Republic of the Philippines

SUPREME COURT
Manila

considering that they had not yet filed their Answer. Petitioner, however,
insisted that the joint motion to dismiss is standard operating procedure in
their bank to effect a compromise and to preclude future filing of claims,
counterclaims or suits for damages.

FIRST DIVISION
G.R. No. 141968

February 12, 2001

THE INTERNATIONAL CORPORATE BANK (now UNION BANK OF THE

PHILIPPINES), petitioner,
vs.
SPS. FRANCIS S. GUECO and MA. LUZ E. GUECO, respondents.
KAPUNAN, J.:
The respondent Gueco Spouses obtained a loan from petitioner
International Corporate Bank (now Union Bank of the Philippines) to
purchase a car - a Nissan Sentra 1600 4DR, 1989 Model. In consideration
thereof, the Spouses executed promissory notes which were payable in
monthly installments and chattel mortgage over the car to serve as
security for the notes.1wphi1.nt
The Spouses defaulted in payment of installments. Consequently, the Bank
filed on August 7, 1995 a civil action docketed as Civil Case No. 658-95 for
"Sum of Money with Prayer for a Writ of Replevin"1 before the Metropolitan
Trial Court of Pasay City, Branch 45.2 On August 25, 1995, Dr. Francis
Gueco was served summons and was fetched by the sheriff and
representative of the bank for a meeting in the bank premises. Desi Tomas,
the Bank's Assistant Vice President demanded payment of the amount of
P184,000.00 which represents the unpaid balance for the car loan. After
some negotiations and computation, the amount was lowered to
P154,000.00, However, as a result of the non-payment of the reduced
amount on that date, the car was detained inside the bank's compound.
On August 28, 1995, Dr. Gueco went to the bank and talked with its
Administrative Support, Auto Loans/Credit Card Collection Head, Jefferson
Rivera. The negotiations resulted in the further reduction of the
outstanding loan to P150,000.00.
On August 29, 1995, Dr. Gueco delivered a manager's check in amount of
P150,000.00 but the car was not released because of his refusal to sign the
Joint Motion to Dismiss. It is the contention of the Gueco spouses and their
counsel that Dr. Gueco need not sign the motion for joint dismissal

After several demand letters and meetings with bank representatives, the
respondents Gueco spouses initiated a civil action for damages before the
Metropolitan Trial Court of Quezon City, Branch 33. The Metropolitan Trial
Court dismissed the complaint for lack of merit. 3
On appeal to the Regional Trial Court, Branch 227 of Quezon City, the
decision of the Metropolitan Trial Court was reversed. In its decision, the
RTC held that there was a meeting of the minds between the parties as to
the reduction of the amount of indebtedness and the release of the car but
said agreement did not include the signing of the joint motion to dismiss as
a condition sine qua non for the effectivity of the compromise. The court
further ordered the bank:
1. to return immediately the subject car to the appellants in good
working condition; Appellee may deposit the Manager's check - the
proceeds of which have long been under the control of the issuing
bank in favor of the appellee since its issuance, whereas the funds
have long been paid by appellants to .secure said Manager's
Check, over which appellants have no control;
2. to pay the appellants the sum of P50,000.00 as moral damages;
P25,000.00 as exemplary damages, and P25,000.00 as attorney's
fees, and
3. to pay the cost of suit.
In other respect, the decision of the Metropolitan Trial Court Branch
33 is hereby AFFIRMED.4
The case was elevated to the Court of Appeals, which on February 17,
2000, issued the assailed decision, the decretal portion of which reads:
WHEREFORE, premises considered, the petition for review on
certiorari is hereby DENIED and the Decision of the Regional Trial
Court of Quezon City, Branch 227, in Civil Case No. Q-97-31176, for
lack of any reversible error, is AFFIRMED in toto. Costs against
petitioner.

SO ORDERED.5
The Court of Appeals essentially relied on the respect accorded to the
finality of the findings of facts by the lower court and on the latter's finding
of the existence of fraud which constitutes the basis for the award of
damages.
The petitioner comes to this Court by way of petition for review
on certiorari under Rule 45 of the Rules of Court, raising the following
assigned errors:
I
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO
AGREEMENT WITH RESPECT TO THE EXECUTION OF THE JOINT
MOTION TO DISMISS AS A CONDITION FOR THE COMPROMISE
AGREEMENT.
II
THE COURT OF APPEALS ERRED IN GRANTING MORAL AND
EXEMPLARY DAMAGES AND ATTORNEY'S FEES IN FAVOR OF THE
RESPONDENTS.
III
THE COURT OF APPEALS ERRED IN HOLDING THAT THE PETITIONER
RETURN THE SUBJECT CAR TO THE RESPONDENTS, WITHOUT
MAKING ANY PROVISION FOR THE ISSUANCE OF THE NEW
MANAGER'S/CASHIER'S CHECK BY THE RESPONDENTS IN FAVOR OF
THE PETITIONER IN LIEU OF THE ORIGINAL CASHIER'S CHECK THAT
ALREADY BECAME STALE.6
As to the first issue, we find for the respondents. The issue as to what
constitutes the terms of the oral compromise or any subsequent novation
is a question of fact that was resolved by the Regional Trial Court and the
Court of Appeals in favor of respondents. It is well settled that the findings
of fact of the lower court, especially when affirmed by the Court of
Appeals, are binding upon this Court.7 While there are exceptions to this
rule,8 the present case does not fall under anyone of them, the petitioner's
claim to the contrary, notwithstanding.

Being an affirmative allegation, petitioner has the burden of evidence to

prove his claim that the oral compromise entered into by the parties on
August 28, 1995 included the stipulation that the parties would jointly file a
motion to dismiss. This petitioner failed to do. Notably, even the
Metropolitan Trial Court, while ruling in favor of the petitioner and thereby
dismissing the complaint, did not make a factual finding that the
compromise agreement included the condition of the signing of a joint
motion to dismiss.
The Court of Appeals made the factual findings in this wise:
In support of its claim, petitioner presented the testimony of Mr.
Jefferson Rivera who related that respondent Dr. Gueco was aware
that the signing of the draft of the Joint Motion to Dismiss was one
of the conditions set by the bank for the acceptance of the reduced
amount of indebtedness and the release of the car. (TSN, October
23, 1996, pp. 17-21, Rollo, pp. 18, 5). Respondents, however,
maintained that no such condition was ever discussed during their
meeting of August 28, 1995 (Rollo, p. 32).
The trial court, whose factual findings are entitled to respect since
it has the 'opportunity to directly observe the witnesses and to
determine by their demeanor on the stand the probative value of
their testimonies' (People vs. Yadao, et al. 216 SCRA 1, 7 [1992]),
failed to make a categorical finding on the issue. In dismissing the
claim of damages of the respondents, it merely observed that
respondents are not entitled to indemnity since it was their
unjustified reluctance to sign of the Joint Motion to Dismiss that
delayed the release of the car. The trial court opined, thus:
'As regards the third issue, plaintiffs' claim for damages is
unavailing. First, the plaintiffs could have avoided the
renting of another car and could have avoided this
litigation had he signed the Joint Motion to Dismiss. While it
is true that herein defendant can unilaterally dismiss the
case for collection of sum of money with replevin, it is
equally true that there is nothing wrong for the plaintiff to
affix his signature in the Joint Motion to Dismiss, for after
all, the dismissal of the case against him is for his own
good and benefit. In fact, the signing of the Joint Motion to
Dismiss gives the plaintiff three (3) advantages. First, he
will recover his car. Second, he will pay his obligation to the
bank on its reduced amount of P150,000.00 instead of its
original claim of P184,985.09. And third, the case against

him will be dismissed. Plaintiffs, likewise, are not entitled to

the award of moral damages and exemplary damages as
there is no showing that the defendant bank acted
fraudulently or in bad faith.' (Rollo, p. 15)

with human experience. Considering the effect of the

signing of the Joint Motion to Dismiss on the appellants'
substantive right, it is more in accord with human
experience to expect Dr. Gueco, upon being shown the
Joint Motion to Dismiss, to refuse to pay the Manager's
Check and for the bank to refuse to accept the manager's
check. The only logical explanation for this inaction is that
Dr. Gueco was not shown the Joint Motion to Dismiss in the
meeting of August 28, 1995, bolstering his claim that its
signing was never put into consideration in reaching a
compromise.' xxx.9

The Court has noted, however, that the trial court, in its findings of
facts, clearly indicated that the agreement of the parties on August
28, 1995 was merely for the lowering of the price, hence 'xxx On August 28, 1995, bank representative Jefferson
Rivera and plaintiff entered into an oral compromise
agreement, whereby the original claim of the bank of
P184,985.09 was reduced to P150,000.00 and that upon
payment of which, plaintiff was informed that the subject
motor vehicle would be released to him.' (Rollo, p. 12)
The lower court, on the other hand, expressly made a finding that
petitioner failed to include the aforesaid signing of the Joint Motion
to Dismiss as part of the agreement. In dismissing petitioner's
claim, the lower court declared, thus:
'If it is true, as the appellees allege, that the signing of the
joint motion was a condition sine qua nonfor the reduction
of the appellants' obligation, it is only reasonable and
logical to assume that the joint motion should have been
shown to Dr. Gueco in the August 28, 1995 meeting. Why
Dr. Gueco was not given a copy of the joint motion that day
of August 28, 1995, for his family or legal counsel to see to
be brought signed, together with the P150,000.00 in
manager's check form to be submitted on the following day
on August 29, 1995? (sic) [I]s a question whereby the
answer up to now eludes this Court's comprehension. The
appellees would like this Court to believe that Dr Gueco
was informed by Mr. Rivera Rivera of the bank requirement
of signing the joint motion on August 28, 1995 but he did
not bother to show a copy thereof to his family or legal
counsel that day August 28, 1995. This part of the theory
of appellee is too complicated for any simple oral
agreement. The idea of a Joint Motion to Dismiss being
signed as a condition to the pushing through a deal
surfaced only on August 29, 1995.
'This Court is not convinced by the appellees' posturing.
Such claim rests on too slender a frame, being inconsistent

We see no reason to reverse.

Anent the issue of award of damages, we find the claim of petitioner
meritorious. In finding the petitioner liable for damages, both .the Regional
Trial Court and the Court of Appeals ruled that there was fraud on the part
of the petitioner. The CA thus declared:
The lower court's finding of fraud which became the basis of the
award of damages was likewise sufficiently proven. Fraud under
Article 1170 of the Civil Code of the Philippines, as amended is the
'deliberate and intentional evasion of the normal fulfillment of
obligation' When petitioner refused to release the car despite
respondent's tender of payment in the form of a manager's check,
the former intentionally evaded its obligation and thereby became
liable for moral and exemplary damages, as well as attorney's
fees.10
We disagree.
Fraud has been defined as the deliberate intention to cause damage or
prejudice. It is the voluntary execution of a wrongful act, or a willful
omission, knowing and intending the effects which naturally and
necessarily arise from such act or omission; the fraud referred to in Article
1170 of the Civil Code is the deliberate and intentional evasion of the
normal fulfillment of obligation.11 We fail to see how the act of the
petitioner bank in requiring the respondent to sign the joint motion to
dismiss could constitute as fraud. True, petitioner may have been remiss in
informing Dr. Gueco that the signing of a joint motion to dismiss is a
standard operating procedure of petitioner bank. However, this can not in
anyway have prejudiced Dr. Gueco. The motion to dismiss was in fact also
for the benefit of Dr. Gueco, as the case filed by petitioner against it before
the lower court would be dismissed with prejudice. The whole point of the

parties entering into the compromise agreement was in order that Dr.
Gueco would pay his outstanding account and in return petitioner would
return the car and drop the case for money and replevin before the
Metropolitan Trial Court. The joint motion to dismiss was but a natural
consequence of the compromise agreement and simply stated that Dr.
Gueco had fully settled his obligation, hence, the dismissal of the case.
Petitioner's act of requiring Dr. Gueco to sign the joint motion to dismiss
can not be said to be a deliberate attempt on the part of petitioner to
renege on the compromise agreement of the parties. It should, likewise, be
noted that in cases of breach of contract, moral damages may only be
awarded when the breach was attended by fraud or bad faith. 12 The law
presumes good faith. Dr. Gueco failed to present an iota of evidence to
overcome this presumption. In fact, the act of petitioner bank in lowering
the debt of Dr. Gueco from P184,000.00 to P150,000.00 is indicative of its
good faith and sincere desire to settle the case. If respondent did suffer
any damage, as a result of the withholding of his car by petitioner, he has
only himself to blame. Necessarily, the claim for exemplary damages must
fait. In no way, may the conduct of petitioner be characterized as "wanton,
fraudulent, reckless, oppressive or malevolent."13
We, likewise, find for the petitioner with respect to the third assigned error.
In the meeting of August 29, 1995, respondent Dr. Gueco delivered a
manager's check representing the reduced amount of P150,000.00. Said
check was given to Mr. Rivera, a representative of respondent bank.
However, since Dr. Gueco refused to sign the joint motion to dismiss, he
was made to execute a statement to the effect that he was withholding the
payment of the check.14 Subsequently, in a letter addressed to Ms. Desi
Tomas, vice president of the bank, dated September 4, 1995, Dr. Gueco
instructed the bank to disregard the 'hold order" letter and demanded the
immediate release of his car,15 to which the former replied that the
condition of signing the joint motion to dismiss must be satisfied and that
they had kept the check which could be claimed by Dr. Gueco
anytime.16 While there is controversy as to whether the document
evidencing the order to hold payment of the check was formally offered as
evidence by petitioners,17 it appears from the pleadings that said check has
not been encashed.
The decision of the Regional Trial Court, which was affirmed in toto by the
Court of Appeals, orders the petitioner:
1. to return immediately the subject car to the appellants in good
working condition. Appellee may deposit the Manager's Check - the
proceeds of which have long been under the control of the issuing
bank in favor of the appellee since its issuance, whereas the funds

have long been paid by appellants to secure said Manager's Check

over which appellants have no control.18
Respondents would make us hold that petitioner should return the car or
its value and that the latter, because of its own negligence, should suffer
the loss occasioned by the fact that the check had become stale. 19 It is
their position that delivery of the manager's check produced the effect of
payment20 and, thus, petitioner was negligent in opting not to deposit or
use said check. Rudimentary sense of justice and fair play would not
countenance respondents' position.
A stale check is one which has not been presented for payment within a
reasonable time after its issue. It is valueless and, therefore, should not be
paid. Under the negotiable instruments law, an instrument not payable on
demand must be presented for payment on the day it falls due. When the
instrument is payable on demand, presentment must be made within a
reasonable time after its issue. In the case of a bill of exchange,
presentment is sufficient if made within a reasonable time after the last
negotiation thereof.21
A check must be presented for payment within a reasonable time after its
issue,22 and in determining what is a "reasonable time," regard is to be had
to the nature of the instrument, the usage of trade or business with respect
to such instruments, and the facts of the particular case. 23 The test is
whether the payee employed such diligence as a prudent man exercises in
his own affairs.24 This is because the nature and theory behind the use of a
check points to its immediate use and payability. In a case, a check
payable on demand which was long overdue by about two and a half (21/2) years was considered a stale check. 25 Failure of a payee to encash a
check for more than ten (10) years undoubtedly resulted in the check
becoming stale.26 Thus, even a delay of one (1) week27 or two (2)
days,28 under the specific circumstances of the cited cases constituted
unreasonable time as a matter of law.
In the case at bar, however, the check involved is not an ordinary bill of
exchange but a manager's check. A manager's check is one drawn by the
bank's manager upon the bank itself. It is similar to a cashier's check both
as to effect and use. A cashier's check is a check of the bank's cashier on
his own or another check. In effect, it is a bill of exchange drawn by the
cashier of a bank upon the bank itself, and accepted in advance by the act
of its issuance.29 It is really the bank's own check and may be treated as a
promissory note with the bank as a maker.30The check becomes the
primary obligation of the bank which issues it and constitutes its written
promise to pay upon demand. The mere issuance of it is considered an

acceptance thereof. If treated as promissory note, the drawer would be the

maker and in which case the holder need not prove presentment for
payment or present the bill to the drawee for acceptance.31
Even assuming that presentment is needed, failure to present for payment
within a reasonable time will result to the discharge of the drawer only to
the extent of the loss caused by the delay.32 Failure to present on time,
thus, does not totally wipe out all liability. In fact, the legal situation
amounts to an acknowledgment of liability in the sum stated in the check.
In this case, the Gueco spouses have not alleged, much less shown that
they or the bank which issued the manager's check has suffered damage
or loss caused by the delay or non-presentment. Definitely, the original
obligation to pay certainly has not been erased.
It has been held that, if the check had become stale, it becomes
imperative that the circumstances that caused its non-presentment be
determined.33 In the case at bar, there is no doubt that the petitioner bank
held on the check and refused to encash the same because of the
controversy surrounding the signing of the joint motion to dismiss. We see
no bad faith or negligence in this position taken by the Bank.1wphi1.nt
WHEREFORE, premises considered, the petition for review is given due
course. The decision of the Court of Appeals affirming the decision of the
Regional Trial Court is SET ASIDE. Respondents are further ordered to pay
the original obligation amounting to P150,000.00 to the petitioner upon
surrender or cancellation of the manager's check in the latter's possession,
afterwhich, petitioner is to return the subject motor vehicle in good
working condition.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
THIRD DIVISION
G.R. No. 150255. April 22, 2005
SCHMITZ TRANSPORT & BROKERAGE CORPORATION, Petitioners,
vs.
TRANSPORT VENTURE, INC., INDUSTRIAL INSURANCE COMPANY,
LTD., and BLACK SEA SHIPPING AND DODWELL now INCHCAPE
SHIPPING SERVICES, Respondents.
DECISION

CARPIO-MORALES, J.:
On petition for review is the June 27, 2001 Decision 1 of the Court of
Appeals, as well as its Resolution 2 dated September 28, 2001 denying the
motion for reconsideration, which affirmed that of Branch 21 of the
Regional Trial Court (RTC) of Manila in Civil Case No. 92-631323 holding
petitioner Schmitz Transport Brokerage Corporation (Schmitz Transport),
together with Black Sea Shipping Corporation (Black Sea), represented by
its ship agent Inchcape Shipping Inc. (Inchcape), and Transport Venture
(TVI), solidarily liable for the loss of 37 hot rolled steel sheets in coil that
were washed overboard a barge.
On September 25, 1991, SYTCO Pte Ltd. Singapore shipped from the port of
Ilyichevsk, Russia on board M/V "Alexander Saveliev" (a vessel of Russian
registry and owned by Black Sea) 545 hot rolled steel sheets in coil
weighing 6,992,450 metric tons.

At around 5:30 a.m. of October 27, 1991, due to strong waves, 11 the crew
of the barge abandoned it and transferred to the vessel. The barge pitched
and rolled with the waves and eventually capsized, washing the 37 coils
into the sea.12 At 7:00 a.m., a tugboat finally arrived to pull the already
empty and damaged barge back to the pier.13
Earnest efforts on the part of both the consignee Little Giant and Industrial
Insurance to recover the lost cargoes proved futile.14
Little Giant thus filed a formal claim against Industrial Insurance which paid
it the amount of P5,246,113.11. Little Giant thereupon executed a
subrogation receipt15 in favor of Industrial Insurance.
Industrial Insurance later filed a complaint against Schmitz Transport, TVI,
and Black Sea through its representative Inchcape (the defendants) before
the RTC of Manila, for the recovery of the amount it paid to Little Giant plus
adjustment fees, attorneys fees, and litigation expenses. 16

The cargoes, which were to be discharged at the port of Manila in favor of

the consignee, Little Giant Steel Pipe Corporation (Little Giant), 4 were
insured against all risks with Industrial Insurance Company Ltd. (Industrial
Insurance) under Marine Policy No. M-91-3747-TIS.5

Industrial Insurance faulted the defendants for undertaking the unloading

of the cargoes while typhoon signal No. 1 was raised in Metro Manila. 17

The vessel arrived at the port of Manila on October 24, 1991 and the
Philippine Ports Authority (PPA) assigned it a place of berth at the outside
breakwater at the Manila South Harbor.6

By Decision of November 24, 1997, Branch 21 of the RTC held all the
defendants negligent for unloading the cargoes outside of the breakwater
notwithstanding the storm signal.18 The dispositive portion of the decision
reads:

Schmitz Transport, whose services the consignee engaged to secure the

requisite clearances, to receive the cargoes from the shipside, and to
deliver them to its (the consignees) warehouse at Cainta, Rizal, 7 in turn
engaged the services of TVI to send a barge and tugboat at shipside.
On October 26, 1991, around 4:30 p.m., TVIs tugboat "Lailani" towed the
barge "Erika V" to shipside.8
By 7:00 p.m. also of October 26, 1991, the tugboat, after positioning the
barge alongside the vessel, left and returned to the port terminal. 9 At 9:00
p.m., arrastre operator Ocean Terminal Services Inc. commenced to unload
37 of the 545 coils from the vessel unto the barge.
By 12:30 a.m. of October 27, 1991 during which the weather condition had
become inclement due to an approaching storm, the unloading unto the
barge of the 37 coils was accomplished.10 No tugboat pulled the barge back
to the pier, however.

WHEREFORE, premises considered, the Court renders judgment in favor of

the plaintiff, ordering the defendants to pay plaintiff jointly and severally
the sum of P5,246,113.11 with interest from the date the complaint was
filed until fully satisfied, as well as the sum of P5,000.00 representing the
adjustment fee plus the sum of 20% of the amount recoverable from the
defendants as attorneys fees plus the costs of suit. The counterclaims and
cross claims of defendants are hereby DISMISSED for lack of [m]erit. 19
To the trial courts decision, the defendants Schmitz Transport and TVI filed
a joint motion for reconsideration assailing the finding that they are
common carriers and the award of excessive attorneys fees of more
thanP1,000,000. And they argued that they were not motivated by gross or
evident bad faith and that the incident was caused by a fortuitous event. 20
By resolution of February 4, 1998, the trial court denied the motion for
reconsideration. 21

All the defendants appealed to the Court of Appeals which, by decision of

June 27, 2001, affirmed in toto the decision of the trial court, 22 it finding
that all the defendants were common carriers Black Sea and TVI for
engaging in the transport of goods and cargoes over the seas as a regular
business and not as an isolated transaction,23 and Schmitz Transport for
entering into a contract with Little Giant to transport the cargoes from ship
to port for a fee.24
In holding all the defendants solidarily liable, the appellate court ruled that
"each one was essential such that without each others contributory
negligence the incident would not have happened and so much so that the
person principally liable cannot be distinguished with sufficient accuracy." 25
In discrediting the defense of fortuitous event, the appellate court held that
"although defendants obviously had nothing to do with the force of nature,
they however had control of where to anchor the vessel, where discharge
will take place and even when the discharging will commence." 26
The defendants respective motions for reconsideration having been
denied by Resolution27 of September 28, 2001, Schmitz Transport
(hereinafter referred to as petitioner) filed the present petition against TVI,
Industrial Insurance and Black Sea.
Petitioner asserts that in chartering the barge and tugboat of TVI, it was
acting for its principal, consignee Little Giant, hence, the transportation
contract was by and between Little Giant and TVI.28
By Resolution of January 23, 2002, herein respondents Industrial Insurance,
Black Sea, and TVI were required to file their respective Comments. 29
By its Comment, Black Sea argued that the cargoes were received by the
consignee through petitioner in good order, hence, it cannot be faulted, it
having had no control and supervision thereover.30
For its part, TVI maintained that it acted as a passive party as it merely
received the cargoes and transferred them unto the barge upon the
instruction of petitioner.31
In issue then are:
(1) Whether the loss of the cargoes was due to a fortuitous event,
independent of any act of negligence on the part of petitioner Black Sea
and TVI, and

(2) If there was negligence, whether liability for the loss may attach to
Black Sea, petitioner and TVI.
When a fortuitous event occurs, Article 1174 of the Civil Code absolves any
party from any and all liability arising therefrom:
ART. 1174. Except in cases expressly specified by the law, or when it is
otherwise declared by stipulation, or when the nature of the obligation
requires the assumption of risk, no person shall be responsible for those
events which could not be foreseen, or which though foreseen, were
inevitable.
In order, to be considered a fortuitous event, however, (1) the cause of the
unforeseen and unexpected occurrence, or the failure of the debtor to
comply with his obligation, must be independent of human will; (2) it must
be impossible to foresee the event which constitute the caso fortuito, or if
it can be foreseen it must be impossible to avoid; (3) the occurrence must
be such as to render it impossible for the debtor to fulfill his obligation in
any manner; and (4) the obligor must be free from any participation in the
aggravation of the injury resulting to the creditor.32
[T]he principle embodied in the act of God doctrine strictly requires that
the act must be occasioned solely by the violence of nature. Human
intervention is to be excluded from creating or entering into the cause of
the mischief. When the effect is found to be in part the result of the
participation of man, whether due to his active intervention or neglect or
failure to act, the whole occurrence is then humanized and removed from
the rules applicable to the acts of God.33
The appellate court, in affirming the finding of the trial court that human
intervention in the form of contributory negligence by all the defendants
resulted to the loss of the cargoes,34 held that unloading outside the
breakwater, instead of inside the breakwater, while a storm signal was up
constitutes negligence.35 It thus concluded that the proximate cause of the
loss was Black Seas negligence in deciding to unload the cargoes at an
unsafe place and while a typhoon was approaching. 36
From a review of the records of the case, there is no indication that there
was greater risk in loading the cargoes outside the breakwater. As the
defendants proffered, the weather on October 26, 1991 remained normal
with moderate sea condition such that port operations continued and
proceeded normally.37

The weather data report,38 furnished and verified by the Chief of the
Climate Data Section of PAG-ASA and marked as a common exhibit of the
parties, states that while typhoon signal No. 1 was hoisted over Metro
Manila on October 23-31, 1991, the sea condition at the port of Manila at
5:00 p.m. - 11:00 p.m. of October 26, 1991 was moderate. It cannot,
therefore, be said that the defendants were negligent in not unloading the
cargoes upon the barge on October 26, 1991 inside the breakwater.
That no tugboat towed back the barge to the pier after the cargoes were
completely loaded by 12:30 in the morning39 is, however, a material fact
which the appellate court failed to properly consider and appreciate40 the
proximate cause of the loss of the cargoes. Had the barge been towed
back promptly to the pier, the deteriorating sea conditions
notwithstanding, the loss could have been avoided. But the barge was left
floating in open sea until big waves set in at 5:30 a.m., causing it to sink
along with the cargoes.41 The loss thus falls outside the "act of God
doctrine."
The proximate cause of the loss having been determined, who among the
parties is/are responsible therefor?
Contrary to petitioners insistence, this Court, as did the appellate court,
finds that petitioner is a common carrier. For it undertook to transport the
cargoes from the shipside of "M/V Alexander Saveliev" to the consignees
warehouse at Cainta, Rizal. As the appellate court put it, "as long as a
person or corporation holds [itself] to the public for the purpose of
transporting goods as [a] business, [it] is already considered a common
carrier regardless if [it] owns the vehicle to be used or has to hire
one."42 That petitioner is a common carrier, the testimony of its own VicePresident and General Manager Noel Aro that part of the services it offers
to its clients as a brokerage firm includes the transportation of cargoes
reflects so.
Atty. Jubay: Will you please tell us what [are you] functions x x x as
Executive Vice-President and General Manager of said Company?
Mr. Aro: Well, I oversee the entire operation of the brokerage and transport
business of the company. I also handle the various division heads of the
company for operation matters, and all other related functions that the
President may assign to me from time to time, Sir.

Q: Now, in connection [with] your duties and functions as you mentioned,

will you please tell the Honorable Court if you came to know the company
by the name Little Giant Steel Pipe Corporation?
A: Yes, Sir. Actually, we are the brokerage firm of that Company.
Q: And since when have you been the brokerage firm of that company, if
you can recall?
A: Since 1990, Sir.
Q: Now, you said that you are the brokerage firm of this Company. What
work or duty did you perform in behalf of this company?
A: We handled the releases (sic) of their cargo[es] from the Bureau of
Customs. We [are] also in-charged of the delivery of the goods to their
warehouses. We also handled the clearances of their shipment at the
Bureau of Customs, Sir.
xxx
Q: Now, what precisely [was] your agreement with this Little Giant Steel
Pipe Corporation with regards to this shipment? What work did you do with
this shipment?
A: We handled the unloading of the cargo[es] from vessel to lighter and
then the delivery of [the] cargo[es] from lighter to BASECO then to the
truck and to the warehouse, Sir.
Q: Now, in connection with this work which you are doing, Mr. Witness, you
are supposed to perform, what equipment do (sic) you require or did you
use in order to effect this unloading, transfer and delivery to the
warehouse?
A: Actually, we used the barges for the ship side operations, this unloading
[from] vessel to lighter, and on this we hired or we sub-contracted with
[T]ransport Ventures, Inc. which [was] in-charged (sic) of the barges. Also,
in BASECO compound we are leasing cranes to have the cargo unloaded
from the barge to trucks, [and] then we used trucks to deliver [the
cargoes] to the consignees warehouse, Sir.
Q: And whose trucks do you use from BASECO compound to the
consignees warehouse?

A: We utilized of (sic) our own trucks and we have some other contracted
trucks, Sir.

As for petitioners argument that being the agent of Little Giant, any
negligence it committed was deemed the negligence of its principal, it
does not persuade.

xxx
ATTY. JUBAY: Will you please explain to us, to the Honorable Court why is it
you have to contract for the barges of Transport Ventures Incorporated in
this particular operation?
A: Firstly, we dont own any barges. That is why we hired the services of
another firm whom we know [al]ready for quite sometime, which is
Transport Ventures, Inc. (Emphasis supplied) 43
It is settled that under a given set of facts, a customs broker may be
regarded as a common carrier. Thus, this Court, in A.F. Sanchez Brokerage,
Inc. v. The Honorable Court of Appeals,44 held:
The appellate court did not err in finding petitioner, a customs broker, to be
also a common carrier, as defined under Article 1732 of the Civil Code, to
wit,
Art. 1732. Common carriers are persons, corporations, firms or associations
engaged in the business of carrying or transporting passengers or goods or
both, by land, water, or air, for compensation, offering their services to the
public.
xxx
Article 1732 does not distinguish between one whose principal business
activity is the carrying of goods and one who does such carrying only as an
ancillary activity. The contention, therefore, of petitioner that it is not a
common carrier but a customs broker whose principal function is to
prepare the correct customs declaration and proper shipping documents as
required by law is bereft of merit. It suffices that petitioner undertakes to
deliver the goods for pecuniary consideration.45
And in Calvo v. UCPB General Insurance Co. Inc.,46 this Court held that as
the transportation of goods is an integral part of a customs broker, the
customs broker is also a common carrier. For to declare otherwise "would
be to deprive those with whom [it] contracts the protection which the law
affords them notwithstanding the fact that the obligation to carry goods for
[its] customers, is part and parcel of petitioners business." 47

True, petitioner was the broker-agent of Little Giant in securing the release
of the cargoes. In effecting the transportation of the cargoes from the
shipside and into Little Giants warehouse, however, petitioner was
discharging its own personal obligation under a contact of carriage.
Petitioner, which did not have any barge or tugboat, engaged the services
of TVI as handler48 to provide the barge and the tugboat. In their Service
Contract,49 while Little Giant was named as the consignee, petitioner did
not disclose that it was acting on commission and was chartering the
vessel for Little Giant.50 Little Giant did not thus automatically become a
party to the Service Contract and was not, therefore, bound by the terms
and conditions therein.
Not being a party to the service contract, Little Giant cannot directly sue
TVI based thereon but it can maintain a cause of action for negligence.51
In the case of TVI, while it acted as a private carrier for which it was under
no duty to observe extraordinary diligence, it was still required to observe
ordinary diligence to ensure the proper and careful handling, care and
discharge of the carried goods.
Thus, Articles 1170 and 1173 of the Civil Code provide:
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.
ART. 1173. 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. When negligence shows bad faith, the provisions of articles 1171
and 2202, paragraph 2, shall apply.
If the law or contract does not state the diligence which is to be observed
in the performance, that which is expected of a good father of a family
shall be required.
Was the reasonable care and caution which an ordinarily prudent person
would have used in the same situation exercised by TVI? 52

This Court holds not.

TVIs failure to promptly provide a tugboat did not only increase the risk
that might have been reasonably anticipated during the shipside operation,
but was the proximate cause of the loss. A man of ordinary prudence
would not leave a heavily loaded barge floating for a considerable number
of hours, at such a precarious time, and in the open sea, knowing that the
barge does not have any power of its own and is totally defenseless from
the ravages of the sea. That it was nighttime and, therefore, the members
of the crew of a tugboat would be charging overtime pay did not excuse
TVI from calling for one such tugboat.
As for petitioner, for it to be relieved of liability, it should, following Article
173953 of the Civil Code, prove that it exercised due diligence to prevent or
minimize the loss, before, during and after the occurrence of the storm in
order that it may be exempted from liability for the loss of the goods.
While petitioner sent checkers54 and a supervisor55 on board the vessel to
counter-check the operations of TVI, itfailed to take all available and
reasonable precautions to avoid the loss. After noting that TVI failed to
arrange for the prompt towage of the barge despite the deteriorating sea
conditions, it should have summoned the same or another tugboat to
extend help, but it did not.
This Court holds then that petitioner and TVI are solidarily liable 56 for the
loss of the cargoes. The following pronouncement of the Supreme Court is
instructive:
The foundation of LRTAs liability is the contract of carriage and its
obligation to indemnify the victim arises from the breach of that contract
by reason of its failure to exercise the high diligence required of the
common carrier. In the discharge of its commitment to ensure the safety of
passengers, a carrier may choose to hire its own employees or avail itself
of the services of an outsider or an independent firm to undertake the task.
In either case, the common carrier is not relieved of its responsibilities
under the contract of carriage.
Should Prudent be made likewise liable? If at all, that liability could only be
for tort under the provisions of Article 2176 and related provisions, in
conjunction with Article 2180 of the Civil Code. x x x [O]ne might ask
further, how then must the liability of the common carrier, on one hand,
and an independent contractor, on the other hand, be described? It would
be solidary. A contractual obligation can be breached by tort and when the

same act or omission causes the injury, one resulting in culpa contractual
and the other in culpa aquiliana, Article 2194 of the Civil Code can well
apply. In fine, a liability for tort may arise even under a contract, where tort
is that which breaches the contract. Stated differently, when an act which
constitutes a breach of contract would have itself constituted the source of
a quasi-delictual liability had no contract existed between the parties, the
contract can be said to have been breached by tort, thereby allowing the
rules on tort to apply.57
As for Black Sea, its duty as a common carrier extended only from the time
the goods were surrendered or unconditionally placed in its possession and
received for transportation until they were delivered actually or
constructively to consignee Little Giant.58
Parties to a contract of carriage may, however, agree upon a definition of
delivery that extends the services rendered by the carrier. In the case at
bar, Bill of Lading No. 2 covering the shipment provides that delivery be
made "to the port of discharge or so near thereto as she may safely get,
always afloat."59 The delivery of the goods to the consignee was not from
"pier to pier" but from the shipside of "M/V Alexander Saveliev" and into
barges, for which reason the consignee contracted the services of
petitioner. Since Black Sea had constructively delivered the cargoes to
Little Giant, through petitioner, it had discharged its duty. 60
In fine, no liability may thus attach to Black Sea.
Respecting the award of attorneys fees in an amount over P1,000,000.00
to Industrial Insurance, for lack of factual and legal basis, this Court sets it
aside. While Industrial Insurance was compelled to litigate its rights, such
fact by itself does not justify the award of attorneys fees under Article
2208 of the Civil Code. For no sufficient showing of bad faith would be
reflected in a partys persistence in a case other than an erroneous
conviction of the righteousness of his cause. 61 To award attorneys fees to a
party just because the judgment is rendered in its favor would be
tantamount to imposing a premium on ones right to litigate or seek
judicial redress of legitimate grievances.62
On the award of adjustment fees: The adjustment fees and expense of
divers were incurred by Industrial Insurance in its voluntary but
unsuccessful efforts to locate and retrieve the lost cargo. They do not
constitute actual damages.63

As for the court a quos award of interest on the amount claimed, the same
calls for modification following the ruling in Eastern Shipping Lines, Inc. v.
Court of Appeals64 that when the demand cannot be reasonably
established at the time the demand is made, the interest shall begin to run
not from the time the claim is made judicially or extrajudicially but from
the date the judgment of the court is made (at which the time the
quantification of damages may be deemed to have been reasonably
ascertained).65
WHEREFORE, judgment is hereby rendered ordering petitioner Schmitz
Transport & Brokerage Corporation, and Transport Venture Incorporation
jointly and severally liable for the amount of P5,246,113.11 with the
MODIFICATION that interest at SIX PERCENT per annum of the amount due
should be computed from the promulgation on November 24, 1997 of the
decision of the trial court.
Costs against petitioner.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
THIRD DIVISION
G.R. No. 132864 October 24, 2005
PHILIPPINE FREE PRESS, INC., Petitioner,
vs.
COURT OF APPEALS (12th Division) and LIWAYWAY PUBLISHING,
INC., Respondents.
DECISION
GARCIA, J.:
In this petition for review on certiorari under Rule 45 of the Rules of Court,
petitioner Philippine Free Press, Inc. seeks the reversal of the

Decision1 dated February 25, 1998 of the Court of Appeals (CA) in CA-GR
CV No. 52660, affirming, with modification, an earlier decision of the
Regional Trial Court at Makati, Branch 146, in an action for annulment of
deeds of sale thereat instituted by petitioner against the Presidential
Commission for Good
Government (PCGG) and the herein private respondent, Liwayway
Publishing, Inc.

On September 21, 1972 . . ., Teodoro Locsin, Sr. was arrested [and] . . . .

was brought to Camp Crame and was subsequently transferred to the
maximum security bloc at Fort Bonifacio.
Sometime in December, 1972, Locsin, Sr. was informed . . . that no charges
were to be filed against him and that he was to be provisionally released
subject to the following conditions, to wit: (1) he remained (sic) under city
arrest; xxx (5) he was not to publish the Philippine Free Press nor was he
to do, say or write anything critical of the Marcos administration . . . .

As found by the appellate court in the decision under review, the facts are:
xxx [Petitioner] . . . is a domestic corporation engaged in the publication of
Philippine Free Press Magazine, one of the . . . widely circulated political
magazines in the Philippines. Due to its wide circulation, the publication of
the Free Press magazine enabled [petitioner] to attain considerable
prestige prior to the declaration of Martial Law as well as to achieve a high
profit margin. . . .

Consequently, the publication of the Philippine Free Press ceased. The

subject building remained padlocked and under heavy military guard (TSB,
27 May 1993, pp. 51-52; stipulated). The cessation of the publication of the
... magazine led to the financial ruin of [petitioner] . . . . [Petitioners]
situation was further aggravated when its employees demanded the
payment of separation pay as a result of the cessation of its operations.
[Petitioners] minority stockholders, furthermore, made demands that
Locsin, Sr. buy out their shares. xxx.

Sometime in . . . 1963, [petitioner] purchased a parcel of land situated at

No. 2249, Pasong Tamo Street, Makati which had an area of 5,000 square
meters as evidenced by . . . (TCT) No. 109767 issued by the Register of
Deeds of Makati (Exh. Z). Upon taking possession of the subject land,
[petitioner] constructed an office building thereon to house its various
machineries, equipment, office furniture and fixture. [Petitioner] thereafter
made the subject building its main office . . . .

On separate occasions in 1973, Locsin, Sr. was approached by the late Atty.
Crispin Baizas with offers from then President Marcos for the acquisition of
the [petitioner]. However, Locsin, Sr. refused the offer stating that
[petitioner] was not for sale (TSN, 2 May 1988, pp. 8-9, 40; 27 May 1993,
pp. 66-67).

During the 1965 presidential elections, [petitioner] supported the late

President Diosdado Macapagal against then Senate President Ferdinand
Marcos. Upon the election of the late President Ferdinand Marcos in 1965
and prior to the imposition of Martial law on September 21, 1972,
[petitioner] printed numerous articles highly critical of the Marcos
administration, exposing the corruption and abuses of the regime. The
[petitioner] likewise ran a series of articles exposing the plan of the
Marcoses to impose a dictatorship in the guise of Martial Law . . . .
In the evening of September 20, 1972, soldiers surrounded the Free Press
Building, forced out its employees at gunpoint and padlocked the said
establishment. The soldier in charge of the military contingent then
informed Teodoro Locsin, Jr., the son of Teodoro Locsin, Sr., the President of
[petitioner], that Martial Law had been declared and that they were
instructed by the late President Marcos to take over the building and to
close the printing press. xxx.

A few months later, the late Secretary Guillermo De Vega approached

Locsin, Sr. reiterating Marcoss offer to purchase the name and the assets
of the [petitioner].xxx
Sometime during the middle of 1973, Locsin, Sr. was contacted by Brig.
Gen. Hans Menzi, the former aide-de-camp of then President Marcos
concerning the sale of the [petitioner]. Locsin, Sr. requested that the
meeting be held inside the [petitioner] Building and this was arranged by
Menzi (TSN, 27 May 1993, pp. 69-70). During the said meeting, Menzi once
more reiterated Marcoss offer to purchase both the name and the assets
of [petitioner] adding that "Marcos cannot be denied" (TSN, 27 May 1993,
p. 71). Locsin, Sr. refused but Menzi insisted that he had no choice but to
sell. Locsin, Sr. then made a counteroffer that he will sell the land, the
building and all the machineries and equipment therein but he will be
allowed to keep the name of the [petitioner]. Menzi promised to clear the
matter with then President Marcos (TSN, 27 May 1993, p. 72). Menzi
thereafter contacted Locsin, Sr. and informed him that President Marcos
was amenable to his counteroffer and is offering the purchase price of Five
Million Seven Hundred Fifty Thousand (P5, 750,000.00) Pesos for the land,

the building, the machineries, the office furnishing and the fixtures of the
[petitioner] on a "take-it-or-leave-it" basis (TSN, 2 May 1988, pp.42-43; 27
May 1993, p. 88).
On August 22, 1973, Menzi tendered to Locsin, Sr. a check for One Million
(P1, 000,000.00) Pesos downpayment for the sale, . . . Locsin, Sr. accepted
the check, subject to the condition that he will refund the same in case the
sale will not push through. (Exh. 7).
On August 23, 1973, the Board of Directors of [petitioner] held a meeting
and reluctantly passed a resolution authorizing Locsin, Sr. to sell the assets
of the [petitioner] to Menzi minus the name "Philippine Free Press (Exhs. A1 and 1; TSN, 27 May 1993, pp. 73-76).

In time, petitioner appealed to the Court of Appeals (CA) whereat its

appellate recourse was docketed as CA-G.R. C.V. No. 52660.
As stated at the outset hereof, the appellate court, in a decision dated
February 25, 1998, affirmed with modification the appealed decision of the
trial court, the modification consisting of the deletion of the award of
attorneys fees to private respondent, thus:
WHEREFORE, with the sole modification that the award of attorneys fees in
favor of [respondent] be deleted, the Decision appealed from is hereby
AFFIRMED in all respects.
SO ORDERED.

On October 23, 1973, the parties [petitioner, as vendor and private

respondent, represented by B/Gen. Menzi, as vendee] met . . . and
executed two (2) notarized Deeds of Sale covering the land, building and
the machineries of the [petitioner]. Menzi paid the balance of the purchase
price in the amount of . . . (P4,750,000.00) Pesos (Exhs. A and (; B and
10;TSN, 27 May 1993, pp. 81-82; 3 June 1993, p. 89).

Hence, petitioners present recourse, urging the setting aside of the

decision under review which, to petitioner, decided questions of substance
in a way not in accord with law and applicable jurisprudence considering
that the appellate court gravely erred:

Locsin, Sr. thereafter used the proceeds of the sale to pay the separation
pay of [petitioners] employees, buy out the shares of the minority
stockholders as well as to settle all its obligations.

xxx IN ITS MISAPPLICATION OF THE DECISIONS OF THE HONORABLE COURT

THAT RESULTED IN ITS ERRONEOUS CONCLUSION THAT PETITIONER'S
CAUSE OF ACTION HAD ALREADY PRESCRIBED.

On February 26, 1987, [petitioner] filed a complaint for Annulment of

Sale against [respondent] Liwayway and the PCGG before the Regional Trail
Court of Makati, Branch 146 on the grounds of vitiated consent and gross
inadequacy of purchase price. On motion of defendant PCGG, the
complaint against it was dismissed on October 22, 1987. (Words in bracket
and underscoring added)
In a decision dated October 31, 1995,2 the trial court dismissed petitioners
complaint and granted private respondents counterclaim, to wit:
WHEREFORE, in view of all the foregoing premises, the herein complaint for
annulment of sales is hereby dismissed for lack of merit.
On [respondent] counterclaim, the court finds for [respondent] and against
[petitioner] for the recovery of attorneys fees already paid for at
P1,945,395.98, plus a further P316,405.00 remaining due and payable.
SO ORDERED. (Words in bracket added)

II
xxx IN CONCLUDING THAT THE UNDISPUTED FACTS AND CIRCUMSTANCES
PRECEDING THE EXECUTION OF THE CONTRACTS OF SALE FOR THE
PETITIONER'S PROPERTIES DID NOT ESTABLISH THE FORCE, INTIMIDATION,
DURESS AND UNDUE INFLUENCE WHICH VITIATED PETITIONER'S CONSENT.
A. xxx IN CONSIDERING AS HEARSAY THE TESTIMONIAL EVIDENCE WHICH
CLEARLY ESTABLISHED THE THREATS MADE UPON PETITIONER AND THAT
RESPONDENT LIWAYWAY WILL BE USED AS THE CORPORATE VEHICLE FOR
THE FORCED ACQUISITION OF PETITIONER'S PROPERTIES.
B. xxx IN CONCLUDING THAT THE ACTS OF THEN PRESIDENT MARCOS
DURING MARTIAL LAW DID NOT CONSTITUTE THE FORCE, INTIMIDATION,
DURESS AND UNDUE INFLUENCE WHICH VITIATED PETITIONER'S CONSENT.

