in certain negligible respects, for which
the other party may be adequately indemnified by an allowance and deduction from the
contract price or by an award of damages. But a party who knowingly and wilfully fails
to perform his contract in any respect, or omits to perform a material part of it, cannot
be permitted, under the protection of this rule, to compel the other party, and the trend
of the more recent decisions is to hold that the percentage of omitted or irregular
performance may in and of itself be sufficient to show that there had not been a
substantial performance.37
By reason of the inconsequential nature of the breach or omission, the law deems the
performance as substantial, making it the obligee’s duty to pay.38 The compulsion of
payment is predicated on the substantial benefit derived by the obligee from the partial
performance. Although compelled to pay, the obligee is nonetheless entitled to an
allowance for the sum required to remedy omissions or defects and to complete the
work agreed upon.39
Conversely, the principle of substantial performance is inappropriate when the
incomplete performance constitutes a material breach of the contract. A contractual
breach is material if it will adversely affect the nature of the obligation that the obligor
promised to deliver, the benefits that the obligee expects to receive after full
compliance, and the extent that the non-performance defeated the purposes of the
contract.40 Accordingly, for the principle embodied in Article 1234 to apply, the failure
of Joaquin and Suarez to comply with their commitment should not defeat the ultimate
purpose of the contract.
The primary objective of the parties in entering into the services agreement was to
obtain a foreign loan to finance the construction of IHC’s hotel project. This objective
could be inferred from IHC’s approval of phase 1 to phase 6 of the proposal. Phase 1
and phase 2, respectively the preparation of a new project study and the settlement of
the unregistered mortgage, would pave the way for Joaquin and Suarez to render
assistance to IHC in applying for the DBP guaranty and thereafter to look for an able
and willing foreign financial institution acceptable to DBP. All the steps that Joaquin and
Suarez undertook to accomplish had a single objective – to secure a loan to fund the
construction and eventual operations of the hotel of IHC. In that regard, Joaquin himself
admitted that his assistance was specifically sought to seek financing for IHC’s hotel
project.41
Needless to say, finding the foreign financier that DBP would guarantee was the
essence of the parties’ contract, so that the failure to completely satisfy such obligation
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could not be characterized as slight and unimportant as to have resulted in Joaquin and
Suarez’s substantial performance that consequentially benefitted IHC. Whatever
benefits IHC gained from their services could only be minimal, and were even probably
outweighed by whatever losses IHC suffered from the delayed construction of its hotel.
Consequently, Article 1234 did not apply.
3.
IHC is nonetheless liable to pay under the rule on constructive fulfillment of a mixed
conditional obligation
Notwithstanding the inapplicability of Article 1186 and Article 1234 of the Civil Code,
IHC was liable based on the nature of the obligation.
Considering that the agreement between the parties was not circumscribed by a
definite period, its termination was subject to a condition – the happening of a future
and uncertain event.42 The prevailing rule in conditional obligations is that the
acquisition of rights, as well as the extinguishment or loss of those already acquired,
shall depend upon the happening of the event that constitutes the condition.43
To recall, both the RTC and the CA held that Joaquin and Suarez’s obligation was
subject to the suspensive condition of successfully securing a foreign loan guaranteed
by DBP. IHC agrees with both lower courts, and even argues that the obligation with a
suspensive condition did not arise when the event or occurrence did not happen. In that
instance, partial performance of the contract subject to the suspensive condition was
tantamount to no performance at all. As such, the respondents were not entitled to any
compensation.
We have to disagree with IHC’s argument.
To secure a DBP-guaranteed foreign loan did not solely depend on the diligence or the
sole will of the respondents because it required the action and discretion of third
persons – an able and willing foreign financial institution to provide the needed funds,
and the DBP Board of Governors to guarantee the loan. Such third persons could not
be legally compelled to act in a manner favorable to IHC. There is no question that
when the fulfillment of a condition is dependent partly on the will of one of the
contracting parties,44 or of the obligor, and partly on chance, hazard or the will of a
third person, the obligation is mixed.45 The existing rule in a mixed conditional
obligation is that when the condition was not fulfilled but the obligor did all in his power
to comply with the obligation, the condition should be deemed satisfied.46