C. xxx IN RESOLVING THE INSTANT CASE ON THE BASIS OF MERE

SURMISES AND SPECULATIONS INSTEAD OF THE UNDISPUTED EVIDENCE
ON RECORD.
III
xxx IN CONCLUDING THAT THE GROSSLY INADEQUATE PURCHASE PRICE
FOR PETITIONER'S PROPERTIES DOES NOT INDICATE THE VITIATION OF
PETITIONER'S CONSENT TO THE CONTRACTS OF SALE.
IV
xxx IN CONCLUDING THAT PETITIONER'S USE OF THE PROCEEDS OF THE
SALE FOR ITS SURVIVAL CONSTITUTE AN IMPLIED RATIFICATION [OF] THE
CONTRACTS OF SALE.
V
xxx IN EXCLUDING PETITIONER'S EXHIBITS "X-6" TO "X-7" AND "Y-3"
(PROFFER) WHICH ARE ADMISSIBLE EVIDENCE WHICH COMPETENTLY
PROVE THAT THEN PRESIDENT MARCOS OWNED PRIVATE RESPONDENT
LIWAYWAY, WHICH WAS USED AS THE CORPORATE VEHICLE FOR THE
ACQUISITION OF PETITIONER'S PROPERTIES.
The petition lacks merit.
Petitioner starts off with its quest for the allowance of the instant recourse
on the submission that the martial law regime tolled the prescriptive period
under Article 1391 of the Civil Code, which pertinently reads:
Article 391. The action for annulment shall be brought within four years.
This period shall begin:
In cases of intimidation, violence or undue influence, from the time the
defect of the consent ceases.
xxx xxx xxx
It may be recalled that the separate deeds of sale3 sought to be annulled
under petitioners basic complaint were both executed on October 23,
1973. Per the appellate court, citing Development Bank of the Philippines

[DBP] vs. Pundogar4, the 4-year prescriptive period for the annulment of
the aforesaid deeds ended "in late 1977", doubtless suggesting that
petitioners right to seek such annulment accrued four (4) years earlier, a
starting time-point corresponding, more or less, to the date of the
conveying deed, i.e., October 23, 1973. Petitioner contends, however, that
the 4-year prescriptive period could not have commenced to run on
October 23, 1973, martial law being then in full swing. Plodding on,
petitioner avers that the continuing threats on the life of Mr. Teodoro
Locsin, Sr. and his family and other menacing effects of martial law which
should be considered as force majeure - ceased only after the February 25,
1986 People Power uprising.
Petitioner instituted its complaint for annulment of contracts on February
26, 1987. The question that now comes to the fore is: Did the 4-year
prescriptive period start to run in late October 1973, as postulated in the
decision subject of review, or on February 25, 1986, as petitioner argues,
on the theory that martial law has the effects of aforce majeure5, which, in
turn, works to suspend the running of the prescriptive period for the main
case filed with the trial court.
Petitioner presently faults the Court of Appeals for its misapplication of the
doctrinal rule laid down in DBP vs. Pundogar6 where this Court, citing and
quoting excerpts from the ruling in Tan vs. Court of Appeals 7, as reiterated
in National Development Company vs. Court of Appeals, 8 wrote
We can not accept the petitioners contention that the period during which
authoritarian rule was in force had interrupted prescription and that the
same began to run only on February 25, 1986, when the Aquino
government took power. It is true that under Article 1154 [of the Civil
Code] xxx fortuitous events have the effect of tolling the period of
prescription. However, we can not say, as a universal rule, that the period
from September 21, 1972 through February 25, 1986 involves a force
majeure. Plainly, we can not box in the "dictatorial" period within the term
without distinction, and without, by necessity, suspending all liabilities,
however demandable, incurred during that period, including perhaps those
ordered by this Court to be paid. While this Court is cognizant of acts of the
last regime, especially political acts, that might have indeed precluded the
enforcement of liability against that regime and/or its minions, the Court is
not inclined to make quite a sweeping pronouncement, . . . . It is our
opinion that claims should be taken on a case-to-case basis. This selective
rule is compelled, among others, by the fact that not all those imprisoned
or detained by the past dictatorship were true political oppositionists, or,
for that matter, innocent of any crime or wrongdoing. Indeed, not a few of

them were manipulators and scoundrels. [Italization in the original;

Underscoring and words in bracket added]
According to petitioner, the appellate court misappreciated and thus
misapplied the correct thrust of the Tan case, as reiterated in DBP which,
per petitioners own formulation, is the following: 9
The prevailing rule, therefore, is that on a case-to-case basis, the Martial
Law regime may be treated as force majeure that suspends the running of
the applicable prescriptive period provided that it is established that the
party invoking the imposition of Martial Law as a force majeure are true
oppositionists during the Martial Law regime and that said party was
so circumstanced that is was impossible for said party to
commence, continue or to even resist an action during the
dictatorial regime. (Emphasis and underscoring in the original)
We are not persuaded.
It strains credulity to believe that petitioner found it impossible to
commence and succeed in an annulment suit during the entire stretch of
the dictatorial regime. The Court can grant that Mr. Locsin, Sr. and
petitioner were, in the context of DBP and Tan, "true oppositionists" during
the period of material law. Petitioner, however, has failed to convincingly
prove that Mr. Locsin, Sr., as its then President, and/or its governing board,
were so circumstanced that it was well-nigh impossible for him/them to
successfully institute an action during the martial law years. Petitioner
cannot plausibly feign ignorance of the fact that shortly after his arrest in
the evening of September 20, 1972, Mr. Locsin, Sr., together with several
other journalists10, dared to file suits against powerful figures of the
dictatorial regime and veritably challenged the legality of the declaration
of martial law. Docketed in this Court asGR No. L-35538, the case, after
its consolidation with eight (8) other petitions against the martial law
regime, is now memorialized in books of jurisprudence and cited in legal
publications and case studies as Aquino vs. Enrile.11
Incidentally, Mr. Locsin Sr., as gathered from the ponencia of then Chief
Justice Querube Makalintal in Aquino,was released from detention
notwithstanding his refusal to withdraw from his petition in said case.
Judging from the actuations of Mr. Locsin, Sr. during the onset of martial
law regime and immediately thereafter, any suggestion that intimidation or
duress forcibly stayed his hands during the dark days of martial law to seek
judicial assistance must be rejected.12

Given the foregoing perspective, the Court is not prepared to disturb the
ensuing ruling of the appellate court on the effects of martial law on
petitioners right of action:
In their testimonies before the trial court, both Locsin, Sr. and Locsin, Jr.
claimed that they had not filed suit to recover the properties until 1987 as
they could not expect justice to be done because according to them,
Marcos controlled every part of the government, including the courts, (TSN,
2 May 1988, pp. 23-24; 27 May 1993, p. 121). While that situation may
have obtained during the early years of the martial law administration, We
could not agree with the proposition that it remained consistently
unchanged until 1986, a span of fourteen (14) years. The unfolding of
subsequent events would show that while dissent was momentarily stifled,
it was not totally silenced. On the contrary, it steadily simmered and
smoldered beneath the political surface and culminated in that groundswell
of popular protest which swept the dictatorship from power. 13
The judiciary too, as an institution, was no ivory tower so detached from
the ever changing political climate. While it was not totally impervious to
the influence of the dictatorships political power, it was not hamstrung as
to render it inutile to perform its functions normally. To say that the
Judiciary was not able to render justice to the persons who sought redress
before it . . . during the Martial Law years is a sweeping and unwarranted
generalization as well as an unfounded indictment. The Judiciary, . . . did
not lack in gallant jurists and magistrates who refused to be cowed into
silence by the Marcos administration. Be that as it may, the Locsins
mistrust of the courts and of judicial processes is no excuse for their nonobservance of the prescriptive period set down by law.
Corollary to the presented issue of prescription of action for annulment of
contract voidable on account of defect of consent14 is the question of
whether or not duress, intimidation or undue influence vitiated the
petitioners consent to the subject contracts of sale. Petitioner delves at
length on the vitiation issue and, relative thereto, ascribes the following
errors to the appellate court: first, in considering as hearsay the
testimonial evidence that may prove the element of "threat" against
petitioner or Mr. Locsin, Sr., and the dictatorial regime's use of private
respondent as a corporate vehicle for forcibly acquiring petitioners
properties; second, in concluding that the acts of then President Marcos
during the martial law years did not have a consent-vitiating effect on
petitioner; andthird, in resolving the case on the basis of mere surmises
and speculations.

The evidence referred to as hearsay pertains mainly to the testimonies of

Messrs. Locsin, Sr. and Teodoro Locsin, Jr. (the Locsins, collectively), which,
in gist, established the following facts: 1) the widely circulated Free
Pressmagazine, which, prior to the declaration of Martial Law, took the
strongest critical stand against the Marcos administration, was closed
down on the eve of such declaration, which closure eventually drove
petitioner to financial ruin; 2) upon Marcos orders, Mr. Locsin, Sr. was
arrested and detained for over 2 months without charges and, together
with his family, was threatened with execution; 3) Mr. Locsin, Sr. was
provisionally released on the condition that he refrains from
reopening Free Press and writing anything critical of the Marcos
administration; and 4) Mr. Locsin, Sr. and his family remained fearful of
reprisals from Marcos until the 1986 EDSA Revolution.
Per the Locsins, it was amidst the foregoing circumstances that petitioners
property in question was sold to private respondent, represented by Gen.
Menzi, who, before the sale, allegedly applied the squeeze on Mr. Locsin,
Sr. thru the medium of the "Marcos cannot be denied" and "[you] have no
choice but to sell" line.
The appellate court, in rejecting petitioners above posture of vitiation of
consent, observed:
It was under the above-enumerated circumstances that the late Hans
Menzi, allegedly acting on behalf of the late President Marcos, made his
offer to purchase the Free Press. It must be noted, however, that the
testimonies of Locsin, Sr. and Locsin, Jr. regarding Menzis alleged implied
threat that "Marcos cannot be denied" and that [respondent] was to be the
corporate vehicle for Marcoss takeover of the Free Press is hearsay as
Menzi already passed away and is no longer in a position to defend
himself; the same can be said of the offers to purchase made by Atty.
Crispin Baizas and Secretary Guillermo de Vega who are also both dead. It
is clear from the provisions of Section 36, Rule 130 of the 1989 Revised
Rules on Evidence that any evidence, . . . is hearsay if its probative value is
not based on the personal knowledge of the witness but on the knowledge
of some other person not on the witness stand. Consequently, hearsay
evidence, whether objected to or not, has no probative value unless the
proponent can show that the evidence falls within the exceptions to the
hearsay evidence rule (Citations omitted)
The appellate courts disposition on the vitiation-of-consent angle and
the ratio therefor commends itself for concurrence.

Jurisprudence instructs that evidence of statement made or a testimony is

hearsay if offered against a party who has no opportunity to cross-examine
the witness. Hearsay evidence is excluded precisely because the party
against whom it is presented is deprived of or is bereft of opportunity to
cross-examine the persons to whom the statements or writings are
attributed.15 And there can be no quibbling that because death has
supervened, the late Gen Menzi, like the other purported Marcos
subalterns, Messrs. Baizas and De Vega, cannot cross-examine the Locsins
for the threatening statements allegedly made by them for the late
President.
Like the Court of Appeals, we are not unmindful of the exception to the
hearsay rule provided in Section 38, Rule 130 of the Rules of Court, which
reads:
SEC. 38. Declaration against interest. The declaration made by a person
deceased or unable to testify, against the interest of the declarant, if the
fact asserted in the declaration was at the time it was made so far contrary
to the declarant's own interest, that a reasonable man in his position would
not have made the declaration unless he believed it to be true, may be
received in evidence against himself or his successors-in-interest and
against third persons.
However, in assessing the probative value of Gen. Menzis supposed
declaration against interest, i.e., that he was acting for the late President
Marcos when he purportedly coerced Mr. Locsin, Sr. to sell the Free Press
property, we are loathed to give it the evidentiary weight petitioner
endeavors to impress upon us. For, the Locsins can hardly be considered as
disinterested witnesses. They are likely to gain the most from the
annulment of the subject contracts. Moreover, allegations of duress or
coercion should, like fraud, be viewed with utmost caution. They should not
be laid lightly at the door of men whose lips had been sealed by
death.16 Francisco explains why:
[I]t has been said that "of all evidence, the narration of a witness of his
conversation with a dead person is esteemed in justice the weakest." One
reason for its unreliability is that the alleged declarant can not recall to the
witness the circumstances under which his statement were made. The
temptation and opportunity for fraud in such cases also operate against
the testimony. Testimony to statements of a deceased person, at least
where proof of them will prejudice his estate, is regarded as an unsafe
foundation for judicial action except in so far as such evidence is borne out
by what is natural and probable under the circumstances taken in
connection with actual known facts. And a court should be very slow to act

upon the statement of one of the parties to a supposed agreement after

the death of the other party; such corroborative evidence should be
adduced as to satisfy the court of the truth of the story which is to benefit
materially the person telling it. 17
Excepting, petitioner insists that the testimonies of its witnesses the
Locsins - are not hearsay because:
In this regard, hearsay evidence has been defined as "the evidence not of
what the witness knows himself but of what he has heard from others." xxx
Thus, the mere fact that the other parties to the conversations testified to
by the witness are already deceased does [not] render such testimony
inadmissible for being hearsay. 18
xxx xxx xxx
The testimonies of Teodoro Locsin, Sr. and Teodoro Locsin, Jr. that the late
Atty. Baizas, Gen. Menzi and Secretary de Vega stated that they were
representing Marcos, that "Marcos cannot be denied", and the fact that
Gen. Menzi stated that private respondent Liwayway was to be the
corporate vehicle for the then President Marcos' take-over of petitioner
Free Press are not hearsay. Teodoro Locsin, Sr. and Teodoro Locsin, Jr. were
in fact testifying to matters of their own personal knowledge
because they were either parties to the said conversation or were
present at the time the said statements were made. 19
Again, we disagree.
Even if petitioner succeeds in halving its testimonial evidence, one-half
purporting to quote the words of a live witness and the other half
purporting to quote what the live witness heard from one already dead, the
other pertaining to the dead shall nevertheless remain hearsay in
character.
The all too familiar rule is that "a witness can testify only to those facts
which he knows of his own knowledge". 20There can be no quibbling that
petitioners witnesses cannot testify respecting what President Marcos said
to Gen. Menzi about the acquisition of petitioners newspaper, if any there
be, precisely because none of said witnesses ever had an opportunity to
hear what the two talked about.
Neither may petitioner circumvent the hearsay rule by invoking the
exception under the declaration-against-interest rule. In context, the only

declaration supposedly made by Gen. Menzi which can conceivably be

labeled as adverse to his interest could be that he was acting in behalf of
Marcos in offering to acquire the physical assets of petitioner. Far from
making a statement contrary to his own interest, a declaration conveying
the notion that the declarant possessed the authority to speak and to act
for the President of the Republic can hardly be considered as a declaration
against interest.
Petitioner next assails the Court of Appeals on its conclusion that Martial
Law is not per se a consent-vitiating phenomenon. Wrote the appellate
court: 21
In other words, the act of the ruling power, in this case the martial law
administration, was not an act of mere trespass but a trespass in law - not
a perturbacion de mero hecho but a pertubacion de derecho - justified as it
is by an act of government in legitimate self-defense (IFC
Leasing & Acceptance Corporation v. Sarmiento Distributors Corporation,
, citing Caltex (Phils.) v. Reyes, 84 Phil. 654 [1949]. Consequently, the act
of the Philippine Government in declaring martial law can not be
considered as an act of intimidation of a third person who did not take part
in the contract (Article 1336, Civil Code). It is, therefore, incumbent on
[petitioner] to present clear and convincing evidence showing that the late
President Marcos, acting through the late Hans Menzi, abused his martial
law powers by forcing plaintiff-appellant to sell its assets. In view of the
largely hearsay nature of appellants evidence on this point, appellants
cause must fall.
According to petitioner, the reasoning of the appellate court is "flawed"
because:22
It is implicit from the foregoing reasoning of the Court of Appeals that it
treated the forced closure of the petitioner's printing press, the arrest and
incarceration without charges of Teodoro Locsin, Sr., the threats that he will
be shot and the threats that other members of his family will be arrested
as legal acts done by a dictator under the Martial Law regime. The same
flawed reasoning led the Court of Appeals to the erroneous conclusion that
such acts do not constitute force, intimidation, duress and undue influence
that vitiated petitioner's consent to the Contracts of Sale.
The contention is a rehash of petitioners bid to impute on private
respondent acts of force and intimidation that were made to bear on
petitioner or Mr. Locsin, Sr. during the early years of martial law. It failed to
take stock of a very plausible situation depicted in the appellate courts

decision which supports its case disposition on the issue respecting

vitiation. Wrote that court:
Even assuming that the late president Marcos is indeed the owner of
[respondent], it does not necessarily follow that he, acting through the late
Hans Menzi, abused his power by resorting to intimidation and undue
influence to coerce the Locsins into selling the assets of Free Press to them
(sic).
It is an equally plausible scenario that Menzi convinced the Locsins to sell
the assets of the Free Press without resorting to threats or moral coercion
by simply pointing out to them the hard fact that the Free Press was in dire
financial straits after the declaration of Martial Law and was being sued by
its former employees, minority stockholders and creditors. Given such a
state of affairs, the Locsins had no choice but to sell their assets. 23
Petitioner laments that the scenario depicted in the immediately preceding
quotation as a case of a court resorting to "mere surmises and
speculations", 24 oblivious that petitioner itself can only offer, as
counterpoint, also mere surmises and speculations, such as its claim about
Eugenio Lopez Sr. and Imelda R. Marcos offering "enticing amounts" to
buy Free Press.25
It bears stressing at this point that even after the imposition of martial law,
petitioner, represented by Mr. Locsin, Sr., appeared to have dared the ire of
the powers-that-be. He did not succumb to, but in fact spurned offers to
buy, lock-stock-and-barrel, the Free Press magazine, dispatching Marcos
emissaries with what amounts to a curt "Free Press is not for sale". This
reality argues against petitioners thesis about vitiation of its contracting
mind, and, to be sure, belying the notion that Martial Law worked as a
Sword of Damocles that reduced petitioner or Mr. Locsin, Sr. into being a
mere automaton. The following excerpt from the Court of Appeals decision
is self-explanatory: 26
Noteworthy is the fact that although the threat of arrest hung over his
head like the Sword of Damocles, Locsin Sr. was still able to reject the
offers of Atty. Baizas and Secretary De Vega, both of whom were
supposedly acting on behalf of the late President Marcos, without being
subjected to reprisals. In fact, the Locsins testified that the initial offer of
Menzi was rejected even though it was supposedly accompanied by the
threat that "Marcos cannot be denied". Locsin, Sr. was, moreover, even
able to secure a compromise that only the assets of the Free Press will be
sold. It is, therefore, quite possible that plaintiff-appellants financial
condition, albeit caused by the declaration of Martial Law, was a major

factor in influencing Locsin, Sr. to accept Menzis offer. It is not farfetched

to consider that Locsin, Sr. would have eventually proceeded with the sale
even in the absence of the alleged intimidation and undue influence
because of the absence of other buyers.
Petitioners third assigned error centers on the gross inadequacy of the
purchase price, referring to the amount of P5,775,000.00 private
respondent paid for the property in question. To petitioner, the amount
thus paid does not even approximate the actual market value of the assets
and properties,27 and is very much less than the P18 Million offered by
Eugenio Lopez.28 Accordingly, petitioner urges the striking down, as
erroneous, the ruling of the Court of Appeals on purchase price
inadequacy, stating in this regard as follows: 29
Furthermore, the Court of Appeals in determining the adequacy of the price
for the properties and assets of petitioner Free Press relied heavily on the
claim that the audited financial statements for the years 1971 and 1972
stated that the book value of the land is set at Two Hundred Thirty-Seven
Thousand Five Hundred Pesos (P237,500.00). However, the Court of
Appeals' reliance on the book value of said assets is clearly misplaced. It
should be noted that the book value of fixed assets bears very little
correlation with the actual market value of an asset. (Emphasis and
underscoring in the original).
With the view we take of the matter, the book or actual market value of the
property at the time of sale is presently of little moment. For, petitioner is
effectively precluded, by force of the principle of estoppel ,30 from
cavalierly disregarding with impunity its own books of account in which the
property in question is assigned a value less than what was paid therefor.
And, in line with the rule on the quantum of evidence required in civil
cases, neither can we cavalierly brush aside private respondents
evidence, cited with approval by the appellate court, that tends to prove
that-31
xxx the net book value of the Properties was actually only P994,723.66 as
appearing in Free Press's Balance Sheet as of November 30, 1972 (marked
as Exh. 13 and Exh. V), which was duly audited by SyCip, Gorres, and
Velayo, thus clearly showing that Free Press actually realized a hefty profit
of P4,755,276.34 from the sale to Liwayway.
Lest it be overlooked, gross inadequacy of the purchase price does not, as
a matter of civil law, per se affect a contract of sale. Article 1470 of the
Civil Code says so. It reads:

Article 1470. Gross inadequacy of price does not affect a contract of sale,
except as it may indicate a defect in the consent, or that the parties really
intended a donation or some other act or contract.
Following the aforequoted codal provision, it behooves petitioner to first
prove "a defect in the consent", failing which its case for annulment
contract of sale on ground gross inadequacy of price must fall. The
categorical conclusion of the Court of Appeals, confirmatory of that of the
trial court, is that the price paid for the Free Pressoffice building, and other
physical assets is not unreasonable to justify the nullification of the sale.
This factual determination, predicated as it were on offered evidence,
notably petitioners Balance Sheet as of November 30, 1972 (Exh. 13),
must be accorded great weight if not finality.32
In the light of the foregoing disquisition, the question of whether or not
petitioners undisputed utilization of the proceeds of the sale constitutes,
within the purview of Article 1393 of the Civil Code, 33 implied ratification of
the contracts of sale need not detain us long. Suffice it to state in this
regard that the ruling of the Court of Appeals on the matter is well-taken.
Wrote the appellate court: 34
In the case at bench, Free Presss own witnesses admitted that the
proceeds of the 1973 sale were used to settle the claims of its employees,
redeem the shares of its stockholders and finance the companys entry into
money-market shareholdings and fishpond business activities (TSN, 2 May
1988, pp. 16, 42-45). It need not be overemphasized that by using the
proceeds in this manner, Free Press only too clearly confirmed the
voluntaries of its consent and ratified the sale. Needless to state, such
ratification cleanses the assailed contract from any alleged defects from
the moment it was constituted (Art. 1396, Civil Code).
Petitioners posture that its use of the proceeds of the sale does not
translate to tacit ratification of what it viewed as voidable contracts of sale,
such use being a "matter of [its financial] survival",35 is untenable. As
couched, Article 1393 of the Civil Code is concerned only with the act
which passes for ratification of contract, not the reason which actuated the
ratifying person to act the way he did. "Ubi lex non distinguit nec nos
distinguere debemus. When the law does not distinguish, neither should
we". 36
Finally, petitioner would fault the Court of Appeals for excluding Exhibits
"X-6" to "X-7" and "Y-3" (proffer). These excluded documents which were
apparently found in the presidential palace or turned over by the US
Government to the PCGG, consist of, among others, what appears to be

private respondents Certificate of Stock for 24,502 shares in the name of

Gen. Menzi, but endorsed in blank. The proffer was evidently intended to
show that then President Marcos owned private respondent, Liwayway
Publishing Inc. Said exhibits are of little relevance to the resolution of the
main issue tendered in this case. Whether or not the contracts of sale in
question are voidable is the issue, not the ownership of Liwayway
Publishing, Inc.
WHEREFORE, the petition is DENIED, and the challenged decision of the
Court of Appeals AFFIRMED.
Costs against petitioner.
SO ORDERED.

ESTE DEL SOL MOUNTAIN RESERVE, INC., VALENTIN S. DAEZ, JR.,

MANUEL Q. SALIENTES, MA. ROCIO A. DE VEGA, ALEXANDER G.
ASUNCION, ALBERTO * M. LADORES, VICENTE M. DE VERA, JR., and
FELIPE B. SESE, respondents.
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision 1 of the Court
of Appeals2 dated November 8, 1999 in CA-G.R. CV No. 53328 reversing
the Decision3 of the Regional Trial Court of Pasig City, Branch 159 dated
June 2, 1994 in Civil Case No. 39224. Essentially, the Court of Appeals
found and declared that the fees provided for in the Underwriting and
Consultancy Agreements executed by and between petitioner First Metro
Investment Corp. (FMIC) and respondent Este del Sol Mountain Reserve,
Inc. (Este del Sol) simultaneously with the Loan Agreement dated January
31, 1978 were mere subterfuges to camouflage the usurious interest
charged by petitioner FMIC.
The facts of the case are as follows:
It appears that on January 31, 1978, petitioner FMIC granted respondent
Este del Sol a loan of Seven Million Three Hundred Eighty-Five Thousand
Five Hundred Pesos (P7,385,500.00) to finance the construction and
development of the Este del Sol Mountain Reserve, a sports/resort complex
project located at Barrio Puray, Montalban, Rizal.4

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 141811

November 15, 2001

FIRST METRO INVESTMENT CORPORATION, petitioner,

vs.

Under the terms of the Loan Agreement, the proceeds of the loan were to
be released on staggered basis. Interest on the loan was pegged at sixteen
(16%) percent per annum based on the diminishing balance. The loan was
payable in thirty-six (36) equal and consecutive monthly amortizations to
commence at the beginning of the thirteenth month from the date of the
first release in accordance with the Schedule of Amortization. 5 In case of
default, an acceleration clause was, among others, provided and the
amount due was made subject to a twenty (20%) percent one-time penalty
on the amount due and such amount shall bear interest at the highest rate
permitted by law from the date of default until full payment thereof plus
liquidated damages at the rate of two (2%) percent per month
compounded quarterly on the unpaid balance and accrued interests
together with all the penalties, fees, expenses or charges thereon until the
unpaid balance is fully paid, plus attorney's fees equivalent to twenty-five
(25%) percent of the sum sought to be recovered, which in no case shall be
less than Twenty Thousand Pesos (P20,000.00) if the services of a lawyer
were hired.6
In accordance with the terms of the Loan Agreement, respondent Este del
Sol executed several documents7 as security for payment, among them, (a)
a Real Estate Mortgage dated January 31, 1978 over two (2) parcels of land
being utilized as the site of its development project with an area of
approximately One Million Twenty-Eight Thousand and Twenty-Nine

(1,028,029) square meters and particularly described in TCT Nos. N-24332

and N-24356 of the Register of Deeds of Rizal, inclusive of all
improvements, as well as all the machineries, equipment, furnishings and
furnitures existing thereon; and (b) individual Continuing Suretyship
agreements by co-respondents Valentin S. Daez, Jr., Manuel Q. Salientes,
Ma. Rocio A. De Vega, Alexander G. Asuncion, Alberto M. Ladores, Vicente
M. De Vera, Jr. and Felipe B. Sese, all dated February 2, 1978, to guarantee
the payment of all the obligations of respondent Este del Sol up to the
aggregate sum of Seven Million Five Hundred Thousand Pesos
(P7,500,000.00) each.8
Respondent Este del Sol also executed, as provided for by the Loan
Agreement, an Underwriting Agreement on January 31, 1978 whereby
petitioner FMIC shall underwrite on a best-efforts basis the public offering
of One Hundred Twenty Thousand (120,000) common shares of respondent
Este del Sol's capital stock for a one-time underwriting fee of Two Hundred
Thousand Pesos (P200,000.00). In addition to the underwriting fee, the
Underwriting Agreement provided that for supervising the public offering of
the shares, respondent Este del Sol shall pay petitioner FMIC an annual
supervision fee of Two Hundred Thousand Pesos (P200,000.00) per annum
for a period of four (4) consecutive years. The Underwriting Agreement
also stipulated for the payment by respondent Este del Sol to petitioner
FMIC a consultancy fee of Three Hundred Thirty-Two Thousand Five
Hundred Pesos (P332,500.00) per annum for a period of four (4)
consecutive years. Simultaneous with the execution of and in accordance
with the terms of the Underwriting Agreement, a Consultancy Agreement
was also executed on January 31, 1978 whereby respondent Este del Sol
engaged the services of petitioner FMIC for a fee as consultant to render
general consultancy services.9
In three (3) letters all dated February 22, 1978 petitioner billed respondent
Este del Sol for the amounts of [a] Two Hundred Thousand Pesos
(P200,000.00) as the underwriting fee of petitioner FMIC in connection with
the public offering of the common shares of stock of respondent Este del
Sol; [b] One Million Three Hundred Thirty Thousand Pesos (P1,330,000.00)
as consultancy fee for a period of four (4) years; and [c] Two Hundred
Thousand Pesos (P200,000.00) as supervision fee for the year beginning
February, 1978, in accordance to the Underwriting Agreement. 10 The said
amounts of fees were deemed paid by respondent Este del Sol to petitioner
FMIC which deducted the same from the first release of the loan.
Since respondent Este del Sol failed to meet the schedule of repayment in
accordance with a revised Schedule of Amortization, it appeared to have
incurred a total obligation of Twelve Million Six Hundred Seventy-Nine
Thousand Six Hundred Thirty Pesos and Ninety-Eight Centavos
(P12,679,630.98) per the petitioner's Statement of Account dated June 23,
1980,11 to wit:

STATEMENT OF ACCOUNT OF ESTE DEL SOL MOUNTAIN RESERVE, INC.

AS OF JUNE 23, 1980

PARTICULARS

Total amount due as of 11-22-78 per revised amortization

schedule dated 1-3-78

AMO

P7,999,63

Interest on P7,999,631.42 @ 16% p.a. from 11-22-78 to 2-2279 (92 days)

327,09

Balance

8,326,72

One time penalty of 20% of the entire unpaid obligations

under Section 6.02 (ii) of Loan Agreement

1,665,34

Past due interest under Section 6.02 (iii) of loan Agreement:

@ 19% p.a. from 2-22-79 to 11-30-79 (281 days)
@ 21% p.a. from 11-30-79 to 6-23-80 (206 days)

1,481,87
1,200,71

Other charges publication of extra judicial foreclosure of

REM made on 5-23-80 & 6-6-80

Total Amount Due and Collectible as of June 23, 1980

4,96

P12,679,63

Accordingly, petitioner FMIC caused the extrajudicial foreclosure of the real

estate mortgage on June 23, 1980.12At the public auction, petitioner FMIC
was the highest bidder of the mortgaged properties for Nine Million Pesos
(P9,000,000.00). The total amount of Three Million One Hundred EightyEight Thousand Six Hundred Thirty Pesos and Seventy-Five Centavos
(P3,188,630.75) was deducted therefrom, that is, for the publication fee for

the publication of the Sheriff's Notice of Sale, Four Thousand Nine Hundred
Sixty-Four Pesos (P4,964.00); for Sheriff's fees for conducting the
foreclosure proceedings, Fifteen Thousand Pesos (P15,000.00); and for
Attorney's fees, Three Million One Hundred Sixty-Eight Thousand Six
Hundred Sixty-Six Pesos and Seventy-Five Centavos (P3,168,666.75). The
remaining balance of Five Million Eight Hundred Eleven Thousand Three
Hundred Sixty-Nine Pesos and Twenty-Five Centavos (P5,811,369.25) was
applied to interests and penalty charges and partly against the principal,
due as of June 23, 1980, thereby leaving a balance of Six Million Eight
Hundred Sixty-Three Thousand Two Hundred Ninety-Seven Pesos and
Seventy-Three Centavos (P6,863,297.73) on the principal amount of the
loan as of June 23, 1980.13
Failing to secure from the individual respondents, as sureties of the loan of
respondent Este del Sol by virtue of their continuing surety agreements,
the payment of the alleged deficiency balance, despite individual demands
sent to each of them,14 petitioner instituted on November 11, 1980 the
instant collection suit15 against the respondents to collect the alleged
deficiency balance of Six Million Eight Hundred Sixty-Three Thousand Two
Hundred Ninety-Seven Pesos and Seventy-Three Centavos (P6,863,297.73)
plus interest thereon at twenty-one (21%) percent per annum from June
24, 1980 until fully paid, and twenty-five (25%) percent thereof as and for
attorney's fees and costs.
In their Answer, the respondents sought the dismissal of the case and set
up several special and affirmative defenses, foremost of which is that the
Underwriting and Consultancy Agreements executed simultaneously with
and as integral parts of the Loan Agreement and which provided for the
payment of Underwriting, Consultancy and Supervision fees were in reality
subterfuges resorted to by petitioner FMIC and imposed upon respondent
Este del Sol to camouflage the usurious interest being charged by
petitioner FMIC.16
The petitioner FMIC presented as its witnesses during the trial: Cesar
Valenzuela, its former Senior Vice-President, Felipe Neri, its Vice-President
for Marketing, and Dennis Aragon, an Account Manager of its Account
Management Group, as well as documentary evidence. On the other hand,
co-respondents Vicente M. De Vera, Jr. and Valentin S. Daez, Jr., and
Perfecto Doroja, former Senior Manager and Assistant Vice-President of
FMIC, testified for the respondents.
After the trial, the trial court rendered its decision in favor of petitioner
FMIC, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and
against defendants, ordering defendants jointly and severally to
pay to plaintiff the amount of P6,863,297.73 plus 21% interest per
annum, from June 24, 1980, until the entire amount is fully paid,

plus the amount equivalent to 25% of the total amount due, as

attorney's fees, plus costs of suit.
Defendants' counterclaims are dismissed, for lack of merit.
Finding the decision of the trial court unacceptable, respondents
interposed an appeal to the Court of Appeals. On November 8, 1999, the
appellate court reversed the challenged decision of the trial court. The
appellate court found and declared that the fees provided for in the
Underwriting and Consultancy Agreements were mere subterfuges to
camouflage the excessively usurious interest charged by the petitioner
FMIC on the loan of respondent Este del Sol; and that the stipulated
penalties, liquidated damages and attorney's fees were "excessive,
iniquitous, unconscionable and revolting to the conscience," and declared
that in lieu thereof, the stipulated one time twenty (20%) percent penalty
on the amount due and ten (10%) percent of the amount due as attorney's
fees would be reasonable and suffice to compensate petitioner FMIC for
those items. Thus, the appellate court dismissed the complaint as against
the individual respondents sureties and ordered petitioner FMIC to pay or
reimburse respondent Este del Sol the amount of Nine Hundred SeventyOne Thousand Pesos (P971,000.00) representing the difference between
what is due to the petitioner and what is due to respondent Este del Sol,
based on the following computation:17

A: DUE TO THE [PETITIONER]

Principal of Loan

Add: 20% one-time

Penalty
Attorney's fees

Less: Proceeds of foreclosure Sale

Deficiency

B. DUE TO [RESPONDENT ESTE DEL SOL]

P7,382,500.00

1,476,500.00
900,000.00 P9,759,000.00

9,000,000.00

P759,000.00

Return of usurious interest in the form of:

Underwriting fee
Supervision fee
Consultancy fee

Total amount due Este

e] MADE AN ERRONEOUS COMPUTATION ON SUPPOSEDLY "WHAT IS

DUE TO EACH PARTY AFTER THE FORECLOSURE SALE", AS SHOWN
IN PP. 34-35 OF THE ASSAILED DECISION, EVEN GRANTING JUST
FOR THE SAKE OF ARGUMENT THAT THE APPELLATE COURT WAS
CORRECT IN STIGMATIZING [i] THE PROVISIONS OF THE LOAN
AGREEMENT THAT REFER TO STIPULATED PENALTIES, LIQUIDATED
DAMAGES AND ATTORNEY'S FEES AS SUPPOSEDLY "EXCESSIVE,
INIQUITOUS AND UNCONSCIONABLE AND REVOLTING TO THE
CONSCIENCE" AND [ii] THE UNDERWRITING, SUPERVISION AND
CONSULTANCY SERVICES AGREEMENT AS SUPPOSEDLY "MERE
SUBTERFUGES TO CAMOUFLAGE THE USURIOUS INTEREST
CHARGED" UPON THE RESPONDENT ESTE BY PETITIONER.

P 200,000.00
200,000.00
1,330,000.00

P1,730,000.00

The appellee is, therefore, obliged to return to the appellant Este

del Sol the difference of P971,000.00 or (P1,730,000.00 less
P759,000.00).

f] REFUSED TO CONSIDER THE FACT THAT RESPONDENT ESTE, AND

THUS THE INDIVIDUAL RESPONDENTS, ARE STILL OBLIGATED TO
THE PETITIONER.

Hence, the instant petition anchored on the following assigned errors: 19

Petitioner essentially assails the factual findings and conclusion of the

appellate court that the Underwriting and Consultancy Agreements were
executed to conceal a usurious loan. Inquiry upon the veracity of the
appellate court's factual findings and conclusion is not the function of this
Court for the Supreme Court is not a trier of facts. Only when the factual
findings of the trial court and the appellate court are opposed to each
other does this Court exercise its discretion to re-examine the factual
findings of both courts and weigh which, after considering the record of the
case, is more in accord with law and justice.

THE APPELLATE COURT HAS DECIDED QUESTIONS OF SUBSTANCE IN A WAY

NOT IN ACCORD WITH LAW AND WITH APPLICABLE DECISIONS OF THIS
HONORABLE COURT WHEN IT:

After a careful and thorough review of the record including the evidence
adduced, we find no reason to depart from the findings of the appellate
court.

Petitioner moved for reconsideration of the appellate court's adverse

decision. However, this was denied in a Resolution 18 dated February 9,
2000 of the appellate court.

a] HELD THAT ALLEGEDLY THE UNDERWRITING AND CONSULTANCY

AGREEMENTS SHOULD NOT BE CONSIDERED SEPARATE AND
DISTINCT FROM THE LOAN AGREEMENT, AND INSTEAD, THEY
SHOULD BE CONSIDERED AS A SINGLE CONTRACT.
b] HELD THAT THE UNDERWRITING AND CONSULTANCY
AGREEMENTS ARE "MERE SUBTERFUGES TO CAMOUFLAGE THE
USURIOUS INTEREST CHARGED" BY THE PETITIONER.
c] REFUSED TO CONSIDER THE TESTIMONIES OF PETITIONER'S
WITNESSES ON THE SERVICES PERFORMED BY PETITIONER.
d] REFUSED TO CONSIDER THE FACT [i] THAT RESPONDENTS HAD
WAIVED THEIR RIGHT TO SEEK RECOVERY OF THE AMOUNTS THEY
PAID TO PETITIONER, AND [ii] THAT RESPONDENTS HAD ADMITTED
THE VALIDITY OF THE UNDERWRITING AND CONSULTANCY
AGREEMENTS.

First, there is no merit to petitioner FMIC's contention that Central Bank

Circular No. 905 which took effect on January 1, 1983 and removed the
ceiling on interest rates for secured and unsecured loans, regardless of
maturity, should be applied retroactively to a contract executed on January
31, 1978, as in the case at bar, that is, while the Usury Law was in full
force and effect. It is an elementary rule of contracts that the laws, in force
at the time the contract was made and entered into, govern it. 20 More
significantly, Central Bank Circular No. 905 did not repeal nor in any way
amend the Usury Law but simply suspended the latter's effectivity. 21 The
illegality of usury is wholly the creature of legislation. A Central Bank
Circular cannot repeal a law. Only a law can repeal another law. 22 Thus,
retroactive application of a Central Bank Circular cannot, and should not,
be presumed.23
Second, when a contract between two (2) parties is evidenced by a written
instrument, such document is ordinarily the best evidence of the terms of
the contract. Courts only need to rely on the face of written contracts to
determine the intention of the parties. However, this rule is not without

exception.24 The form of the contract is not conclusive for the law will not
permit a usurious loan to hide itself behind a legal form. Parol evidence is
admissible to show that a written document though legal in form was in
fact a device to cover usury. If from a construction of the whole transaction
it becomes apparent that there exists a corrupt intention to violate the
Usury Law, the courts should and will permit no scheme, however
ingenious, to becloud the crime of usury.25

e) Petitioner FMIC was in fact unable to organize an underwriting/selling

syndicate to sell any share of stock of respondent Este del Sol and much
less to supervise such a syndicate, thus failing to comply with its obligation
under the Underwriting Agreement.38 Besides, there was really no need for
an Underwriting Agreement since respondent Este del Sol had its own
licensed marketing arm to sell its shares and all its shares have been sold
through its marketing arm.39

In the instant case, several facts and circumstances taken altogether show
that the Underwriting and Consultancy Agreements were simply cloaks or
devices to cover an illegal scheme employed by petitioner FMIC to conceal
and collect excessively usurious interest, and these are:

f) Petitioner FMIC failed to comply with its obligation under the Consultancy
Agreement,40 aside from the fact that there was no need for a Consultancy
Agreement, since respondent Este del Sol's officers appeared to be more
competent to be consultants in the development of the projected
sports/resort complex.41

a) The Underwriting and Consultancy Agreements are both dated January

31, 1978 which is the same date of the Loan Agreement. 26 Furthermore,
under the Underwriting Agreement payment of the supervision and
consultancy fees was set for a period of four (4) years 27 to coincide
ultimately with the term of the Loan Agreement.28 This fact means that all
the said agreements which were executed simultaneously were set to
mature or shall remain effective during the same period of time.
b) The Loan Agreement dated January 31, 1978 stipulated for the
execution and delivery of an underwriting agreement29 and specifically
mentioned that such underwriting agreement is a condition precedent 30 for
petitioner FMIC to extend the loan to respondent Este del Sol, indicating
and as admitted by petitioner FMIC's employees,31that such Underwriting
Agreement is "part and parcel of the Loan Agreement."32
c) Respondent Este del Sol was billed by petitioner on February 28, 1978
One Million Three Hundred Thirty Thousand Pesos (P1,330,000.00) 33 as
consultancy fee despite the clear provision in the Consultancy Agreement
that the said agreement is for Three Hundred Thirty-Two Thousand Five
Hundred Pesos (P332,500.00) per annum for four (4) years and that only
the first year consultancy fee shall be due upon signing of the said
consultancy agreement.34
d) The Underwriting, Supervision and Consultancy fees in the amounts of
Two Hundred Thousand Pesos (P200,000.00), and one Million Three
Hundred Thirty Thousand Pesos (P1,330,000.00), respectively, were billed
by petitioner to respondent Este del Sol on February 22, 1978, 35 that is, on
the same occasion of the first partial release of the loan in the amount of
Two Million Three Hundred Eighty-Two Thousand Five Hundred Pesos
(P2,382,500.00).36 It is from this first partial release of the loan that the
said corresponding bills for Underwriting, Supervision and Constantly fees
were conducted and apparently paid, thus, reverting back to petitioner
FMIC the total amount of One Million Seven Hundred Thirty Thousand Pesos
(P1,730,000.00) as part of the amount loaned to respondent Este del Sol. 37

All the foregoing established facts and circumstances clearly belie the
contention of petitioner FMIC that the Loan, Underwriting and Consultancy
Agreements are separate and independent transactions. The Underwriting
and Consultancy Agreements which were executed and delivered
contemporaneously with the Loan Agreement on January 31, 1978 were
exacted by petitioner FMIC as essential conditions for the grant of the loan.
An apparently lawful loan is usurious when it is intended that additional
compensation for the loan be disguised by an ostensibly unrelated contract
providing for payment by the borrower for the lender's services which are
of little value or which are not in fact to be rendered, such as in the instant
case.42 In this connection, Article 1957 of the New Civil Code clearly
provides that:
Art. 1957. Contracts and stipulations, under any cloak or device
whatever, intended to circumvent the laws against usury shall be
void. The borrower may recover in accordance with the laws on
usury.
In usurious loans, the entire obligation does not become void because of
an agreement for usurious interest; the unpaid principal debt still stands
and remains valid but the stipulation as to the usurious interest is void,
consequently, the debt is to be considered without stipulation as to the
interest.43 The reason for this rule was adequately explained in the case
of Angel Jose Warehousing Co., Inc. v. Chelda Enterprises 44 where this Court
held:
In simple loan with stipulation of usurious interest, the prestation of
the debtor to pay the principal debt, which is the cause of the
contract (Article 1350, Civil Code), is not illegal. The illegality lies
only as to the prestation to pay the stipulated interest; hence,
being separable, the latter only should be deemed void, since it is
the only one that is illegal.
Thus, the nullity of the stipulation on the usurious interest does not affect
the lender's right to receive back the principal amount of the loan. With

respect to the debtor, the amount paid as interest under a usurious

agreement is recoverable by him, since the payment is deemed to have
been made under restraint, rather than voluntarily.45
This Court agrees with the factual findings and conclusion of the appellate
court, to wit:
We find the stipulated penalties, liquidated damages and
attorney's fees, excessive, iniquitous and unconscionable and
revolting to the conscience as they hardly allow the borrower any
chance of survival in case of default. And true enough, ESTE folded
up when the appellee extrajudicially foreclosed on its (ESTE's)
development project and literally closed its offices as both the
appellee and ESTE were at the time holding office in the same
building. Accordingly, we hold that 20% penalty on the amount due
and 10% of the proceeds of the foreclosure sale as attorney's fees
would suffice to compensate the appellee, especially so because
there is no clear showing that the appellee hired the services of
counsel to effect the foreclosure, it engaged counsel only when it
was seeking the recovery of the alleged deficiency.
Attorney's fees as provided in penal clauses are in the nature of liquidated
damages. So long as such stipulation does not contravene any law, morals,
or public order, it is binding upon the parties. Nonetheless, courts are
empowered to reduce the amount of attorney's fees if the same is
"iniquitous or unconscionable."46 Articles 1229 and 2227 of the New Civil
Code provide that:
Art. 1229. The judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by
the debtor. Even if there has been no performance, the penalty
may also be reduced by the courts if it is iniquitous or
unconscionable.
Art. 2227. Liquidated damages, whether intended as an indemnity
or a penalty, shall be equitably reduced if they are iniquitous or
unconscionable.
In the case at bar, the amount of Three Million One Hundred Eighty-Eight
Thousand Six Hundred Thirty Pesos and Seventy-Five Centavos
(93,188,630.75) for the stipulated attorney's fees equivalent to twenty-five
(25%) percent of the alleged amount due, as of the date of the auction sale
on June 23, 1980, is manifestly exorbitant and unconscionable.
Accordingly, we agree with the appellate court that a reduction of the
attorney's fees to ten (10%) percent is appropriate and reasonable under
the facts and circumstances of this case.
Lastly, there is no merit to petitioner FMIC's contention that the appellate
court erred in awarding an amount allegedly not asked nor prayed for by

respondents. Whether the exact amount of the relief was not expressly
prayed for is of no moment for the reason that the relief was plainly
warranted by the allegations of the respondents as well as by the facts as
found by the appellate court. A party is entitled to as much relief as the
facts may warrant 47
In view of all the foregoing, the Court is convinced that the appellate court
committed no reversible error in its challenged Decision.
WHEREFORE, the instant petition is hereby DENIED, and the assailed
Decision of the Court of Appeals is AFFIRMED. Costs against petitioner.
SO ORDERED.

Spouses FERDINAND AGUILAR and JOSEPHINE C.

AGUILAR, Petitioners,
vs.
CITYTRUST FINANCE CORPORATION, Respondent.
x-----------------------x
G.R. No. 159706
WORLD CARS, INC., Petitioner,
vs.
Spouses FERDINAND and JOSEPHINE C. AGUILAR, Respondents.
DECISION
CARPIO MORALES, J.:
Sometime in May 1992, Josephine Aguilar (Josephine) canvassed, via
telephone, prices of cars from different car dealers listed in the yellow
pages of the Philippine Long Distance Telephone directory.
On May 23, 1992, World Cars, Inc. (World Cars) sent its representative
Joselito Perez (Perez) and Vangie Tayag (Vangie) to the Aguilar residence in
New Manila, Quezon City bringing with them calling cards, brochures and
price list for different car models, among other things. The two
representatives discussed with Josephine the advantages and
disadvantages of the different models, their prices and terms of payment. 1
Josephine having decided to purchase a white 1992 Nissan California at the
agreed price of P370,000.00, payable in 90 days, Perez and Vangie
repaired to the Aguilar residence on May 30, 1992, bringing with them a
white 1992 Nissan California bearing Motor No. GA16-099086 and Chassis
No. WGLB12-D10269, and the documents bearing on the sale.

Republic of the Philippines

SUPREME COURT
THIRD DIVISION
G.R. No. 159592 October 25, 2005

As Josephine and her husband Ferdinand Aguilar (the Aguilars) were being
made to sign by the two representatives a promissory note, chattel
mortgage, disclosures and other documents the dates of which were left
blank and which showed that they would still be obliged to pay on
installment in 12 months for the car even if checks in full payment thereof
in 90 days were to be issued, the two replied that it was only for formality,
for in case the checks were not cleared, the documents would take effect,
otherwise they would be cancelled.2
The Aguilars did sign the promissory note3 binding them to be jointly and
severally liable to World Cars in the amount of P301,992.00, payable in 12
months, with a monthly amortization of P25,166.00 and a late payment
charge of 5% per month on each unpaid installment from due date until
fully paid.

By Josephines claim, at the time she and her husband signed the
promissory note, its date, May 30, 1992, and the due date of the monthly
amortization which was agreed to be every 3rd day of each month starting
July 1992 were not reflected therein.4
The Aguilars did execute too a chattel mortgage5 in favor of World Cars
which embodied a deed of assignment6 in favor of Citytrust Finance
Corporation (Citytrust).7 Again by Josephines claim, the date May 30, 1992
appearing in the chattel mortgage cum deed of assignment was not yet
filled up at the time she and her husband signed it. 8
After the Aguilars signing of the documents, Perez asked Josephine to
make the check payments payable to him, prompting her to call up Perezs
boss, a certain Lily Paloma, to inquire whether Perez could collect payment
to which Lily replied in the affirmative, the latter advising her to just secure
a receipt.9
Josephine thus issued four Far East Bank and Trust Company (FEBTC)
checks, the details of which are indicated below:

Check No.

Payable to

Amount

Dated

11270310

Joselito Perez

P148,000.00

May 30, 1992

11270411

World Cars

P16,000.00

May 30, 1992

11270512

Joselito Perez

P111,000.00

June 30, 1992

112706

Joselito Perez

P111,000.00

July 30, 1992

For Check Nos. 112703, 112705, and 112706 which were made payable to
Perez in the total amount ofP370,000.00, Perez issued Josephine World
Cars Provisional Receipt No. 5965.13 Check No. 112704 which was made
payable to World Cars represented payment of the premium on the car
insurance, secured from Dominion Insurance which issued a policy in the
name of Josephine.14

Josephine was subsequently issued on June 2, 1992 Official Receipt No.

6111797515 by the Land Transportation Office covering the payment of the
fees for the registration of the car.
In mid-June of 1992, Perez and Vangie went back to the Aguilar residence
requesting that Check No. 112705 dated June 30, 1992 payable to Perez in
the amount of P111,000.00 be cancelled and that two checks in the total
amount of P111,000.00 be issued in replacement thereof, one in the
amount of P4,150.00 to be made payable to Sunny Motors, which appears
to be a sales outlet of World Cars, for processing fee of the documents, and
the other in the amount of P106,850.00 to be again made payable to
Perez. Josephine obliged and accordingly issued Check No. 112724 16 in the
amount of P4,150.00 payable to Sunny Motors, and Check No. 11272517 in
the amount of P106,850.00 payable to Perez.
Check Nos. 112703,18 11272419 and 11272520 were in the meantime
cleared.21
No official receipt for the checks having been issued to Josephine, she
warned Perez that if she did not get any by the end of July 1992, she would
request for stop payment of the last check she issued in his name, Check
No. 11270622 dated July 30, 1992 in the amount of P111,000.00. Perez
failed to deliver any receipt to Josephine, drawing her to advise, by telefax,
FEBTC Del Monte, Quezon City Branch a letter 23 dated July 30, 1992 to stop
the payment of Check No. 112706.
The clearing of Check No. 112706 having been stopped on Josephines
advice, Perez repaired to the Aguilar residence, asking the reason therefor.
On being informed by Josephine of the reason, Perez explained that
receipts were in Bulacan where the main office of World Cars is, and he had
no time to go there owing to its distance. Perez then advised Josephine that
if she did not issue another check to replace Check No. 112706, the 12month installment term of payment under the documents she and her
husband signed would take effect. 24
Not wanting to be bound by the 12-month installment term, Josephine
issued Check No. 11276725 dated August 4, 1992 in the amount
of P111,000.00 payable to Perez who issued her Sunny Motor Sales
Provisional Receipt No. 5028.26
Check No. 112767 was also later cleared.27
In September 1992, Josephine received a letter28 dated August 20, 1992
from Ana Marie Caber (Ana Marie), Account Specialist of Citytrust, advising
her that as of August 20, 1992, her overdue account with it in connection
with the purchase of the car had amounted to "P1,045.39" inclusive of past
due charges.

Josephine at once informed Ana Marie that she had fully paid the car to
which Ana Marie replied that "maybe not all of the papers have been
processed yet," hence, she advised Josephine not to worry about it. 29

installment papers so purchased after deducting the financing and

other charges. Discounting and purchase of installment papers shall be
at the sole option and discretion of [Citytrust];

In December 1992, Josephine received another letter30 dated December 9,

1992 from Citytrust advising her that her account had been, as of
December 9, 1992, overdue in the amount of P110,706.60 inclusive of
unpaid installments for the months of August, September, October,
November and December 1992 plus accumulated penalty charges; and
that if she failed to arrange for another payment scheme, her account
would be referred to its legal counsel for collection.

xxx

Josephine again called Ana Marie inquiring what was going on and the
latter replied that no payment for the car had been received. Josephine
also called up World Cars and spoke to its Vice-President, a certain
Domondon, who informed her that based on company records, the last
payment had not been received.31
The spouses Aguilar thus filed a complaint32 for "annulment of chattel
mortgage plus damages" against Citytrust and World Cars before the
Regional Trial Court (RTC) of Quezon City.
In its Answer with Counterclaims and Crossclaim against World
Cars,33 Citytrust disclaimed knowledge of the alleged prior arrangement
and the alleged subsequent payments made by the Aguilars to World Cars.
And it claimed that it accepted the endorsement and assignment of the
promissory note and chattel mortgage in good faith, relying on the terms
and conditions thereof; and that assuming that the Aguilars claim were
true, World Cars appeared to have violated the terms and conditions of the
Receivables Financing Agreement (RFA) it executed with it, the pertinent
portions of which read:34

5. As further warranties, [World Cars] hereby agrees and shall be bound by

the following:
a. World Cars guarantees to [Citytrust] its successors, and
assigns, that it has full right and legal authority to make the
assignment or discounting; that the installment papers so
discounted by virtue of this agreement, are subsisting, valid,
enforceable and in all respects what they purport to be; that the
papers contain the entire agreement between the customers and
[World Cars]; that said papers are not subject to any defense, offset or
counterclaim; that the personalty covered by said papers have been
delivered to and accepted by the customers in full compliance with the
orders and specifications of the latter; that the required downpayment has
been paid in full by the customer and that the balances appearing in said
documents are net and accurate and there are no contra-accounts, setoffs, or counterclaims whatsoever against said amounts; that the
payment thereof is not contingent or conditioned on the
fulfillment of any contract, condition or warranty, past or future,
express or implied; that it has absolute and good title to such
contracts and the personalties covered thereby and the right to
sell and transfer the same in favor of [Citytrust]; and that said
contracts and personalties have not been previously sold, discounted,
assigned or pledged to any other party nor will [World Cars] sell, assign,
discount or pledge the same hereafter;
xxx

1. [World Cars] hereby agrees and covenants to discount with

[Citytrust] subject to the terms and conditions hereinafter
stipulated, installment papers evidencing actual sales made by
[World Cars] of brand new automobiles, trucks, household appliances
and other durable goods acceptable to [Citytrust]. Wheresoever used
herein, the term "installment paper" shall refer to any document or
documents evidencing sale of personalty on the installment plan
including "Conditional Sale Contracts, Deed of Chattel
Mortgages, Trust Receipts, Contracts of Lease and other evidences of
indebtedness or choses in action, signed by the customers evidencing
the unpaid obligations duly negotiated and/or assigned in favor of
[Citytrust] by virtue of a Deed of Assignment duly notarized;

6. In the event that it shall at any time appear that an installment

paper which [Citytrust] purchased from [World Cars] do not
conform to the warranties under this Agreement or to the
qualifications given in paragraph 5, [Citytrust] shall reassign, and
[World Cars] repurchase, the installment paper(s) andthe latter
shall pay [Citytrust] the unpaid balance of the account less any
unearned service chargeswithin ten (10) days from [World Cars] receipt
of notice of reassignment. Said notice will contain a statement of the
amount payable by [World Cars] as aforesaid. No tender or presentation of
the paper reassigned shall be necessary.
x x x (Emphasis and underscoring supplied)

2. Discounting of the installment papers by virtues hereof shall be

on without-recourse and offer-and-acceptance basis, and that if
[Citytrust] finds the same acceptable, it shall purchase and pay
[World Cars] the balance due and outstanding on the respective

Citytrust prayed in its Crossclaim against World Cars that "in the remote
event that the complaint is not dismissed . . . [World Cars] be ordered to

pay all and whatever unpaid obligation due to [it] arising from [the]
promissory note . . ."35
In its Answer with Counterclaim,36 World Cars claimed that, among other
things, it received only the check in the amount of P148,000.00 (Check No.
112703 payable to Perez) as downpayment for the car; and that the
Aguilars defaulted in the payment of their monthly amortizations to
Citytrust, and it should not be held accountable for the personal and
unilateral obligations of the Aguilars to Citytrust.
At the pre-trial conference, only the counsels for the Aguilars and Citytrust
appeared. World Cars was thus declared as in default.
As defined in the Pre-trial Order37 dated November 11, 1994, the issues of
the case were:
1. Whether or not [the Aguilars] have duly paid the purchase price of the
car, and if so, whether or not [they] can still be held liable to pay under the
promissory note and the chattel mortgage.
2. Whether or not [Citytrust and World Cars] are liable to [the Aguilars] for
damages and if so, how much.
3. Whether or not [the Aguilars] have fully paid the balance installment
price of the [car] which was purchased from [World Cars].
4. Whether or not [the Aguilars] are entitled to the damages prayed for in
the complaint.

The trial court further found that Perez was authorized to receive payment
for the car, hence, all payments made to him for the purchase of the car
were payments made to his principal, World Cars; that the Aguilars had
paid a total amount of P386,000.00 including their final payment on July
30, 2002, which date World Cars admitted to be the deadline therefor; and
that the Aguilars had no intention to be bound by the promissory note
which they signed in favor of World Cars or its assignee nor by the terms of
the Chattel Mortgage, the conforme in the undated Letter (Notice of
Assignment) of World Cars and the Disclosure Statement of Loan/Credit
Transaction having been predicated on the validity of the promissory note.
Moreover, the trial court held that the fact that on May 30, 1992, the same
date of the promissory note, Josephine issued three checks to fully cover
the purchase price of the car (the fourth represented payment of insurance
premium), the last of which was still to mature on July 30, 1992, proves
that the Aguilars signed the promissory note without intending to be bound
by its terms.
In fine, the trial court held that the Aguilars had paid World Cars the full
purchase price of the car, and Citytrust as the assignee of World Cars had
no right to collect from them the amount stated in the Chattel
Mortgage cum Deed of Assignment which is simulated and, therefore, void,
following Art. 1346 of the Civil Code which provides:
Art. 1346. An absolutely simulated or fictitious contract is void. A relative
simulation, when it does not prejudice a third person and is not intended
for any purpose contrary to law, morals, good customs, public order or
public policy binds the parties to their real agreement.
The trial court thus disposed:

5. Whether or not [Citytrust] is entitled to the cross-claim prayed for

against [World Cars].
6. Whether or not [the Aguilars] are still liable for their unpaid obligations
to [Citytrust].
7. Whether or not [World Cars] is liable to pay the unpaid obligations of
[the Aguilars] if the latter will be able to prove that they already fully paid
the price of the subject car.
8. Who among the parties is entitled to damages and attorneys fees, and
if so, how much?
By Decision38 dated January 12, 1999, Branch 77 of the Quezon City RTC
found Perez to be an agent of World Cars, hence, an extension of its
personality as far as the sale of the car to the Aguilars was concerned.

WHEREFORE, premises considered, judgment is hereby rendered:

1. Finding [spouses Aguilar] to have fully paid the purchase price of the
1992 Nissan California car, which they bought from Worlds Cars, Inc. on
May 30, 1992, through its agent, Joselito Perez;
2. Annulling the Promissory Note (Exhibit "D"), the Chattel Mortgage
(Exhibit "D-1"), the conforme in the undated Letter-Notice of Assignment of
defendant World Cars, Inc., (Exhibit "D-2"), and the Disclosure Statement
Loan/Credit Transaction (Exhibit "D-3"), for being void as they are
simulated contracts, thereby releasing [spouses Aguilar] from any liability
arising from these documents;
3. Ordering [Citytrust and World Cars] to pay, jointly and severally, to
[spouses Aguilar] the following sums:P500,000.00 as moral
damages; P100,000.00 as exemplary damages; P50,000.00 as attorneyes
fees andP20,000.00 as litigation expenses;

4. Dismissing the counterclaims and cross-claims of World Cars, Inc. and

Citytrust Finance Corporation; and
5. Directing the [Citytrust and World Cars] to pay the costs of suit.
Citytrust appealed to the Court of Appeals on the following assigned errors:

. . . AWARDING DAMAGES TO [SPOUSES AGUILAR]. 40

By Decision41 of December 5, 2002, the appellate court modified that of the
trial court, the dispositive portion of which reads verbatim:
WHEREFORE, premises considered, the Decision of the court a quo is
hereby MODIFIED to read as follows:

I.
THE COURT A QUO COMMITTED SERIOUS ERRORS OF FACT AND OF LAW IN
NOT HOLDING THAT [SPOUSES AGUILAR] ARE LIABLE TO [CITYTRUST] FOR
THE PAYMENT OF THE PROMISSORY NOTE (PN) (EXH. "I") AND ARE BOUND
BY THE TERMS AND CONDITIONS OF SAID PN AND CHATTEL MORTGAGE
(EXH. "2").

1. Ordering [the Aguilars] to pay Citytrust the amount of P252,486.58

representing the unpaid balance of the promissory note.
2. Ordering [World Cars] to pay [the Aguilars] the following amount, to wit:
(a) P252,486.58 representing the unpaid balance of the promissory note
which [spouses Aguilar] were heretofore ordered to pay Citytrust;

II.
THAT ASSUMING, THAT SPOUSES AGUILAR ARE NOT LIABLE ON THE
PROMISSORY NOTE, THE COURT A QUO COMMITTED SERIOUS ERRORS OF
FACT AND OF LAW IN NOT HOLDING THAT WORLD CARS IS LIABLE TO
CITYTRUST AS GENERAL ENDORSER OF THE PROMISSORY NOTE AND FOR
VIOLATION OF ITS WARRANTY UNDER THE RECEIVABLES FINANCING
AGREEMENT (RFA).
III.
THE COURT A QUO, COMMITTED SERIOUS ERRORS IN FACT AND IN
LAW WHEN IT ADJUDGED CITYTRUST JOINTLY AND SEVERALLY LIABLE TO
[SPOUSES AGUILAR].39 (Emphasis supplied)
World Cars appealed too, contending that the trial court erred in:
I.
. . . HOLDING WORLD CARS, INC., LIABLE FOR THE PERSONAL ACTIONS OR
ACTIONS BEYOND THE SCOPE OF AUTHORITY OF ITS SALES AGENT
JOSELITO PEREZ.
II.
. . . HOLDING THAT THE SALE IS A CASH SALE AND NOT AN INSTALLMENT
SALE AS EVIDENCED BY THE PROMISSORY NOTE AND CHATTEL MORTGAGE
EXECUTED BY [SPOUSES AGUILAR] IN FAVOR OF [WORLD CARS] AND
ASSIGNED TO [CITYTRUST].
III.

(b) P500,000.00 as moral damages; P100,000.00 as exemplary

damages; P50,000.00 as attorneys fees; andP20,000.00 as litigation
expenses.
3. Ordering [World Cars] to pay [Citytrust] the following amount, to wit:
a) Penalty charges based on P252,486.58 at the rate of 5% per month from
date of default until fully paid;
b) P50,000.00 as attorneys fees and appearance fee of P500.00 per
hearing.
c) P50,000.00 as liquidated damages, cost of suit and other litigation
expenses. (Underscoring supplied)
Hence, the present separate petitions of the Aguilars and World Cars.
The Aguilars fault the appellate court in:
A.
. . . GIVING LEGAL EFFECT TO THE PROMISSORY NOTE (PN) AND ITS
DERIVATIVE INSTRUMENTS WHEN IT RULED THE SAME NULL AND VOID
SINCE IT IS NOT REALLY DESIRED OR INTENDED TO PRODUCE LEGAL
EFFECT.
B.
. . . RULING [CITYTRUST] A HOLDER IN DUE COURSE CONTRARY TO
EVIDENCE ON RECORD.

C.
. . . RULING [SPOUSES AGUILAR] LIABLE ON THE PN CONTRARY TO
EVIDENCE ON RECORD.
D.
. . . RULING [CITYTRUST NOT JOINTLY AND SEVERALLY LIABLE WITH WORLD
CARS FOR DAMAGES AND ATTORNEYS FEES CONTRARY TO EVIDENCE ON
RECORD.42 (Underscoring supplied)
On the other hand, World Cars contend that:
A. THE ASSAILED DECISIONS OF THE HONORABLE COURT OF APPEALS
ARE CONTRARY TO LAW AND PREVAILING JURISPRUDENCE.
B. CONSIDERING THAT THE ASSAILED DECISIONS OF THE HONORABLE
COURT OF APPEALS ARE CONTRARY TO LAW AND PREVAILING
JURISPRUDENCE THE AWARDS OF MORAL DAMAGES AGAINST WORLD
CARS, INC. ARE ALSO CONTRARY TO LAW.
C. LIKEWISE, THE AWARDS OF EXEMPLARY DAMAGES, ATTORNEYS FEES
AND APPEARANCE FEES, LITIGATION EXPENSES AND THE COST OF SUIT
AGAINST [WORLD CARS] ARE ALSO CONTRARY TO LAW.43(Underscoring
supplied)
Clearly, Perez was the agent of World Cars and was duly authorized to
accept payment for the car. Josephines testimony that before issuing the
checks in the name of Perez, she verified from his supervisor and the latter
confirmed Perez authority to receive payment remains unrefuted by World
Cars. In fact, World Cars admitted in its Answer with Counterclaim that
"[w]hat was actually paid [by the Aguilars] and received by [it] was
[Josephines] check in the amount of P148,000.00 as downpayment for
the said car."44 Parenthetically, as earlier stated, when Josephine spoke to
World Cars Vice President Domondon, the latter informed her that
the last payment had not been received.45 This information of Domondon
does not jibe with the claim of World Cars that it received only Josephines
first check in the amount of P148,000.00 as downpayment.
As the above table of checks issued by Josephine shows, the check in the
amount of P148,000.00, Check No. 112703 dated May 30, 1992,
was payable to Perez.
Since the Aguilars payment to Perez is deemed payment to World Cars,
the promissory note, chattel mortgage and other accessory documents
they executed which were to take effect only in the event the checks would
be dishonored were deemed nullified, all the checks having been cleared.

Since the condition for the instruments to become effective was fulfilled,
the obligation on the part of the Aguilars to be bound thereby did not arise
and World Cars did not thus acquire rights thereunder following Art. 1181
of the Civil Code which provides:
ARTICLE 1181. In conditional obligations, the acquisition of
rights, as well as the extinguishment or loss of those already
acquired, shall depend upon the happening of the event which
constitutes the condition.(Emphasis supplied)
As no right against the Aguilars was acquired by World Cars under the
promissory note and chattel mortgage, it had nothing to assign to
Citytrust. Consequently, Citytrust cannot enforce the instruments against
the Aguilars, for an assignee cannot acquire greater rights than those
pertaining to the assignor.46
At all events, the Aguilars having fully paid the car before they became
aware of the assignment of the instruments to Citytrust when they
received notice thereof by Citytrust, they were released of their obligation
thereunder. The Civil Code so provides:
ARTICLE 1626. The debtor who, before having knowledge of the
assignment, pays his creditor, shall be released from the obligation.
While Citytrust cannot enforce the instruments against the Aguilars, since
under the RFA, specifically paragraph 5(a) thereof, World Cars guaranteed
as follows:
5. As further warranties, [World Cars] hereby agrees and shall be bound by
the following:
a. World Cars guarantees to [Citytrust] its successors, and
assigns, that it has full right and legal authority to make the
assignment or discounting; that the installment papers so
discounted by virtue of this agreement, are subsisting, valid,
enforceable and in all respects what they purport to be; that the
papers contain the entire agreement between the customers and
[World Cars]; x x x that it has absolute and good title to such
contracts and the personalties covered thereby and the right to
sell and transfer the same in favor of [Citytrust]; x x x (Emphasis
and underscoring supplied),
Citytrusts allegations in its Crossclaim against World Cars Inc., to wit:
xxx
6. That under the terms and conditions of the RFA, upon violation of
the dealers warranties and undertakings, defendant Citytrust Finance

Corporation is entitled to recourse the discounted/assigned installments

papers to the former;

(1) whatever unpaid obligation due to it arising from the assignment of the
promissory note;

7. That assuming that plaintiffs complaint is correct, defendant World Cars,

Inc., appears to have violated the terms and conditions of the RFA it
executed with Citytrust Finance Corporation;

(2) P50,000.00 as attorneys fees and P500.00 per hearing; and

Moreover, if it is proven that said plaintiffs have already paid the amount
on said promissory note, then defendant World Cars Inc. would appear to
have received twice the considerations thereof because it likewise received
the proceeds of discounting thereof, from defendant Citytrust at the time
said note was endorsed and assigned thus, unjustly enriching itself;

(3) P50,000.00 as liquidated damages, cost of suit and other litigation

expenses.
(b) spouses Aguilar
(1) P500,000.00 as moral damages;

xxx

(2) P100,000.00 as exemplary damages;

9. Assuming that plaintiffs claims are proven to be true and that defendant
World Cars, Inc. violated its warranties and undertakings to the defendant
Citytrust, defendant World Cars, Inc. should likewise be made liable to
herein defendant Citytrust for all the unpaid obligations arising from said
promissory note above alleged, plus damages and attorneys fees as
maybe proven during the trial.47 (Emphasis and underscoring supplied),

(3) P50,000.00 as attorneys fees; and

are well-taken.
Respecting the award of moral and exemplary damages, attorneys fees
and other litigation expenses to the Aguilars which World Cars assails, the
same is in order. For by Josephines testimony, 48 she was "annoyed, upset
and angry"; and her husband became hypertensive on account of, and the
credit line of their business was affected by World Cars fraudulent breach
of its agreement with them.49
As for the award to Citytrust of attorneys fees, appearance fees, litigation
expenses and costs of suit against World Cars, the same is in order too,
World Cars violation of the RFA having compelled Citytrust to incur
expenses to protect its interest.50
WHEREFORE, the Court of Appeals decision is REVERSED and SET
ASIDE and another rendered:
1. ANNULLING the promissory note, chattel mortgage and its accessory
contracts;
2. ORDERING World Cars to PAY:
(a) Citytrust

(4) P20,000.00 as litigation expenses.

Costs against petitioner, World Cars, Inc.
SO ORDERED.

"WHEREFORES the Order dated May 15, 1991 is hereby ANNULLED

and SET ASIDE and the Decision dated November 14, 1990
dismissing the [C]omplaint is RESINSTATED. The bonds posted by
plaintiffs-appellees and defendants-appellants are hereby
RELEASED."5
The Facts
The factual antecedents of the case, as found by the CA, are as follows:

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 108346

July 11, 2001

Spouses MARIANO Z. VELARDE and AVELINA D.

VELARDE, petitioners,
vs.
COURT OF APPEALS, DAVID A. RAYMUNDO and GEORGE
RAYMUNDO, respondents.
PANGANIBAN, J.:
A substantial breach of a reciprocal obligation, like failure to pay the price
in the manner prescribed by the contract, entitled the injured party to
rescind the obligation. Rescission abrogates the contract from its inception
and requires a mutual restitution of benefits received.
The Case
Before us is a Petition for Review on Certiorari 1 questioning the Decision2 of
the Court of Appeals (CA) in CA-GR CV No. 32991 dated October 9, 1992,
as well as its Resolution3 dated December 29, 1992 denying petitioner's
motion for reconsideration.4
The dispositive portion of the assailed Decision reads:

"x x x. David Raymundo [herein private respondent] is the absolute

and registered owner of a parcel of land, together with the house
and other improvements thereon, located at 1918 Kamias St.,
Dasmarias Village, Makati and covered by TCT No. 142177.
Defendant George Raymundo [herein private petitioners] is David's
father who negotiated with plaintiffs Avelina and Mariano Velarde
[herein petitioners] for the sale of said property, which was,
however, under lease (Exh. '6', p. 232, Record of Civil Case No.
15952).
"On August 8, 1986, a Deed of Sale with Assumption of Mortgage
(Exh. 'A'; Exh. '1', pp. 11-12, Record) was executed by defendant
David Raymundo, as vendor, in favor of plaintiff Avelina Velarde, as
vendee, with the following terms and conditions:
'x x x

xxx

xxx

'That for and in consideration of the amount of EIGHT

HUNDRED THOUSAND PESOS (P800,000.00), Philippine
currency, receipt of which in full is hereby acknowledged
by the VENDOR from the VENDEE, to his entire and
complete satisfaction, by these presents the VENDOR
hereby SELLS, CEDES, TRANSFERS, CONVEYS AND
DELIVERS, freely and voluntarily, with full warranty of a
legal and valid title as provided by law, unto the VENDEE,
her heirs, successors and assigns, the parcel of land
mentioned and described above, together with the house
and other improvements thereon.
'That the aforesaid parcel of land, together with the house
and other improvements thereon, were mortgaged by the
VENDOR to the BANK OF THE PHILIPPINE ISLANDS, Makati,
Metro Manila to secure the payment of a loan of ONE
MILLION EIGHT HUNDRED THOUSAND PESOS
(P1,800,000.00), Philippine currency, as evidenced by a
Real Estate Mortgage signed and executed by the VENDOR
in favor of the said Bank of the Philippine Islands, on _____
and which Real Estate Mortgage was ratified before Notary

Public for Makati, _____, as Doc. No. ______, Page No. _____,
Book No. ___, Series of 1986 of his Notarial Register.
'That as part of the consideration of this sale, the VENDEE
hereby assumes to pay the mortgage obligations on the
property herein sold in the amount of ONE MILLION EIGHT
HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine
currency, in favor of Bank of Philippine Islands, in the name
of the VENDOR, and further agrees to strictly and faithfully
comply with all the terms and conditions appearing in the
Real Estate Mortgage signed and executed by the VENDOR
in favor of BPI, including interests and other charges for
late payment levied by the Bank, as if the same were
originally signed and executed by the VENDEE.
'It is further agreed and understood by the parties herein
that the capital gains tax and documentary stamps on the
sale shall be for the account of the VENDOR; whereas, the
registration fees and transfer tax thereon shall be the
account of the VENDEE.' (Exh. 'A', pp. 11-12, Record).'
"On the same date, and as part of the above-document, plaintiff
Avelina Velarde, with the consent of her husband, Mariano,
executed an Undertaking (Exh. 'C', pp. 13-14, Record).'
'x x x

xxx

xxx

'Whereas, as per deed of Sale with Assumption of

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

'WHEREAS, this undertaking is being executed in favor of

Mr. David A. Raymundo, for purposes of attesting and
confirming our private understanding concerning the said
mortgage obligations to be assumed.
'NOW, THEREFORE, for and in consideration of the
foregoing premises, and the assumption of the mortgage
obligations of ONE MILLION EIGHT HUNDRED THOUSAND
PESOS (P1,800,000.00), Philippine currency, with the bank
of the Philippine Islands, I, Mrs, Avelina D, Velarde with the
consent of my husband, Mariano Z. Velardo, do hereby bind
and obligate myself, my heirs, successors and assigns, to
strictly and faithfully comply with the following terms and
conditions:
'1. That until such time as my assumption of the mortgage
obligations on the property purchased is approved by the
mortgagee bank, the Bank of the Philippine Islands, I shall
continue to pay the said loan in accordance with the terms
and conditions of the Deed of Real Estate Mortgage in the
name of Mr. David A. Raymundo, the original Mortgagor.
'2. That, in the event I violate any of the terms and
conditions of the said Deed of Real Estate Mortgage, I
hereby agree that my downpayment of P800,000.00, plus
all payments made with the Bank of the Philippine Islands
on the mortgage loan, shall be forfeited in favor of Mr.
David A. Raymundo, as and by way of liquidated damages,
without necessity of notice or any judicial declaration to
that effect, and Mr. David A. Raymundo shall resume total
and complete ownership and possession of the property
sold by way of Deed of Sale with Assumption of Mortgage,
and the same shall be deemed automatically cancelled and
be of no further force or effect, in the same manner as it
(the) same had never been executed or entered into.
'3. That I am executing the Undertaking for purposes of
binding myself, my heirs, successors and assigns, to
strictly and faithfully comply with the terms and conditions
of the mortgage obligations with the Bank of the Philippine
Islands, and the covenants, stipulations and provisions of
this Undertaking.
'That, David A. Raymundo, the vendor of the property
mentioned and identified above, [does] hereby confirm and
agree to the undertakings of the Vendee pertinent to the
assumption of the mortgage obligations by the Vendee
with the Bank of the Philippine Islands. (Exh. 'C', pp. 13-14,
Record).'

"This undertaking was signed by Avelina and Mariano Velarde and

David Raymundo.
"It appears that the negotiated terms for the payment of the
balance of P1.8 million was from the proceeds of a loan that
plaintiffs were to secure from a bank with defendant's help.
Defendants had a standing approved credit line with the Bank of
the Philippine Islands (BPI). The parties agreed to avail of this,
subject to BPI's approval of an application for assumption of
mortgage by plaintiffs. Pending BPI's approval o[f] the application,
plaintiffs were to continue paying the monthly interests of the loan
secured by a real estate mortgage.
"Pursuant to said agreements, plaintiffs paid BPI the monthly
interest on the loan secured by the aforementioned mortgage for
three (3) months as follows: September 19, 1986 at P27,225.00;
October 20, 1986 at P23,000.00; and November 19, 1986 at
P23,925.00 (Exh. 'E', 'H' & 'J', pp. 15, 17and 18, Record).
"On December 15, 1986, plaintiffs were advised that the
Application for Assumption of Mortgage with BPI, was not approved
(Exh. 'J', p. 133, Record). This prompted plaintiffs not to make any
further payment.
"On January 5, 1987, defendants, thru counsel, wrote plaintiffs
informing the latter that their non-payment to the mortgage bank
constitute[d] non-performance of their obligation (Exh. '3', p. 220,
Record).
"In a Letter dated January 7, 1987, plaintiffs, thru counsel, responded, as
follows:
'This is to advise you, therefore, that our client is willing to
pay the balance in cash not later than January 21, 1987
provided: (a) you deliver actual possession of the property
to her not later than January 15, 1987 for her immediate
occupancy; (b) you cause the re- lease of title and
mortgage from the Bank of P.I. and make the title available
and free from any liens and encumbrances; and (c) you
execute an absolute deed of sale in her favor free from any
liens or encumbrances not later than January 21, 1987.'
(Exhs. 'k', '4', p. 223, Record).
"On January 8, 1987 defendants sent plaintiffs a notarial notice of
cancellation/rescission of the intended sale of the subject property
allegedly due to the latter's failure to comply with the terms and
conditions of the Deed of Sale with Assumption of Mortgage and
the Undertaking (Exh. '5', pp. 225-226, Record)."6

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

private respondents for specific performance, nullity of cancellation, writ of
possession and damages. This was docketed as Civil Case No. 15952 at the
Regional Trial Court of Makati, Branch 149. The case was tried and heard
by then Judge Consuelo Ynares-Santiago (now an associate justice of this
Court), who dismissed the Complaint in a Decision dated November 14,
1990.7 Thereafter, petitioners filed a Motion for Reconsideration.8
Meanwhile, then Judge Ynares-Santiago was promoted to the Court of
Appeals and Judge Salvador S. A. Abad Santos was assigned to the sala she
vacated. In an Order dated May 15, 1991,9 Judge Abad Santos granted
petitioner's Motion for Reconsideration and directed the parties to proceed
with the sale. He instructed petitioners to pay the balance of P1.8 million to
private respondents who, in turn, were ordered to execute a deed of
absolute sale and to surrender possession of the disputed property to
petitioners.
Private respondents appealed to the CA.
Ruling of the Court of Appeal
The CA set aside the Order of Judge Abad Santos and reinstated then Judge
Ynares-Santiago's earlier Decision dismissing petitioners' Complaint.
Upholding the validity of the rescission made by private respondents, the
CA explained its ruling in this wise:
"In the Deed of Sale with Assumption of Mortgage, it was stipulated
that 'as part of the consideration of this sale, the VENDEE
(Velarde)' would assume to pay the mortgage obligation on the
subject property in the amount of P 1.8 million in favor of BPI in the
name of the Vendor (Raymundo). Since the price to be paid by the
Vendee Velarde includes the downpayment of P800,000.00 and the
balance of Pl.8 million, and the balance of Pl.8 million cannot be
paid in cash, Vendee Velarde, as part of the consideration of the
sale, had to assume the mortgage obligation on the subject
property. In other words, the assumption of the mortgage
obligation is part of the obligation of Velarde, as vendee, under the
contract. Velarde further agreed 'to strictly and faithfully comply
with all the terms and conditions appearing in the Real Estate
Mortgage signed and executed by the VENDOR in favor of BPI x x x
as if the same were originally signed and executed by the Vendee.
(p. 2, thereof, p. 12, Record). This was reiterated by Velarde in the
document entitled 'Undertaking' wherein the latter agreed to
continue paying said loan in accordance with the terms and
conditions of the Deed of Real Estate Mortgage in the name of
Raymundo. Moreover, it was stipulated that in the event of
violation by Velarde of any terms and conditions of said deed of
real estate mortgage, the downpayment of P800,000.00 plus all
payments made with BPI or the mortgage loan would be forfeited

and the [D]eed of [S]ale with [A]ssumption of [M]ortgage would

thereby be Cancelled automatically and of no force and effect
(pars. 2 & 3, thereof, pp 13-14, Record).
"From these 2 documents, it is therefore clear that part of the
consideration of the sale was the assumption by Velarde of the
mortgage obligation of Raymundo in the amount of Pl.8 million.
This would mean that Velarde had to make payments to BPI under
the [D]eed of [R]eal [E]state [M]ortgage the name of Raymundo.
The application with BPI for the approval of the assumption of
mortgage would mean that, in case of approval, payment of the
mortgage obligation will now be in the name of Velarde. And in the
event said application is disapproved, Velarde had to pay in full.
This is alleged and admitted in Paragraph 5 of the Complaint.
Mariano Velarde likewise admitted this fact during the hearing on
September 15, 1997 (p. 47, t.s.n., September 15, 1987; see also
pp. 16-26, t.s.n., October 8, 1989). This being the case, the nonpayment of the mortgage obligation would result in a violation of
the contract. And, upon Velarde's failure to pay the agreed price,
the[n] Raymundo may choose either of two (2) actions - (1)
demand fulfillment of the contract, or (2) demand its rescission
(Article 1191, Civil Code).
"The disapproval by BPI of the application for assumption of
mortgage cannot be used as an excuse for Velarde's non-payment
of the balance of the purchase price. As borne out by the evidence,
Velarde had to pay in full in case of BPI's disapproval of the
application for assumption of mortgage. What Velarde should have
done was to pay the balance of P1.8 million. Instead, Velarde sent
Raymundo a letter dated January 7, 1987 (Exh. 'K', '4') which was
strongly given weight by the lower court in reversing the decision
rendered by then Judge Ynares-Santiago. In said letter, Velarde
registered their willingness to pay the balance in cash but
enumerated 3 new conditions which, to the mind of this Court,
would constitute a new undertaking or new agreement which is
subject to the consent or approval of Raymundo. These 3
conditions were not among those previously agreed upon by
Velarde and Raymundo. These are mere offers or, at most, an
attempt to novate. But then again, there can be no novation
because there was no agreement of all the parties to the new
contract (Garcia, Jr. vs. Court of Appeals, 191 SCRA 493).
"It was likewise agreed that in case of violation of the mortgage
obligation, the Deed of Sale with Assumption of Mortgage would be
deemed 'automatically cancelled and of no further force and effect,
as if the same had never been executed or entered into.' While it is
true that even if the contract expressly provided for automatic
rescission upon failure to pay the price, the vendee may still pay,
he may do so only for as long as no demand for rescission of the
contract has been made upon him either judicially or by a notarial

act (Article 1592, Civil Code). In the case at bar, Raymundo sent
Velarde notarial notice dated January 8, 1987 of
cancellation/rescission of the contract due to the latter's failure to
comply with their obligation. The rescission was justified in view of
Velarde's failure to pay the price (balance) which is substantial and
fundamental as to defeat the object of the parties in making the
agreement. As adverted to above, the agreement of the parties
involved a reciprocal obligation wherein the obligation of one is a
resolutory condition of the obligation of the other, the nonfulfillment of which entitles the other party to rescind the contract
(Songcuan vs. IAC, 191 SCRA 28). Thus, the non-payment of the
mortgage obligation by appellees Velarde would create a right to
demand payment or to rescind the contract, or to criminal
prosecution (Edca Publishing & Distribution Corporation vs. Santos,
184 SCRA 614). Upon appellee's failure, therefore, to pay the
balance, the contract was properly rescinded (Ruiz vs. IAC, 184
SCRA 720). Consequently, appellees Velarde having violated the
contract, they have lost their right to its enforcement and hence,
cannot avail of the action for specific performance (Voysaw vs.
Interphil Promotions, Inc., 148 SCRA 635)."10
Hence, this appeal.

11

The Issues
Petitioners, in their Memorandum,12 interpose the following assignment of
errors:
"I.
The Court of Appeals erred in holding that the non-payment of the
mortgage obligation resulted in a breach of the contract.
"II
The Court of Appeals erred in holding that the rescission
(resolution) of the contract by private respondents was justified.
"III
The Court of Appeals erred in holding that petitioners' January 7,
1987 letter gave three 'new conditions' constituting mere offers or
an attempt to novate necessitating a new agreement between the
parties."
The Court's Ruling

The Petition is partially meritorious.

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

Petitioners likewise claim that the rescission of the contract by private

respondents was not justified, inasmuch as the former had signified their
willingness to pay the balance of the purchase price only a little over a
month from the time they were notified of the disapproval of their
application for assumption of mortgage. Petitioners also aver that the
breach of the contract was not substantial as would warrant a rescission.
They cite several cases15 in which this Court declared that rescission of a
contract would not be permitted for a slight or casual breach. Finally, they
argue that they have substantially performed their obligation in good faith,
considering that they have already made the initial payment of P800,000
and three (3) monthly mortgage payments.
As pointed out earlier, the breach committed by petitioners was not so
much their nonpayment of the mortgage obligations, as their
nonperformance of their reciprocal obligation to pay the purchase price
under the contract of sale. Private respondents' right to rescind the
contract finds basis in Article 1191 of the Civil Code, which explicitly
provides as follows:
"Art. 1191. -- The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply with
what is incumbent upon him.
The injured party may choose between fulfillment and the
rescission of the obligation, with the payment of damages in either
case. He may also seek rescission even after he has chosen
fulfillment, if the latter should become impossible."
The right of rescission of a party to an obligation under Article 1191 of the
Civil Code is predicated on a breach of faith by the other party who violates
the reciprocity between them.16 The breach contemplated in the said
provision is the obligor's failure to comply with an existing
obligation.17 When the obligor cannot comply with what is incumbent upon
it, the obligee may seek rescission and, in the absence of any just cause
for the court to determine the period of compliance, the court shall decree
the rescission.18
In the present case, private respondents validly exercised their right to
rescind the contract, because of the failure of petitioners to comply with
their obligation to pay the balance of the purchase price. Indubitably, the
latter violated the very essence of reciprocity in the contract of sale, a
violation that consequently gave rise to private respondent's right to
rescind the same in accordance with law.
True, petitioners expressed their willingness to pay the balance of the
purchase price one month after it became due; however, this was not
equivalent to actual payment as would constitute a faithful compliance of
their reciprocal obligation. Moreover, the offer to pay was conditioned on
the performance by private respondents of additional burdens that had not

been agreed upon in the original contract. Thus, it cannot be said that the
breach committed by petitioners was merely slight or casual as would
preclude the exercise of the right to rescind.
Misplaced is petitioners' reliance on the cases 19 they cited, because the
factual circumstances in those cases are not analogous to those in the
present one. In Song Fo there was, on the part of the buyer, only a delay of
twenty (20) days to pay for the goods delivered. Moreover, the buyer's
offer to pay was unconditional and was accepted by the seller.

whatever he may be obliged to restore. 20 To rescind is to declare a contract

void at its inception and to put an end to it as though it never was. It is not
merely to terminate it and release the parties from further obligations to
each other, but to abrogate it from the beginning and restore the parties to
their relative positions as if no contract has been made. 21

Third Issue

In Zepeda, the breach involved a mere one-week delay in paying the

balance of 1,000 which was actually paid.
In Tan, the alleged breach was private respondent's delay of only a few
days, which was for the purpose of clearing the title to the property; there
was no reference whatsoever to the nonpayment of the contract price.
In the instant case, the breach committed did not merely consist of a slight
delay in payment or an irregularity; such breach would not normally defeat
the intention of the parties to the contract. Here, petitioners not only failed
to pay the P1.8 million balance, but they also imposed upon private
respondents new obligations as preconditions to the performance of their
own obligation. In effect, the qualified offer to pay was a repudiation of an
existing obligation, which was legally due and demandable under the
contract of sale. Hence, private respondents were left with the legal option
of seeking rescission to protect their own interest.
Mutual Restitution

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

Required in Rescission
As discussed earlier, the breach committed by petitioners was the
nonperformance of a reciprocal obligation, not a violation of the terms and
conditions of the mortgage contract. Therefore, the automatic rescission
and forfeiture of payment clauses stipulated in the contract does not apply.
Instead, Civil Code provisions shall govern and regulate the resolution of
this controversy.
Considering that the rescission of the contract is based on Article 1191 of
the Civil Code, mutual restitution is required to bring back the parties to
their original situation prior to the inception of the contract. Accordingly,
the initial payment of P800,000 and the corresponding mortgage payments
in the amounts of P27,225, P23,000 and P23,925 (totaling P874,150.00)
advanced by petitioners should be returned by private respondents, lest
the latter unjustly enrich themselves at the expense of the former.
Rescission creates the obligation to return the object of the contract. It can
be carried out only when the one who demands rescission can return

SECOND DIVISION
G.R. No. 129598

August 15, 2001

PNB MADECOR, petitioner,

vs.
GERARDO C. UY, respondent.
QUISUMBING,J.:
This is a petition for review on certiorari filed by petitioner PNB
Management and Development Corporation (PNB MADECOR) seeking to
annul the decision of the Court of Appeals dated February 19, 1997, and its

resolution dated June 19, 1997 in CA-G.R. CV No. 49693, affirming the
order of the Regional Trial Court of Manila, Branch 38, dated August 21,
1995 in Civil Case No. 95-72685. In said order, the RTC directed the
garnishment of the credits and receivables of Pantranco North Express, Inc.
(PNEI), also known as Philippine National Express, Inc., in the possession of
PNB MADECOR, and if these were insufficient to cover the debt of PNB
MADECOR to PNEI, to levy upon the assets of PNB MADECOR.
The facts of this case, culled from the decision of the CA, 1 are as follows:
Guillermo Uy, doing business under the name G.U. Enterprises, assigned to
respondent Gerardo Uy his receivables due from Pantranco North Express
Inc. (PNEI) amounting to P4,660,558.00. The deed of assignment included
sales invoices containing stipulations regarding payment of interest and
attorney's fees.
On January 23, 1995, Gerardo Uy filed with the RTC a collection suit with an
application for the issuance of a writ of preliminary attachment against
PNEI. He sought to collect from PNEI the amount of P8,397,440.00. He
alleged that PNEI was guilty of fraud in contracting the obligation sued
upon, hence his prayer for a writ of preliminary attachment.
A writ of preliminary attachment was issued on January 26, 1995,
commanding the sheriff "to attach the properties of the defendant, real or
personal, and/or (of) any person representing the defendant" 2 in such
amount as to cover Gerardo Uy's demand.
On January 27, 1995, the sheriff issued a notice of garnishment addressed
to the Philippine National Bank (PNB) attaching the "goods, effects, credits,
monies and all other personal properties"3 of PNEI in the possession of the
bank, and requesting a reply within five days. PNB MADECOR received a
similar notice.
On March 1995, the RTC, through the application of Gerardo Uy, issued a
subpoena duces tecum for the production of certain documents in the
possession of PNB and PNB MADECOR: (1) from PNB, books of account of
PNEI regarding trust account nos. T-8461-I, 8461-II, and T-8565; and (2)
from PNB MADECOR, contracts showing PNEI's receivables from the
National Real Estate Development Corporation (NAREDECO), now PNB
MADECOR, from 1981 up to the period when the documents were
requested.