Considering that the respondents were able to secure an agreement with Weston, and
subsequently tried to reverse the prior cancellation of the guaranty by DBP, we rule that
they thereby constructively fulfilled their obligation.
4.
Quantum meruit should apply in the absence of an express agreement on the fees
The next issue to resolve is the amount of the fees that IHC should pay to Joaquin and
Suarez.
Joaquin claimed that aside from the approved ₱2,000,000.00 fee to implement phase 1
to phase 6, the IHC Board of Directors had approved an additional ₱500,000.00 as
payment for his services. The RTC declared that he and Suarez were entitled to
₱200,000.00 each, but the CA revised the amounts to ₱700,000.00 for Joaquin and
₱200,000.00 for Suarez.
Anent the ₱2,000,000.00, the CA rightly concluded that the full amount of
₱2,000,000.00 could not be awarded to respondents because such amount was not
allocated exclusively to compensate respondents, but was intended to be the estimated
maximum to fund the expenses in undertaking phase 6 of the scope of services. Its
conclusion was unquestionably borne out by the minutes of the February 11, 1969
meeting, viz:
xxxx
II
The preparation of the necessary papers for the DBP including the preparation of the
application, the presentation of the mechanics of financing, the actual follow up with the
different departments of the DBP which includes the explanation of the feasibility
studies up to the approval of the loan, conditioned on the DBP’s acceptance of the
project as feasible. The estimated expenses for this particular phase would be
contingent, i.e. upon DBP’s approval of the plan now being studied and prepared, is
somewhere around ₱2,000,000.00.
After a brief discussion on the matter, the Board on motion duly made and seconded,
unanimously adopted a resolution of the following tenor:
RESOLUTION NO. ______
(Series of 1969)
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107
"RESOLVED, as it is hereby RESOLVED, that if the Reparations allocation and the
plan being negotiated with the DBP is realized the estimated maximum expenses of
₱2,000,000.00 for this phase is hereby authorized subject to the sound discretion of the
committee composed of Justice Felix Angelo Bautista, Jose N. Valero and Ephraim G.
Gochangco."47 (Emphasis supplied)
Joaquin’s claim for the additional sum of ₱500,000.00 was similarly without factual and
legal bases. He had requested the payment of that amount to cover services rendered
and still to be rendered to IHC separately from those covered by the first six phases of
the scope of work. However, there is no reason to hold IHC liable for that amount due
to his failure to present sufficient proof of the services rendered towards that end.
Furthermore, his July 11, 1969 letter revealed that the additional services that he had
supposedly rendered were identical to those enumerated in the technical proposal,
thus:
The Board of Directors
International Hotel Corporation
Thru: Justice Felix Angelo Bautista
President & Chairman of the Board
Gentlemen:
I have the honor to request this Body for its deliberation and action on the fees for my
services rendered and to be rendered to the hotel project and to the corporation. These
fees are separate from the fees you have approved in your previous Board Resolution,
since my fees are separate. I realize the position of the corporation at present, in that it
is not in a financial position to pay my services in cash, therefore, I am requesting this
Body to consider payment of my fees even in the form of shares of stock, as you have
done to the other technical men and for other services rendered to the corporation by
other people.
Inasmuch as my fees are contingent on the successful implementation of this project, I
request that my fees be based on a percentage of the total project cost. The fees which
I consider reasonable for the services that I have rendered to the project up to the
completion of its construction is ₱500,000.00. I believe said amount is reasonable since
this is approximately only ¾ of 1% of the total project cost.