At the hearing in connection with the subpoena, PNB moved to be allowed

to submit a position paper on its behalf and/or on behalf of PNB MADECOR.
In its position paper dated April 3, 1995, PNB MADECOR alleged that it was
the owner of the parcel of land located in Quezon City that was leased to
PNEI for use as bus terminal. Moreover, PNB MADECOR claimed:
"2. PNEI has not been paying its rentals from October 1990 to
March 24, 1994 when it (PNEI) vacated the property. As of the
latter date, PNB MADECOR's receivables against PNEI amounted to
P8,784,227.48, representing accumulated rentals, inclusive of
interest;
3. On the other hand, PNB MADECOR has payables to PNEI in the
amount of P7,884,000.00 as evidenced by a promissory note
executed on October 31, 1982 by then NAREDECO in favor of PNEI;
4. Considering that PNB MADECOR is a creditor of PNEI with respect
to the P8,784,227.48 and at the same time its debtor with respect
to the P7,884,000.00, PNB MADECOR and PNEI are therefore
creditors and debtors of each other; and
5. By force of the law on compensation, both obligations of PNB
MADECOR and PNEI are already considered extinguished to the
concurrent amount or up to P7,884,000.00 so that PNEI is still
obligated to pay PNB MADECOR the amount of P900,227.48. x x
x ."4
On the other hand, Gerardo Uy filed an omnibus motion controverting PNB
MADECOR's claim of compensation. Even if compensation were possible,
according to him, PNEI would still have sufficient funds in the hands of PNB
MADECOR to fully satisfy his claim. He explained' that:
"The allegation of PNB MADECOR that it owes PNEI only . . .
(P7,884,000.00) is not accurate. Apparently, PNB MADECOR only
considered the principal amount. In the first place, to be precise,
the principal debt amounts to exactly . . . (P7,884,921.10) as
clearly indicated in the Promissory Note dated 31 October 1982 . . .
In accordance with the stipulations contained in the promissory
note, notice of demand was sent by PNEI to PNB MADECOR (then
NAREDECO) through a letter dated 28 September 1984 and
received by the latter on 1 October 1984 . . . The second paragraph
of the subject promissory note states that '[F]ailure to pay the
above amount by NAREDECO after due notice has been made by

PNEI would entitle PNEI to collect an 18% [interest] per annum

from date of notice of demand'. Hence, interest should be
computed and start to run from November 1984 until the present
in order to come up with the outstanding debt of PNB MADECOR to
PNEI. And to be more precise, the outstanding debt of PNB
MADECOR to PNEI as of April 1995 amounts to . . .
(P75,813,508.26). Hence, even if the alleged debt of PNEI to PNB
MADECOR amounting to . . . (P8,784,227.48) shall be compensated
and deducted from PNB MADECOR's debt to PNEI, there shall still
be a remainder of . . . (P67,029,380.78), largely sufficient enough
to cover complainant's claim."5
Also in his omnibus motion, he prayed for an order directing that levy be
made upon all goods, credits, deposits, and other personal properties of
PNEI under the control of PNB MADECOR, to the extent of his demand.
PNB MADECOR opposed his omnibus motion, particularly the claim that its
obligation to PNEI earned an interest of 18 percent annually. It argued that
PNEI's letter dated September 28, 1984 was not a demand letter but
merely a request for the implementation of the arrangement for set-off of
receivables between PNEI and PNB, as provided in adacion en
pago executed on July 28, 1983.6 Gerardo Uy again controverted PNB
MADECOR's arguments.
Meanwhile, in the main case, the RTC rendered judgment on July 26, 1995
against PNEI. The corresponding writ of execution was issued on August
18, 1995.
As regards the issue between PNEI and PNB MADECOR, the RTC issued the
assailed order on August 21, 1995, the decretal portion of which provided:
"WHEREFORE, the Sheriff of this Court is hereby directed to
garnish/levy or cause to be garnished/levied the amount stated in
the writ of attachment issued by this Court from the credits and
receivables/collectibles of PNEI from PNB MADECOR (NAREDECO)
and to levy and/or cause to levy upon the assets of the debtor PNB
MADECOR should its personal assets be insufficient to cover its
debt with PNEI.
Furthermore, Mr. Roger L. Venarosa, Vice-President, Trust
Department, Philippine National Bank, and other concerned
officials of said bank, is/are hereby directed to submit the books of
accounts of Pantranco North Express, Inc./Philippine National

Express, Inc. under Trust Account Nos. T-8461-I, T-8461-II, T-8565

with its position paper within five (5) days from notice hereof.
SO ORDERED."
Petitioner appealed said order to the CA which, however, affirmed the RTC
in a decision dated February 19, 1997. Petitioner's motion for
reconsideration was denied in a resolution dated June 19, 1997.
According to the CA, there could not be any compensation between PNEI's
receivables from PNB MADECOR and the latter's obligation to the former
because PNB MADECOR's supposed debt to PNEI is the subject of
attachment proceedings initiated by a third party, herein respondent
Gerardo Uy. This is a controversy that would prevent legal compensation
from taking place, per the requirements set forth in Article 1279 of the Civil
Code. Moreover, the CA stressed that it was not clear whether, at the time
compensation was supposed to have taken place, the rentals being
claimed by petitioner were indeed still unpaid. The CA pointed out that
petitioner did not present evidence in this regard, apart from a statement
of account.
The CA also questioned petitioner's inaction in claiming the unpaid rentals
from PNEI, when the latter started defaulting in its payment as early as
1994. This, according to the CA, indicates that the debt was either already
settled or not yet demandable and liquidated.
The CA rejected petitioner's contention that Rule 39, Section 43 of the
Revised Rules of Court applies to the present case. Said rule sets forth the
procedure to follow when a person alleged to have property or to be
indebted to a judgment obligor claims an interest in the property or denies
the debt. In such a situation, under said Rule the judgment obligee is
required to institute a separate action against such person. The CA held
that there was no need for a separate action here since petitioner had
already become a forced intervenor in the case by virtue of the notice of
garnishment served upon it.
Hence, this petition. Petitioner now assigns the following alleged errors for
our consideration:
I
THE [COURT OF APPEALS] COMMITTED A CLEAR ERROR IN THE
INTERPRETATION OF THE APPLICABLE LAW HEREIN WHEN IT RULED

THAT THE REQUISITES FOR LEGAL COMPENSATION AS SET FORTH

UNDER ARTICLES 1278 AND 1279 OF THE CIVIL CODE DO NOT
CONCUR IN THE CASE AT BAR.

the Civil Code. Petitioner assails the CA's ratiocination that compensation
could not have taken place because the receivables in question were the
subject of attachment proceedings commenced by a third party
(respondent). This reasoning is contrary to law, according to petitioner.

II
THE [COURT OF APPEALS] COMMITTED A CLEAR ERROR IN
INTERPRETING THE PROVISIONS OF SECTION 45, RULE 39 OF THE
RULES OF COURT, NOW SECTION 43, RULE 39 OF THE REVISED
RULES OF COURT, AS AMENDED ON 1 JULY 1997, BY RULING THAT
PETITIONER PNB-MADECOR, UPON BEING CITED FOR AND SERVED
WITH A NOTICE OF GARNISHMENT BECAME A FORCED
INTERVENOR, HENCE, DENYING THE RIGHT OF HEREIN PETITIONER
TO VENTILATE ITS POSITION IN A FULL-BLOWN TRIAL AS PROVIDED
FOR UNDER SEC. 10, RULE 57, WHICH REMAINS THE SAME RULE
UNDER THE REVISED RULES OF COURT AS AMENDED ON 1 JULY
1997.
III
THE [COURT OF APPEALS] COMMITTED AN ERROR IN FINDING THAT
A DEMAND WAS MADE BY PANTRANCO NORTH EXPRESS, INC. TO
PNB MADECOR FOR THE PAYMENT OF THE PROMISSORY NOTE
DATED 31 OCTOBER 1982.7
After considering these assigned errors carefully insofar as they raise
issues of law, we find that the petition lacks merit. We shall now discuss
the reasons for our conclusion.
Petitioner admits its indebtedness to PNEI, in the principal sum of
P7,884,921.10, per a promissory note dated October 31, 1982 executed by
its precursor NAREDECO in favor of PNEI. It also admits that the principal
amount should earn an interest of 18 percent per annum under the
promissory note, in case NAREDECO fails to pay the principal amount after
notice. Petitioner adds that the receivables of PNEI were thereafter
conveyed to PNB in payment of PNEI's loan obligation to the latter, in
accordance with a dacion en pago agreement executed between PNEI and
PNB.
Petitioner, however, maintains that there is nothing now that could be
subject of attachment or execution in favor of respondent since
compensation had already taken place as between its debt to PNEI and the
latter's obligation to it, consistent with Articles 1278, 1279, and 1290 of

Petitioner insists that even the Asset Privatization Trust (APT), which now
has control over PNEI, recognized the set-off between the subject
receivables as indicated in its reply to petitioner's demand for payment of
PNEI's unpaid rentals.8 The APT stated in its letter:
"xxx

xxx

xxx

While we have long considered the amount of SEVEN MILLION

EIGHT HUNDRED EIGHTY FIVE THOUSAND PESOS (P7,885,000.00)
which PNEI had earlier transmitted to you as its share in an aborted
project as partial payment for PNEI's unpaid rentals in favor of PNBMadecor, being a creditor like your goodself of PNEI, we are unable
to be of assistance to you regarding your claim for the balance
thereof. We trust that you will understand our common
predicament.
xxx

xxx

xxx"

Petitioner argues that PNEI's letter dated September 28, 1984 did not
contain a demand for payment but only notice of the implementation of
thedacion en pago agreement between PNB and PNEI.
Petitioner contends that the CA's statement that PNEI's obligation to
petitioner had either been settled or was not yet demandable is highly
speculative and conjectural. On the contrary, petitioner asserts that its
failure to institute a judicial action against PNEI proved that the receivables
of petitioner and PNEI had already been subject to legal compensation.
Petitioner submits that Rule 39, Section 43 of the Revised Rules of Court
applies to the present case. It asserts that it stands to lose more than P7
million if not given the opportunity to present its side in a formal
proceeding such as that provided under the cited rule. According to
petitioner, it was not an original party to this case but only became
involved when it was issued a subpoenaduces tecum by the trial court.
For his part, respondent claims that the requisites for legal compensation
are not present in this case, contrary to petitioner's assertion. He argues
that the better rule should be that compensation cannot take place where

one of the obligations sought to be compensated is the subject of a suit

between a third party and a party interested in the compensation, as in
this case.
Moreover, respondent points out that, while the alleged demand letter sent
by PNEI to petitioner was dated September 28, 1984, the unpaid rentals
due petitioner from PNEI accrued during the period October 1990 to March
1994, or before petitioner's obligation to PNEI became due. This being so,
respondent argues that there can be no compensation since there was as
yet no compensable debt in 1984 when PNEI demanded payment from
petitioner.
Even granting that there had been compensation, according to respondent,
PNEI would still have sufficient funds with petitioner since the PNB
MADECOR's obligation to PNEI earned interest.
Respondent echoes the observation of the CA that petitioner failed to file a
suit against PNEI at the time when it should have. This failure gave rise to
the presumption that PNEI's obligation might have already been settled,
waived, or otherwise extinguished, according to him. He contends that
petitioner's explanation that it did not sue PNEI because there had been
legal compensation is only an afterthought and contrary to logic and
reason.
On petitioner's claim that it had been denied due process, respondent
avers that he did not have to file a separate action against petitioner since
this would only result in multiplicity of suits. Furthermore, he points out
that the order of attachment is an interlocutory order that may not be the
subject of appeal.
Finally, respondent calls the attention of this Court to the sale by PNB of its
shares in PNB MADECOR to the "Dy Group", which in turn assigned its
majority interest to the "Atlanta Group". Respondent claims that the Dy
Group set aside some P30 million for expenses to be incurred in litigating
PNB MADECOR's pending cases, and asks that his "claim over this amount,
arising from the instant case,"9 be given preference in case the PNEI
properties already garnished prove insufficient to satisfy his claim.
The first and third errors assigned by petitioner are obviously interrelated
and must be resolved together.
Worth stressing, compensation is a mode of extinguishing to the
concurrent amount the obligations of persons who in their own right and as

principals arereciprocally debtors and creditors of each other.10 Legal

compensation takes place by operation of law when all the requisites are
present,11 as opposed to conventional compensation which takes place
when the parties agree to compensate their mutual obligations even in the
absence of some requisites.12
Legal compensation requires the concurrence of the following conditions:
(1) that each one of the obligors be bound principally, and that he
be at the same time a principal creditor of the other;
(2) that both debts consist in a sum of money, or if the things due
are consumable, they be of the same kind, and also of the same
quality if the latter has been stated;
(3) that the two debts be due;
(4) that they be liquidated and demandable;
(5) that over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the
debtor.13
Petitioner insists that legal compensation had taken place such that no
amount of money belonging to PNEI remains in its hands, and,
consequently, there is nothing that could be garnished by respondent.
We find, however, that legal compensation could not have occurred
because of the absence of one requisite in this case: that both debts must
be due and demandable.
The CA observed:
"Under the terms of the promissory note, failure on the part of
NAREDECO (PNB MADECOR) to pay their value of the instrument
'after due notice has been made by PNEI would entitle PNEI to
collect an 18% [interest] per annum from date of notice of
demand'."14
Petitioner makes a similar assertion in its petition, that

"x x x It has been stipulated that the promissory note shall earn an
interest of 18% per annum in case NAREDECO, after notice, fails to
pay the amount stated therein."15
Petitioner's obligation to PNEI appears to be payable on demand, following
the above observation made by the CA and the assertion made by
petitioner. Petitioner is obligated to pay the amount stated in the
promissory note upon receipt of a notice to pay from PNEI. If petitioner fails
to pay after such notice, the obligation will earn an interest of 18 percent
per annum.
Respondent alleges that PNEI had already demanded payment. The alleged
demand letter reads in part:
"We wish to inform you that as of August 31, 1984 your
outstanding accounts amounted to P10,376,078.67, inclusive of
interest.
In accordance with our previous arrangement, we have conveyed
in favor of the Philippine National Bank P7,884,921.10 of said
receivables from you. With this conveyance, the unpaid balance of
your account will be P2,491,157.57.16
To forestall further accrual of interest, we request that you take up
with PNB the implementation of said arrangement. x x x." 17
We agree with petitioner that this letter was not one demanding payment,
but one that merely informed petitioner of (1) the conveyance of a certain
portion of its obligation to PNEI per adacion en pago arrangement between
PNEI and PNB, and (2) the unpaid balance of its obligation after deducting
the amount conveyed to PNB. The import of this letter is not that PNEI was
demanding payment, but that PNEI was advising petitioner to settle the
matter of implementing the earlier arrangement with PNB.
Apart from the aforecited letter, no other demand letter appears on record,
nor has any of the parties adverted to another demand letter.
Since petitioner's obligation to PNEI is payable on demand, and there being
no demand made, it follows that the obligation is not yet due. Therefore,
this obligation may not be subject to compensation for lack of a requisite
under the law. Without compensation having taken place, petitioner
remains obligated to PNEI to the extent stated in the promissory note. This

obligation may undoubtedly be garnished in favor of respondent to satisfy

PNEI's judgment debt.18
As to respondent's claim that legal compensation could not have taken
place due to the existence of a controversy involving one of the mutual
obligations, we find this matter no longer controlling. Said controversy was
not seasonably communicated to petitioner as required under Article 1279
of the Civil Code.
The controversy,i.e., the action instituted by respondent against PNEI,
must have been communicated to PNB MADECOR in due time to prevent
compensation from taking place. By "in due time" should be meant the
period before legal compensation was supposed to take place, considering
that legal compensation operates so long as the requisites concur, even
without any conscious intent on the part of the parties. 19 A controversy that
is communicated to the parties after that time may no longer undo the
compensation that had taken place by force of law, lest the law concerning
legal compensation be for naught.
Petitioner had notice of the present controversy when it received the
subpoenaduces tecum issued by the trial court. The exact date when
petitioner received the subpoena is not on record, but petitioner was
allowed to submit a position paper regarding said subpoena per order of
the trial court dated March 27, 1995.20 We assume that petitioner had
notice of the pending litigation at least no later than this date. Now, was
this date before that period when legal compensation would have
occurred, assuming all other requisites to be present?
Clearly, it is not. PNB MADECOR's obligation to PNEI was contracted in
1982 and the alleged demand letter was sent by PNEI to petitioner on
September 1984. On the other hand, PNEI's obligation to petitioner, the
payment of monthly rentals, accrued during the period October 1990 to
March 1994 and a demand to pay was sent in 1993. Assuming the other
requisites to be present, legal compensation of the mutual obligations
would have taken place on March 1994 at the latest. Obviously, this was
before petitioner received notice of the pendency of this litigation in 1995.
The controversy communicated to petitioner in 1995 could not have
affected the legal compensation that would have taken place in 1994.
As regards respondent's averment that there was as yet no compensable
debt when PNEI sent petitioner a demand letter on September 1984, since
PNEI was not yet indebted to petitioner at that time, the law does not
require that the parties' obligations be incurred at the same time. What the

law requires only is that the obligations be due and demandable at the
same time.
Coming now to the second assigned error, which we reserved as the last
for our discussion, petitioner contends that it did not become a forced
intervenor in the present case even after being served with a notice of
garnishment. Petitioner argues that the correct procedure would have been
for respondent to file a separate action against PNB MADECOR, per Section
43 of Rule 39 of the Rules of Court.21 Petitioner insists it was denied its
right to ventilate its claims in a separate, full-blown trial when the courtsa
quo ruled that the abovementioned rule was inapplicable to the present
case.
On this score, we had occasion to rule as early as 1921 inTayabas Land Co.
v. Sharruf ,22 as follows:
". . . garnishment . . . consists in the citation of some stranger to
the litigation, who is debtor to one of the parties to the action. By
this means such debtor stranger becomes a forced intervenor; and
the court, having acquired jurisdiction over his person by means of
the citation, requires him to pay his debt, not to his former creditor,
but to the new creditor, who is creditor in the main litigation. It is
merely a case of involuntary novation by the substitution of one
creditor for another. Upon principle the remedy is a species of
attachment or execution for reaching any property pertaining to a
judgment debtor which may be found owing to such debtor by a
third person."
Again, inPerla Compania de Seguros, Inc. v. Ramolete,23 we declared:
"Through service of the writ of garnishment, the garnishee
becomes a "virtual party" to, or a "forced intervenor" in, the case
and the trial court thereby acquires jurisdiction to bind him to
compliance with all orders and processes of the trial court with a
view to the complete satisfaction of the judgment of the court."
Petitioner here became a forced intervenor by virtue of the notice of
garnishment served upon him. It could have presented evidence on its
behalf. The CA, in fact, noted that petitioner presented a statement of
account purportedly showing that PNEI had not yet settled its obligation to
petitioner.24 That petitioner failed to present any more proof of its claim, as
observed by the CA, is no longer the fault of the courts.

There is no need for the institution of a separate action under Rule 39,
Section 43, contrary to petitioner's claim. This provision contemplates a
situation where the person allegedly holding property of (or indebted to)
the judgment debtor claims an adverse interest in the property (or denies
the debt). In this case, petitioner expressly admits its obligation to PNEI. 25
WHEREFORE, the petition is DENIED. The assailed decision and resolution
of the Court of Appeals are AFFIRMED. Costs against petitioner.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 109087

May 9, 2001

RODZSSEN SUPPLY CO. INC., petitioner,

vs.
FAR EAST BANK & TRUST CO., respondent.

this action, plus interest thereon at the rate of 12% per annum
counted from October 1979 until fully paid;
"2. Ordering the defendant to pay the plaintiff the sum equivalent
to 25% of the total amount due and collectible; and
"3. Ordering the defendant to pay the costs of the suit."5
The Facts
The factual and procedural antecedents of the case are summarized by the
Court of Appeals as follows:

PANGANIBAN, J.:
When both parties to a transaction are mutually negligent in the
performance of their obligations, the fault of one cancels the negligence of
the other. Thus, their rights and obligations may be determined equitably.
No one shall enrich oneself at the expense of another.1wphi1.nt
The Case
Before us is a Petition for Review on Certiorari 1 under Rule 45 of the Rules
of Court, assailing the January 21, 1993 Decision 2 of the Court of
Appeals3 (CA) in CA-GR CV No. 26045. The challenged Decision affirmed
with modification the ruling of the Regional Trial Court of Bacolod City in
Civil Case No. 2296. The CA ruled as follows:
"WHEREFORE, the decision under appeal should be, as it is hereby
affirmed in all its aspects, except for the deletion of paragraph 2 of
its dispositive portion, which paragraph shall be replaced by a new
paragraph which shall read as follows:
'2. ordering the defendant to pay the plaintiff the sum
equivalent to 10% of the total amount due and collectible,
as attorney's fees; and'
"No pronouncement as to costs."4
On the other hand, the trial court had rendered this judgment:
"1. Ordering the defendant to pay the plaintiff the sum of
P76,000.00, representing the principal amount being claimed in

"In the complaint from which the present proceedings originated, it

is alleged that on January 15, 1979, defendant Rodzssen Supply,
Inc. opened with plaintiff Far East Bank and Trust Co. a 30-day
domestic letter of credit, LC No. 52/0428/79-D, in the amount of
P190,000.00 in favor of Ekman and Company, Inc. (Ekman) for the
purchase from the latter of five units of hydraulic loaders, to expire
on February 15, 1979; that subsequent amendments extended the
validity of said LC up to October 16, 1979; that on March 16, 1979,
three units of the hydraulic loaders were delivered to defendant for
which plaintiff on March 26, 1979, paid Ekman the sum of
P114,000.00, which amount defendant paid plaintiff before the
expiry date of the LC; that the shipment of the remaining two units
of hydraulic loaders valued at P76,000.00 sent by Ekman was
'readily received by the defendant' before the expiry date [of]
subject LC; that upon Ekman's presentation of the documents for
the P76,000.00 'representing final negotiation' on the LC before the
expiry date, and 'after a series of negotiations', plaintiff paid to
Ekman the amount of P76,000.00; and that upon plaintiff's demand
on defendant to pay for said amount (P76,000.00), defendant'
refused to pay ... without any valid reason'. Plaintiff prays for
judgment ordering defendant to pay the abovementioned
P76,000.00 plus due interest thereon, plus 25% of the amount of
the award as attorney's fees.
"In the Answer, defendant interposed, inter alia, by way of special
and affirmative defenses that plaintiff ha[d] no cause of action
against defendant; that there was a breach of contract by plaintiff
who in bad faith paid Ekman, knowing that the two units of
hydraulic loaders had been delivered to defendant after the expiry
date of subject LC; and that in view of the breach of contract,

defendant offered to return to plaintiff the two units of hydraulic

loaders, 'presently still with the defendant' but plaintiff refused to
take possession thereof.
"The trial court's ruling that plaintiff [was] entitled to recover from
defendant the amount of P76,000.00 was based on its following
findings/conclusions: (1) under the contract of sale of the five
loaders between Ekman and defendant, upon Ekman's delivery to,
and acceptance by, defendant of the two remaining units of the
five loaders, defendant became liable to Ekman for the payment of
said two units. However, as defendant did not pay Ekman, the
latter pressed plaintiff for the payment of said two loaders in the
amount of P76,000.00. In the honest belief that it was still under
obligation to Ekman for said amount, considering that Ekman had
presented all the necessary documents, plaintiff voluntarily paid
the said amount to Ekman. Plaintiff's x x x voluntary and lawful act
of payment g[a]ve rise to a quasi-contract between plaintiff and
defendant; and if defendant should escape liability for said
amount, the result would be to allow defendant to enrich itself at
plaintiff's expense x x x.
"x x x. While defendant, indeed offered to return the two loaders to
plaintiff, x x x this offer was made 3 years after defendant's receipt
of the goods, when plaintiff pressed for payment. By said voluntary
acceptance of the two loaders, estoppel works against defendant
who should have refused delivery of, and/or immediately offered to
return, the goods.
"Accordingly, judgment was rendered in favor of the plaintiff and
against the defendant x x x."6
The CA Ruling
The CA rejected petitioner's imputation of bad faith and negligence to
respondent bank for paying for the two hydraulic loaders, which had been
delivered after the expiration of the subject letter of credit. The appellate
court pointed out that petitioner received the equipment after the letter of
credit had expired. "To absolve defendant from liability for the price of the
same," the CA explained, "is to allow it to get away with its unjust
enrichment at the expense of the plaintiff."
Hence, this Petition.7

Issues
Petitioner presents the following issues for resolution:
"1. Whether or not it is proper for a banking institution to pay a
letter of credit which has long expired or been cancelled.
"2. Whether or not respondent courts were correct in their
conclusion that there was a consummated sale between petitioner
and Ekman Co.
"3. Whether or not Respondent Court of Appeals was correct in
evading the issues raised in the appeal that under the trust receipt,
petitioner was merely the depositary of private respondent with
respect to the goods covered by the trust receipt." 8
The Court's Ruling
We affirm the Court of Appeals, but lower the interest rate to only 6
percent and delete the award of attorney's fees.
First Issue:
Efficacy of Letter of Credit
Petitioner asserts that respondent bank was negligent in paying for the two
hydraulic loaders, when it no longer had any obligation to do so in view of
the expiration and cancellation of the Letter of Credit.
Petitioner Rodzssen Supply Inc. applied for and obtained an irrevocable 30day domestic Letter of Credit from Far East Bank and Trust Company Inc.
on January 15, 1979, in favor of Ekman and Company Inc., in order to
finance the purchase of five units of hydraulic loaders in the amount
of P190,000. Originally set to expire on February 15, 1979, the subject
Letter of Credit was amended several times to extend its validity until
October 16, 1979.
The Letter of Credit expressly restricted the negotiation to respondent bank
and specifically instructed Ekman and Company Inc. to tender the following
documents: (1) delivery receipt duly acknowledged by the buyer, (2)
accepted draft, and (3) duly signed commercial invoices. Likewise, the
instrument contained a provision with regard to its expiration date. 8

For the first three hydraulic loaders that were delivered, the bank paid the
amount specified in the letter of credit. The present dispute pertains only
to the last two hydraulic loaders.

Petitioner claims that it accepted the late delivery of the equipment, only
because it was bound to accept it under the company's trust receipt
arrangement with respondent bank.

Clearly, the bank paid Ekman when the former was no longer bound to do
so under the subject Letter of Credit. The records show that respondent
paid the latter P76,000 for the last two hydraulic loaders on March 14,
1980,10five months after the expiration of the Letter of Credit on October
16, 1979.11 In fact, on December 27, 1979, the bank had informed
Rodzssen of the cancellation of the commercial paper and credited P22,800
to the account of the latter. The amount represented the marginal deposit,
which petitioner had been required to put up for the unnegotiated portion
of the Letter of Credit -- P76,000 for the two hydraulic loaders.12

Granting that petitioner was bound under such arrangement to accept the
late delivery of the equipment, we note its unexplained inaction for almost
four years with regard to the status of the ownership or possession of the
loaders. Bewildering was its lack of action to validate the ownership and
possession of the loaders, as well as its stolidity over the purported failed
sales transaction. Significant too is the fact that it formalized its offer to
return the two pieces of equipment only after respondent's demand for
payment, which came more than three years after it accepted delivery.

The subject Letter of Credit had become invalid upon the lapse of the
period fixed therein.13 Thus, respondent should not have paid Ekman; it
was not obliged to do so. In the same vein, of no moment was Ekman's
presentation, within the prescribed period, of all the documents necessary
for collection, as the Letter of Credit had already expired and had in fact
been cancelled.
Second Issue:
Was Petitioner Liable to Respondent?
Be that as it may, we agree with the CA that petitioner should pay
respondent bank the amount the latter expended for the equipment
belatedly delivered by Ekman and voluntarily received and kept by
petitioner.
Respondent bank's right to seek recovery from petitioner is anchored, not
upon the inefficacious Letter of Credit, but on Article 2142 of the Civil Code
which reads as follows:
"Certain lawful, voluntary and unilateral acts give rise to the
juridical relation of quasi-contract to the end that no one shall be
unjustly enriched or benefited at the expense of another."
Indeed, equitable considerations behoove us to allow recovery by
respondent. True, it erred in paying Ekman, but petitioner itself was not
without fault in the transaction. It must be noted that the latter had
voluntarily received and kept the loaders since October 1979.

When both parties to a transaction are mutually negligent in the

performance of their obligations, the fault of one cancels the negligence of
the other and, as in this case, their rights and obligations may be
determined equitably under the law proscribing unjust enrichment.
Payment of Interest
We, however, disagree with both the CA and the trial court's imposition of
12 percent interest on the sum to be paid by petitioner. In Eastern
Shipping Lines v. CA,14 the Court laid down the following guidelines in the
imposition of interest:
"x x x

xxx

xxx

2. When an obligation, not constituting a loan or forbearance of

money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate
of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand
can be established with reasonable certainty. Accordingly, where
the demand is established with reasonable certainty, the interest
shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money

becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be 12%
per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance
of credit."
Although the sum of money involved in this case was payable to a bank,
the present factual milieu clearly shows that it was not a loan or
forbearance of money. Thus, pursuant to established jurisprudence and
Article 2009 of the Civil Code, petitioner is bound to pay interest at 6
percent per annum, computed from April 7, 1983, the time respondent
bank demanded payment from petitioner. From the finality of the judgment
until its satisfaction, the interest shall be 12 percent per
annum.1wphi1.nt
Attorney's Fees
Considering that negligence is imputable to both parties, both should bear
their respective costs of the suit. We also delete the award of attorney's
fees in favor of respondent bank.15
WHEREFORE, the Petition is DENIED and the assailed Decision of the Court
of Appeals AFFIRMED with the following MODIFICATIONS:
1. Petitioner Rodzssen Supply Co., Inc. is ORDERED to reimburse
Respondent Far East Bank and Trust Co., Inc. P76,000 plus interest
thereon at the rate of 6 percent per annum computed from April 7,
1983. After this judgment becomes final, the interest shall be 12
percent per annum.
2. The award of attorney's fees in favor of respondent is DELETED.
3. No pronouncement as to costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 149683

June 16, 2003

ILOILO TRADERS FINANCE INC., Petitioner,

vs.
HEIRS OF OSCAR SORIANO JR., and MARTA L.
SORIANO, Respondents.
DECISION
VITUG, J.:
On 23 October 1979 and 29 February 1980, the spouses Oscar Soriano and
Marta Soriano executed two promissory notes, secured by real property
mortgages, in favor of petitioner Iloilo Traders Finance, Inc. (ITF). When the
Sorianos defaulted on the notes, ITF, on 23 June 1981, moved for the
extrajudicial foreclosure of the mortgages. Evidently, in order to forestall
the foreclosure, respondent spouses filed, on 27 August 1981, a complaint
for "Declaration of a Void Contract, Injunction and Damages." On 06
January 1982, the trial court issued a writ of preliminary injunction to
suspend the public sale of the hypothecated property. On 16 August 1983,
the parties entered into an "Amicable Settlement" and, after affixing their
signatures thereon, submitted the agreement before the court. Instead of
approving forthwith the amicable settlement, the trial court required the
parties to first give some clarifications on a number of items. The order
read in part "Paragraph 4 of the compromise agreement dated August 16, 1983 states:
That the plaintiffs waive any claims, counterclaims, attorneys fees or
damages that they may have against herein defendants.

"Plaintiffs and defendant Iloilo Traders Finance, Inc., are directed to clarify
whether the words herein defendants include defendants Bernadette
Castellano and the provincial sheriff of Iloilo.
"If the plaintiffs desire to dismiss the complaint against defendants
Castellano and the provincial sheriff of Iloilo, they should state it
categorically and in writing.
"Furthermore, the Court wants to know from the plaintiffs and defendant
Iloilo Traders Finance, Inc., if the writ of preliminary injunction issued on
January 6, 1982 should be lifted as to all three defendants.
"The clarification herein sought after by the Court shall be made in writing
and signed by the parties concerned, assisted by their respective
attorneys.
"This Order shall be complied with within a period of ten (10) days from
notice hereof."1
The parties failed to comply with the court order. Resultantly, the trial court
disapproved the amicable settlement and set the case for pre-trial. Nothing
much could be gleaned from the records about what might have transpired
next not until seven years later when the Soriano couple filed a motion to
submit anew the amicable settlement. The motion was opposed by ITF on
the ground that the amount expressed in the settlement would no longer
be accurate considering the lapse of seven years, implying in a way that it
could be amendable thereto if the computation were to be revised. The
trial court denied the Soriano motion. Significantly, while the order of
denial was made on the thesis that the debtor spouses, without the
consent of ITF, could not unilaterally resurrect the amicable settlement, the
trial court, nevertheless, made the following observations "x x x (T)hat in relation to the disapproved Amicable Settlement, the
intention of ITF to agree and abide by the provisions thereof, as evidenced
by the signatures thereto of its President and counsels, cannot be ignored.
That intention pervades to the present time since the disapproval by the
court pertains only to a technicality which in no way intruded into the
substance of the agreement reached by the parties. Such being the case,
the Amicable Settlement had novated the original agreement of that
parties as embodied in the promissory note. The rights and obligations of
the parties, therefore, at this time should be based on the provisions of the
amicable settlement, these should pertain to the principal amount as of

that date which the parties pegged at P431,200.00 and the legal rate of
interest thereon.
"The foregoing should however be a good issue in another forum, not in
the present case."2
Taking cue from the court order, the Sorianos withdrew their complaint
and, on 16 October 1991, filed a case for novation and specific
performance, docketed Civil Case No. 20047, before the Regional Trial
Court, Branch 37, of Iloilo City. The case ultimately concluded with a finding
made by the trial court in favor of herein respondents. On appeal to it, the
Court of Appeals affirmed the judgment of the court a quo.
The parties have submitted that the issue focuses on whether or not the
amicable settlement entered into between the parties has novated the
original obligation and also, as they would correctly suggest in their
argument, on whether the proposed terms of the amicable settlement were
carried out or have been rendered inefficacious.
The "amicable settlement" read "COME NOW plaintiffs and defendant Iloilo Traders Finance, Inc., assisted
by their respective undersigned counsels and to this Honorable Court most
respectfully submit the following Amicable Settlement, thus:
"1. That the total of the two (2) accounts of plaintiff to herein
defendant as of June 30, 1983 is Two Hundred Ninety Thousand Six
Hundred Ninety One Pesos (P290,691.00) of which amount
P10,691.00 shall be paid by plaintiffs to herein defendant at the
time of the signing of this Amicable Settlement;
"2. That to this amount of P290,691.00 shall be added P151,200.00
by way of interest for 36 months thus making a total of Four
Hundred Thirty One Thousand Two Hundred Pesos (P431,200.00);
"3. That this amount of P431,200.00 shall be paid by plaintiffs to
herein defendant in 36 monthly installments as follows, the first
installment at P12,005.00 shall be paid on or before August 16,
1983 and the 2nd to 36th installments at P11,977.00 shall be paid
on the 15th day of each month thereafter until fully paid;
"4. That the plaintiffs waive any claims, counterclaims, attorneys
fees or damages that they may have against herein defendants;

"5. That should plaintiffs fail to comply with the terms of this
Amicable Settlement the preliminary injunction issued in the case
shall be immediately dissolved and the foreclosure and public
auction sale of the properties of the plaintiffs subject of the
mortgage to defendant shall immediately take place and the
corresponding writ of execution shall issue from this Court;

"WHEREFORE, it is respectfully prayed of this Honorable Court that the

foregoing Amicable Settlement be approved."3

It would appear that the arrangement reached by the Soriano spouses and
ITF would have the original obligation of respondent spouses on two
promissory notes for the sums of P150,000.00 and P80,000.00, both
secured by real estate mortgages, impliedly modified. The amicable
settlement contained modificatory changes. Thus, (1) it increased the
indebtedness of the Soriano spouses, merely due to accruing interest, from
P290,691.00 to P431,200.00; (2) it extended the period of payment and
provided for new terms of payment; and (3) it provided for a waiver of
claims, counterclaims, attorneys fees or damages that the debtor-spouses
might have against their creditor, but the settlement neither cancelled, nor
materially altered the usual clauses in, the real estate mortgages, e.g., the
foreclosure of the mortgaged property in case of default.

Novation may either be extinctiv or modificatory, much being dependent

on the nature of the change and the intention of the parties. Extinctive
novation is never presumed; there must be an express intention to
novate;4 in cases where it is implied, the acts of the parties must clearly
demonstrate their intent to dissolve the old obligation as the moving
consideration for the emergence of the new one.5 Implied novation
necessitates that the incompatibility between the old and new obligation
be total on every point such that the old obligation is completely
superseded by the new one. The test of incompatibility is whether they can
stand together, each one having an independent existence; if they cannot
and are irreconcilable, the subsequent obligation would also extinguish the
first.

Verily, the parties entered into the agreement basically to put an end to
Civil Case No. 14007 then pending before the Regional Trial
Court.11 Concededly, the provisions of the settlement were beneficial to the
respondent couple. The compromise extended the terms of payment and
implicitly deferred the extrajudicial foreclosure of the mortgaged property.
It was well to the interest of respondent spouses to ensure its judicial
approval; instead, they went to ignore the order of the trial court and
virtually failed to make any further appearance in court. This conduct on
the part of respondent spouses gave petitioner the correct impression that
the Sorianos did not intend to be bound by the compromise settlement,
and its non-materialization negated the very purpose for which it was
executed.

An extinctive novation would thus have the twin effects of, first,
extinguishing an existing obligation and, second, creating a new one in its
stead. This kind of novation presupposes a confluence of four essential
requisites: (1) a previous valid obligation, (2) an agreement of all parties
concerned to a new contract, (3) the extinguishment of the old obligation,
and (4) the birth of a valid new obligation.6 Novation is merely modificatory
where the change brought about by any subsequent agreement is merely
incidental to the main obligation (e.g., a change in interest rates 7 or an
extension of time to pay8); in this instance, the new agreement will not
have the effect of extinguishing the first but would merely supplement it or
supplant some but not all of its provisions.1wphi1

Given the circumstances, the provisions of Article 2041 of the Civil Code
come in point -

"6. That this Amicable Settlement is submitted as the basis for

decision in this case.

An amicable settlement or a compromise is a contract whereby the parties,

by making reciprocal concessions, avoid a litigation or put an end to one
already commenced.9 It may be judicial or extrajudicial; the absence of
court approval notwithstanding,10 the agreement can become the source of
rights and obligations of the parties.

"If one of the parties fails or refuses to abide by the compromise, the other
party may either enforce the compromise or regard it as rescinded and
insist upon his original demand."
As so well put in Diongzon vs. Court of Appeals,12 a "supposed new
agreement is deemed not to have taken effect where a debtor never
complied with his undertaking." In such a case, the other party is given the
option to enforce the provisions of the amicable settlement or to rescind
it13 and may insist upon the original demand without the necessity for a
prior judicial declaration of rescission.14
WHEREFORE, the decision of the Court of Appeals in C.A. G.R. CV No.
46910, affirming that of the court a quo, is REVERSED and SET ASIDE, and
another is entered dismissing the complaint in Civil Case No. 20047 before
the Regional Trial Court, Branch 37, of Iloilo City. No costs. SO ORDERED.

a Real Estate Mortgage dated October 13, 1977 in favor of PSBank over the
same aforementioned 8 real properties.

Republic of the Philippines

SUPREME COURT
FIRST DIVISION
G.R. No. 145441. April 26, 2005
PHILIPPINE SAVINGS BANK, Petitioners,
vs.
SPS. RODOLFO C. MAALAC, JR. and ROSITA P.
MAALAC, Respondents.
DECISION
YNARES-SANTIAGO, J.:
This appeal by certiorari1 assails the decision of the Court of Appeals dated
October 12, 2000 in CA-G.R. CV No. 502922 which affirmed with
modifications the decision of the Regional Trial Court of Pasig, Branch
1613 dated April 27, 1993 in Civil Case No. 53967 which ordered the
annulment of the Certificate of Sale involving TCT Nos. N-1347, N-1348 and
N-3267 issued in favor of petitioner Philippine Savings Bank (PSBank) and
dismissing Land Registration Case No. R-3951.
The facts as culled from the records are as follows:
On October 8, 1976, respondent-spouses Rodolfo and Rosita Maalac
(Maalac) obtained a P1,300,000.00 loan from PSBank covered by
promissory note L.C. No. 76-269. As security for the loan, Maalac
executed a Real Estate Mortgage in favor of the bank over 8 parcels of land
covered by TCT Nos. 417012, N-1348, N-1347, N-3267, N-8552, N-6162,
469843 and 343593.
In view of Maalacs inability to pay the loan installments as they fell due,
their loan obligation was restructured on October 13, 1977. Accordingly,
Maalac signed another promissory note denominated as LC No. 77-232 for
P1,550,000.00 payable to the order of PSBank with interest rate of 19%
annum.4 To secure the payment of the restructured loan, Maalac executed

On March 5, 1979, Maalac and spouses Igmidio and Dolores Galicia, with
the prior consent of PSBank,5 entered into a Deed of Sale with Assumption
of Mortgage involving 3 of the mortgaged properties covered by TCT Nos.
N-6162 (now N-36192), N-8552 (now TCT No. N-36193), and 469843 (now
TCT No. N-36194). The Deed of Sale with Assumption of Mortgage
contained the following stipulations:
1. The VENDEES shall assume as they hereby assume as part of the
purchase price, the amount of P550,000.00, representing the portion of the
mortgaged obligation of the VENDORS in favor of the Philippine Savings
Bank, which is secured by that Real Estate Mortgage contract mentioned in
the Second Whereas Clause hereof covering among others the abovedescribed parcels of land under the same terms and conditions as
originally constituted.
2. The VENDORS hereby warrant valid title to, and peaceful possession of
the property herein sold subject to the encumbrance hereinbefore
mentioned.
3. This instrument shall be subject to the Consent of the Philippine Savings
Bank.
4. All expenses relative to this instrument including documentary stamps,
registration fees, transfer taxes and other charges shall be for the account
of the VENDEES.6
Thereafter, the 3 parcels of land purchased by the Galicias, together with
another property, were in turn mortgaged by them to secure a
P2,600,000.00 loan which they obtained from PSBank. Specifically, the
mortgaged properties include TCT Nos. N-36192, N-36193, N-36194,
(formerly TCT Nos. N-6162, N-8552 and 469843, respectively) and
75584.7 This loan is evidenced by Promissory Note LC-79-36. 8
On March 12, 1979, Maalac paid PSBank P919,698.11 which corresponds
to the value of the parcels of land covered by TCT Nos. N-36192, N-36193,
and N-36194, now registered in the name of the spouses Galicia.
Accordingly, PSBank executed a partial release of the real estate mortgage
covered by the aforesaid properties.9

On August 25, 1981, the spouses Galicia obtained a second loan from
PSBank in the amount of P3,250,000.00 for which they executed
Promissory Note LC No. 81-108. They also executed a Real Estate Mortgage
in favor of the bank covering TCT Nos. N-36192, N-36193, N-36194, 75584
and 87690.10
Since Maalac defaulted again in the payment of their loan installments
and despite repeated demands still failed to pay their past due obligation
which now amounted to P1,804,241.76, PSBank filed with the Office of the
Provincial Sheriff of Rizal a petition for extrajudicial foreclosure of their 5
remaining mortgaged properties, specifically those covered by TCT Nos.
417012, N-1347, N-1348, N-3267, and 343593.
Despite several postponements of the public auction sale, Maalac still
failed to pay their mortgage obligation. Thus, on May 3, 1982, the
foreclosure sale of the subject real properties proceeded with PSBank as
the highest bidder in the amount of P2,185,225.76. 11 On the same date,
the Certificate of Sale was issued by the Acting Ex-Oficio Provincial Sheriff
for Rizal province.12
Maalac failed to redeem the properties hence titles thereto were
consolidated in the name of PSBank and new certificates of title were
issued in favor of the bank, namely, TCT No. N-79995 in lieu of TCT No.
343593; TCT No. 79996 in lieu of TCT No. 417012; TCT No. 79997 in lieu of
TCT No. N-3267; TCT No. N-79998 in lieu of TCT No. N-1347; and TCT No. N79999 in lieu of TCT No. N-1348.
On December 16, 1983, Maalac wrote the Chairman of the Board of
PSBank asking information on their request for the partial release of the
mortgage covered by TCT Nos. N-36192, N-36193, N-36194, and 417012
(now TCT No. 79996). TCT Nos. 36192, 36193, and 36194 were registered
in the name of the Galicias, and mortgaged to partially secure their
outstanding loan from the bank. Enclosed in the same letter is a Cashiers
Check for P1,200,000.00 with a notation which reads:
Re: Payment to effect release of TCT Nos. N-36192, 36193, and 36194
under loan account of Spouses Igmedio and Dolores Galicia; and TCT No.
417012 under Loan Account of Spouses Rodolfo and Rosita Maalac.
Upon receipt of the check, PSBanks Acting Manager Lino L. Macasaet
issued a typewritten receipt with the inscription:13

Received from Sps. Rodolfo and Rosita Maalac and Sps. Igmidio and
Dolores Galicia PCIB Check No. 002133 in the amount of One Million Two
Hundred Thousand Pesos Only (P1,200,000.00).
It is understood however, that receipt of said check is not a commitment
on the part of the Bank to release the Four (4) TCTs requested to be
released on your letter dated 19 December 1983.
On December 19, 1983, the bank applied P1,000,000.00 of the
P1,200,000.00 to the loan account of the Galicias as payment for the
arrearages in interest and the remaining P200,000.00 thereof was applied
to the expenses relative to the account of Maalac.14
On May 23, 1985, the bank sold the property covered by TCT No. 79996
(previously TCT No. 343593) to Ester Villanueva who thereafter sold it to
Maalac. On October 30, 1985, the land covered by TCT No. 79995 was
sold by the bank to Teresita Jalbuena.
Thereafter, or on October 20, 1986, Maalac instituted an action for
damages, docketed as Civil Case No. 53967, before the Regional Trial Court
of Pasig, Branch 161, against PSBank and its officers namely Cezar
Valenzuela, Alfredo Barretto and Antonio Viray, and spouses Alejandro and
Teresita Jalbuena.
The bank also filed a petition, docketed as LRC Case No. R-3951, before the
Regional Trial Court of Pasig, Branch 159, for the issuance of a writ of
possession against the properties covered by TCT Nos. N-79997, N-79998,
and N-79999 (formerly TCT Nos. N-3267, N-1347, and N-1348) and the
ejectment of the respondents.
In an order dated January 2, 1989, the trial court consolidated LRC Case
No. R-3951 with Civil Case No. 53967. On April 27, 1993, a judgment was
rendered the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered ordering:
For Civil Case No. 53967
1. The annulment of the Certificate of Sale issued by the acting Ex-Oficio
Provincial Sheriff of Rizal on May 3, 1982 involving Transfer Certificate of
Title Nos. N-1347-Rizal, N-1348-Rizal and N-3267-Rizal and the Contract to
Sell executed by defendant PSB in favor of defendants spouses Alejandro

Jalbuena and Teresita Jalbuena involving the real property covered by

Transfer Certificate of Title No. N-79995; and,

HAD BECOME NULL AND VOID AS THE SAME HAD BEEN FORECLOSED BY
PETITIONER;

2. The dismissal of counterclaims for lack of merit.

d.] AWARDED MORAL DAMAGES IN FAVOR OF RESPONDENTS. 17

For Land Registration Case No. R-3951

Petitioner claims that the Court of Appeals erred in sustaining the trial
courts order consolidating Civil Case No. 53967 with LRC Case No. R-3951,
arguing that consolidation is proper only when it involves actions, which
means an ordinary suit in a court of justice by which one party prosecutes
another for the enforcement or protection of a right, or a prevention of a
wrong. Citing A.G. Development Corp. v. Court of Appeals,18 petitioner
posits that LRC Case No. R-3951, being summary in nature and not being
an action within the contemplation of the Rules of Court, should not have
been consolidated with Civil Case No. 53967.

3. The dismissal of the petition for lack of merit.

No costs.
SO ORDERED.15
The Court of Appeals affirmed with modification the decision of the trial
court, the decretal portion of which reads:
WHEREFORE, the decision appealed from is AFFIRMED with the
modification that the defendant-appellant Philippine Savings Bank is
directed to indemnify the plaintiffs-appellants in the amount of Two
Hundred Thousand Pesos (200,000.00) each as moral damages. Costs
against the defendant-appellant bank.
SO ORDERED.16

We do not agree. In Active Wood Products Co., Inc. v. Court of

Appeals,19 this Court also deemed it proper to consolidate Civil Case No.
6518-M, which was an ordinary civil action, with LRC Case No. P-39-84,
which was a petition for the issuance of a writ of possession. The Court
held that while a petition for a writ of possession is anex parte proceeding,
being made on a presumed right of ownership, when such presumed right
of ownership is contested and is made the basis of another action, then the
proceedings for writ of possession would also become groundless. The
entire case must be litigated and if need be must be consolidated with a
related case so as to thresh out thoroughly all related issues.

Hence the instant petition which raises the following issues:

THE APPELLATE COURT HAS DECIDED QUESTIONS OF SUBSTANCE IN A WAY
PROBABLY NOT IN ACCORD WITH LAW AND WITH APPLICABLE DECISIONS
OF THIS HONORABLE COURT WHEN IT:
a.] HELD THAT THE GENERAL RULE WITH RESPECT TO THE ISSUANCE OF
WRITS OF POSSESSION SHOULD NOT BE APPLIED IN THIS CASE, AND WHAT
SHOULD INSTEAD BE APPLIED IS THE EXCEPTION ENUNCIATED IN VACA VS.
COURT OF APPEALS, 234 SCRA 146;
b.] UPHELD THE CONSOLIDATION OF CIVIL CASE NO. 53967 WITH LRC CASE
NO. 3951 WHEN PROCEDURALLY THOSE TWO PROCEEDINGS COULD
SCARCELY BE CONSOLIDATED;
c.] HELD THAT SUPPOSEDLY THERE WAS A NOVATION "OF THE PREVIOUS
MORTGAGE OF THE PROPERTIES" WHEN IN TRUTH AND IN FACT THE
MORTGAGE HAD ALREADY CEASED TO EXIST, THAT IS, THE MORTGAGE

In the same case, the Court likewise rejected the contention that under the
Rules of Court only actions can be consolidated. The Court held that the
technical difference between an action and a proceeding, which involve the
same parties and subject matter, becomes insignificant and consolidation
becomes a logical conclusion in order to avoid confusion and unnecessary
expenses with the multiplicity of suits.
In the instant case, the consolidation of Civil Case No. 53967 with LRC Case
No. R-3951 is more in consonance with the rationale behind the
consolidation of cases which is to promote a more expeditious and less
expensive resolution of the controversy than if they were heard
independently by separate branches of the trial court. Hence, the technical
difference between Civil Case No. 53967 and LRC Case No. R-3951 must be
disregarded in order to promote the ends of justice.
Petitioner also contends that the Court of Appeals committed reversible
error in applying the doctrine laid down inBarican v. Intermediate Appellate

Court.20 It insists on the application of the general rule that it is ministerial

upon the court to issue a writ of possession on the part of the purchaser in
a foreclosure sale. It argues that the Baricandoctrine is inapplicable
because the sale with assumption of mortgage in the present case involves
properties different from those which are the subject of the writ of
possession while in Barican, the assumption of mortgage refers to the
same property subject of the writ of possession. We recall that the Court of
Appeals applied the Barican doctrine based on the following factual
similarities between the two cases, thus:21
"In Civil Case No. C-11232, the petitioner-spouses claim ownership of the
foreclosed property against the respondent bank and Nicanor Reyes to
whom the former sold the property by negotiated sale; the complaint
alleged that the DBP knew the assumption of mortgage between the
mortgagors and the petitioner-spouses and the latter have paid to the
respondent bank certain amounts to update the loan balances of the
mortgagors and transfer and restructuring fees which payments are duly
receipted; the petitioner-spouses were already in possession of the
property since September 28, 1979 and long before the respondent bank
sold the same property to respondent Nicanor Reyes on October 28, 1984;
and the respondent bank never took physical possession of the property."
In a similar manner, the following facts were duly established in the case at
bench: 1. The petition for issuance of the writ of possession was only filed
sometime in May 1988 although the right of redemption lapsed as early as
May 7, 1983; 2. Appellant bank neither obtained physical possession of the
properties nor did they file any action for ejectment against the plaintiffsappellants; 3. On December 16, 1983, the plaintiffs-appellants issued a
check in favor of the appellant bank to effect the release of TCT Nos.
36192, 36193, 36194 and 417012 which was applied by appellant bank to
the plaintiffs-appellants account and that of the Galicias and; 4. Appellant
bank executed a Deed of Absolute Sale over TCT No. 79996 (formerly TCT
No. 417012) on May 23, 1985 in favor of a certain Elsa Calusa Villanueva
who thereafter sold it back to the plaintiffs-appellants. Hence, the same
ruling in the Barican case should be applied, that is, "the obligation of a
court to issue a writ of possession in favor of the purchaser in a foreclosure
of mortgage case ceases to be ministerial.
We agree with the petitioner. While indeed the two cases demonstrate
palpable similarities, the Court of Appeals overlooked essential differences
that would render the Barican doctrine inapplicable to the instant case. In
Barican, the issuance of the writ of possession was deferred because a
pending action for the declaration of ownership over the foreclosed
property was made by an adverse claimant who was in possession of the
subject property. Clearly, the rights of the third parties, who are plaintiffs in

the pending civil case, would be adversely affected with the

implementation of the writ.
In the instant case, the petitioner bank became the absolute owner of the
properties subject of the writ of possession, after they were foreclosed, and
titles thereto were consolidated in the name of the bank. It sufficiently
established its ownership over the parcels of land subject of the writ of
possession, by presenting in evidence the Certificate of Sale, 22 Affidavit of
Consolidation of Ownership, 23 and copies of new TCTs of the foreclosed
properties in the name of the petitioner.24 Unlike in Barican, the ownership
of the foreclosed properties are not open to question the ownership thereof
being established by competent evidence.
Moreover, as earlier pointed out by the petitioner, the parcels of land
subject of the writ of possession are different from those sold by the
petitioner bank to Jalbuena and Villanueva. Hence, unlike in the Barican
case, the implementation of the writ will not affect the rights of innocent
third persons.
On the issue of novation, the Court of Appeals held that novation occurred
when PSBank applied P1,000,000.00 of the P1,200,000.00 PCIB Check No.
002133 tendered by Maalac to the loan account of the Galicias and the
remaining P200,000.00 thereof to Maalacs account. It held that when the
bank applied the amount of the check in accordance with the instructions
contained therein, there was novation of the previous mortgage of the
properties. It further observed that the bank was fully aware that the
issuance of the check was conditional hence, when it made the application
thereof, it agreed to be bound by the conditions imposed by Maalac. 25
Novation is the extinguishment of an obligation by the substitution or
change of the obligation by a subsequent one which extinguishes or
modifies the first, either by changing the object or principal conditions, or,
by substituting another in place of the debtor, or by subrogating a third
person in the rights of the creditor. In order for novation to take place, the
concurrence of the following requisites is indispensable:
1. There must be a previous valid obligation,
2. There must be an agreement of the parties concerned to a new contract,
3. There must be the extinguishment of the old contract, and
4. There must be the validity of the new contract. 26

The elements of novation are patently lacking in the instant case. Maalac
tendered a check for P1,200,000.00 to PSBank for the release of 4 parcels
of land covered by TCT Nos. N-36192, 36193, and 36194, under the loan
account of the Galicias and 417012 (now TCT No. 79996) under the loan
account of Maalac. However, while the bank applied the tendered amount
to the accounts as specified by Maalac, it nevertheless refused to release
the subject properties. Instead, it issued a receipt with a notation that the
acceptance of the check is not a commitment on the part of the bank to
release the 4 TCTs as requested by Maalac.
From the foregoing, it is obvious that there was no agreement to form a
new contract by novating the mortgage contracts of the Maalacs and the
Galicias. In accepting the check, the bank only acceded to Maalacs
instruction on whose loan accounts the proceeds shall be applied but
rejected the other condition that the 4 parcels of land be released from
mortgage. Clearly, there is no mutual consent to replace the old mortgage
contract with a new obligation. The conflicting intention and acts of the
parties underscore the absence of any express disclosure or circumstances
with which to deduce a clear and unequivocal intent by the parties to
novate the old agreement.
Novation is never presumed, and the animus novandi, whether totally or
partially, must appear by express agreement of the parties, or by their acts
that are too clear and unmistakable. The extinguishment of the old
obligation by the new one is a necessary element of novation, which may
be effected either expressly or impliedly. The term "expressly" means that
the contracting parties incontrovertibly disclose that their object in
executing the new contract is to extinguish the old one. Upon the other
hand, no specific form is required for an implied novation, and all that is
prescribed by law would be an incompatibility between the two contracts.
While there is really no hard and fast rule to determine what might
constitute to be a sufficient change that can bring about novation, the
touchstone for contrariety, however, would be an irreconcilable
incompatibility between the old and the new obligations. 27
A fortiori, 3 of the 4 properties sought to be released from mortgage,
namely, TCT Nos. N-36192, N-36193, and N-36194, have already been sold
by Maalac to Galicia and are now registered in the name of the latter who
thereafter mortgaged the same as security to a separate loan they
obtained from the bank. Thus, without the consent of PSBank as the
mortgagee bank, Maalac, not being a party to the mortgage contract
between the Galicias and the bank, cannot demand much less impose
upon the bank the release of the subject properties. Unless there is a
stipulation to the contrary, the release of the mortgaged property can only

be made upon the full satisfaction of the loan obligation upon which the
mortgage attaches. Unfortunately, Maalac has not shown that the
P1,000,000.00 was sufficient to cover not only the accrued interests but
also the entire indebtedness of the Galicias to the bank.
Neither can Maalac be deemed substitute debtor within the
contemplation of Article 1293 of the Civil Code, which states that:
Art. 1293. Novation which consists in substituting a new debtor in the place
of the original one, may be made without the knowledge or against the will
of the latter, but not without the consent of the creditor. Payment by the
new debtor gives him the rights mentioned in articles 1236 and 1237. 28
In order to change the person of the debtor, the old one must be expressly
released from the obligation, and the third person or new debtor must
assume the formers place in the relation. Novation is never presumed.
Consequently, that which arises from a purported change in the person of
the debtor must be clear and express. It is thus incumbent on Maalac to
show clearly and unequivocally that novation has indeed taken
place.29 InMagdalena Estates Inc. v. Rodriguez,30 we held that "the mere
fact that the creditor receives a guaranty or accepts payments from a third
person who has agreed to assume the obligation, when there is no
agreement that the first debtor shall be released from responsibility, does
not constitute a novation, and the creditor can still enforce the obligation
against the original debtor."
Maalac has not shown by competent evidence that they were expressly
taking the place of Galicia as debtor, or that the latter were being released
from their solidary obligation. Nor was it shown that the obligation of the
Galicias was being extinguished and replaced by a new one. The existence
of novation must be shown in clear and unmistakable terms.
Likewise, we hold that Maalac cannot demand to repurchase the
foreclosed piece of land covered by TCT No. 417012 (now TCT No. 79996)
from the bank. Its foreclosure and the consolidation of ownership in favor
of the bank and the resultant cancellation of mortgage effectively
cancelled the mortgage contract between Maalac and the bank. Insofar as
TCT No. 417012 is concerned, there is no more existing mortgage to speak
of. As the absolute owner of the foreclosed property, the petitioner has the
discretion to reject or accept any offer to repurchase.
Granting arguendo that a new obligation was established with the
acceptance by the bank of the PCIB Check and its application to the loan

account of Maalac on the condition that TCT No. 417012 would be

released, this new obligation however could not supplant the October 13,
1977 real estate mortgage executed by Maalac, which, by all intents and
purposes, is now a defunct and non-existent contract. As mentioned
earlier, novation cannot be presumed.
We however sustain the award of moral damages. While the bank had the
legal basis to withhold the release of the mortgaged properties,
nevertheless, it was not forthright and was lacking in candor in dealing
with Maalac. In accepting the PCIB Check, the bank knew fully well that
the payment was conditioned on its commitment to release the specified
properties. At the first instance, the bank should not have accepted the
check or returned the same had it intended beforehand not to honor the
request of Maalac. In accepting the check and applying the proceeds
thereof to the loan accounts of Maalac and Galicia, the former were led to
believe that the bank was favorably acting on their request. In justifying
the award of moral damages, the Court of Appeals correctly observed that
"there is the unjustified refusal of the appellant bank to make a definite
commitment while profiting from the proceeds of the check by applying it
to the principal and the interest of the Galicias and plaintiff-appellants." 31
Moral damages are meant to compensate the claimant for any physical
suffering, mental anguish, fright, serious anxiety, besmirched reputation,
wounded feelings, moral shock, social humiliation and similar injuries
unjustly caused. Although incapable of pecuniary estimation, the amount
must somehow be proportional to and in approximation of the suffering
inflicted. Moral damages are not punitive in nature and were never
intended to enrich the claimant at the expense of the defendant. There is
no hard-and-fast rule in determining what would be a fair and reasonable
amount of moral damages, since each case must be governed by its own
peculiar facts. Trial courts are given discretion in determining the amount,
with the limitation that it "should not be palpably and scandalously
excessive." Indeed, it must be commensurate to the loss or injury
suffered.32
Respondent Rosita Maalac has adequately established the factual basis
for the award of moral damages when she testified that she suffered
mental anguish and social humiliation as a result of the failure of the bank
to release the subject properties or its failure to return the check despite
its refusal to make a definite commitment to comply with the clearly-stated
object of the payment.
Respondent Rodolfo Maalac however is not similarly entitled to moral
damages. The award of moral damages must be anchored on a clear

showing that he actually experienced mental anguish, besmirched

reputation, sleepless nights, wounded feelings or similar injury. There was
no better witness to this experience than respondent himself. Since
respondent Rodolfo Maalac failed to testify on the witness stand, the trial
court did not have any factual basis to award moral damages to
him.33 Indeed, respondent Rodolfo Maalac should have taken the witness
stand and should have testified on the mental anguish, serious anxiety,
wounded feelings and other emotional and mental suffering he purportedly
suffered to sustain his claim for moral damages. Mere allegations do not
suffice; they must be substantiated by clear and convincing proof.
Nevertheless, we find the award of P200,000.00 excessive and
unconscionable. As we said, moral damages are not intended to enrich the
complainant at the expense of the defendant. Rather, these are awarded
only to enable the injured party to obtain "means, diversions or
amusements" that will serve to alleviate the moral suffering that resulted
by reason of the defendants culpable action. The purpose of such
damages is essentially indemnity or reparation, not punishment or
correction. In other words, the award thereof is aimed at a restoration
within the limits of the possible, of the spiritual status quo ante; therefore,
it must always reasonably approximate the extent of injury and be
proportional to the wrong committed.34 The award of P50,000.00 as moral
damages is reasonable under the circumstances.35
WHEREFORE, the petition is GRANTED. The decision of the Court of
Appeals dated October 12, 2000 in CA-G.R. CV No. 50292 is REVERSED and
SET ASIDE. The petitioner Philippine Savings Bank is DIRECTED to
indemnify respondent Rosita P. Maalac in the amount of P50,000.00 as
moral damages. The Regional Trial Court of the City of Pasig, Branch 161 is
ORDERED to issue a writ of possession in favor of Philippine Savings Bank.
No costs.
SO ORDERED.

The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court,
assailing the August 31, 2001 Decision 2 of the Court of Appeals (CA) in CAGR CV No. 50095, which disposed as follows:
"WHEREFORE, the instant appeal is DISMISSED for lack of merit. The
decision dated January 19, 1995 of the Regional Trial Court, Branch 145,
Makati City is AFFIRMEDin toto."3
The Facts

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 149756

February 11, 2005

MYRNA RAMOS, petitioner,

vs.
SUSANA S. SARAO and JONAS RAMOS, respondents.
DECISION
PANGANIBAN, J.:
Although the parties in the instant case denominated their contract as
a "DEED OF SALE UNDER PACTO DE RETRO," the "sellers" have continued
to possess and to reside at the subject house and lot up to the present.
This evident factual circumstance was plainly overlooked by the trial and
the appellate courts, thereby justifying a review of this case. This
overlooked fact clearly shows that the petitioner intended merely to secure
a loan, not to sell the property. Thus, the contract should be deemed an
equitable mortgage.

On February 21, 1991, Spouses Jonas Ramos and Myrna Ramos executed a
contract over their conjugal house and lot in favor of Susana S. Sarao for
and in consideration of P1,310,430.4 Entitled "DEED OF SALE UNDER PACTO
DE RETRO," the contract, inter alia, granted the Ramos spouses the option
to repurchase the property within six months from February 21, 1991,
for P1,310,430 plus an interest of 4.5 percent a month. 5 It was further
agreed that should the spouses fail to pay the monthly interest or to
exercise the right to repurchase within the stipulated period, the
conveyance would be deemed an absolute sale.6
On July 30, 1991, Myrna Ramos tendered to Sarao the amount
of P1,633,034.20 in the form of two managers checks, which the latter
refused to accept for being allegedly insufficient.7 On August 8, 1991,
Myrna filed a Complaint for the redemption of the property and moral
damages plus attorneys fees.8 The suit was docketed as Civil Case No. 912188 and raffled to Branch 145 of the Regional Trial Court (RTC) of Makati
City. On August 13, 1991, she deposited with the RTC two checks that
Sarao refused to accept.9
On December 21, 1991, Sarao filed against the Ramos spouses a Petition
"for consolidation of ownership in pacto de retro sale" docketed as Civil
Case No. 91-3434 and raffled to Branch 61 of the RTC of Makati City. 10 Civil
Case Nos. 91-2188 and 91-3434 were later consolidated and jointly tried
before Branch 145 of the said Makati RTC.11
The two lower courts narrated the trial in this manner:
"x x x Myrna [Ramos] testified as follows: On February 21, 1991, she and
her husband borrowed from Sarao the amount of P1,234,000.00, payable
within six (6) months, with an interest thereon at 4.5% compounded
monthly from said date until August 21, 1991, in order for them to pay

[the] mortgage on their house. For and in consideration of the said amount,
they executed a deed of sale under a [pacto de retro] in favor of Sarao
over their conjugal house and lot registered under TCT No. 151784 of the
Registry of Deeds of Makati (Exhibit A). She further claimed that Sarao will
keep the torrens title until the lapse of the 6-month period, in which case
she will redeem [the] subject property and the torrens title covering it.
When asked why it was the amount of P1,310,430 instead of the
aforestated amount which appeared in the deed, she explained that upon
signing of the deed in question, the sum of P20,000.00 representing
attorneys fees was added, and its total amount was multiplied with 4.5%
interest rate, so that they could pay in advance the compounded interest.
She also stated that although the market value of the subject property as
of February 1991 [was] calculated to [be] more or less P10 million, it was
offered [for] only P1,310,430.00 for the reason that they intended nothing
but to redeem the same. In May 1991, she wrote a letter to Atty. Mario
Aguinaldo requesting him to give a computation of the loan obligation, and
[expressed] her intention to redeem the subject property, but she received
no reply to her letter. Instead, she, through her husband, secured directly
from Sarao a handwritten computation of their loan obligation, the total of
which amount[ed] to P1,562,712.14. Later, she sent several letters to
Sarao, [furnishing] Atty. Aguinaldo with copies, asking them for the
updated computation of their loan obligation as of July 1991, but [no reply
was again received]. During the hearing of February 17, 1992, she
admitted receiving a letter dated July 23, 1991 from Atty. Aguinaldo which
show[ed] the computation of their loan obligation [totaling]
to P2,911,579.22 (Exhs. 6, 6-A). On July 30, 1991, she claimed that she
offered the redemption price in the form of two (2) managers checks
amounting to P1,633,034.20 (Exhs. H-1 & H-2) to Atty. Aguinaldo, but the
latter refused to accept them because they [were] not enough to pay the
loan obligation. Having refused acceptance of the said checks covering the
redemption price, on August 13, 1991 she came to Court to consign the
checks (Exhs. L-4 and L-5). Subsequently, she proceeded to the Register of
Deeds to cause the annotation of lis pendens on TCT No. 151784 (Exh. B-1A). Hence, she filed the x x x civil case against Sarao.
"On the other hand, Sarao testified as follows: On February 21, 1991,
spouses Ramos together with a certain Linda Tolentino and her husband,
Nestor Tolentino approached her and offered transaction involv[ing a] sale
of property[. S]he consulted her lawyer, Atty. Aguinaldo, and on the same
date a corresponding deed of sale underpacto de retro was executed and
signed (Exh. 1 ). Later on, she sent, through her lawyer, a demand letter
dated June 10, 1991 (Exh. 6) in view of Myrnas failure to pay the monthly
interest of 4.5% as agreed upon under the deed[. O]n June 14, 1991 Jonas
replied to said demand letter (Exh. 8); in the reply Jonas admitted that he

no longer ha[d] the capacity to redeem the property and to pay the
interest. In view of the said reply of Jonas, [Sarao] filed the corresponding
consolidation proceedings. She [further claimed] that before filing said
action she incurred expenses including payment of real estate taxes in
arrears, x x x transfer tax and capital [gains] tax, and [expenses] for [the]
consolidated proceedings, for which these expenses were accordingly
receipted (Exhs. 6, 6-1 to 6-0). She also presented a modified computation
of the expenses she had incurred in connection with the execution of the
subject deed (Exh. 9). She also testified that Myrna did not tender payment
of the correct and sufficient price for said real property within the 6-month
period as stipulated in the contract, despite her having been shown the
computation of the loan obligation, inclusive of capital gains tax, real
estate tax, transfer tax and other expenses. She admitted though that
Myrna has tendered payment amounting to P1,633,034.20 in the form of
two managers checks, but these were refused acceptance for being
insufficient. She also claimed that several letters (Exhs. 2, 4 and 5) were
sent to Myrna and her lawyer, informing them of the computation of the
loan obligation inclusive of said expenses. Finally, she denied the
allegations made in the complaint that she allied herself with Jonas, and
claimed that she ha[d] no knowledge about said allegation." 12
After trial, the RTC dismissed the Complaint and granted the prayer of
Sarao to consolidate the title of the property in her favor. 13 Aggrieved,
Myrna elevated the case to the CA.
Ruling of the Court of Appeals
The appellate court sustained the RTCs finding that the disputed contract
was a bonafide pacto de retro sale, not a mortgage to secure a loan.14 It
ruled that Myrna Ramos had failed to exercise the right of repurchase, as
the consignation of the two managers checks was deemed invalid. She
allegedly failed (1) to deposit the correct repurchase price and (2) to
comply with the required notice of consignation.15
Hence, this Petition.16
The Issues
Petitioner raises the following issues for our consideration:
"1. Whether or not the honorable appellate court erred in ruling the subject
Deed of Sale under Pacto de Retro was, and is in reality and under the law
an equitable mortgage;

"2. Whether or not the honorable appellate court erred in affirming the
ruling of the court a quo that there was no valid tender of payment of the
redemption price neither [sic] a valid consignation in the instant case; and
"3. Whether or not [the] honorable appellate court erred in affirming the
ruling of the court a quo denying the claim of petitioner for damages and
attorneys fees."17
The Courts Ruling
The Petition is meritorious in regard to Issues 1 and 2.
First Issue:
A Pacto de Retro Sale
or an Equitable Mortgage?
Respondent Sarao avers that the herein Petition should have been
dismissed outright, because petitioner (1) failed to show proof that she had
served a copy of it to the Court of Appeals and (2) raised questions of fact
that were not proper issues in a petition under Rule 45 of the Rules of
Court.18 This Court, however, disregarded the first ground; otherwise,
substantial injustice would have been inflicted on petitioner. Since the
Court of Appeals is not a party here, failure to serve it a copy of the Petition
would not violate any right of respondent. Service to the CA is indeed
mentioned in the Rules, but only to inform it of the pendency of the appeal
before this Court.
As regards Item 2, there are exceptions to the general rule barring a review
of questions of fact.19 The Court reviewed the factual findings in the
present case, because the CA had manifestly overlooked certain relevant
and undisputed facts which, after being considered, justified a different
conclusion.20
Pacto de Retro Sale Distinguished
from Equitable Mortgage
The pivotal issue in the instant case is whether the parties intended the
contract to be a bona fide pacto de retrosale or an equitable mortgage.

In a pacto de retro, ownership of the property sold is immediately

transferred to the vendee a retro, subject only to the repurchase by the
vendor a retro within the stipulated period.21 The vendor a retros failure to
exercise the right of repurchase within the agreed time vests upon the
vendee a retro, by operation of law, absolute title to the property.22 Such
title is not impaired even if the vendee a retro fails to consolidate title
under Article 1607 of the Civil Code.23
On the other hand, an equitable mortgage is a contract that -- although
lacking the formality, the form or words, or other requisites demanded by a
statute -- nevertheless reveals the intention of the parties to burden a
piece or pieces of real property as security for a debt. 24 The essential
requisites of such a contract are as follows: (1) the parties enter into what
appears to be a contract of sale, but (2) their intention is to secure an
existing debt by way of a mortgage.25 The nonpayment of the debt when
due gives the mortgagee the right to foreclose the mortgage, sell the
property, and apply the proceeds of the sale to the satisfaction of the loan
obligation.26
This Court has consistently decreed that the nomenclature used by the
contracting parties to describe a contract does not determine its
nature.27 The decisive factor is their intention -- as shown by their conduct,
words, actions and deeds -- prior to, during, and after executing the
agreement.28 This juristic principle is supported by the following provision
of law:
Article 1371. In order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered. 29
Even if a contract is denominated as a pacto de retro, the owner of the
property may still disprove it by means of parol evidence, 30 provided that
the nature of the agreement is placed in issue by the pleadings filed with
the trial court.31
There is no single conclusive test to determine whether a deed absolute on
its face is really a simple loan accommodation secured by a
mortgage.32 However, the law enumerates several instances that show
when a contract is presumed to be an equitable mortgage, as follows:
Article 1602. The contract shall be presumed to be an equitable mortgage,
in any of the following cases:

(1) When the price of a sale with right to repurchase is unusually

inadequate;

remained as her address for the service of court orders and copies of
Respondent Saraos pleadings.40

(2) When the vendor remains in possession as lessee or otherwise;

The presumption of equitable mortgage imposes a burden on Sarao to

present clear evidence to rebut it. Corollary to this principle, the favored
party need not introduce proof to establish such presumption; the party
challenging it must overthrow it, lest it persist. 41 To overturn that prima
facie fact that operated against her, Sarao needed to adduce substantial
and credible evidence to prove that the contract was a bona fide pacto de
retro. This evidentiary burden she miserably failed to discharge.

(3) When upon or after the expiration of the right to repurchase another
instrument extending the period of redemption or granting a new period is
executed;
(4) When the purchaser retains for himself a part of the purchase price;
(5) When the vendor binds himself to pay the taxes on the thing sold;
(6) In any other case where it may be fairly inferred that the real intention
of the parties is that the transaction shall secure the payment of a debt or
the performance of any other obligation.
In any of the foregoing cases, any money, fruits, or other benefit to be
received by the vendee as rent or otherwise shall be considered as interest
which shall be subject to the usury laws.33
Furthermore, a contract purporting to be a pacto de retro is construed as
an equitable mortgage when the terms of the document and the
surrounding circumstances so require. 34 The law discourages the use of
a pacto de retro, because this scheme is frequently used to circumvent a
contract known as a pactum commissorium. The Court has frequently
noted that a pacto de retro is used to conceal a contract of loan secured by
a mortgage.35Such construction is consistent with the doctrine that the law
favors the least transmission of rights.36
Equitable Mortgage Presumed
to be Favored by Law
Jurisprudence has consistently declared that the presence of even just one
of the circumstances set forth in the forgoing Civil Code provision suffices
to convert a contract to an equitable mortgage.37 Article 1602 specifically
states that the equitable presumption applies to any of the cases therein
enumerated.
In the present factual milieu, the vendor retained possession of the
property allegedly sold.38 Petitioner and her children continued to use it as
their residence, even after Jonas Ramos had abandoned them. 39 In fact, it

Contrary to Saraos bare assertions, a meticulous review of the evidence

reveals that the alleged contract was executed merely as security for a
loan.
The July 23, 1991 letter of Respondent Saraos lawyer had required
petitioner to pay a computed amount -- under the heading "House and Lot
Loan"42 -- to enable the latter to repurchase the property. In effect,
respondent would resell the property to petitioner, once the latters loan
obligation would have been paid. This explicit requirement was a clear
indication that the property was to be used as security for a loan.
The loan obligation was clear from Saraos evidence as found by the trial
court, which we quote:
"x x x [Sarao] also testified that Myrna did not tender payment of the
correct and sufficient price for said real property within the 6-month period
as stipulated in the contract, despite her having been shown the
computation of the loan obligation, inclusive of capital gains tax, real
estate tax, transfer tax and other expenses. She admitted though that
Myrna has tendered payment amounting to P1,633,034.20 in the form of
two managers checks, but these were refused acceptance for being
insufficient. She also claimed that several letters (Exhs. 2, 4 and 5) were
sent to Myrna and her lawyer, informing them of the computation of
the loan obligation inclusive of said expenses. x x x."43
Respondent herself stressed that the pacto de retro had been entered into
on the very same day that the property was to be foreclosed by a
commercial bank.44 Such circumstance proves that the spouses direly
needed funds to avert a foreclosure sale. Had they intended to sell the
property just to realize some profit, as Sarao suggests, 45they would not
have retained possession of the house and continued to live there. Clearly,

the spouses had entered into the alleged pacto de retro sale to secure a
loan obligation, not to transfer ownership of the property.
Sarao contends that Jonas Ramos admitted in his June 14, 1991 letter to
her lawyer that the contract was a pacto de retro.46 That letter, however,
cannot override the finding that the pacto de retro was executed merely as
security for a loan obligation. Moreover, on May 17, 1991, prior to the
transmittal of the letter, petitioner had already sent a letter to Saraos
lawyer expressing the formers desire to settle the mortgage on the
property.47Considering that she had already denominated the transaction
with Sarao as a mortgage, petitioner cannot be prejudiced by her
husbands alleged admission, especially at a time when they were already
estranged.48
Inasmuch as the contract between the parties was an equitable mortgage,
Respondent Saraos remedy was to recover the loan amount from
petitioner by filing an action for the amount due or by foreclosing the
property.49
Second Issue:
Propriety of Tender of
Payment and Consignation
Tender of payment is the manifestation by debtors of their desire to comply
with or to pay their obligation.50 If the creditor refuses the tender of
payment without just cause, the debtors are discharged from the obligation
by the consignation of the sum due. 51 Consignation is made by depositing
the proper amount to the judicial authority, before whom the tender of
payment and the announcement of the consignation shall be proved. 52 All
interested parties are to be notified of the consignation. 53 Compliance with
these requisites is mandatory.54
The trial and the appellate courts held that there was no valid
consignation, because petitioner had failed to offer the correct amount and
to provide ample consignation notice to Sarao.55 This conclusion is
incorrect.
Note that the principal loan was P1,310,430 plus 4.5 per cent monthly
interest compounded for six months. Expressing her desire to pay in the
fifth month, petitioner averred that the total amount due
was P1,633,034.19, based on the computation of Sarao herself. 56 The

amount of P2,911,579.22 that the latter demanded from her to settle the
loan obligation was plainly exorbitant, since this sum included other items
not covered by the agreement. The property had been used solely as
secure ty for the P1,310,430 loan; it was therefore improper to include in
that amount payments for gasoline and miscellaneous expenses, taxes,
attorneys fees, and other alleged loans. When Sarao unjustly refused the
tender of payment in the amount of P1,633,034.20, petitioner correctly
filed suit and consigned the amount in order to be released from the
latters obligation.
The two lower courts cited Article 1257 of the Civil Code to justify their
ruling that petitioner had failed to notify Respondent Sarao of the
consignation. This provision of law states that the obligor may be released,
provided the consignation is first announced to the parties interested in the
fulfillment of the obligation.
The facts show that the notice requirement was complied with. In her
August 1, 1991 letter, petitioner said that should the respondent fail to
accept payment, the former would consign the amount.57 This statement
was an unequivocal announcement of consignation. Concededly, sending
to the creditor a tender of payment and notice of consignation -- which was
precisely what petitioner did -- may be done in the same act. 58
Because petitioners consignation of the amount of P1,633,034.20 was
valid, it produced the effect of payment.59"The consignation, however, has
a retroactive effect, and the payment is deemed to have been made at the
time of the deposit of the thing in court or when it was placed at the
disposal of the judicial authority."60 "The rationale for consignation is to
avoid making the performance of an obligation more onerous to the debtor
by reason of causes not imputable to him."61
Third Issue:
Moral Damages and Attorneys Fees
Petitioner seeks moral damages in the amount of P500,000 for alleged
sleepless nights and anxiety over being homeless. 62 Her bare assertions
are insufficient to prove the legal basis for granting any award under
Article 2219 of the Civil Code.63 Verily, an award of moral damages is
uncalled for, considering that it was Respondent Saraos accommodation
that settled the earlier obligation of the spouses with the commercial bank
and allowed them to retain ownership of the property.

Neither have attorneys fees been shown to be proper.64 As a general rule,

in the absence of a contractual or statutory liability therefor, sound public
policy frowns on penalizing the right to litigate.65 This policy applies
especially to the present case, because there is a need to determine
whether the disputed contract was a pacto de retro sale or an equitable
mortgage.

(3) COMMANDING Respondent Sarao to return to petitioner the owners

copy of TCT No. 151784 in the name of the Ramos spouses and issued by
the Register of Deeds of Makati City

Other Matters

(5) ORDERING petitioner to pay Sarao in the amount of P67,567.10 as

reimbursement for real property taxes

In a belated Manifestation filed on October 19, 2004, Sarao declared that

she was the "owner of the one-half share of Jonas Ramos in the conjugal
property," because of his alleged failure to file a timely appeal with the
CA.66 Such declaration of ownership has no basis in law, considering that
the present suit being pursued by petitioner pertains to a mortgage
covering the whole property.
Besides, it is basic that defenses and issues not raised below cannot be
considered on appeal.67
The Court, however, observes that Respondent Sarao paid real property
taxes amounting to P67,567.10 to halt the auction sale scheduled for
October 8, 2004, by the City of Muntinlupa.68 Her payment was made in
good faith and benefited petitioner. Accordingly, Sarao should be
reimbursed; otherwise, petitioner would be unjustly enriched, 69 under
Article 2175 of the Civil Code which provides:
Art. 2175. Any person who is constrained to pay the taxes of another shall
be entitled to reimbursement from the latter.
WHEREFORE, the Petition is partly GRANTED and the assailed
Decision SET ASIDE. Judgment is hereby rendered:
(1) DECLARING (a) the disputed contract as an equitable mortgage, (b)
petitioners loan to Respondent Sarao to be in the amount
of P1,633,034.19 as of July 30, 1991; and (c) the mortgage on the property
-- covered by TCT No. 151784 in the name of the Ramos spouses and
issued by the Register of Deeds of Makati City --as discharged
(2) ORDERING the RTC to release to Sarao the consigned amount
of P1,633,034.19

(4) DIRECTING the Register of Deeds of Makati City to cancel Entry No.
24057, the annotation appearing on TCT No. 151784

No pronouncement as to costs.
SO ORDERED.