So far, I have accomplished Phases 1-5 of my report dated February 1, 1969 and which
you authorized us to do under Board Resolution of February 11, 1969. It is only Phase
6 which now remains to be implemented. For my appointment as Consultant dated May
12, 1969 and the Board Resolution dated June 23, 1969 wherein I was appointed to the
Technical Committee, it now follows that I have been also authorized to implement part
of Phases 7 & 8.
A brief summary of my accomplished work has been as follows:
1. I have revised and made the new Project Study of your hotel project, making it
bankable and feasible.
2. I have reduced the total cost of your project by approximately ₱24,735,000.00.
3. I have seen to it that a registered mortgage with the Reparations Commission did not
affect the application with the IBP for approval to processing.
4. I have prepared the application papers acceptable to the DBP by means of an
advance analysis and the presentation of the financial mechanics, which was accepted
by the DBP.
5. I have presented the financial mechanics of the loan wherein the requirement of the
DBP for an additional ₱19,000,000.00 in equity from the corporation became
unnecessary.
6. The explanation of the financial mechanics and the justification of this project was
instrumental in changing the original recommendation of the Investment Banking
Department of the DBP, which recommended disapproval of this application, to the
present recommendation of the Real Estate Department which is for the approval of this
project for proceeding.
7. I have submitted to you several offers already of foreign financiers which are in your
files. We are presently arranging the said financiers to confirm their funds to the DBP
for our project,
8. We have secured the approval of the DBP to process the loan application of this
corporation as per its letter July 2, 1969.
9. We have performed other services for the corporation which led to the cooperation
and understanding of the different factions of this corporation.
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I have rendered services to your corporation for the past 6 months with no clear
understanding as to the compensation of my services. All I have drawn from the
corporation is the amount of ₱500.00 dated May 12, 1969 and personal payment
advanced by Justice Felix Angelo Bautista in the amount of ₱1,000.00.
I am, therefore, requesting this Body for their approval of my fees. I have shown my
good faith and willingness to render services to your corporation which is evidenced by
my continued services in the past 6 months as well as the accomplishments above
mentioned. I believe that the final completion of this hotel, at least for the processing of
the DBP up to the completion of the construction, will take approximately another 2 ½
years. In view of the above, I again reiterate my request for your approval of my fees.
When the corporation is in a better financial position, I will request for a withdrawal of a
monthly allowance, said amount to be determined by this Body.
Very truly yours,
(Sgd.)
Francisco G., Joaquin, Jr.48
(Emphasis supplied)
Joaquin could not even rest his claim on the approval by IHC’s Board of Directors. The
approval apparently arose from the confusion between the supposedly separate
services that Joaquin had rendered and those to be done under the technical proposal.
The minutes of the July 11, 1969 board meeting (when the Board of Directors allowed
the payment for Joaquin’s past services and for the 70% project completion by the
technical group) showed as follows:
III
The Third order of business is the compensation of Mr. Francisco G. Joaquin, Jr. for his
services in the corporation.
After a brief discussion that ensued, upon motion duly made and seconded, the
stockholders unanimously approved a resolution of the following tenor:
RESOLUTION NO. ___
(Series of 1969)
"RESOLVED that Mr. Francisco G. Joaquin, Jr. be granted a compensation in the
amount of Five Hundred Thousand (₱500,000.00) Pesos for his past services and
services still to be rendered in the future to the corporation up to the completion of the
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Project.1âwphi1 The President is given full discretion to discuss with Mr. Joaquin the
manner of payment of said compensation, authorizing him to pay part in stock and part
in cash."
Incidentally, it was also taken up the necessity of giving the Technical Group a portion
of the compensation that was authorized by this corporation in its Resolution of
February 11, 1969 considering that the assistance so far given the corporation by said
Technical Group in continuing our project with the DBP and its request for guaranty for
a foreign loan is 70% completed leaving only some details which are now being
processed. It is estimated that ₱400,000.00 worth of Common Stock would be
reasonable for the present accomplishments and to this effect, the President is
authorized to issue the same in the name of the Technical Group, as follows:
₱200,000.00 in Common Stock to Rafael Suarez, an associate in the Technical Group,
and ₱200,000.00 in Common stock to Francisco G. Joaquin, Jr., also a member of the
Technical Group.49
the policy that no premium should be placed on the right to litigate. There should be
factual or legal support in the records before the award of such fees is sustained. It is
not enough justification for the award simply because respondents were compelled to
protect their rights.54
ACCORDINGLY, the Court DENIES the petition for review on certiorari; and AFFIRMS
the decision of the Court of Appeals promulgated on November 8, 2002 in C.A.-G.R.
No. 47094 subject to the MODIFICATIONS that: (a) International Hotel Corporation is
ordered to. pay Francisco G. Joaquin, Jr. and Rafael Suarez ₱100,000.00 each as
compensation for their services, and (b) the award of ₱20,000.00 as attorney's fees is
deleted.
No costs of suit.
SO ORDERED.
LUCAS P. BERSMAIN
Associate Justice

Lastly, the amount purportedly included services still to be rendered that supposedly
extended until the completion of the construction of the hotel. It is basic, however, that
in obligations to do, there can be no payment unless the obligation has been
completely rendered.50

It is notable that the confusion on the amounts of compensation arose from the parties’
inability to agree on the fees that respondents should receive. Considering the absence
of an agreement, and in view of respondents’ constructive fulfillment of their obligation,
the Court has to apply the principle of quantum meruit in determining how much was
still due and owing to respondents. Under the principle of quantum meruit, a contractor
is allowed to recover the reasonable value of the services rendered despite the lack of
a written contract.51 The measure of recovery under the principle should relate to the
reasonable value of the services performed.52 The principle prevents undue
enrichment based on the equitable postulate that it is unjust for a person to retain any
benefit without paying for it. Being predicated on equity, the principle should only be
applied if no express contract was entered into, and no specific statutory provision was
applicable.53

Under the established circumstances, we deem the total amount of ₱200,000.00 to be

reasonable compensation for respondents’ services under the principle of quantum
meruit.

Finally, we sustain IHC’s position that the grant of attorney’s fees lacked factual or legal
basis. Attorney’s fees are not awarded every time a party prevails in a suit because of
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