This is a petition for review on certiorari of the Decision1 of the Court of

Appeals dated 27 May 1999 affirming the dismissal by the Regional Trial
Court of Makati, Branch 65,2 of the complaint for damages filed by Filinvest
Land, Inc. (Filinvest) against herein private respondents Pacific Equipment
Corporation (Pecorp) and Philippine American General Insurance Company.
The essential facts of the case, as recounted by the trial court, are as
follows:
On 26 April 1978, Filinvest Land, Inc. ("FILINVEST", for brevity), a
corporation engaged in the development and sale of residential
subdivisions, awarded to defendant Pacific Equipment Corporation
("PACIFIC", for brevity) the development of its residential subdivisions
consisting of two (2) parcels of land located at Payatas, Quezon City, the
terms and conditions of which are contained in an "Agreement". (Annex A,
Complaint). To guarantee its faithful compliance and pursuant to the
agreement, defendant Pacific posted two (2) Surety Bonds in favor of
plaintiff which were issued by defendant Philippine American General
Insurance ("PHILAMGEN", for brevity). (Annexes B and C, Complaint).
Notwithstanding three extensions granted by plaintiff to defendant Pacific,
the latter failed to finish the contracted works. (Annexes G, I and K,
Complaint). On 16 October 1979, plaintiff wrote defendant Pacific advising
the latter of its intention to takeover the project and to hold said defendant
liable for all damages which it had incurred and will incur to finish the
project. (Annex "L", Complaint).
Republic of the Philippines
SUPREME COURT
SECOND DIVISION
G.R. No.138980 September 20, 2005
FILINVEST LAND, INC., Petitioners,
vs.
HON. COURT OF APPEALS, PHILIPPINE AMERICAN GENERAL
INSURANCE COMPANY, and PACIFIC EQUIPMENT
CORPORATION, Respondent.
DECISION
CHICO-NAZARIO, J.:

On 26 October 1979, plaintiff submitted its claim against defendant

Philamgen under its performance and guarantee bond (Annex M,
Complaint) but Philamgen refused to acknowledge its liability for the
simple reason that its principal, defendant Pacific, refused to acknowledge
liability therefore. Hence, this action.
In defense, defendant Pacific claims that its failure to finish the contracted
work was due to inclement weather and the fact that several items of
finished work and change order which plaintiff refused to accept and pay
for caused the disruption of work. Since the contractual relation between
plaintiff and defendant Pacific created a reciprocal obligation, the failure of
the plaintiff to pay its progressing bills estops it from demanding fulfillment
of what is incumbent upon defendant Pacific. The acquiescence by plaintiff
in granting three extensions to defendant Pacific is likewise a waiver of the
formers right to claim any damages for the delay. Further, the unilateral
and voluntary action of plaintiff in preventing defendant Pacific from

completing the work has relieved the latter from the obligation of
completing the same.
On the other hand, Philamgen contends that the various amendments
made on the principal contract and the deviations in the implementation
thereof which were resorted to by plaintiff and co-defendant Pacific without
its (defendant Philamgens) written consent thereto, have automatically
released the latter from any or all liability within the purview and
contemplation of the coverage of the surety bonds it has issued. Upon
agreement of the parties to appoint a commissioner to assist the court in
resolving the issues confronting the parties, on 7 July 1981, an order was
issued by then Presiding Judge Segundo M. Zosa naming Architect Antonio
Dimalanta as Court Commissioner from among the nominees submitted by
the parties to conduct an ocular inspection and to determine the amount of
work accomplished by the defendant Pacific and the amount of work done
by plaintiff to complete the project.
On 28 November 1984, the Court received the findings made by the Court
Commissioner. In arriving at his findings, the Commissioner used the
construction documents pertaining to the project as basis. According to
him, no better basis in the work done or undone could be made other than
the contract billings and payments made by both parties as there was no
proper procedure followed in terminating the contract, lack of inventory of
work accomplished, absence of appropriate record of work progress
(logbook) and inadequate documentation and system of construction
management.
Based on the billings of defendant Pacific and the payments made by
plaintiff, the work accomplished by the former amounted
to P11,788,282.40 with the exception of the last billing (which was not
acted upon or processed by plaintiff) in the amount of P844,396.42. The
total amount of work left to be accomplished by plaintiff was based on the
original contract amount less value of work accomplished by defendant
Pacific in the amount ofP681,717.58 (12,470,000-11,788,282.42).
As regards the alleged repairs made by plaintiff on the construction
deficiencies, the Court Commissioner found no sufficient basis to justify the
same. On the other hand, he found the additional work done by defendant
Pacific in the amount of P477,000.00 to be in order.

a) Failure of the commissioner to conduct a joint survey which according to

the latter is indispensable to arrive at an equitable and fair resolution of
the issues between the parties;
b) The cost estimates of the commissioner were based on pure conjectures
and contrary to the evidence; and,
c) The commissioner made conclusions of law which were beyond his
assignment or capabilities.
In its comment, defendant Pacific alleged that the failure to conduct joint
survey was due to plaintiffs refusal to cooperate. In fact, it was defendant
Pacific who initiated the idea of conducting a joint survey and inventory
dating back 27 November 1983. And even assuming that a joint survey
were conducted, it would have been an exercise in futility because all
physical traces of the actual conditions then obtaining at the time relevant
to the case had already been obliterated by plaintiff.
On 15 August 1990, a Motion for Judgment Based on the Commissioners
Resolution was filed by defendant Pacific.
On 11 October 1990, plaintiff filed its opposition thereto which was but a
rehash of objections to the commissioners report earlier filed by said
plaintiff.3
On the basis of the commissioners report, the trial court dismissed
Filinvests complaint as well as Pecorps counterclaim. It held:
In resolving this case, the court observes that the appointment of a
Commissioner was a joint undertaking among the parties. The findings of
facts of the Commissioner should therefore not only be conclusive but final
among the parties. The court therefore agrees with the commissioners
findings with respect to
1. Cost to repair deficiency or defect P532,324.02
2. Unpaid balance of work done by defendant - P1,939,191.67
3. Additional work/change order (due to defendant) P475,000.00

On 01 April 1985, plaintiff filed its objections to the Commissioners

Resolution on the following grounds:

The unpaid balance due defendant therefore is P1,939,191.67. To this

amount should be added additional work performed by defendant at
plaintiffs instance in the sum of P475,000.00. And from this total

of P2,414,191.67 should be deducted the sum of P532,324.01 which is the

cost to repair the deficiency or defect in the work done by defendant. The
commissioner arrived at the figure of P532,324.01 by getting the average
between plaintiffs claim of P758,080.37 and defendants allegation
of P306,567.67. The amount due to defendant per the commissioners
report is therefore P1,881,867.66.
Although the said amount of P1,881,867.66 would be owing to defendant
Pacific, the fact remains that said defendant was in delay since April 25,
1979. The third extension agreement of September 15, 1979 is very clear
in this regard. The pertinent paragraphs read:
a) You will complete all the unfinished works not later than Oct. 15, 1979. It
is agreed and understood that this date shall DEFINITELY be the LAST and
FINAL extension & there will be no further extension for any cause
whatsoever.
b) We are willing to waive all penalties for delay which have accrued since
April 25, 1979 provided that you are able to finish all the items of the
contracted works as per revised CPM; otherwise you shall continue to be
liable to pay the penalty up to the time that all the contracted works shall
have been actually finished, in addition to other damages which we may
suffer by reason of the delays incurred.
Defendant Pacific therefore became liable for delay when it did not finish
the project on the date agreed on October 15, 1979. The court however,
finds the claim of P3,990,000.00 in the form of penalty by reason of delay
(P15,000.00/day from April 25, 1979 to Jan. 15, 1980) to be excessive. A
forfeiture of the amount due defendant from plaintiff appears to be a
reasonable penalty for the delay in finishing the project considering the
amount of work already performed and the fact that plaintiff consented to
three prior extensions.

considering that: (a) time is of the essence of the contract; (b) the
liquidated damages was fixed by the parties to serve not only as penalty in
case Pecorp fails to fulfill its obligation on time, but also as indemnity for
actual and anticipated damages which Filinvest may suffer by reason of
such failure; and (c) the total liquidated damages sought is only 32% of the
total contract price, and the same was freely and voluntarily agreed upon
by the parties.
At the outset, it should be stressed that as only the issue of liquidated
damages has been elevated to this Court, petitioner Filinvest is deemed to
have acquiesced to the other matters taken up by the courts below.
Section 1, Rule 45 of the 1997 Rules of Court states in no uncertain terms
that this Courts jurisdiction in petitions for review on certiorari is limited to
"questions of law which must be distinctly set forth."5 By assigning only
one legal issue, Filinvest has effectively cordoned off any discussion into
the factual issue raised before the Court of Appeals. 6 In effect, Filinvest has
yielded to the decision of the Court of Appeals, affirming that of the trial
court, in deferring to the factual findings of the commissioner assigned to
the parties case. Besides, as a general rule, factual matters cannot be
raised in a petition for review on certiorari. This Court at this stage is
limited to reviewing errors of law that may have been committed by the
lower courts.7 We do not perceive here any of the exceptions to this rule;
hence, we are restrained from conducting further scrutiny of the findings of
fact made by the trial court which have been affirmed by the Court of
Appeals. Verily, factual findings of the trial court, especially when affirmed
by the Court of Appeals, are binding and conclusive on the Supreme
Court.8 Thus, it is settled that:
(a) Based on Pecorps billings and the payments made by Filinvest, the
balance of work to be accomplished by Pecorp amounts to P681,717.58
representing 5.47% of the contract work. This means to say that Pecorp, at
the time of the termination of its contract, accomplished 94.53% of the
contract work;

The foregoing considered, this case is dismissed. The counterclaim is

likewise dismissed.

(b) The unpaid balance of work done by Pecorp amounts to P1,939,191.67;

No Costs.4

(c) The additional work/change order due Pecorp amounts to P475,000.00;

The Court of Appeals, finding no reversible error in the appealed decision,

affirmed the same.

(d) The cost to repair deficiency or defect, which is for the account of
Pecorp, is P532,324.02; and

Hence, the instant petition grounded solely on the issue of whether or not
the liquidated damages agreed upon by the parties should be reduced

(e) The total amount due Pecorp is P1,881,867.66.

Coming now to the main matter, Filinvest argues that the penalty in its
entirety should be respected as it was a product of mutual agreement and
it represents only 32% of the P12,470,000.00 contract price, thus, not
shocking and unconscionable under the circumstances. Moreover, the
penalty was fixed to provide for actual or anticipated liquidated damages
and not simply to ensure compliance with the terms of the contract; hence,
pursuant toLaureano v. Kilayco,9 courts should be slow in exercising the
authority conferred by Art. 1229 of the Civil Code.

In herein case, the trial court ruled that the penalty charge for delay
pegged at P15,000.00 per day of delay in the aggregate amount
of P3,990,000.00 -- was excessive and accordingly reduced it
to P1,881,867.66 "considering the amount of work already performed and
the fact that [Filinvest] consented to three (3) prior extensions." The Court
of Appeals affirmed the ruling but added as well that the penalty was
unconscionable "as the construction was already not far from completion."
Said the Court of Appeals:

We are not swayed.

Turning now to plaintiffs appeal, We likewise agree with the trial court that
a penalty interest of P15,000.00 per day of delay as liquidated damages
or P3,990,000.00 (representing 32% penalty of the P12,470,000.00
contract price) is unconscionable considering that the construction was
already not far from completion. Penalty interests are in the nature of
liquidated damages and may be equitably reduced by the courts if they are
iniquitous or unconscionable (Garcia v. Court of Appeals, 167 SCRA 815,
Lambert v. Fox, 26 Phil. 588). The judge shall equitably reduce the penalty
when the principal obligation has been partly or irregularly complied with
by the debtor. Even if there has been no performance, the penalty may
also be reduced by the courts if it is iniquitous or unconscionable (Art.
1229, New Civil Code). Moreover, plaintiffs right to indemnity due to
defendants delay has been cancelled by its obligations to the latter
consisting of unpaid works.

There is no question that the penalty of P15,000.00 per day of delay was
mutually agreed upon by the parties and that the same is sanctioned by
law. A penal clause is an accessory undertaking to assume greater liability
in case of breach.10 It is attached to an obligation in order to insure
performance11 and has a double function: (1) to provide for liquidated
damages, and (2) to strengthen the coercive force of the obligation by the
threat of greater responsibility in the event of breach.12 Article 1226 of the
Civil Code states:
Art. 1226. In obligations with a penal clause, the penalty shall substitute
the indemnity for damages and the payment of interests in case of
noncompliance, if there is no stipulation to the contrary. Nevertheless,
damages shall be paid if the obligor refuses to pay the penalty or is guilty
of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance
with the provisions of this Code.
As a general rule, courts are not at liberty to ignore the freedom of the
parties to agree on such terms and conditions as they see fit as long as
they are not contrary to law, morals, good customs, public order or public
policy.13 Nevertheless, courts may equitably reduce a stipulated penalty in
the contract in two instances: (1) if the principal obligation has been partly
or irregularly complied; and (2) even if there has been no compliance if the
penalty is iniquitous or unconscionable in accordance with Article 1229 of
the Civil Code which provides:
Art. 1229. The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even
if there has been no performance, the penalty may also be reduced by the
courts if it is iniquitous or unconscionable.

This Court finds no fault in the cost estimates of the court-appointed

commissioner as to the cost to repair deficiency or defect in the works
which was based on the average between plaintiffs claim of P758,080.37
and defendants P306,567.67 considering the following factors: that
"plaintiff did not follow the standard practice of joint survey upon take over
to establish work already accomplished, balance of work per contract still
to be done, and estimate and inventory of repair" (Exhibit "H"). As for the
cost to finish the remaining works, plaintiffs estimates were brushed aside
by the commissioner on the reasoned observation that "plaintiffs cost
estimate for work (to be) done by the plaintiff to complete the project is
based on a contract awarded to another contractor (JPT), the nature and
magnitude of which appears to be inconsistent with the basic contract
between defendant PECORP and plaintiff FILINVEST."14
We are hamstrung to reverse the Court of Appeals as it is rudimentary that
the application of Article 1229 is essentially addressed to the sound
discretion of the court.15 As it is settled that the project was already
94.53% complete and that Filinvest did agree to extend the period for
completion of the project, which extensions Filinvest included in computing
the amount of the penalty, the reduction thereof is clearly warranted.

Filinvest, however, hammers on the case of Laureano v. Kilayco,16 decided

in 1915, which cautions courts to distinguish between two kinds of penalty
clauses in order to better apply their authority in reducing the amount
recoverable. We held therein that:
. . . [I]n any case wherein there has been a partial or irregular compliance
with the provisions in a contract for special indemnification in the event of
failure to comply with its terms, courts will rigidly apply the doctrine
of strict construction against the enforcement in its entirety of the
indemnification, where it is clear from the terms of the
contract that the amount or character of the indemnity is fixed without
regard to the probable damages which might be anticipated as a result of a
breach of the terms of the contract; or, in other words, where the
indemnity provided for is essentially a mere penalty having for its principal
object the enforcement of compliance with the contract. But the courts
will be slow in exercising the jurisdiction conferred upon them in
article 115417 so as to modify the terms of an agreed upon
indemnification where it appears that in fixing such indemnification the
parties had in mind a fair and reasonable compensation for actual
damages anticipated as a result of a breach of the contract, or, in other
words, where the principal purpose of the indemnification agreed upon
appears to have been to provide for the payment of actual anticipated and
liquidated damages rather than the penalization of a breach of the
contract. (Emphases supplied)
Filinvest contends that the subject penalty clause falls under the second
type, i.e., the principal purpose for its inclusion was to provide for payment
of actual anticipated and liquidated damages rather than the penalization
of a breach of the contract. Thus, Filinvest argues that had Pecorp
completed the project on time, it (Filinvest) could have sold the lots sooner
and earned its projected income that would have been used for its other
projects.
Unfortunately for Filinvest, the above-quoted doctrine is inapplicable to
herein case. The Supreme Court inLaureano instructed that a distinction
between a penalty clause imposed essentially as penalty in case of breach
and a penalty clause imposed as indemnity for damages should be
made in cases where there has been neither partial nor irregular
compliance with the terms of the contract. In cases where there has been
partial or irregular compliance, as in this case, there will be no substantial
difference between a penalty and liquidated damages insofar as legal
results are concerned.18 The distinction is thus more apparent than real
especially in the light of certain provisions of the Civil Code of the
Philippines which provides in Articles 2226 and Article 2227 thereof:

Art. 2226. Liquidated damages are those agreed upon by the parties to a
contract to be paid in case of breach thereof.
Art. 2227. Liquidated damages, whether intended as an indemnity or a
penalty, shall be equitably reduced if they are iniquitous or
unconscionable.
Thus, we lamented in one case that "(t)here is no justification for the Civil
Code to make an apparent distinction between a penalty and liquidated
damages because the settled rule is that there is no difference between
penalty and liquidated damages insofar as legal results are concerned and
that either may be recovered without the necessity of proving actual
damages and both may be reduced when proper."19
Finally, Filinvest advances the argument that while it may be true that
courts may mitigate the amount of liquidated damages agreed upon by the
parties on the basis of the extent of the work done, this contemplates a
situation where the full amount of damages is payable in case of total
breach of contract. In the instant case, as the penalty clause was agreed
upon to answer for delay in the completion of the project considering that
time is of the essence, "the parties thus clearly contemplated the payment
of accumulated liquidated damages despite, and precisely because of,
partial performance."20 In effect, it is Filinvests position that the first part
of Article 1229 on partial performance should not apply precisely because,
in all likelihood, the penalty clause would kick in in situations where Pecorp
had already begun work but could not finish it on time, thus, it is being
penalized for delay in its completion.
The above argument, albeit sound,21 is insufficient to reverse the ruling of
the Court of Appeals. It must be remembered that the Court of Appeals not
only held that the penalty should be reduced because there was partial
compliance but categorically stated as well that the penalty was
unconscionable. Otherwise stated, the Court of Appeals affirmed the
reduction of the penalty not simply because there was partial
compliance per se on the part of Pecorp with what was incumbent upon it
but, more fundamentally, because it deemed the penalty unconscionable
in the light of Pecorps 94.53% completion rate.
In Ligutan v. Court of Appeals,22 we pointed out that the question of
whether a penalty is reasonable or iniquitous can be partly subjective and
partly objective as its "resolution would depend on such factors as, but not
necessarily confined to, the type, extent and purpose of the penalty, the
nature of the obligation, the mode of breach and its consequences, the
supervening realities, the standing and relationship of the parties, and the

like, the application of which, by and large, is addressed to the sound

discretion of the court."23
In herein case, there has been substantial compliance in good faith on the
part of Pecorp which renders unconscionable the application of the full
force of the penalty especially if we consider that in 1979 the amount
ofP15,000.00 as penalty for delay per day was quite steep indeed. Nothing
in the records suggests that Pecorps delay in the performance of 5.47% of
the contract was due to it having acted negligently or in bad faith. Finally,
we factor in the fact that Filinvest is not free of blame either as it likewise
failed to do that which was incumbent upon it, i.e., it failed to pay Pecorp
for work actually performed by the latter in the total amount
of P1,881,867.66. Thus, all things considered, we find no reversible error in
the Court of Appeals exercise of discretion in the instant case.
Before we write finis to this legal contest that had spanned across two and
a half decades, we take note of Pecorps own grievance. From its Comment
and Memorandum, Pecorp, likewise, seeks affirmative relief from this Court
by praying that not only should the instant case be dismissed for lack of
merit, but that Filinvest should likewise be made to pay "what the Court
Commissioner found was due defendant" in the "total amount
ofP2,976,663.65 plus 12% interest from 1979 until full payment thereof
plus attorneys fees."24 Pecorp, however, cannot recover that which it seeks
as we had already denied, in a Resolution dated 21 June 2000, its own
petition for review of the 27 May 1999 decision of the Court of Appeals.
Thus, as far as Pecorp is concerned, the ruling of the Court of Appeals has
already attained finality and can no longer be disturbed.
WHEREFORE, premises considered, the Decision of the Court of Appeals
dated 27 May 1999 is AFFIRMED. No pronouncement as to costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

JESUS SAN AGUSTIN, petitioner,

vs.
HON. COURT OF APPEALS and MAXIMO MENEZ, JR., respondents.
QUISUMBING, J.:
This petition for review on certiorari seeks the reversal of the decision 1 of
the Court of Appeals dated May 19, 1995, affirming that of the Regional
Trial Court in LRC Case No. R-4659.
The relevant facts, as summarized by the CA, are as follows:
On February 11, 1974, the Government Service Insurance System (GSIS)
sold to a certain Macaria Vda. de Caiquep, a parcel of residential land with
an area of 168 square meters located in Rosario, Pasig City and
denominated as Lot 13, Block 7, Pcs-5816 of the Government Service and
Insurance System Low Cost Housing Project (GSIS-LCHP). The sale is
evidenced by a Deed of Absolute Sale. 2 On February 19, 1974, the
Register of Deeds of Rizal issued in the name of Macaria Vda. de Caiquep.
Transfer Certificate of Title (TCT) No. 436465 with the following
encumbrance annotated at the back of the title:
This Deed of Absolute Sale is subject to the conditions enumerated
below which shall be permanent encumbrances on the
property, the violation of any of which shall entitle the vendor to
cancel x x x. this Deed of Absolute Sale and reenter the property;
The purpose of the sale be to aid the vendee in acquiring a lot for
himself/themselves and not to provide him/them with a means for
speculation or profit by a future assignment of his/their right herein
acquired or the resale of the lot through rent, lease or subletting to
others of the lot and subject of this deed, and therefore, the
vendee shall not sell, convey, lease or sublease, or otherwise
encumber the property in favor of any other party within five (5)
years from the dates final and absolute ownership thereof
becomes vested in the vendee, except in cases of hereditary
succession or resale in favor of the vendor:
x x x (emphasis supplied).3

SECOND DIVISION
G.R. No. 121940

December 4, 2001

A day after We issuance of TCT No. 436465, or on February 20, 1974,

Macaria Vda. de Caiquep sold the subject lot to private respondent,
Maximo Menez, Jr., as evidenced by a Deed of Absolute Sale (Exhibit

"D").4 This deed was notarized but was not registered immediately upon its
execution in 1974 because GSIS prohibited him from registering the same
in view of the five-year prohibition to sell during the period ending in 1979.
Sometime in 1979, for being suspected as a subversive, an Arrest, Search
and Seizure Order (ASSO) was issued against private respondent. Military
men ransacked his house in Cainta, Rizal. Upon learning that he was
wanted by the military, he voluntarily surrendered and was detained for
two (2) years. When released, another order for his re-arrest was issued so
he hid in Mindanao for another four (4) years or until March 1984. In
December of 1990, he discovered that the subject TCT was missing. He
consulted a lawyer but the latter did not act immediately on the matter.
Upon consulting a new counsel, an Affidavit of Loss5 was filed with the
Register of Deeds of Pasig and a certified copy6 of TCT No. 436465 was
issued. Private respondent also declared the property for tax purposes and
obtained a certification thereof from the Assessor's Office. 7
Private respondent sent notices to the registered owner at her address
appearing in the title and in the Deed of Sale. And, with his counsel, he
searched for the ,registered owner in Metro Manila and Rizal and as far as
Samar, Leyte, Calbayog City, Tacloban City, and in Eastern and Northern
Samar. However, their search proved futile.
On July 8, 1992 private respondent filed a petition docketed as LRC Case
No. R-4659 with the RTC, Branch 154, Pasig, Metro Manila for the issuance
of owner's duplicate copy of TCT No. 436465 to replace the lost one. To
show he was the owner of the contested lot, he showed the Deed of
Absolute Sale, Exhibit "D". The petition was set for hearing and the court's
order dated July 10, 1992 was published once in Malaya, a nationally
circulated newspaper in the Philippines.8
During the hearing on September 3, 1992, only Menez and his counsel
appeared. The Register of Deeds who was not served notice, and the Office
of the Solicitor General and the Provincial Prosecutor who were notified did
not attend.
On September 18, 1992, there being no opposition, Menez presented his
evidence ex-parte. The trial court granted his petition in its decision 9 dated
September 30, 1992, the dispositive portion of which reads:
WHEREFORE, the petition is hereby GRANTED and the Registry of
Deeds of Pasig, Metro Manila, is hereby directed to issue a new
Owner's Duplicate Copy of Transfer Certificate of Title No. 436465

based on the original thereon filed in his office which shall contain
the memorandum of encumbrance and an additional memorandum
of the fact that it was issued in place of the lost duplicate and
which shall, in all respect, be entitled to like faith and credit as the
original duplicate, for all legal intents and purposes.
Issuance of new owner's duplicate copy shall be made only after
this decision shall have become final and executory. The said lost
owner's duplicate is hereby declared null and void.
Petitioner shall pay all legal fees in connection with the issuance of
the new owner's copy.
Let copies of this Order be furnished the petitioner, the registered
owner of his given address in the title, in the deed of sale, and in
the tax declaration; the Registry of Deeds of Pasig, the Office of the
Solicitor General; and the Provincial Fiscal of Pasig, Metro Manila.
SO ORDERED.10
On October 13, 1992, herein petitioner, Jesus San Agustin, received a copy
of the abovecited decision. He-claimed this was the first time he became
aware of the case of her aunt, Macaria Vda. de Caiquep who, according to
him, died sometime in 1974. Claiming that he was the present occupant of
the property and the heir of Macaria, he filed his "Motion to Reopen
Reconstitution Proceedings''11 on October 27, 1992. On December 3, 1992,
RTC issued an order denying said motion.12
Petitioner filed an appeal with the Court of Appeals, which, as earlier
stated, was denied in its decision of May 19, 1995. Petitioner moved for a
reconsideration, but it was denied in a resolution dated September 11,
1995.13
Thus, the present petition, attributing the following errors to the court
a quo:
A.
THE RESPONDENT COURT GRAVELY ERRED IN HOLDING THAT LRC CASE NO.
R-4659 BEING ONLY A PETITION FOR THE ISSUANCE OF A NEW OWNER'S
DUPLICATE OF TITLE, THERE IS NO NEED OF PERSONAL NOTICE TO THE
PETITIONER, THE ACTUAL POSSESSOR [WHO HAS] AND ACTUALLY BEEN
PAYING THE REAL ESTATE TAX, DESPITE PRIVATE RESPONDENT'S

KNOWLEDGE OF ACTUAL POSSESSION OF AND INTEREST OVER THE

PROPERTY COVERED BY TCT NO. 436465.14
B.
RESPONDENT COURT GRAVELY ERRED IN HOLDING THAT THE SALE
BETWEEN THE PRIVATE RESPONDENT AND MACARIA VDA. DE CAIQUEP IS
NOT NULL AND VOID AND UNDER ARTICLE 1409 OF THE CIVIL CODE
SPECIFICALLY PARAGRAPH (7) THEREOF WHICH REFERS TO CONTRACTS
EXPRESSLY PROHIBITED OR DECLARED VOID BY LAW. 15
Considering the above assignment of errors, let us resolve the
corresponding issues raised by petitioner.
The first issue involves private respondent's alleged failure to send notice
to petitioner who is the actual possessor of the disputed lot. Stated briefly,
is petitioner entitled to notice? Our finding is in the negative.
Presidential Decree No. 1529, otherwise known as the "Property
Registration Decree" is decisive. It provides:
Sec. 109. Notice and replacement of lost duplicate certificate. In
case of loss or theft of an owner's duplicate certificate of title, due
notice under oath shall be sent by the owner or by someone in his
behalf to the Register of Deeds of the province or city where the
land lies as soon as the loss or theft is discovered. If a duplicate
certificate is lost or destroyed, or cannot be produced by a person
applying for the entry of a new certificate to him or for :the
registration of any instrument, a sworn statement of the fact of
such loss or destruction may be filed by the registered owner or
other person it interest and registered.
Upon the petition of the registered owner or other person in
interest, the court may, after notice and due hearing, direct the
issuance of a new duplicate certificate, which shall contain a
memorandum of the fact that it is issued in place of the lost
duplicate certificate, but shall in all respects be entitled to like faith
and credit as the original duplicate, and shall thereafter be
regarded as such for all purposes of this decree.
In Office of Court Administrator vs. Matas, A.M. No. RTJ-92-836, 247 SCRA
9, 16-17 (1995), we held:

In the case at bar, the respective certificate of title of the

properties in question on file with the Register of Deeds are
existing, and it is the owner's copy of the certificate of title that
was alleged to have been lost or destroyed. Thus, it is Section 109
of P.D. 1529 which was approved on June 11, 1978 that becomes
effective and is applicable, a reading of which shows that it is
practically the same as Section 109 of Act No. 496, governing
reconstitution of a duplicate certificate of title lost or destroyed.
Consequently, it is sufficient that the notice under Section 109 is
sent to the Register of Deeds and to those persons who are known
to have, or appear to have, an interest in the property as shown in
the Memorandum of encumbrances at the back of the original or
transfer certificate of title on file in the office of the Register of
Deeds. From a legal standpoint, there are no other interested
parties who should be notified, except those abovementioned
since they are the only ones who may be deemed to have a claim
to the property involved. A person dealing with registered is not
charged with notice of encumbrances not annotated on the back of
the title. (Emphasis supplied.)
Here, petitioner does not appear to have an interest in the property based
on the memorandum of encumbrances annotated at the back of the title.
His claim, that he is an heir (nephew) of the original owner of the lot
covered by the disputed lot and the present occupant thereof is not
annotated in the said memorandum of encumbrances. Neither was his
claim entered on the Certificate of Titles in the name of their
original/former owners on file with the Register of Deeds at the time of the
filing or pendency of LRC Case No. R-4659. Clearly, petitioner is not entitled
to notice.
Noteworthy is the fact that there was compliance by private respondent of
the RTC's order of publication of the petition in a newspaper of general
circulation. This is sufficient notice of the petition to the public at large.
Petitioner contends that as possessor or actual occupant of the lot in
controversy, he is entitled under the law to be notified. He relies
on Alabang Development Corporation vs. Valenzuela, G.R. No. L-54094,
116 SCRA 261, 277 (1982)) which held that in reconstitution proceedings,
courts must make sure that indispensable parties, i.e.. the actual owners
and possessors of the lands involved, are duly served with actual and
personal notice of the petition. As pointed out by the appellate court, his
reliance on Alabang is misplaced because the cause of action in that case
is based on Republic Act i No. 26, entitled "An Act Providing A Special
Procedure for the Reconstitution of Torrens Certificate of Title Lost or

Destroyed," while the present case is based on Section 109 of P.D. 1529 as
above explained.

the condition and treat the sale as good, in which event, the sale
can not be assailed for breach of the condition aforestated. 19

Under Republic Act No. 26, reconstitution is validly made only in case
the original copy of the certificate of title with the Register of Deeds is lost
or destroyed. And if no notice of the date of hearing of a reconstitution
case is served on a possessor or one having interest in the property
involved, he is deprived of his day in court and the order of reconstitution
is null and void.16 The case at bar is not for reconstitution, but merely for
replacement of lost duplicate certificate.

In this case, the GSIS has not filed any action for the annulment of Exhibit
"D", nor for the forfeiture of the lot in question. In our view, the contract of
sale remains valid between the parties, unless and until annulled in the
proper suit filed by the rightful party, the GSIS. For now, the said contract
of sale is binding upon the heirs of Macaria Vda. de Caiquep, including
petitioner who alleges to be one of her heirs, in line with the rule that heirs
are bound by contracts entered into by their predecessors-in-interest. 20

On the second assigned error, petitioner contends that Exhibit "D" is null
and void under Article 1409 of the Civil Code, specifically paragraph
(7),17 because the deed of sale was executed within the five-year
prohibitory period under Commonwealth Act No. 141, as amended,
otherwise known as "The Public Land Act."18

We are not unmindful of the social justice policy of R.A. 8291 otherwise
known as "Government Service Insurance Act of 1997" in granting housing
assistance to the less-privileged GSIS members and their dependents
payable at an affordable payment scheme.21 This is the same policy which
the 5-year restrictive clause in the contract seeks to implement by stating
in the encumbrance itself annotated at the back of TCT No. 436465 that,
"The purpose of the sale is to aid the vendee in acquiring a lot for
himself/themselves and not to provide him/them with a means for
speculation or profit by a future assignment of his/their right herein
acquired or the resale of the lot through rent, lease or subletting to others
of the lot and subject of this deed, . . . within five (5) years from the date
final and absolute ownership thereof becomes vested in the vendee,
except in cases of hereditary succession or resale in favor of the
vendor."22 However, absent the proper action taken by the GSIS as the
original vendor referred to, the contract between petitioner's predecessorin-interest and private respondent deserves to be upheld. For as pointed
out by said private respondent, it is protected by the Constitution under
Section 10, Article III, of the Bill of Rights stating that, "No law impairing
the obligation of contracts shall be passed." Much as we would like to see a
salutary policy triumph, that provision of the Constitution duly calls for
compliance.

We find petitioner's contention less than meritorious. We agree with

respondent court that the proscription under Com. Act No. 141 on sale
within the 5-year restrictive period refers to homestead lands only. Here
the lot in dispute is not a homestead land, as found by the trial and
appellate courts. Said lot is owned by GSIS, under TCT No. 10028 in its
proprietary capacity.
Moreover, as far as the violation of the 5-year restrictive condition imposed
by GSIS in its contract with petitioner's predecessor-in-interest is
concerned, it is the GSIS and not petitioner who had a cause of action
against private respondent. Vide the instructive case of Sarmiento vs.
Salud:
The condition that the appellees Sarmiento spouses could not
resell the property except to the People's Homesite and Housing
Corporation (PHHC for short) within the next 25 years after
appellees' purchasing the lot is manifestly a condition in favor of
the PHHC, and not one in favor of the Sarmiento spouses. The
condition conferred no actionable right on appellees herein, since it
operated as a restriction upon their jus disponendi of the property
they bought, and thus limited their right of ownership. It follows
that on the assumption that the mortgage to appellee Salud and
the foreclosure sale violated the condition in the Sarmiento
contract, only the PHHC was entitled to invoke the condition
aforementioned, and not the Sarmientos. The validity or invalidity
of the sheriff's foreclosure sale to appellant Salud thus violative of
its right of exclusive reacquisition; but it (PHHC) also could waive

More in point, however, is the fact that, following Sarmiento v.

Salud,23 "Even if the transaction between the original awardee and herein
petitioner were wrongful, still, as between themselves, the purchaser and
the seller were both in pari delicto, being participes criminis as it were." As
in Sarmiento, in this case both were aware of the existence of the
stipulated condition in favor of the original seller, GSIS, yet both entered
into an agreement violating said condition and nullifying its effects.
Similarly, as Acting Chief Justice JBL Reyes concluded inSarmiento, "Both
parties being equally guilty, neither is entitled to complain against the
other. Having entered into the transaction with open eyes, and having

benefited from it, said parties should be held in estoppel to assail and
annul their own deliberate acts."
WHEREFORE, the appeal is DENIED, and the decision of the respondent
court is AFFIRMED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 150843

March 14, 2003

CATHAY PACIFIC AIRWAYS, LTD., petitioner,

vs.
SPOUSES DANIEL VAZQUEZ and MARIA LUISA MADRIGAL
VAZQUEZ, respondents.
DAVIDE, JR., C.J.:
Is an involuntary upgrading of an airline passengers accommodation from
one class to a more superior class at no extra cost a breach of contract of
carriage that would entitle the passenger to an award of damages? This is
a novel question that has to be resolved in this case.
The facts in this case, as found by the Court of Appeals and adopted by
petitioner Cathay Pacific Airways, Ltd., (hereinafter Cathay) are as follows:
Cathay is a common carrier engaged in the business of transporting
passengers and goods by air. Among the many routes it services is the
Manila-Hongkong-Manila course. As part of its marketing strategy, Cathay
accords its frequent flyers membership in its Marco Polo Club. The
members enjoy several privileges, such as priority forupgrading of booking
without any extra charge whenever an opportunity arises. Thus, a frequent
flyer booked in the Business Class has priority for upgrading to First Class if
the Business Class Section is fully booked.

Respondents-spouses Dr. Daniel Earnshaw Vazquez and Maria Luisa

Madrigal Vazquez are frequent flyers of Cathay and are Gold Card
members of its Marco Polo Club. On 24 September 1996, the Vazquezes,
together with their maid and two friends Pacita Cruz and Josefina Vergel de
Dios, went to Hongkong for pleasure and business.
For their return flight to Manila on 28 September 1996, they were booked
on Cathays Flight CX-905, with departure time at 9:20 p.m. Two hours
before their time of departure, the Vazquezes and their companions
checked in their luggage at Cathays check-in counter at Kai Tak Airport
and were given their respective boarding passes, to wit, Business Class
boarding passes for the Vazquezes and their two friends, and Economy
Class for their maid. They then proceeded to the Business Class passenger
lounge.
When boarding time was announced, the Vazquezes and their two friends
went to Departure Gate No. 28, which was designated for Business Class
passengers. Dr. Vazquez presented his boarding pass to the ground
stewardess, who in turn inserted it into an electronic machine reader or
computer at the gate. The ground stewardess was assisted by a ground
attendant by the name of Clara Lai Han Chiu. When Ms. Chiu glanced at
the computer monitor, she saw a message that there was a "seat change"
from Business Class to First Class for the Vazquezes.
Ms. Chiu approached Dr. Vazquez and told him that the Vazquezes
accommodations were upgraded to First Class. Dr. Vazquez refused the
upgrade, reasoning that it would not look nice for them as hosts to travel in
First Class and their guests, in the Business Class; and moreover, they
were going to discuss business matters during the flight. He also told Ms.
Chiu that she could have other passengers instead transferred to the First
Class Section. Taken aback by the refusal for upgrading, Ms. Chiu consulted
her supervisor, who told her to handle the situation and convince the
Vazquezes to accept the upgrading. Ms. Chiu informed the latter that the
Business Class was fully booked, and that since they were Marco Polo Club
members they had the priority to be upgraded to the First Class. Dr.
Vazquez continued to refuse, so Ms. Chiu told them that if they would not
avail themselves of the privilege, they would not be allowed to take the
flight. Eventually, after talking to his two friends, Dr. Vazquez gave in. He
and Mrs. Vazquez then proceeded to the First Class Cabin.
Upon their return to Manila, the Vazquezes, in a letter of 2 October 1996
addressed to Cathays Country Manager, demanded that they be
indemnified in the amount of P1million for the "humiliation and
embarrassment" caused by its employees. They also demanded "a written

apology from the management of Cathay, preferably a responsible person

with a rank of no less than the Country Manager, as well as the apology
from Ms. Chiu" within fifteen days from receipt of the letter.
In his reply of 14 October 1996, Mr. Larry Yuen, the assistant to Cathays
Country Manager Argus Guy Robson, informed the Vazquezes that Cathay
would investigate the incident and get back to them within a weeks time.
On 8 November 1996, after Cathays failure to give them any feedback
within its self-imposed deadline, the Vazquezes instituted before the
Regional Trial Court of Makati City an action for damages against Cathay,
praying for the payment to each of them the amounts of P250,000 as
temperate damages; P500,000 as moral damages; P500,000 as exemplary
or corrective damages; and P250,000 as attorneys fees.
In their complaint, the Vazquezes alleged that when they informed Ms.
Chiu that they preferred to stay in Business Class, Ms. Chiu "obstinately,
uncompromisingly and in a loud, discourteous and harsh voice threatened"
that they could not board and leave with the flight unless they go to First
Class, since the Business Class was overbooked. Ms. Chius loud and
stringent shouting annoyed, embarrassed, and humiliated them because
the incident was witnessed by all the other passengers waiting for
boarding. They also claimed that they were unjustifiably delayed to board
the plane, and when they were finally permitted to get into the aircraft, the
forward storage compartment was already full. A flight stewardess
instructed Dr. Vazquez to put his roll-on luggage in the overhead storage
compartment. Because he was not assisted by any of the crew in putting
up his luggage, his bilateral carpal tunnel syndrome was aggravated,
causing him extreme pain on his arm and wrist. The Vazquezes also
averred that they "belong to the uppermost and absolutely top elite of both
Philippine Society and the Philippine financial community, [and that] they
were among the wealthiest persons in the Philippine[s]."
In its answer, Cathay alleged that it is a practice among commercial
airlines to upgrade passengers to the next better class of accommodation,
whenever an opportunity arises, such as when a certain section is fully
booked. Priority in upgrading is given to its frequent flyers, who are
considered favored passengers like the Vazquezes. Thus, when the
Business Class Section of Flight CX-905 was fully booked, Cathays
computer sorted out the names of favored passengers for involuntary
upgrading to First Class. When Ms. Chiu informed the Vazquezes that they
were upgraded to First Class, Dr. Vazquez refused. He then stood at the
entrance of the boarding apron, blocking the queue of passengers from
boarding the plane, which inconvenienced other passengers. He shouted

that it was impossible for him and his wife to be upgraded without his two
friends who were traveling with them. Because of Dr. Vazquezs outburst,
Ms. Chiu thought of upgrading the traveling companions of the Vazquezes.
But when she checked the computer, she learned that the Vazquezes
companions did not have priority for upgrading. She then tried to book the
Vazquezes again to their original seats. However, since the Business Class
Section was already fully booked, she politely informed Dr. Vazquez of such
fact and explained that the upgrading was in recognition of their status as
Cathays valued passengers. Finally, after talking to their guests, the
Vazquezes eventually decided to take the First Class accommodation.
Cathay also asserted that its employees at the Hong Kong airport acted in
good faith in dealing with the Vazquezes; none of them shouted,
humiliated, embarrassed, or committed any act of disrespect against them
(the Vazquezes). Assuming that there was indeed a breach of contractual
obligation, Cathay acted in good faith, which negates any basis for their
claim for temperate, moral, and exemplary damages and attorneys fees.
Hence, it prayed for the dismissal of the complaint and for payment of
P100,000 for exemplary damages and P300,000 as attorneys fees and
litigation expenses.
During the trial, Dr. Vazquez testified to support the allegations in the
complaint. His testimony was corroborated by his two friends who were
with him at the time of the incident, namely, Pacita G. Cruz and Josefina
Vergel de Dios.
For its part, Cathay presented documentary evidence and the testimonies
of Mr. Yuen; Ms. Chiu; Norma Barrientos, Comptroller of its retained
counsel; and Mr. Robson. Yuen and Robson testified on Cathays policy of
upgrading the seat accommodation of its Marco Polo Club members when
an opportunity arises. The upgrading of the Vazquezes to First Class was
done in good faith; in fact, the First Class Section is definitely much better
than the Business Class in terms of comfort, quality of food, and service
from the cabin crew. They also testified that overbooking is a widely
accepted practice in the airline industry and is in accordance with the
International Air Transport Association (IATA) regulations. Airlines overbook
because a lot of passengers do not show up for their flight. With respect to
Flight CX-905, there was no overall overbooking to a degree that a
passenger was bumped off or downgraded. Yuen and Robson also stated
that the demand letter of the Vazquezes was immediately acted upon.
Reports were gathered from their office in Hong Kong and immediately
forwarded to their counsel Atty. Remollo for legal advice. However, Atty.
Remollo begged off because his services were likewise retained by the
Vazquezes; nonetheless, he undertook to solve the problem in behalf of

Cathay. But nothing happened until Cathay received a copy of the

complaint in this case. For her part, Ms. Chiu denied that she shouted or
used foul or impolite language against the Vazquezes. Ms. Barrientos
testified on the amount of attorneys fees and other litigation expenses,
such as those for the taking of the depositions of Yuen and Chiu.

On appeal by the petitioners, the Court of Appeals, in its decision of 24 July

2001,2 deleted the award for exemplary damages; and it reduced the
awards for moral and nominal damages for each of the Vazquezes to
P250,000 and P50,000, respectively, and the attorneys fees and litigation
expenses to P50,000 for both of them.

In its decision1 of 19 October 1998, the trial court found for the Vazquezes
and decreed as follows:

The Court of Appeals ratiocinated that by upgrading the Vazquezes to First

Class, Cathay novated the contract of carriage without the formers
consent. There was a breach of contract not because Cathay overbooked
the Business Class Section of Flight CX-905 but because the latter pushed
through with the upgrading despite the objections of the Vazquezes.

WHEREFORE, finding preponderance of evidence to sustain the

instant complaint, judgment is hereby rendered in favor of plaintiffs
Vazquez spouses and against defendant Cathay Pacific Airways,
Ltd., ordering the latter to pay each plaintiff the following:
a) Nominal damages in the amount of P100,000.00 for
each plaintiff;
b) Moral damages in the amount of P2,000,000.00 for each
plaintiff;
c) Exemplary damages in the amount of P5,000,000.00 for
each plaintiff;
d) Attorneys fees and expenses of litigation in the amount
of P1,000,000.00 for each plaintiff; and
e) Costs of suit.
SO ORDERED.
According to the trial court, Cathay offers various classes of seats from
which passengers are allowed to choose regardless of their reasons or
motives, whether it be due to budgetary constraints or whim. The choice
imposes a clear obligation on Cathay to transport the passengers in the
class chosen by them. The carrier cannot, without exposing itself to
liability, force a passenger to involuntarily change his choice. The
upgrading of the Vazquezes accommodation over and above their
vehement objections was due to the overbooking of the Business Class. It
was a pretext to pack as many passengers as possible into the plane to
maximize Cathays revenues. Cathays actuations in this case displayed
deceit, gross negligence, and bad faith, which entitled the Vazquezes to
awards for damages.

However, the Court of Appeals was not convinced that Ms. Chiu shouted at,
or meant to be discourteous to, Dr. Vazquez, although it might seemed that
way to the latter, who was a member of the elite in Philippine society and
was not therefore used to being harangued by anybody. Ms. Chiu was a
Hong Kong Chinese whose fractured Chinese was difficult to understand
and whose manner of speaking might sound harsh or shrill to Filipinos
because of cultural differences. But the Court of Appeals did not find her to
have acted with deliberate malice, deceit, gross negligence, or bad faith. If
at all, she was negligent in not offering the First Class accommodations to
other passengers. Neither can the flight stewardess in the First Class Cabin
be said to have been in bad faith when she failed to assist Dr. Vazquez in
lifting his baggage into the overhead storage bin. There is no proof that he
asked for help and was refused even after saying that he was suffering
from "bilateral carpal tunnel syndrome." Anent the delay of Yuen in
responding to the demand letter of the Vazquezes, the Court of Appeals
found it to have been sufficiently explained.
The Vazquezes and Cathay separately filed motions for a reconsideration of
the decision, both of which were denied by the Court of Appeals.
Cathay seasonably filed with us this petition in this case. Cathay maintains
that the award for moral damages has no basis, since the Court of Appeals
found that there was no "wanton, fraudulent, reckless and oppressive"
display of manners on the part of its personnel; and that the breach of
contract was not attended by fraud, malice, or bad faith. If any damage
had been suffered by the Vazquezes, it was damnum absque injuria, which
is damage without injury, damage or injury inflicted without injustice, loss
or damage without violation of a legal right, or a wrong done to a man for
which the law provides no remedy. Cathay also invokes our decision
in United Airlines, Inc. v. Court of Appeals3 where we recognized that, in
accordance with the Civil Aeronautics Boards Economic Regulation No. 7,
as amended, an overbooking that does not exceed ten percent cannot be

considered deliberate and done in bad faith. We thus deleted in that case
the awards for moral and exemplary damages, as well as attorneys fees,
for lack of proof of overbooking exceeding ten percent or of bad faith on
the part of the airline carrier.
On the other hand, the Vazquezes assert that the Court of Appeals was
correct in granting awards for moral and nominal damages and attorneys
fees in view of the breach of contract committed by Cathay for transferring
them from the Business Class to First Class Section without prior notice or
consent and over their vigorous objection. They likewise argue that the
issuance of passenger tickets more than the seating capacity of each
section of the plane is in itself fraudulent, malicious and tainted with bad
faith.
The key issues for our consideration are whether (1) by upgrading the seat
accommodation of the Vazquezes from Business Class to First Class Cathay
breached its contract of carriage with the Vazquezes; (2) the upgrading
was tainted with fraud or bad faith; and (3) the Vazquezes are entitled to
damages.
We resolve the first issue in the affirmative.
A contract is a meeting of minds between two persons whereby one agrees
to give something or render some service to another for a consideration.
There is no contract unless the following requisites concur: (1) consent of
the contracting parties; (2) an object certain which is the subject of the
contract; and (3) the cause of the obligation which is
established.4 Undoubtedly, a contract of carriage existed between Cathay
and the Vazquezes. They voluntarily and freely gave their consent to an
agreement whose object was the transportation of the Vazquezes from
Manila to Hong Kong and back to Manila, with seats in the Business Class
Section of the aircraft, and whose cause or consideration was the fare paid
by the Vazquezes to Cathay.
The only problem is the legal effect of the upgrading of the seat
accommodation of the Vazquezes. Did it constitute a breach of contract?
Breach of contract is defined as the "failure without legal reason to comply
with the terms of a contract."5 It is also defined as the "[f]ailure, without
legal excuse, to perform any promise which forms the whole or part of the
contract."6

In previous cases, the breach of contract of carriage consisted in either the

bumping off of a passenger with confirmed reservation or the downgrading
of a passengers seat accommodation from one class to a lower class. In
this case, what happened was the reverse. The contract between the
parties was for Cathay to transport the Vazquezes to Manila on a Business
Class accommodation in Flight CX-905. After checking-in their luggage at
the Kai Tak Airport in Hong Kong, the Vazquezes were given boarding cards
indicating their seat assignments in the Business Class Section. However,
during the boarding time, when the Vazquezes presented their boarding
passes, they were informed that they had a seat change from Business
Class to First Class. It turned out that the Business Class was overbooked in
that there were more passengers than the number of seats. Thus, the seat
assignments of the Vazquezes were given to waitlisted passengers, and the
Vazquezes, being members of the Marco Polo Club, were upgraded from
Business Class to First Class.
We note that in all their pleadings, the Vazquezes never denied that they
were members of Cathays Marco Polo Club. They knew that as members of
the Club, they had priority for upgrading of their seat accommodation at no
extra cost when an opportunity arises. But, just like other privileges, such
priority could be waived. The Vazquezes should have been consulted first
whether they wanted to avail themselves of the privilege or would consent
to a change of seat accommodation before their seat assignments were
given to other passengers. Normally, one would appreciate and accept an
upgrading, for it would mean a better accommodation. But, whatever their
reason was and however odd it might be, the Vazquezes had every right to
decline the upgrade and insist on the Business Class accommodation they
had booked for and which was designated in their boarding passes. They
clearly waived their priority or preference when they asked that other
passengers be given the upgrade. It should not have been imposed on
them over their vehement objection. By insisting on the upgrade, Cathay
breached its contract of carriage with the Vazquezes.
We are not, however, convinced that the upgrading or the breach of
contract was attended by fraud or bad faith. Thus, we resolve the second
issue in the negative.
Bad faith and fraud are allegations of fact that demand clear and
convincing proof. They are serious accusations that can be so conveniently
and casually invoked, and that is why they are never presumed. They
amount to mere slogans or mudslinging unless convincingly substantiated
by whoever is alleging them.

Fraud has been defined to include an inducement through insidious

machination. Insidious machination refers to a deceitful scheme or plot
with an evil or devious purpose. Deceit exists where the party, with intent
to deceive, conceals or omits to state material facts and, by reason of such
omission or concealment, the other party was induced to give consent that
would not otherwise have been given.7
Bad faith does not simply connote bad judgment or negligence; it imports a
dishonest purpose or some moral obliquity and conscious doing of a wrong,
a breach of a known duty through some motive or interest or ill will that
partakes of the nature of fraud.8
We find no persuasive proof of fraud or bad faith in this case. The
Vazquezes were not induced to agree to the upgrading through insidious
words or deceitful machination or through willful concealment of material
facts. Upon boarding, Ms. Chiu told the Vazquezes that their
accommodations were upgraded to First Class in view of their being Gold
Card members of Cathays Marco Polo Club. She was honest in telling them
that their seats were already given to other passengers and the Business
Class Section was fully booked. Ms. Chiu might have failed to consider the
remedy of offering the First Class seats to other passengers. But, we find
no bad faith in her failure to do so, even if that amounted to an exercise of
poor judgment.
Neither was the transfer of the Vazquezes effected for some evil or devious
purpose. As testified to by Mr. Robson, the First Class Section is better than
the Business Class Section in terms of comfort, quality of food, and service
from the cabin crew; thus, the difference in fare between the First Class
and Business Class at that time was $250.9 Needless to state, an upgrading
is for the better condition and, definitely, for the benefit of the passenger.
We are not persuaded by the Vazquezes argument that the overbooking of
the Business Class Section constituted bad faith on the part of Cathay.
Section 3 of the Economic Regulation No. 7 of the Civil Aeronautics Board,
as amended, provides:
Sec 3. Scope. This regulation shall apply to every Philippine and
foreign air carrier with respect to its operation of flights or portions
of flights originating from or terminating at, or serving a point
within the territory of the Republic of the Philippines insofar as it
denies boarding to a passenger on a flight, or portion of a flight
inside or outside the Philippines, for which he holds confirmed
reserved space. Furthermore, this Regulation is designed to cover
only honest mistakes on the part of the carriers and excludes

deliberate and willful acts of non-accommodation. Provided,

however, that overbooking not exceeding 10% of the seating
capacity of the aircraft shall not be considered as a deliberate and
willful act of non-accommodation.
It is clear from this section that an overbooking that does not exceed ten
percent is not considered deliberate and therefore does not amount to bad
faith.10 Here, while there was admittedly an overbooking of the Business
Class, there was no evidence of overbooking of the plane beyond ten
percent, and no passenger was ever bumped off or was refused to board
the aircraft.
Now we come to the third issue on damages.
The Court of Appeals awarded each of the Vazquezes moral damages in
the amount of P250,000. Article 2220 of the Civil Code provides:
Article 2220. Willful injury to property may be a legal ground for
awarding moral damages if the court should find that, under the
circumstances, such damages are justly due. The same rule applies
to breaches of contract where the defendant acted fraudulently or
in bad faith.
Moral damages include physical suffering, mental anguish, fright, serious
anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation, and similar injury. Although incapable of pecuniary
computation, moral damages may be recovered if they are the proximate
result of the defendants wrongful act or omission.11 Thus, case law
establishes the following requisites for the award of moral damages: (1)
there must be an injury clearly sustained by the claimant, whether
physical, mental or psychological; (2) there must be a culpable act or
omission factually established; (3) the wrongful act or omission of the
defendant is the proximate cause of the injury sustained by the claimant;
and (4) the award for damages is predicated on any of the cases stated in
Article 2219 of the Civil Code.12
Moral damages predicated upon a breach of contract of carriage may only
be recoverable in instances where the carrier is guilty of fraud or bad faith
or where the mishap resulted in the death of a passenger. 13 Where in
breaching the contract of carriage the airline is not shown to have acted
fraudulently or in bad faith, liability for damages is limited to the natural
and probable consequences of the breach of the obligation which the

parties had foreseen or could have reasonably foreseen. In such a case the
liability does not include moral and exemplary damages. 14
In this case, we have ruled that the breach of contract of carriage, which
consisted in the involuntary upgrading of the Vazquezes seat
accommodation, was not attended by fraud or bad faith. The Court of
Appeals award of moral damages has, therefore, no leg to stand on.
The deletion of the award for exemplary damages by the Court of Appeals
is correct. It is a requisite in the grant of exemplary damages that the act
of the offender must be accompanied by bad faith or done in wanton,
fraudulent or malevolent manner.15 Such requisite is absent in this case.
Moreover, to be entitled thereto the claimant must first establish his right
to moral, temperate, or compensatory damages.16 Since the Vazquezes are
not entitled to any of these damages, the award for exemplary damages
has no legal basis. And where the awards for moral and exemplary
damages are eliminated, so must the award for attorneys fees. 17
The most that can be adjudged in favor of the Vazquezes for Cathays
breach of contract is an award for nominal damages under Article 2221 of
the Civil Code, which reads as follows:
Article 2221 of the Civil Code provides:
Article 2221. Nominal damages are adjudicated in order that a
right of the plaintiff, which has been violated or invaded by the
defendant, may be vindicated or recognized, and not for the
purpose of indemnifying the plaintiff for any loss suffered by him.
Worth noting is the fact that in Cathays Memorandum filed with this Court,
it prayed only for the deletion of the award for moral damages. It deferred
to the Court of Appeals discretion in awarding nominal damages; thus:
As far as the award of nominal damages is concerned, petitioner
respectfully defers to the Honorable Court of Appeals discretion.
Aware as it is that somehow, due to the resistance of respondentsspouses to the normally-appreciated gesture of petitioner to
upgrade their accommodations, petitioner may have disturbed the
respondents-spouses wish to be with their companions (who
traveled to Hong Kong with them) at the Business Class on their
flight to Manila. Petitioner regrets that in its desire to provide the
respondents-spouses with additional amenities for the one and
one-half (1 1/2) hour flight to Manila, unintended tension ensued. 18

Nonetheless, considering that the breach was intended to give more

benefit and advantage to the Vazquezes by upgrading their Business Class
accommodation to First Class because of their valued status as Marco Polo
members, we reduce the award for nominal damages to P5,000.
Before writing finis to this decision, we find it well-worth to quote the apt
observation of the Court of Appeals regarding the awards adjudged by the
trial court:
We are not amused but alarmed at the lower courts unbelievable alacrity,
bordering on the scandalous, to award excessive amounts as damages. In
their complaint, appellees asked for P1 million as moral damages but the
lower court awarded P4 million; they asked for P500,000.00 as exemplary
damages but the lower court cavalierly awarded a whooping P10 million;
they asked for P250,000.00 as attorneys fees but were awarded P2 million;
they did not ask for nominal damages but were awarded P200,000.00. It is
as if the lower court went on a rampage, and why it acted that way is
beyond all tests of reason. In fact the excessiveness of the total award
invites the suspicion that it was the result of "prejudice or corruption on the
part of the trial court."
The presiding judge of the lower court is enjoined to hearken to the
Supreme Courts admonition in Singson vs. CA (282 SCRA 149
[1997]), where it said:
The well-entrenched principle is that the grant of moral
damages depends upon the discretion of the court based
on the circumstances of each case. This discretion is
limited by the principle that the amount awarded should
not be palpably and scandalously excessive as to indicate
that it was the result of prejudice or corruption on the part
of the trial court.
and in Alitalia Airways vs. CA (187 SCRA 763 [1990], where it was
held:
Nonetheless, we agree with the injunction expressed by
the Court of Appeals that passengers must not prey on
international airlines for damage awards, like "trophies in a
safari." After all neither the social standing nor prestige of
the passenger should determine the extent to which he
would suffer because of a wrong done, since the dignity

affronted in the individual is a quality inherent in him and

not conferred by these social indicators. 19
We adopt as our own this observation of the Court of Appeals.
WHEREFORE, the instant petition is hereby partly GRANTED. The Decision
of the Court of Appeals of 24 July 2001 in CA-G.R. CV No. 63339 is hereby
MODIFIED, and as modified, the awards for moral damages and attorneys
fees are set aside and deleted, and the award for nominal damages is
reduced to P5,000.
No pronouncement on costs.
SO ORDERED.

DANILO D. MENDOZA, also doing business under the name and style of
ATLANTIC EXCHANGE PHILIPPINES, petitioner,
vs.
COURT OF APPEALS, PHILIPPINE NATIONAL BANK, FERNANDO
MARAMAG, JR., RICARDO G. DECEPIDA and BAYANI A.
BAUTISTA, respondents.
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision1 dated August
8, 1994 of the respondent Court of Appeals (Tenth Division) in CA-G.R. CV
No. 38036 reversing the judgment2 of the Regional Trial Court (RTC) and
dismissing the complaint therein.
Petitioner Danilo D. Mendoza is engaged in the domestic and international
trading of raw materials and chemicals. He operates under the business
name Atlantic Exchange Philippines (Atlantic), a single proprietorship
registered with the Department of Trade and Industry (DTI). Sometime in
1978 he was granted by respondent Philippine National Bank (PNB) a Five
Hundred Thousand Pesos (P500,000.00) credit line and a One Million Pesos
(P1,000,000.00) Letter of Credit/Trust Receipt (LC/TR) line.
As security for the credit accommodations and for those which may
thereinafter be granted, petitioner mortgaged to respondent PNB the
following: 1) three (3) parcels of land3 with improvements in F. Pasco
Avenue, Santolan, Pasig; 2) his house and lot in Quezon City; and 3)
several pieces of machinery and equipment in his Pasig coco-chemical
plant.
The real estate mortgage4 provided the following escalation clause:

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 116710

June 25, 2001

(f) The rate of interest charged on the obligation secured by this

mortgage as well as the interest on the amount which may have
been advanced by the Mortgagee in accordance with paragraph (d)
of the conditions herein stipulated shall be subject during the life of
this contract to such increase within the rates allowed by law, as
the Board of Directors of the Mortgagee may prescribe for its
debtors.
Petitioner executed in favor of respondent PNB three (3) promissory notes
covering the Five Hundred Thousand Pesos (P500,000.00) credit line, one
dated March 8, 1979 for Three Hundred Ten Thousand Pesos
(P310,000.00); another dated March 30, 1979 for Forty Thousand Pesos

(P40,000.00); and the last dated September 27, 1979 for One Hundred Fifty
Thousand Pesos (P150,000.00). The said 1979 promissory notes uniformly
stipulated: "with interest thereon at the rate of 12% per annum, until paid,
which interest rate the Bank may, at any time, without notice, raise within
the limits allowed by law xxx."5
Petitioner made use of his LC/TR line to purchase raw materials from
foreign importers. He signed a total of eleven (11) documents
denominated as "Application and Agreement for Commercial Letter of
Credit,"6 on various dates from February 8 to September 11, 1979, which
uniformly contained the following clause: "Interest shall be at the rate of
9% per annum from the date(s) of the draft(s) to the date(s) of arrival of
payment therefor in New York. The Bank, however, reserves the right to
raise the interest charges at any time depending on whatever policy it may
follow in the future."7
In a letter dated January 3, 1980 and signed by Branch Manager Fil S.
Carreon Jr., respondent PNB advised petitioner Mendoza that effective
December 1, 1979, the bank raised its interest rates to 14% per annum, in
line with Central Bank's Monetary Board Resolution No. 2126 dated
November 29, 1979.
On March 9, 1981, he wrote a letter to respondent PNB requesting for the
restructuring of his past due accounts into a five-year term loan and for an
additional LC/TR line of Two Million Pesos (P2,000,000.00).8 According to
the letter, because of the shut-down of his end-user companies and the
huge amount spent for the expansion of his business, petitioner failed to
pay to respondent bank his LC/TR accounts as they became due and
demandable.
Ceferino D. Cura, Branch Manager of PNB Mandaluyong replied on behalf of
the respondent bank and required petitioner to submit the following
documents before the bank would act on his request: 1) Audited Financial
Statements for 1979 and 1980; 2) Projected cash flow (cash in - cash out)
for five (5) years detailed yearly; and 3) List of additional machinery and
equipment and proof of ownership thereof. Cura also suggested that
petitioner reduce his total loan obligations to Three Million Pesos
(P3,000,000.00) "to give us more justification in recommending a plan of
payment or restructuring of your accounts to higher authorities of the
Bank."9
On September 25, 1981, petitioner sent another letter addressed to PNB
Vice-President Jose Salvador, regarding his request for restructuring of his
loans. He offered respondent PNB the following proposals: 1) the disposal

of some of the mortgaged properties, more particularly, his house and lot
and a vacant lot in order to pay the overdue trust receipts; 2) capitalization
and conversion of the balance into a 5-year term loan payable semiannually or on annual installments; 3) a new Two Million Pesos
(P2,000,000.00) LC/TR line in order to enable Atlantic Exchange Philippines
to operate at full capacity; 4) assignment of all his receivables to PNB from
all domestic and export sales generated by the LC/TR line; and 5)
maintenance of the existing Five Hundred Thousand Pesos (P500,000.00)
credit line.
The petitioner testified that respondent PNB Mandaluyong Branch found his
proposal favorable and recommended the implementation of the
agreement. However, Fernando Maramag, PNB Executive Vice-President,
disapproved the proposed release of the mortgaged properties and
reduced the proposed new LC/TR line to One Million Pesos
(P1,000,000.00).10 Petitioner claimed he was forced to agree to these
changes and that he was required to submit a new formal proposal and to
sign two (2) blank promissory notes.
In a letter dated July 2, 1982, petitioner offered the following revised
proposals to respondent bank: 1) the restructuring of past due accounts
including interests and penalties into a 5-year term loan, payable semiannually with one year grace period on the principal; 2) payment of Four
Hundred Thousand Pesos (P400,000.00) upon the approval of the proposal;
3) reduction of penalty from 3% to 1%; 4) capitalization of the interest
component with interest rate at 16% per annum; 5) establishment of a One
Million Pesos (P1,000,000.00) LC/TR line against the mortgaged properties;
6) assignment of all his export proceeds to respondent bank to guarantee
payment of his loans.
According to petitioner, respondent PNB approved his proposal. He further
claimed that he and his wife were asked to sign two (2) blank promissory
note forms. According to petitioner, they were made to believe that the
blank promissory notes were to be filled out by respondent PNB to conform
with the 5-year restructuring plan allegedly agreed upon. The first
Promissory Note,11 No. 127/82, covered the principal while the second
Promissory Note,12 No. 128/82, represented the accrued interest.
Petitioner testified that respondent PNB allegedly contravened their verbal
agreement by 1) affixing dates on the two (2) subject promissory notes to
make them mature in two (2) years instead of five (5) years as supposedly
agreed upon; 2) inserting in the first Promissory Note No. 127/82 an
interest rate of 21% instead of 18%; 3) inserting in the second Promissory
Note No. 128/82, the amount stated therein representing the accrued

interest as One Million Five Hundred Thirty Six Thousand Four Hundred
Ninety Eight Pesos and Seventy Three Centavos (P1,536,498.73) when it
should only be Seven Hundred Sixty Thousand Three Hundred Ninety Eight
Pesos and Twenty Three Centavos (P760,398.23) and pegging the interest
rate thereon at 18% instead of 12%.
The subject Promissory Notes Nos. 127/82 and 128/82 both dated
December 29, 1982 in the principal amounts of Two Million Six Hundred
Fifty One Thousand One Hundred Eighteen Pesos and Eighty Six Centavos
(P2,651,118.86) and One Million Five Hundred Thirty Six Thousand Seven
Hundred Ninety Eight and Seventy Three Centavos (P1,536,798.73)
respectively and marked Exhibits "BB" and "CC" respectively, were payable
on equal semi-annual amortization and contained the following escalation
clause:
x x x which interest rate the BANK may increase within the limits
allowed by law at any time depending on whatever policy it may
adopt in the future; Provided, that, the interest rate on this note
shall be correspondingly decreased in the event that the applicable
maximum interest rate is reduced by law or by the Monetary
Board. In either case, the adjustment in the interest rate agreed
upon shall take effect on the effectivity date of the increase or
decrease in the maximum interest rate. x x x

Thousand Dollars ($114,000.00).14 However, petitioner claimed that

respondent PNB subsequently debited 14% instead of 10% from his export
proceeds.15
Pursuant to the escalation clauses of the subject two (2) promissory notes,
the interest rate on the principal amount in Promissory Note No. 127/82
was increased from 21% to 29% on May 28, 1984, and to 32% on July 3,
1984 while the interest rate on the accrued interest per Promissory Note
No. 128/82 was increased from 18% to 29% on May 28, 1984, and to 32%
on July 3, 1984.
Petitioner failed to pay the subject two (2) Promissory Notes Nos. 127/82
and 128/82 (Exhibits "BB" and "CC") as they fell due. Respondent PNB
extra-judicially foreclosed the real and chattel mortgages, and the
mortgaged properties were sold at public auction to respondent PNB, as
highest bidder, for a total of Three Million Seven Hundred Ninety Eight
Thousand Seven Hundred Nineteen Pesos and Fifty Centavos
(P3,798,719.50).

According to the petitioner, sometime in June 1983 the new PNB

Mandaluyong Branch Manager Bayani A. Bautista suggested that he sell
the coco-chemical plant so that he could keep up with the semi-annual
amortizations. On three (3) occasions, Bautista even showed up at the
plant with some unidentified persons who claimed that they were
interested in buying the plant.

The petitioner filed in the RTC in Pasig, Rizal a complaint for specific
performance, nullification of the extra-judicial foreclosure and damages
against respondents PNB, Fernando Maramag Jr., Ricardo C. Decepida,
Vice-President for Metropolitan Branches, and Bayani A. Bautista. He
alleged that the Extrajudicial Foreclosure Sale of the mortgaged properties
was null and void since his loans were restructured to a five-year term
loan; hence, it was not yet due and demandable; that the escalation
clauses in the subject two (2) Promissory Notes Nos. 127/82 and 128/82
were null and void, that the total amount presented by PNB as basis of the
foreclosure sale did not reflect the actual loan obligations of the plaintiff to
PNB; that Bautista purposely delayed payments on his exports and caused
delays in the shipment of materials; that PNB withheld certain personal
properties not covered by the chattel mortgage; and that the foreclosure of
his mortgages was premature so that he was unable to service his foreign
clients, resulting in actual damages amounting to Two Million Four
Thousand Four Hundred Sixty One Pesos (P 2,004,461.00).

Petitioner testified that when he confronted the PNB management about

the two (2) Promissory Notes Nos. 127/82 and 128/82 (marked Exhibits
"BB" and "CC" respectively) which he claimed were improperly filled out,
Bautista and Maramag assured him that the five-year restructuring
agreement would be implemented on the condition that he assigns 10% of
his export earnings to the Bank.13 In a letter dated August 22, 1983,
petitioner Mendoza consented to assign 10% of the net export proceeds of
a Letter of Credit covering goods amounting to One Hundred Fourteen

On March 16, 1992, the trial court rendered judgment in favor of the
petitioner and ordered the nullification of the extrajudicial foreclosure of
the real estate mortgage, the Sheriffs sale of the mortgaged real
properties by virtue of consolidation thereof and the cancellation of the
new titles issued to PNB; that PNB vacate the subject premises in Pasig and
turn the same over to the petitioner; and also the nullification of the
extrajudicial foreclosure and sheriff's sale of the mortgaged chattels, and
that the chattels be returned to petitioner Mendoza if they were removed

It appears from the record that the subject Promissory Notes Nos. 127/82
and 128/82 superseded and novated the three (3) 1979 promissory notes
and the eleven (11) 1979 "Application and Agreement for Commercial
Letter of Credit" which the petitioner executed in favor of respondent PNB.

from his Pasig premises or be paid for if they were lost or rendered
unserviceable.
The trial court also ordered respondent PNB to restructure to five-years
petitioner's principal loan of Two Million Six Hundred Fifty One Thousand
One Hundred Eighteen Pesos and Eighty Six Centavos (P2,651,118.86) and
the accumulated capitalized interest on the same in the amount of Seven
Hundred Sixty Thousand Three Hundred Eighty Nine Pesos and Twenty
Three Centavos (P760,389.23) as of December 1982, and that respondent
PNB should compute the additional interest from January 1983 up to
October 15, 1984 only when respondent PNB took possession of the said
properties, at the rate of 12% and 9% respectively.
The trial court also ordered respondent PNB to grant petitioner Mendoza an
additional Two Million Pesos (P2,000,000.00) loan in order for him to have
the necessary capital to resume operation. It also ordered respondents
PNB, Bayani A. Bautista and Ricardo C. Decepida to pay to petitioner actual
damages in the amount of Two Million One Hundred Thirteen Thousand
Nine Hundred Sixty One Pesos (P2,113,961.00) and the peso equivalent of
Six Thousand Two Hundred Fifteen Dollars ($6,215.00) at the prevailing
foreign exchange rate on October 11, 1983; and exemplary damages in the
amount of Two Hundred Thousand Pesos (P200,000.00).
Respondent PNB appealed this decision of the trial court to the Court of
Appeals. And the Court of Appeals reversed the decision of the trial court
and dismissed the complaint. Hence, this petition.
It is the petitioners contention that the PNB management restructured his
existing loan obligations to a five-year term loan and granted him another
Two Million Pesos (P2,000,000.00) LC/TR line; that the Promissory Notes
Nos. 127/82 and 128/82 evidencing a 2-year restructuring period or with
the due maturity date "December 29, 1984" were filled out fraudulently by
respondent PNB, and contrary to his verbal agreement with respondent
PNB; hence, his indebtedness to respondent PNB was not yet due and the
extrajudicial foreclosure of his real estate and chattel mortgages was
premature. On the other hand, respondent PNB denies that petitioner's
loan obligations were restructured to five (5) years and maintains that the
subject two (2) Promissory Notes Nos. 127/82 and 128/82 were filled out
regularly and became due as of December 29, 1984 as shown on the face
thereof.
Respondent Court of Appeals held that there is no evidence of a promise
from respondent PNB, admittedly a banking corporation, that it had
accepted the proposals of the petitioner to have a five-year restructuring of

his overdue loan obligations. It found and held, on the basis of the
evidence adduced, that "appellee's (Mendoza) communications were mere
proposals while the bank's responses were not categorical that the
appellee's request had been favorably accepted by the bank."
Contending that respondent PNB had allegedly approved his proposed fiveyear restructuring plan, petitioner presented three (3) documents executed
by respondent PNB officials. The first document is a letter dated March 16,
1981 addressed to the petitioner and signed by Ceferino D. Cura, Branch
Manager of PNB Mandaluyong, which states:
x x x In order to study intelligently the feasibility of your above
request, please submit the following documents/papers within
thirty (30) days from the date thereof, viz:
1. Audited Financial Statements for 1979 and 1980;
2. Projected cash flow (cash in - cash out) for five years
detailed yearly; and
3. List of additional machinery and equipment and proof of
ownership thereof.
We would strongly suggest, however, that you reduce your total
obligations to at least P3 million (principal and interest and other
charges) to give us more justification in recommending a plan of
payment or restructuring of your accounts to higher authorities of
this bank.
The second document is a letter dated May 11, 1981 addressed to Mr. S. Pe
Benito, Jr., Managing Director of the Technological Resources Center and
signed by said PNB Branch Manager, Ceferino D. Cura. According to
petitioner, this letter showed that respondent PNB seriously considered the
restructuring of his loan obligations to a five-year term loan, to wit:
xxx
At the request of our client, we would like to furnish you with the
following information pertinent to his accounts with us:
xxx

We are currently evaluating the proposal of the client to restructure his accounts with us into a five-year plan.
We hope that the above information will guide you in evaluating
the proposals of Mr. Danilo Mendoza.

xxx
Petitioner argues that he submitted the requirements according to the
instructions given to him and that upon submission thereof, his proposed
five-year restructuring plan was deemed automatically approved by
respondent PNB.

xxx
We disagree.
The third document is a letter dated July 8, 1981 addressed to petitioner
and signed by PNB Assistant Vice-President Apolonio B. Francisco.
xxx
Considering that your accounts/accommodations were granted and
carried in the books of our Mandaluyong Branch, we would suggest
that your requests and proposals be directed to Ceferino Cura,
Manager of our said Branch.
We feel certain that Mr. Cura will be pleased to discuss matters of
mutual interest with you.
xxx
Petitioner also presented a letter which he addressed to Mr. Jose Salvador,
Vice-President of the Metropolitan Branches of PNB, dated September 24,
1981, which reads:
Re: Restructuring of our Account into a 5-year Term Loan and
Request for the Establishment of a P2.0 Million LC/TR Line
Dear Sir:
In compliance with our discussion last September 17, we would like
to formalize our proposal to support our above requested
assistance from the Philippine National Bank.
xxx
Again we wish to express our sincere appreciation for your openminded approach towards the solution of this problem which we
know and will be beneficial and to the best interest of the bank and
mutually advantageous to your client.

Nowhere in those letters is there a categorical statement that respondent

PNB had approved the petitioners proposed five-year restructuring plan. It
is stretching the imagination to construe them as evidence that his
proposed five-year restructuring plan has been approved by the
respondent PNB which is admittedly a banking corporation. Only an
absolute and unqualified acceptance of a definite offer manifests the
consent necessary to perfect a contract.16 If anything, those
correspondences only prove that the parties had not gone beyond the
preparation stage, which is the period from the start of the negotiations
until the moment just before the agreement of the parties.17
There is nothing in the record that even suggests that respondent PNB
assented to the alleged five-year restructure of petitioners overdue loan
obligations to PNB. However, the trial court ruled in favor of petitioner
Mendoza, holding that since petitioner has complied with the conditions of
the alleged oral contract, the latter may not renege on its obligation to
honor the five-year restructuring period, under the rule of promissory
estoppel. Citing Ramos v. Central Bank,18 the trial court said:
The broad general rule to the effect that a promise to do or not to
do something in the future does not work an estoppel must be
qualified, since there are numerous cases in which an estoppel has
been predicated on promises or assurances as to future conduct.
The doctrine of promissory estoppel is by no means new,
although the name has been adopted only in comparatively recent
years. According to that doctrine, an estoppel may arise from the
making of a promise, even though without consideration, if it was
intended that the promise should be relied upon and in fact it was
relied upon, and if a refusal to enforce it would be virtually to
sanction the perpetration of fraud or would result in other injustice.
In this respect, the reliance by the promisee is generally evidenced
by action or forbearance on his part, and the idea has been
expressed that such action or forbearance would reasonably have
been expected by the promissor. xxx

The doctrine of promissory estoppel is an exception to the general rule that

a promise of future conduct does not constitute an estoppel. In some
jurisdictions, in order to make out a claim of promissory estoppel, a party
bears the burden of establishing the following elements: (1) a promise
reasonably expected to induce action or forebearance; (2) such promise
did in fact induce such action or forebearance, and (3) the party suffered
detriment as a result.19
It is clear from the forgoing that the doctrine of promissory estoppel
presupposes the existence of a promise on the part of one against whom
estoppel is claimed. The promise must be plain and unambiguous and
sufficiently specific so that the Judiciary can understand the obligation
assumed and enforce the promise according to its terms. 20 For petitioner to
claim that respondent PNB is estopped to deny the five-year restructuring
plan, he must first prove that respondent PNB had promised to approve the
plan in exchange for the submission of the proposal. As discussed earlier,
no such promise was proven, therefore, the doctrine does not apply to the
case at bar. A cause of action for promissory estoppel does not lie where
an alleged oral promise was conditional, so that reliance upon it was not
reasonable.21 It does not operate to create liability where it does not
otherwise exist.22
Since there is no basis to rule that petitioner's overdue loan obligations
were restructured to mature in a period of five (5) years, we see no other
option but to respect the two-year period as contained in the two (2)
subject Promissory Notes Nos. 127/82 and 128/82, marked as Exhibits "BB"
and "CC" respectively which superseded and novated all prior loan
documents signed by petitioner in favor of respondent PNB. Petitioner
argues, in his memorandum, that "respondent Court of Appeals had no
basis in saying that the acceptance of the five-year restructuring is totally
absent from the record."23 On the contrary, the subject Promissory Notes
Nos. 127/82 and 128/82 are clear on their face that they were due on
December 29, 1984 or two (2) years from the date of the signing of the
said notes on December 29, 1982.
Petitioner claims that the two (2) subject Promissory Notes Nos. 127/82
and 128/82 were signed by him in blank with the understanding that they
were to be subsequently filled out to conform with his alleged oral
agreements with PNB officials, among which is that they were to become
due only after five (5) years. If petitioner were to be believed, the PNB
officials concerned committed a fraudulent act in filling out the subject two
(2) promissory notes in question. Private transactions are presumed to be
fair and regular.24 The burden of presenting evidence to overcome this
presumption falls upon petitioner. Considering that petitioner imputes a

serious act of fraud on respondent PNB, which is a banking corporation,

this court will not be satisfied with anything but the most convincing
evidence. However, apart from petitioner's self-serving verbal declarations,
we find no sufficient proof that the subject two (2) Promissory Notes Nos.
127/82 and 128/82 were completed irregularly. Therefore, we rule that the
presumption has not been rebutted.
Besides, it could be gleaned from the record that the petitioner is an astute
businessman who took care to reduce in writing his business proposals to
the respondent bank. It is unthinkable that the same person would commit
the careless mistake of leaving his subject two (2) promissory notes in
blank in the hands of other persons. As the respondent Court of Appeals
correctly pointed out:
Surely, plaintiff-appellee who is a C.P.A and a Tax Consultant (p. 3
TSN, January 9, 1990) will insist that the details of the two
promissory notes he and his wife executed in 1982 should be
specific to enable them to make the precise computation in the
event of default as in the case at bench. In fact, his alleged
omission as a C.P.A. and a Tax Consultant to insist that the two
promissory notes be filled up on important details like the rates of
interest is inconsistent with the legal presumption of a person who
takes ordinary care of his concerns (Section 3 (c), Rule 131,
Revised Rules on Evidence).
As pointed out by the Court of Appeals, Orlando Montecillo, Chief, Loans
and Discounts, PNB Mandaluyong Branch, testified that the said Promissory
Notes Nos. 127/82 and 128/82 were completely filled out when Danilo
Mendoza signed them (Rollo, p. 14).
In a last-ditch effort to save his five-year loan restructuring theory,
petitioner contends that respondent PNB's action of withholding 10% from
his export proceeds is proof that his proposal had been accepted and the
contract had been partially executed. He claims that he would not have
consented to the additional burden if there were no corresponding benefit.
This contention is not well taken. There is no credible proof that the 10%
assignment of his export proceeds was not part of the conditions of the
two-year restructuring deal. Considering that the resulting amount
obtained from this assignment of export proceeds was not even enough to
cover the interest for the corresponding month,25 we are hard-pressed to
construe it as the required proof that respondent PNB allegedly approved
the proposed five-year restructuring of petitioners overdue loan
obligations.

It is interesting to note that in his Complaint, petitioner made no mention

that the assignment of his export proceeds was a condition for the alleged
approval of his proposed five-year loan restructuring plan. The Complaint
merely alleged that "plaintiff in a sincere effort to make payments on his
obligations agreed to assign 10% of his export proceeds to defendant
PNB." This curious omission leads the court to believe that the alleged link
between the petitioners assignment of export proceeds and the alleged
five-year restructuring of his overdue loans was more contrived than real.
It appears that respondent bank increased the interest rates on the two (2)
subject Promissory Notes Nos. 127/82 and 128/82 without the prior
consent of the petitioner. The petitioner did not agree to the increase in the
stipulated interest rate of 21% per annum on Promissory Note No. 127/82
and 18% per annum on Promissory Note No. 128/82. As held in several
cases, the unilateral determination and imposition of increased interest
rates by respondent bank is violative of the principle of mutuality of
contracts ordained in Article 1308 of the Civil Code. 26As held in one case:27
It is basic that there can be no contract in the true sense in the
absence of the element of agreement, or of mutual assent of the
parties. If this assent is wanting on the part of one who contracts,
his act has no more efficacy than if it had been done under duress
or by a person of unsound mind.
Similarly, contract changes must be made with the consent of the
contracting parties. The minds of all the parties must meet as to
the proposed modification, especially when it affects an important
aspect of the agreement. In the case of loan contracts, it cannot be
gainsaid that the rate of interest is always a vital component, for it
can make or break a capital venture.
It has been held that no one receiving a proposal to change a contract to
which he is a party is obliged to answer the proposal, and his silence per se
cannot be construed as an acceptance.28 Estoppel will not lie against the
petitioner regarding the increase in the stipulated interest on the subject
Promissory Notes Nos. 127/82 and 128/82 inasmuch as he was not even
informed beforehand by respondent bank of the change in the stipulated
interest rates. However, we also note that the said two (2) subject
Promissory Notes Nos. 127/82 and 128/82 expressly provide for a penalty
charge of 3% per annum to be imposed on any unpaid amount when due.
Petitioner prays for the release of some of his movables29 being withheld by
respondent PNB, alleging that they were not included among the chattels
he mortgaged to respondent bank. However, petitioner did not present any

proof as to when he acquired the subject movables and hence, we are not
disposed to believe that the same were "after-acquired" chattels not
covered by the chattel and real estate mortgages.
In asserting its rights over the subject movables, respondent PNB relies on
a common provision in the two (2) subject Promissory Notes Nos. 127/82
and 128/82 which states:
In the event that this note is not paid at maturity or when the same
becomes due under any of the provisions hereof, we hereby
authorized the BANK at its option and without notice, to apply to
the payment of this note, any and all moneys, securities and things
of value which may be in its hands on deposit or otherwise
belonging to me/us and for this purpose. We hereby, jointly and
severally, irrevocably constitute and appoint the BANK to be our
true Attorney-in-Fact with full power and authority for us in our
name and behalf and without prior notice to negotiate, sell and
transfer any moneys securities and things of value which it may
hold, by public or private sale and apply the proceeds thereof to
the payment of this note.
It is clear, however, from the above-quoted provision of the said
promissory notes that respondent bank is authorized, in case of default, to
sell "things of value" belonging to the mortgagor "which may be on its
hands for deposit or otherwise belonging to me/us and for this purpose."
Besides the petitioner executed not only a chattel mortgage but also a real
estate mortgage to secure his loan obligations to respondent bank.
A stipulation in the mortgage, extending its scope and effect to afteracquired property is valid and binding where the after-acquired property is
in renewal of, or in substitution for, goods on hand when the mortgage was
executed, or is purchased with the proceeds of the sale of such goods. 30 As
earlier pointed out, the petitioner did not present any proof as to when the
subject movables were acquired.
More importantly, respondent bank makes a valid argument for the
retention of the subject movables. Respondent PNB asserts that those
movables were in fact "immovables by destination" under Art. 415 (5) of
the Civil Code.31 It is an established rule that a mortgage constituted on an
immovable includes not only the land but also the buildings, machinery
and accessories installed at the time the mortgage was constituted as well
as the buildings, machinery and accessories belonging to the mortgagor,
installed after the constitution thereof.32

Petitioner also contends that respondent PNBs bid prices for this
foreclosed properties in the total amount of Three Million Seven Hundred
Ninety Eight Thousand Seven Hundred Nineteen Pesos and Fifty Centavos
(P3,798,719.50), were allegedly "unconscionable and shocking to the
conscience of men". He claims that the fair market appraisal of his
foreclosed plant site together with the improvements thereon located in
Pasig, Metro Manila amounted to Five Million Four Hundred Forty One
Thousand Six Hundred Fifty Pesos (P5,441,650.00) while that of his house
and lot in Quezon City amounted to Seven Hundred Twenty Two Thousand
Pesos (P722,000.00) per the appraisal report dated September 20, 1990 of
Cuervo Appraisers, Inc.33 That contention is not well taken considering that:

WHEREFORE, the petition is hereby DENIED. The challenged Decision of

the Court of Appeals in CA-G.R. CV No. 38036 is AFFIRMED with
modification that the increase in the stipulated interest rates of 21% per
annum and 18% per annum appearing on Promissory Notes Nos. 127/82
and 128/82 respectively is hereby declared null and void.
SO ORDERED.

1. The total of the principal amounts alone of petitioners subject

Promissory Notes Nos. 127/82 and 128/82 which are both overdue
amounted to Four Million One Hundred Eighty Seven Thousand
Nine Hundred Seventeen Pesos and Fifty Nine Centavos
(P 4,187,917.59).
2. While the appraisal of Cuervo Appraisers, Inc. was undertaken in
September 1990, the extrajudicial foreclosure of petitioners real
estate and chattel mortgages have been effected way back on
October 15, 1984, October 23, 1984 and December 21,
1984.34 Common experience shows that real estate values
especially in Metro Manila tend to go upward due to developments
in the locality.1wphi1.nt
3. In the public auction/foreclosure sales, respondent PNB, as
mortgagee, was not obliged to bid more than its claims or more
than the amount of petitioners loan obligations which are all
overdue. The foreclosed real estate and chattel mortgages which
petitioner earlier executed are accessory contracts covering the
collaterals or security of his loans with respondent PNB. The
principal contracts are the Promissory Notes Nos. 127/82 and
128/82 which superseded and novated the 1979 promissory notes
and the 1979 eleven (11) Applications and Agreements for
Commercial Letter of Credit.
Finally, the record shows that petitioner did not even attempt to tender any
redemption price to respondent PNB, as highest bidder of the said
foreclosed real estate properties, during the one-year redemption period.
In view of all the foregoing, it is our view and we hold that the extrajudicial
foreclosure of petitioners real estate and chattel mortgages was not
premature and that it was in fact legal and valid.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 131086

December 14, 2001

BPI EXPRESS CARD CORPORATION, petitioner,

vs.
EDDIE C. OLALIA, respondent.
QUISUMBING, J.:

This petition for review seeks to annul the decision1 of the Court of Appeals
in CA-G.R. CV No. 49618, reversing the order2 of the Regional Trial Court,
Branch 145, of Makati City which held Eddie C. Olalia liable to BPI Express
Card Corporation (BECC) in the amount of P136,290.97. The CA found only
the amount of P13,883.27 to be due and owing to BECC. Petitioners
motion for reconsideration was denied through a resolution, 3 also before us
on review.
The factual antecedents of this case are as follows:
Petitioner operates a credit card system under the name of BPI Express
Card Corporation (BECC) through which it extends credit accommodations
to its cardholders for the purchase of goods and other services from
member establishments of petitioner to be reimbursed later on by the
cardholder upon proper billing.
Respondent Eddie C. Olalia applied4 for and was granted membership and
credit accommodation with BECC. BECC Card No. 020100-3-00-0281667
was issued in his name with a credit limit of P5,000.
In January 1991, Olalias card expired and a renewal card was issued. BECC
also issued Card No. 020100-2-01-0281667 in the name of Cristina G.
Olalia, respondents ex-wife. This second card was an extension of Olalias
credit card. BECC alleges that the extension card was delivered and
received by Olalia at the same time as the renewal card. However, Olalia
denies ever having applied for, much less receiving, the extension card.
As evidenced by charge slips presented and identified in court, it was
found that the extension card in the name of Cristina G. Olalia was used for
purchases made from March to April 1991, particularly in the province of
Iloilo and the City of Bacolod. Total unpaid charges from the use of this card
amounted to P101,844.54.1wphi1.nt
BECC sent a demand letter to Olalia, to which the latter denied liability
saying that said purchases were not made under his own credit card and
that he did not apply for nor receive the extension card in the name of his
wife. He has likewise not used or allowed anybody in his family to receive
or use the extension card. Moreover, his wife, from whom he was already
divorced, left for the States in 1986 and has since resided there. In
addition, neither he nor Cristina was in Bacolod or Iloilo at the time the
questioned purchases were made. She was dropped as defendant by the
trial court, in an Order dated September 29, 1995.5

A case for collection was filed by BECC before the RTC but Olalia only
admits responsibility for the amount of P13,883.27, representing purchases
made under his own credit card. After trial on the merits, a decision was
rendered as follows:
WHEREFORE, judgment is rendered ordering defendant Eddie C.
Olalia to pay plaintiff the sum of Thirteen Thousand Eight Hundred
Eighty-Three Pesos and Twenty-seven Centavos (P13,883.27),
Philippine Currency with interest thereon at the legal rate from June
18, 1991, until fully paid; and to pay the costs.
SO ORDERED.6
From the aforesaid decision, a Motion for Reconsideration was filed,
alleging that Olalia should also be held liable for the purchases arising from
the use of the extension card since he allegedly received the same, as
evidenced by his signature appearing in the Renewal Card
Acknowledgement Receipt7 and by the express provision of paragraph 2 of
the terms and conditions governing the use and issuance of a BPI Express
Card, making the cardholder and his extension jointly and severally liable
for all purchases and availments made through the use of the card.
On April 28, 1995, the Motion for Reconsideration was granted and an
Order was issued, stating:
Defendant Eddie C. Olalia has not filed any reaction paper up to
the present relative to plaintiffs MOTION FOR RECONSIDERATION
dated December 20, 1994.
Finding the allegations in said motion to be meritorious, the same
is hereby granted.
WHEREFORE, the dispositive portion of the decision dated
November 25, 1994, is reconsidered and accordingly
amended/corrected to read as follows:
WHEREFORE, judgment is rendered ordering defendant
Eddie C. Olalia to pay plaintiff the sum of One Hundred
Thirty Six Thousand Two Hundred Ninety Pesos and Ninetyseven Centavos (P136,290.97) Philippine Currency, as of
October 27, 1991.
SO ORDERED.8

Olalia appealed to the Court of Appeals and was there sustained in a

decision dated November 28, 1996. The CA ruled as follows:
THE FOREGOING CONSIDERED, the contested Decision, while
affirmed, is hereby modified by limiting appellants liability only to
P13,883.27, but with interest at 3% per month in addition to
penalty fee of 3% of the amount due every month, until full
payment.9
BECC filed a Motion for Reconsideration but the CA denied the same
through a Resolution dated October 17, 1997.
Hence, this petition wherein BECC contends, as its lone assignment of
error,10 that the Court of Appeals erred in limiting the liability of respondent
to only P13,883.27 exclusive of interest and penalty fee notwithstanding
receipt and availment of the extension card.
More precisely, the issues are: 1) Whether or not an extension card in the
name of Cristina G. Olalia was validly issued and in fact received by
respondent Eddie C. Olalia; and 2) Whether or not Eddie C. Olalia can be
held liable for the purchases made using the extension card.
We discuss the issues jointly.
Under stipulation No. 10 of the terms and conditions governing the
issuance and use of the BPI Express Credit Card, the following is stated:
10. EXTENSIONS/SUPPLEMENTARY CARDS Extension of the CARD
issued to the Cardholder may be given to the latters spouse or
children upon payment of the necessary fee thereof, and
the submission of an application for the purpose; and the use of
such CARD, as well as the extensions, thereof, shall be governed
by this Agreement, and secured by the Surety Undertaking hereto.
Any reference to the CARD issued to the Cardholder hereafter shall
also apply to extensions and/or renewals. Should a CARD be issued
to the spouse/children of a Cardholder upon the Cardholders
request, the Cardholder shall be responsible for all charges
including all fees, interest and other charges made through the
CARD. In the event of separation, legal or otherwise, the
Cardholder shall continue to be responsible for all such charges to
be made through the extension CARD unless Cardholder request in
writing that the privileges of such extension Cardholder under this

Agreement be terminated, provided all charges incurred shall have

been fully paid and satisfied. (Emphasis ours)11
From the foregoing stipulation, it is clear that there are two requirements
before an extension/supplementary card is issued. They are: 1) payment of
the necessary fee, and 2) submission of an application for the purpose.
None of these requirements were shown to have been complied with by
Olalia. Both the trial and appellate courts have found that in Olalias
applications for the original as well as the renewal card, he never applied
for an extension card in the name of his wife. BECC also failed to show any
receipt for any fee given in payment for the purpose of securing an
extension card.
BECC supports its allegation that Eddie C. Olalia received the extension
card in the name of his wife, by presenting the Renewal Card
Acknowledgement Receipt wherein Olalia affixed his signature. Such will
not suffice to prove to this Court that the requirements for the issuance of
the extension card have been complied with, especially in the face of
respondents firm denial.
We have previously held that contracts of this nature are contracts of
adhesion, so-called because their terms are prepared by only one party
while the other merely affixes his signature signifying his adhesion
thereto.12 As such, their terms are construed strictly against the party who
drafted it.13 In this case, it was BECC who made the foregoing stipulation,
thus, they are now tasked to show vigilance for its compliance.
BECC failed to explain who a card was issued without accomplishment of
the requirements. Moreover, BECC did not even secure the specimen
signature of the purported extension cardholder, such that it cannot now
counter Eddie C. Olalias contention that the signatures appearing on the
charge slips of the questioned transactions were not that of his former
wife, Cristina G. Olalia.
We note too that respondent Eddie C. Olalia did not indicate nor declare
that he had a spouse when he applied for a credit card with BECC. In fact,
at the time the extension card was issued and allegedly received by
respondent, Cristina had long left the Philippines.
BECCs negligence absolves respondent Olalia from liability.
In sum, we agree with the Court of Appeals that respondent Olalia should
not be held liable for the purchases made under the so-called extension

card irregularly issued by petitioner and used for purchases made by an

unauthorized party for whose actions the respondent could not be legally
made answerable. This being the case, respondent Olalia could only be
held liable for P13,883.27 representing purchases made under his own
credit card, exclusive of interest and penalty thereon, if any.1wphi1.nt
WHEREFORE, the instant petition is DENIED, and the decision of the
Court of Appeals is hereby AFFIRMED.

This is a petition for review on certiorari where petitioner Spouses Domingo

and Lourdes Paguyo seek the reversal of the Decision 2 and the
Resolution,3 dated 30 April 1997 and 12 September 1997, respectively, of
the Court of Appeals in CA-G.R. CV No. 47034, affirming in toto the
Decision4 dated 21 April 1994 of the Regional Trial Court (RTC), Branch 142
of Makati City.
The Antecedents
The undisputed facts, per summary of the Court of Appeals, follow.

SO ORDERED.
Herein petitioners, Spouses Domingo Paguyo and Lourdes Paguyo, were
the owners of a small five-storey building known as the Paguyo Building
located at Makati Avenue, corner Valdez Street, Makati City. With one (1)
unit per floor, the building has an average area of 100 square meters per
floor and is constructed on a land belonging to the Armas family. 5

Republic of the Philippines

SUPREME COURT
SECOND DIVISION
G.R. No. 130982 September 16, 2005
SPOUSES DOMINGO and LOURDES PAGUYO, Petitioners,
vs.
Pierre astorga and St. Andrew Realty, Inc., Respondent.
DECISION
CHICO-NAZARIO, J.:
. . . Men may do foolish things, make ridiculous contracts, use miserable
judgment, and lose money by them indeed, all they have in the world;
but not for that alone can the law intervene and restore. There must be, in
addition, a violation of the law, the commission of what the law knows as
an actionable wrong, before the courts are authorized to lay hold of the
situation and remedy it.1
The case at bar demonstrates a long drawn-out litigation between parties
who already entered into a valid contract that has subsisted for almost
twenty (20) years but one of them later balks from being bound by it,
alleging fraud, gross inadequacy of consideration, mistake, and undue
influence.

This lot on which the Paguyo Building stands was the subject of Civil Case
No. 5715 entitled, Armas, et al., v. Paguyo, et al., wherein the RTC of Makati
City, Branch 57, rendered a decision on 20 January 1988 approving a
Compromise Agreement made between the Armases and the petitioners.
The compromise agreement provided that in consideration of the total sum
of One Million Seven Hundred Thousand Pesos (P1,700,000.00), the
Armases committed to execute in favor of petitioners a deed of sale and/or
conveyance assigning and transferring unto said petitioners all their rights
and interests over the parcel of land containing an area of 299 square
meters.6
In order for the petitioners to complete their title and ownership over the
lot in question, there was an urgent need to make complete payment to
the Armases, which at that time stood at P917,470.00 considering that
petitioners had previously made partial payments to the Armases.
On 29 November 1988, in order to raise the much needed amount,
petitioner Lourdes Paguyo entered into an agreement captioned
as Receipt of Earnest Money with respondent Pierre Astorga, for the
sale of the formers property consisting of the lot which was to be
purchased from the Armases, together with the improvements thereon,
particularly, the existing building known as the Paguyo Building, under the
following terms and conditions as stated in the document, to wit:
RECEIVED from MR. PIERRE M. ASTORGA the sum of FIFTY THOUSAND
(P50,000.00) PESOS (U.C.P.B. Managers Check No. 013085 dated
November 29, 1988) as earnest money for the sale of our property
consisting of a parcel of land designated as Lot 12 located at Makati
Avenue, Makati, Metro Manila, covered by and described in T.C.T. No.
154806 together with the improvements thereon particularly the existing
building known as the Paguyo Bldg. under the following terms and
conditions:

1. The earnest money (Exh. "D") shall be good for fifteen (15) days from
date of this document during which period the owner is bound to sell the
property to the buyer;
2. Should the buyer decide not to buy the subject property within the
earnest/option period, the seller has the right to forfeit Fifteen Thousand
(P15,000.00) pesos, and return the difference to the buyer;
3. The agreed total purchase price is seven million (P7,000,000.00) pesos
Philippine Currency;
4. Within fifteen (15) days from execution of this document, the buyer shall
pay Fifty (50%) percent of the total purchase price less the aforesaid
earnest money, upon payment of which the following documents shall be
executed or caused to be executed as the case may be, namely:
a. Deed of Absolute Sale of the Paguyo Bldg., in favor of the buyer.
b. Deed of Absolute Sale to be executed by the Armases who still appear
as the registered owners of the lot in favor of the buyer.
c. Deed of Real Estate Mortgage of the same subject lot and Bldg. to
secure the 50% balance of the total purchase price to be executed by the
buyer in favor of the herein seller.
5. The Deed of Real Estate Mortgage shall contain the following provisions,
namely:
a. payment of the 50% balance of the purchase price shall be payable
within fifteen (15) days from actual vacating of the Armases from the
subject lot.
b. During the period commencing from the execution of the documents
mentioned under paragraph 4 (which should be done simultaneously) the
buyer is entitled to one-half (1/2) of the rental due and actually received
from the tenants of the Paguyo Bldg. plus the use of the penthouse while
the seller shall retain possession and use of the basement free of rent until
the balance of the purchase price is fully paid in accordance with the
herein terms and conditions. The one-half (1/2) of the tenants deposits
shall be credited in favor of the buyer. 7
However, contrary to their express representation with respect to the
subject lot, petitioners failed to comply with their obligation to acquire the
lot from the Armas family despite the full financial support of respondents.
Nevertheless, the parties maintained their business relationship under the
terms and conditions of the above-mentioned Receipt of Earnest Money. 8

On 12 December 1988, petitioners asked for and were given by

respondents an additional P50,000.00 to meet the formers urgent need for
money in connection with their construction business. Due also to the
urgent necessity of obtaining money to finance their construction business,
petitioner Lourdes Paguyo, who was also the attorney-in-fact of her
husband, proposed to the respondents the separate sale of the building in
question while she continued to work on the acquisition of the lot from the
Armas family, assuring the respondents that she would succeed in doing
so.9
Aware of the risk of buying an improvement on the lot of a third party who
appeared ambivalent on whether to dispose their property in favor of the
respondents, respondents took a big business gamble and, relying on the
assurance of petitioners that they would eventually acquire the lot and
transfer the same to respondents in accordance with their undertaking in
the Receipt of Earnest Money, respondents agreed to petitioner Lourdes
Paguyos proposal to buy the building first. Thus, on 5 January 1989, the
parties executed the four documents in question namely, the Deed of
Absolute Sale of the Paguyo Building, the Mutual Undertaking, the Deed of
Real Estate Mortgage, and the Deed of Assignment of Rights and
Interest.10 Simultaneously with the signing of the four documents,
respondents paid petitioners the additional amount
of P500,000.00.11 Thereafter, the respondents renamed the Paguyo
Building into GINZA Bldg. and registered the same in the name of
respondent St. Andrew Realty, Inc. at the Makati Assessors Office after
paying accrued real estate taxes in the total amount ofP169,174.95. Since
1990, respondents paid the real estate taxes on subject building as
registered owners thereof. Further, respondents obtained fire insurance
and applied for the conversion of Paguyo Building into a condominium. All
of these acts of ownership exercised by respondents over the building were
with the express knowledge and consent of the petitioners. 12
Pursuant to their agreement contained in the aforecited documents,
particularly in the Mutual Undertaking,13respondent company filed an
ejectment case and obtained a favorable decision against petitioners in the
Metropolitan Trial Court (MeTC) of Makati in Civil Case No. 40050. The case
reached this Court which affirmed the decision of the MeTC in favor of
respondent company. This decision had already been executed and the
respondent company is now in possession of the building. Accordingly,
respondents continued to exercise acts of full ownership, possession and
use over the building.14
On 06 October 1989, petitioners filed a Complaint for the rescission of
the Receipt of Earnest Money15 with the undertaking to return the sum
of P763,890.50. They also sought the rescission of the Deed of Real
Estate Mortgage,16 the Mutual Undertaking, the Deed of Absolute
Sale of Building,17 and the Deed of Assignment of Rights and
Interest.18

In their complaint, petitioners alleged that respondents Astorga and St.

Andrew Realty, Inc., led them to believe that they would advance
the P917,470.00, which was needed by petitioners to complete payment
with the Armases, with the understanding that said amount would simply
be deducted from the P7 Million total consideration due them for the sale
of the lot and the building as agreed upon in their Receipt of Earnest
Money. The same, however, did not materialize because instead of making
available the check for the said amount, respondents did not produce the
amount and even ordered the "stop payment" of the same before it could
be deposited in court.19

Avenue, the particulars and description of which are indicated on TCT No.
154806 which, for reasons we perceive to be not legitimate, was cancelled.
...
(SGD.) HECTOR B. ALMEYDA
For the Firm21
(Emphasis supplied.)

Respondents, in their Answer, however, interjected that as gleaned from

the Receipt of Earnest Money, theMutual Undertaking, the Deed of
Assignment of Rights and Interest, their original intention was to
purchase the Paguyo Building and the lot on which it
stands simultaneously. Respondents interposed that at the time the
decision on the compromise agreement between petitioners and Armases
was rendered, petitioners were badly in need of money because they were
financing their construction business and, with the balance payable to the
Armases, the former were in a huff to produce an amount sufficient to
cover both transactions. Thus, petitioners prevailed upon respondents to
purchase the Paguyo Building first with the lot to follow after petitioners
have successfully acquired it from the Armas family.
Respondents, likewise, stated in their Answer that sometime in July of
1989, petitioners asked respondent corporation to execute a check in the
amount of P917,470.0020 for the final execution of the Deed of Conveyance
of the lot, saying that they were finally able to negotiate the purchase of
the lot owned by the Armases. To settle the transaction, respondent
corporation again complied. After investigation, however, respondents
learned that petitioners were not in the position to deliver the land, all the
rights and interest thereof having allegedly been transferred already to
spouses Rodolfo and Aurora Bacani. They were able to confirm this after
obtaining a copy of a letter dated 22 September 1989 of petitioners
counsel (same counsel representing them presently) to the Register of
Deeds of Makati a month prior to the filing of the instant case. The letter
stated:
Ms. Mila Flores
Register of Deeds

Respondents further explained in their Answer that because of this

development, they were constrained to order "stop payment" of
the P917,470.00 check, which was duly communicated to petitioners in a
letter dated 14 July 1989, to wit:
I am very sorry to inform you that I have to stop payment on Philtrust
Check No. 006759 because I was just reliably informed that you are no
longer in a position to deliver the lot subject of our agreement. While the
financier had already advanced half million pesos which was already
placed in my account, I discouraged her from putting another million pesos
to cover my check with you. I therefore find myself with no alternative but
to order stop payment on my check to protect my rights and interests. 22
The Ruling of the Trial Court
After trial, the RTC ruled in favor of respondents in a Decision 23 dated 21
April 1994, the dispositive portion of which reads:
Judgment is hereby rendered dismissing the complaint for lack of cause of
action, the petition for preliminary injunction is hereby denied, judgment is
rendered in favor of the defendants and ordering the plaintiff spouses
Domingo and Lourdes Paguyo to pay the defendants Pierre Astorga and St.
Andrew Realty, Inc. on their counterclaim.
1. P400,000.00 for moral damages;
2. P200,000.00 as exemplary damages;

Makati, Metro Manila

3. P100,00.00 for attorneys fees and litigation expenses and pay the cost
of suit.24

Dear Ms. Flores:

The Ruling of the Court of Appeals

We represent the spouses Rodolfo and Aurora Bacani, who happen to be

the assignees of all the rights and interests that the couple Domingo and
Lourdes Paguyo have over that parcel of land located along Makati

On appeal, the Court of Appeals promulgated its Decision 25 dated 30 April

1997 in CA-G.R. CV No. 47034 affirming the decision of the trial court, the
dispositive portion of which reads as follows:
WHEREFORE, We find the lower courts decision in full accord with the facts
and the law. Judgment is hereby rendered affirming the assailed decision
dated April 21, 1994 in toto.26
Aggrieved by the ruling, petitioners elevated the matter to us via the
instant petition, contending that the Court of Appeals erred:
1. In concluding that the supposed acts of ownership and possession of
respondents preclude petitioners from seeking rescission and declaration
of nullity of documents signed and executed under mistaken premises that
were not all true and accurate;
2. IN FAILING to find that fraud, mistake and undue influence had been
exerted on petitioner Lourdes Paguyo to make her a party to the assailed
documents;
3. In reading the documents involved without regard to the
contemporaneous acts of the parties prior, during and immediately after
the signing process;
4. In affirming the dismissal of the complaint; and
5. In awarding damages and attorneys fees in favor of the respondents. 27
The questions the Court is now tasked to answer are: (1) Did the Court of
Appeals err in upholding the trial courts decision denying petitioners
complaint for rescission? (2) Was the award of damages and attorneys
fees to respondents proper?
On the first issue, petitioners claim that the 05 January 1989 documents,
particularly the Deed of Absolute Sale of Building, Mutual Undertaking, Real
Estate Mortgage, and Assignment of Rights and Interests read together
with the 29 November 1988 Receipt of Earnest Money, were all designed,
per the respondents representations, to secure their exposure in the total
sum of P763,890.50 which constituted their outlay in the projected
purchase of the Paguyo lot and building.
Respondents dispute petitioners' line of reasoning. They say that the Deed
of Absolute Sale over the building was absolute and unconditional.
Our Ruling
Petitioners contentions lack merit.

The right to rescind a contract involving reciprocal obligations is provided

for in Article 1191 of the Civil Code. Article 1191 states: M
The power to rescind obligations is implied in reciprocal ones, in case one
of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of
the obligation, with the payment of damages in either case. He may also
seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons
who have acquired the thing, in accordance with Articles 1385 and 1388
and the Mortgage Law.
The law speaks of the right of the "injured party" to choose between
rescission or fulfillment of the obligation, with the payment of damages in
either case.28
Here, petitioners claim to be the injured party and consequently seek the
rescission of the Deed of Absolute Sale of the Building and the other
documents in question. Petitioners aver that they are entitled to cancel the
Deed of Sale altogether in view of fraud, gross inadequacy of price,
mistake, and undue influence.
To boost their claim that the Deed of Absolute Sale was intended merely to
document the cash outlays of respondents, petitioners say that
the P600,000.00 consideration as contained in the Deed of Absolute Sale of
the 5-storey Paguyo building is a far cry from the P3 Million valuation
attached to it by respondent Astorga himself and the buildings fair market
value of P2,848,000.00 assessed by the Cuervo Appraisers, Inc.
We find no such inadequacy of consideration in the case at bar. For one, on
top of the P600,000.00 which petitioners received, respondents had to
shoulder the accrued real estate taxes of P169,174.95. For another,
respondent Pierre Astorga explained that said price was what St. Andrew
Realty, Inc., believed as value for their money inasmuch as the building
stands on the lot owned by another and there were separate owners of the
land, who appear reluctant to sell it. For a third, said amount was arrived at
considering the depreciated value of the building and in view of the
economic and political uncertainties in the country at that time, marked by
a series ofcoup detat, which caused real estate prices to plummet.
Respondent Astorga was explicit on this score
ATTY. JOSE

Q: There was statement here by Mrs. Paguyo that this document entitled
the deed of absolute sale of a building marked Exhibit "9" was not
expressive of the intention of the parties meaning to say that she did not
intend to sell the said building and one of the reasons she tried to raise
was the fact that the building was only sold for P500,000.00, what can you
say to that?
A: Well, the P500,000.00 amount that she would want to impress to be an
inadequate amount is what we in St. Andrews end believed as value for
money for the reason that the building stands on the lot she does
not own and there were separate owners and apparent conflict
between them even the seeming impossibility of getting the lot
Q: By the way, before the plaintiffs decided to dispose the building or sell
the building by virtue of this deed of sale marked Exhibit "98" was your
company ever interested in acquiring the said building?
A: The building alone, no. In fact, on December 21 when we had the
problem as to acquiring the lot, we did not part with any payment to Mrs.
Paguyo demonstrating that we had really and truly intended a
simultaneous buy of the building and the lot to acquire the property
simultaneously the building and as well as the lot.
Q: Now, you mentioned that you are a realtor, I will ask you the same
question, which Atty. Almeyda asked me when I was on the witness stand,
as a realtor will you please tell the court what would be your appraisal of
the value of the building?

A: Okay, appraisal can take many forms if its appraised value based on the
construction cost it could be different from appraising per se the building.
That is now existing in that address also appraisal will depend on where
the building is and there is only one owner of the building and the lot. As
the case here is, the building in a manner of speaking stands on thin air.
That is so including depreciation and timing that we were doing in this
transaction which was 1989, my appraisal will be in the range of a Million
may be.
Q: You made mentioned the word timing in 1989, why did you mention
that?
A: Well, 89 was not the best real estate year. In fact, we have a boom in
1988 but prices were already deep during this year such that it is in 1988
when it could have been another price. But this transaction happened or
entered into in 1989, there were no interested buyers during that time, sir.
Q: Why?
A: coup de etat was one, and many other issue on hand that causes value
to take deep.
Q: You mentioned that word depreciation, will you please explain to us
what that depreciation has got to do with that building?

ATTY. COLOMA

A: In appraisal terms the building is in an economic line in every year of

which a certain value is allocated as depreciation for wear and tear for
breakdowns and all that is depreciation. This is deductible from the amount
of the building (sic).

- Objection, your Honor. May we know if the witness is going to express an

opinion or is he testifying now as an expert realtor?

Q: Before you went into this agreement with the plaintiff Paguyo have you
inspected the building?

COURT

A: Yes, sir. Thoroughly, sir.

- As an opinion but it would not bind the Court.

Q: Will you please explain to the court the size of the building and the
description of the building?

WITNESS

ATTY. JOSE

A: That building is five (5) storey it has only one (1) unit per floor, sir. There
is a narrow stairway that leads up to the penthouse. It is, I would say, in an
advance deteriorating stage, it needed some renovations here and
there.29(Emphasis supplied.)

- Yes, please explain.

Moreover, Articles 1355 and 1470 of the Civil Code state:

- I can explain to you.

WITNESS

Art. 1355. Except in cases specified by law, lesion or inadequacy of

cause shall not invalidate a contract,unless there has been fraud,
mistake or undue influence. (Emphasis supplied)
Art. 1470. Gross inadequacy of price does not affect a contract of
sale, except as may indicate a defect in the consent, or that the parties
really intended a donation or some other act or contract. (Emphasis
supplied)
Petitioners herein failed to prove any of the instances mentioned in Articles
1355 and 1470 of the Civil Code, which would invalidate, or even affect,
the Deed of Sale of the Building and the related documents. Indeed, there
is no requirement that the price be equal to the exact value of the subject
matter of sale.30
In Sps. Buenaventura v. Court of Appeals,31 the Court was unequivocal:
Courts cannot follow one every step of his life and extricate him from bad
bargains, protect him from unwise investments, relieve him from one-sided
contracts, or annul the effects of foolish acts. Courts cannot constitute
themselves guardians of persons who are not legally incompetent. Courts
operate not because one person has been defeated or overcome by
another, but because he has been defeated or overcome illegally. Men may
do foolish things, make ridiculous contracts, use miserable judgment, and
lose money by them indeed, all they have in the world; but not for that
alone can the law intervene and restore. There must be, in addition,
a violation of the law, the commission of what the law knows as
an actionable wrong, before the courts are authorized to lay hold of the
situation and remedy it. (Emphases in the original)
What is more, petitioners would wish to convince this Court that petitioner
Lourdes Paguyo was nave enough to accept at face value the assurance of
respondent Astorga that the Deed of Sale was merely to document
respondents cash outlay.
Far from being the nave and easy to fleece lady that she wants this Court
to perceive her to be, evidence on record reveals that petitioner Lourdes
Paguyo is in reality an astute businesswoman, having insured that legal
minds would be available at her disposal at the time she entered into the
transactions she now impugns. As she herself admitted in her testimony
before the trial court, during her receipt of the earnest money and during
the transactions subject of the instant case, her lawyers, one Atty. Lalin
and a certain Atty. Cario, assisted her. She testified as follows:
ATTY. JOSE
Wait, wait, your Honor. I have one question. Now, madam witness, you
mentioned that you were accompanied by a certain Atty. Molina when you

executed the receipt of the earnest money with me. Now, during the
transaction of this subject matter, you will also recall that at times you
were represented in dealing with me as counsel for defendant corporation
by Atty. Lalin and Atty. Carino?
A Yes, sir.32
Neither does the fact that the subject contracts have been prepared by
respondents ipso facto entail that their validity and legality be strictly
interpreted against them. Petitioner Lourdes Paguyos insinuation that she
was disadvantaged will not hold. True, Article 24 of the New Civil Code
provides that "(i)n all contractual, property or other relations, when one of
the parties is at a disadvantage on account of his moral dependence,
ignorance, indigence, mental weakness, tender age or other handicap, the
courts must be vigilant for his protection."33 Thus, the validity and/or
enforceability of the impugned contracts will have to be determined by the
peculiar circumstances obtaining in each case and the situation of the
parties concerned.
Here, petitioner Lourdes Paguyo, being not only cultured but a person with
great business acumen as well, cannot claim to be the weaker or
disadvantaged party in the subject contract so as to call for a strict
interpretation against respondents. More importantly, the parties herein
went through a series of negotiations before the documents were signed
and executed.34
Further, we find the stipulations in the subject documents plain and
unambiguous. For instance, the Deed of Sale provides in no uncertain
termsWHEREAS, the VENDOR is the true and absolute owner, free from any lien
or encumbrance, of a concrete building presently known as the Paguyo
Building, constructed on Lot 12, Blk. 4 (described in T.C.T No. 154806Makati) located at No. 7856 Makati Ave. corner Valdez St., Makati, Metro
Manila, covered by and described in Tax Declaration No. 93762 for the year
1984, and more particularly described as follows:

WHEREAS, the VENDOR is desirous of selling and the VENDEE is willing to

buy the aforedescribed building;
NOW THEREFORE, for and in consideration of the foregoing premises and
of the sum of SIX HUNDRED THOUSAND (P600,000.00) PESOS, Philippine
currency, the receipt of which is hereby acknowledged, the VENDOR
hereby cedes, transfers, and conveys, by way of absolute sale, unto and in
favor of the VENDEE, his successors and assigns, the aforementioned
building with all the improvements therein.

The Municipal Assessor of Makati is therefore hereby authorized to register

this sale in the new Tax Declaration in the name of the VENDEE.
IN WITNESS WHEREOF, the VENDOR hereby affixed his signature by his
wife and attorney-in-fact, LOURDES S. Paguyo, this 5th day of January,
1989, in Pasay City.35
Inasmuch as the stipulations in the aforesaid contract and in the other
contracts being questioned leave no room for interpretation, there was no
cause for applying Article 24 of the New Civil Code.
In sum, in the case at bar, petitioners pray for rescission of the Deed of
Sale of the building and offer to repay the purchase price after their
liquidity position would have improved and after respondents would have
refurbished the building, updated the real property taxes, and turned the
building into a profitable business venture. This Court, however, will not
allow itself to be an instrument to the dissolution of contract validly
entered into. A party should not, after its opportunity to enjoy the benefits
of an agreement, be allowed to later disown the arrangement when the
terms thereof ultimately would prove to operate against its hopeful
expectations.36
On the matter of damages, the Court of Appeals affirmed the trial courts
award of damages and attorneys fees to respondents, namely P400,000 as
moral damages, P200,000 as exemplary damages, P100,000 as attorneys
fees and the costs of suit.

Thus, the amount of moral damages should be set at only P30,000.00, and
the award of exemplary damages at only P20,000.00. The award of
attorneys fees should also be reduced to P20,000.00 which, under the
circumstances of this case, appears justified and reasonable.
All told, we find no reason to reverse the assailed decision of respondent
court. The factual findings of the appellate court are conclusive on the
parties and carry greater weight when they coincide with the factual
findings of the trial court.43 This Court will not weigh the evidence anew
lest there is a showing that the findings of the lower court are totally
devoid of support or are clearly erroneous so as to constitute serious abuse
of discretion. In the instant case, the trial court found that the documents,
which petitioners seek to rescind, were entered into as a result of an armslength transaction. These are factual findings that are now conclusive upon
us.44
WHEREFORE, the Decision and the Resolution dated 30 April 1997 and 12
September 1997, respectively, of the Court of Appeals in CA-G.R. CV No.
47034, are hereby AFFIRMED with MODIFICATION as to the amount of
damages and attorneys fees recoverable, as follows: (1) moral
damages is reduced to P30,000.00, (2) exemplary damages is reduced
to P20,000.00, and (3) attorneys fees is reduced to P20,000.00. Costs
against petitioners.
SO ORDERED.

We have held that moral damages may be recovered in cases where one
willfully causes injury to property, or in cases of breach of contract where
the other party acts fraudulently or in bad faith.37 There is no hard and fast
rule in the determination of what would be a fair amount of moral
damages, since each case must be governed by its own peculiar
circumstances.38 Exemplary damages, on the other hand, are imposed by
way of example or correction for the public good, when the party to a
contract acts in a wanton, fraudulent, oppressive or malevolent
manner.39 Attorneys fees are allowed when exemplary damages are
awarded and when the party to a suit is compelled to incur expenses to
protect his interest.40
While it has been sufficiently proven that the respondents are entitled to
damages, the actual amounts awarded by the lower court must be reduced
because damages are not intended for a litigants enrichment, at the
expense of the petitioners.41 Judicial discretion granted to the courts in the
assessment of damages must always be exercised with balanced restraint
and measured objectivity.42

Republic of the Philippines

SUPREME COURT
SECOND DIVISION
G.R. No. 149252. April 28, 2005

DONALD KWOK, Petitioners,

vs.
PHILIPPINE CARPET MANUFACTURING CORPORATION, Respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review of the Decision1 of the Court of Appeals (CA) in
CA-G.R. SP No. 60232 dismissing Donald Kwoks petition for review
on certiorari and affirming the majority Decision of the National Labor
Relations Commission (NLRC), as well as its resolution in NLRC NCR Case
No. 00-12-07454-96 dismissing the motion for reconsideration of the said
decision.
The Antecedents
In 1965, petitioner Donald Kwok and his father-in-law Patricio L. Lim, along
with some other stockholders, established a corporation, the respondent
Philippine Carpet Manufacturing Corporation (PCMC). The petitioner
became its general manager, executive vice-president and chief operations
officer. Lim, on the other hand, was its president and chairman of the board
of directors. When the petitioner retired 36 years later or on October 31,
1996, he was receiving a monthly salary of P160,000.00.2 He demanded
the cash equivalent of what he believed to be his accumulated vacation
and sick leave credits during the entire length of his service with the
respondent corporation, i.e., from November 16, 1965 to October 31, 1996,
in the total amount of P7,080,546.00 plus interest.3 However, the
respondent corporation refused to accede to the petitioners demands,
claiming that the latter was not entitled thereto.4
The petitioner filed a complaint against the respondent corporation for the
payment of his accumulated vacation and sick leave credits before the
NLRC. He claimed that Lim made a verbal promise to give him unlimited
sick leave and vacation leave benefits and its cash conversion upon his
retirement or resignation without the need for any application therefor. In
addition, Lim also promised to grant him other benefits, such as golf and
country club membership; the privilege to charge the respondent
corporations account; 6% profit-sharing in the net income of the
respondent corporation (while Lim got 4%); and other corporate
perquisites. According to the petitioner, all of these promises were
complied with, except for the grant of the cash equivalent of his
accumulated vacation and sick leave credits upon his retirement. 5

The respondent corporation denied all these, claiming that upon the
petitioners retirement, he received the amount of P6,902,387.19
representing all the benefits due him. Despite this, the petitioner again
demandedP7,080,546.00, which demand was without factual and legal
basis. The respondent corporation asserted that the chairman of its board
of directors and its president/vice-president had unlimited discretion in the
use of their time, and had never been required to file applications for
vacation and sick leaves; as such, the said officers were not entitled to
vacation and sick leave benefits. The respondent corporation, likewise,
pointed out that even if the petitioner was entitled to the said additional
benefits, his claim had already prescribed. It further averred that it had no
policy to grant vacation and sick leave credits to the petitioner. 6
In his Affidavit7 dated May 19, 1998, Lim denied making any such verbal
promise to his son-in-law on the grant of unlimited vacation and sick leave
credits and the cash conversion thereof. Lim averred that the petitioner
had received vacation and sick leave benefits from 1994 to 1996.
Moreover, assuming that he did make such promise to the petitioner, the
same had not been confirmed or approved via resolution of the respondent
corporations board of directors.
It was further pointed out that as per the Memorandum dated November 6,
1981, only regular employees and managerial and confidential employees
falling under Category I were entitled to vacation and sick leave credits.
The petitioner, whose position did not fall under Category I, was, thus, not
entitled to the benefits under the said memorandum. The respondent
corporation alleged that this was admitted by the petitioner himself and
affirmed by Raoul Rodrigo, its incumbent executive vice-president and
general manager.
In a Decision8 dated November 27, 1998, the Labor Arbiter ruled in favor of
the petitioner. The fallo of the decision reads:
WHEREFORE, all the foregoing premises being considered, judgment is
hereby rendered ordering the respondent company to pay complainant the
sum of P7,080,546.00, plus ten percent (10%) thereof as and for attorneys
fees.
SO ORDERED.9
Undaunted, the respondent corporation appealed the decision to the NLRC,
alleging that:

I. THE LABOR ARBITER ERRED IN CONCLUDING THAT KWOK WAS COVERED

BY THE NOVEMBER 6, 1981 MEMORANDUM ON VACATION AND SICK LEAVE
CREDITS.10

Aggrieved, the petitioner filed a petition for review with the CA, on the
following grounds:
I

II. THE LABOR ARBITER ERRED IN CONCLUDING THAT IT WAS

DISCRIMINATORY NOT TO GRANT KWOK THESE BENEFITS. 11
III. KWOKS CLAIMS ARE BASELESS.12
IV. KWOKS CLAIMS FOR BENEFITS ACCRUING FROM 1966 ARE BARRED BY
PRESCRIPTION.13
V. THERE IS NO BASIS FOR THE AWARD OF P7,080,546.00.14
The respondent corporation averred that based on the petitioners
memorandum, his admissions and the contract of employment, the
petitioner was not entitled to the cash conversion of his sick and vacation
leave credits. While the respondent corporation conceded that the
petitioner may have been entitled to unlimited sick and vacation leave
benefits during his employment, it maintained that no such promise was
made by Lim to convert the same; even assuming that such verbal promise
was made, the respondent corporation was not bound thereby since the
petitioner failed to adduce the written conformity of its board of directors.
The respondent corporation insisted that the claims of the petitioner were
barred under Article 291 of the Labor Code.
For his part, the petitioner made the following averments in his
memorandum:

THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR

WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION WHEN IT DECLARED THAT THE VERBAL PROMISE OF MR. LIM
TO PETITIONER WAS UNENFORCEABLE.
II
THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR
WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION WHEN IT RULED THAT THE VERBAL PROMISE BY MR. LIM TO
PETITIONER WAS NOT BINDING AS IT WAS NOT APPROVED BY THE BOARD
OF DIRECTORS.
III
THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR
WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION WHEN IT IGNORED STRONG EVIDENCE THAT PCMC CLOTHED
MR. LIM WITH AWESOME POWERS TO GRANT BENEFITS TO ITS EMPLOYEES
INCLUDING PETITIONER AND RATIFIED THE SAME BY ITS SILENCE AND
WHEN IT IGNORED TOO EXISTING JURISPRUDENCE ON THE MATTER.
IV

The non-performance by PCMC of this particular promise to convert in cash

all of his unused cash (sic) and sick leave credits was precipitated by the
falling out of the marriage between Mr. Kwok and his wife, the daughter of
Mr. Lim. In fact, even while Mr. Kwok was still the Executive Vice-President
and General Manager of PCMC, when the falling out of the said marriage
became apparent, the other benefits or perquisites which Mr. Kwok used to
enjoy were immediately curtailed by Mr. Lim to the prejudice of Mr. Kwok. 15

THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR

WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION WHEN IT IGNORED STRONG AND CLEAR EVIDENCE THAT IN
PCMC THE GIVING OF BENEFITS TO PETITIONER, THOUGH NOT IN WRITING,
WAS A PREVALENT PRACTICE.

On November 29, 1999, the NLRC, by majority vote, rendered judgment

granting the appeal, reversing and setting aside the decision of the Labor
Arbiter.16 The NLRC ordered the dismissal of the complaint. Commissioner
Angelita A. Gacutan filed a dissenting opinion.17

THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR

WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION WHEN IT RULED THAT THE MEMORANDUM DATED APRIL 26,
1997 APPLICABLE TO MR. RAOUL RODRIGO WAS ALSO APPLICABLE TO
PETITIONER.18

On February 28, 2001, the CA rendered judgment affirming the decision of

the NLRC and dismissing the petition.19 The petitioners motion for
reconsideration thereof was denied by the appellate court, per its
Resolution20 dated July 17, 2001.
The petitioner, thus, filed the instant petition for review on certiorari with
this Court, assailing the decision and resolution of the CA on the following
claims:
I
The Hon. Court of Appeals, contrary to law, gravely erred and disregarded
established jurisprudence in ruling that petitioner has not adduced
sufficient evidence to support his claim that he was, indeed, promised the
cash conversion of his unused vacation and sick leave credits upon
retirement.21
II
The Hon. Court of Appeals gravely erred in ruling that even if private
respondents (sic) Mr. Lim did make him such promise, the same cannot be
enforced.22
III
The Hon. Court of Appeals gravely erred and disregarded clear
jurisprudence on the matter when it ruled that there is no showing that
private respondent, thru its board of directors either recognized, approved
or ratified the promise made by Mr. Lim to petitioner. 23

As gleaned from his Memorandum, the petitioner posits that he had

adduced substantial evidence to prove that Lim, as president and chairman
of the respondent corporations board of directors, made a verbal promise
to give him the cash conversion of his accumulated vacation and sick leave
credits upon his retirement (that is, benefits at par with the number of days
to which the officer next in rank to him was entitled). According to the
petitioner, his claim is fortified by the fact that his successor, Raoul
Rodrigo, has unlimited vacation and sick leave credits. The petitioner
further asserts that he would not have accepted the positions in the
respondent corporation without such benefit, especially since his
subordinates were also enjoying the same. He posits that he was entitled
to the said privilege because of his rank. He, likewise, claims that, in
contrast to the evidence he has presented, the respondent corporation
failed to adduce proof of its affirmative allegations.
The petitioner further argues that his complaint was not time-barred since
he filed it on December 5, 1996. Even if this were so, he is, nevertheless,
entitled to the cash value of his vacation and sick leave credits for three
years before his retirement. Moreover, the evidence on record shows that
officers belonging to Category I had been granted the cash conversion of
their earned leave credits after the lapse of three years.
The respondent corporation, for its part, asserts that the petitioner failed to
adduce substantial evidence to the claims in his complaint. Even if Lim had
made such verbal promise to the petitioner, the same is not binding on the
respondent corporation absent its conformity through board resolution.
Moreover, the petitioner is not covered by the Memorandum dated
November 6, 1981 because he had unlimited leave credits; hence, it
cannot be gainsaid that he still had unused leave credits to be converted.
According to the respondent corporation, the petitioner himself admitted
that he was not included in the Memorandum dated November 6, 1981;
and even assuming that he was covered by the said memorandum, the
fact that his complaint was filed only in 1996 precludes him from claiming
the cash conversion of such leave credits for the years 1966 to 1993.
The Courts Ruling
The petition has no merit.
The threshold issue in this case is factual whether or not the petitioner is
entitled, based on the documentary and testimonial evidence on record, to
the cash value of his vacation and sick leave credits in the total amount
ofP7,080,546.00. The resolution of the issue is riveted to our resolution of
whether the petitioners mainly testimonial evidence of an alleged verbal

promise made by a corporate officer to grant him the privilege of

converting accumulated vacation and sick leave credits after retirement or
separation from employment is entitled to probative weight.

the same, especially considering that such privileges are not inherent to
the positions occupied by the petitioner in the respondent corporation, sonin-law of its president or not.

Under Rule 45 of the Rules of Court, only questions of law may be raised
under a petition for review on certiorari. The Court, not being a trier of
facts, is not wont to reexamine and reevaluate the evidence of the parties,
whether testimonial or documentary. Moreover, the findings of facts of the
CA on appeal from the NLRC are, more often than not, given conclusive
effect by the Court. The Court may delve into and resolve factual issues
only in exceptional circumstances, such as when the findings of facts of the
Labor Arbiter, on one hand, and those of the NLRC and the CA, on the
other, are capricious and arbitrary; or when the CA has reached an
erroneous conclusion based on arbitrary findings of fact; and when
substantial justice so requires. In this case, however, the petitioner failed
to convince the Court that the factual findings of the CA which affirmed the
findings of the NLRC on appeal, as well as its conclusions based on the said
findings, are capricious and arbitrary.

In dismissing the petition before it, the CA disbelieved the petitioners

testimony and gave credence and probative weight to the collective
testimonies of the respondent corporations witnesses, who were its
employees and officers, including Lim, whom the petitioner presented as a
hostile witness. We agree with the appellate courts encompassing
synthesis and analysis of the evidence on record:

While the petitioner was unequivocal in claiming that the respondent

corporation, through its president and chairman of the board of directors,
obliged itself, as a matter of policy, to grant him the cash value of his
vacation and sick leave credits upon his retirement, he was burdened to
prove his claim by substantial evidence.24 The petitioner failed to discharge
this burden.
We agree with the petitioners contention that for a contract to be binding
on the parties thereto, it need not be in writing unless the law requires that
such contract be in some form in order that it may be valid or enforceable
or that it be executed in a certain way, in which case that requirement is
absolute and independent.25 Indeed, corporate policies need not be in
writing. Contracts entered into by a corporate officer or obligations or
prestations assumed by such officer for and in behalf of such corporation
are binding on the said corporation only if such officer acted within the
scope of his authority or if such officer exceeded the limits of his authority,
the corporation has ratified such contracts or obligations.
In the present case, the petitioner relied principally on his testimony to
prove that Lim made a verbal promise to give him vacation and sick leave
credits, as well as the privilege of converting the same into cash upon
retirement. The Court agrees that those who belong to the upper corporate
echelons would have more privileges. However, the Court cannot presume
the existence of such privileges or benefits. The petitioner was burdened to
prove not only the existence of such benefits but also that he is entitled to

Except for his bare assertions, petitioner has not adduced sufficient
evidence to support his claim that he was, indeed, promised the cash
conversion of his unused vacation and sick leaves upon retirement.
Petitioner harps on what he calls the prevalent practice in PCMC of giving
him benefits, such as the use of golf and country club facilities, salary
increases, the use of the company vehicle and driver, and sharing in
PCMCs annual net income, without either a written contract or a Board
resolution to back it up. Respondent PCMC denies all these, however.
According to respondent, petitioners share in the income of the company
is actually part of the consultancy fee which PCMC pays DK Management
Services, Inc., a firm owned by petitioners company. PCMC adds that the
yearly salary increases of corporate officers were always with the prior
approval of the Board.
Nevertheless, assuming that petitioner was, indeed, given the benefits
which he so claimed, it does not necessarily follow that among those is the
cash conversion of his accumulated leaves. It is a basic rule in evidence
that each party must prove his affirmative allegation. Since the burden of
proof lies with the party who asserts an affirmative allegation, the plaintiff
or complainant has to prove his affirmative allegations in the complaint
and the defendant or respondent has to prove the affirmative allegations in
his affirmative defenses and counterclaim. Petitioner, in the case at bar,
has failed to discharge this burden.26
The CA made short shift of the claim of the petitioner that per
Memorandum dated November 6, 1981, he was not entitled to the benefits
of the company policy of commutation of leave credits. Indeed, the
company policy of conversion into equivalent cash of unused vacation and
sick leave credits applied only to its regular employees. The petitioner
failed to offer evidence to rebut the testimony of Nel Gopez, Chief
Accountant of the respondent, that the petitioner was not among the
regular employees covered by the policy for the simple reason that he had

unlimited vacation leave benefits. As stated by the CA, the petitioner no

less corroborated the testimony of Gopez, thus:

And would you know, Mr. Witness, why he is (sic) not given the conversion
of the vacation leave benefits at the time category one employees sectors
(sic) are given?

ATTY. PIMENTEL
WITNESS
And, so you mention[ed] earlier that the policy on vacation leave
benefits apply for category one employee(s) and rank-and-file
employee(s)?

Because he has, as far as I can remember, he has unlimited vacation

leave."

WITNESS (Mr. Nel Gopez)

This was corroborated by petitioner himself when he testified in this wise:

Yes.

ATTY. PIMENTEL

ATTY. PIMENTEL

Mr. Witness, you occupied the position of Executive Vice-President and

General Manager. You agree with me that this position or this office of
Executive Vice-President and General Manager are not covered by this
policy.

And who are considered category one employee(s)?

WITNESS
Category One employees are from the rank and of Senior Vice-President
and Assistant General Manager and below, up to the level of department
managers.

WITNESS (Donald Kwok)

Yes, it is not covered by this policy.

ATTY. PIMENTEL
ATTY. PIMENTEL
How about the complainant, Mr. Kwok, does he falling (sic) to the category
one?

So this policy applies to persons below you and your father-in-law?

WITNESS

WITNESS

As far as I can remember, he is (sic) not belong to category one employee.

Yes, right.

ATTY. PIMENTEL

ATTY. PIMENTEL

Therefore, he is not entitled to the lump sum benefit?

And this policy does not apply to you?

WITNESS

WITNESS

Yes, Maam.

As far as Im concerned, it does not apply for (sic) me.

ATTY. PIMENTEL

In all respects, therefore, petitioner, by virtue of his position as Executive

Vice-President, is not covered by the November 6, 1981 Memorandum

granting PCMC employees the conversion of their unused vacation and sick
leaves into cash.27
We have reviewed the records and found no evidence to controvert the
following findings of the CA and its ratiocinations on its resolution of the
petitioners submissions:
Second, even assuming that petitioner is included among the "regular
employees" of PCMC referred to in said memorandum, there is no evidence
that he complied with the cut-off dates for the filing of the cash conversion
of vacation and sick leaves. This being so, we find merit in respondents
argument that petitioners money claims have already been barred by the
three-year prescriptive period under Article 291 of the Labor Code, as
amended.
Third, and this is of primordial importance, there is no proof that petitioner
has filed vacation and sick leaves with PCMCs personnel department.
Without a record of petitioners absences, there is no way to determine the
actual number of leave credits he is entitled to. The P7,080,546.00 figure
arrived at by petitioner supposedly representing the cash equivalent of his
earned sick and vacation leaves is thus totally baseless.
And, fourth, even assuming that PCMC President Patricio Lim did promise
petitioner the cash conversion of his leaves, we agree with respondent that
this cannot bind the company in the absence of any Board resolution to
that effect. We must stress that the personal act of the company president
cannot bind the corporation. As explicitly stated by the Supreme Court
in Peoples Aircargo and Warehousing Co., Inc. v. Court of Appeals:
"The general rule is that, in the absence of authority from the board of
directors, no person, not even its officers, can validly bind a corporation. A
corporation is a juridical person, separate and distinct from its stockholders
and members, having xxx powers, attributes and properties expressly
authorized by law or incident to its existence.

" the power and the responsibility to decide whether the corporation
should enter into a contract that will bind the corporation is lodged in the
board, subject to the articles of incorporation, by-laws, or relevant
provisions of law."

Anent the third assigned error, petitioner maintains that the PCMC Board of
Directors has granted its President, Patricio Lim, awesome powers to grant
benefits to its employees, adding that the Board has always given its
consent to the way Lim ran the affairs of the company especially on
matters relating to the benefits that its corporate officers enjoyed.
True, jurisprudence holds that the president of a corporation possesses the
power to enter into a contract for the corporation when "the conduct on
the part of both the president and corporation [shows] that he had been in
the habit of acting in similar matters on behalf of the company and that
the company had authorized him so to act and had recognized, approved
and ratified his former and similar actions."
In the case at bar, however, there is no showing that PCMC had either
recognized, approved or ratified the cash conversion of petitioners leave
credits as purportedly promised to him by Lim. On the contrary, PCMC has
steadfastly maintained that "the Company, through the Board, has long
adopted the policy of granting its earlier mentioned corporate officers
unlimited leave benefits denying them the privilege of converting their
unused vacation or sick leave benefits into their cash equivalent."
As to the last assigned error, petitioner faults the NLRC for holding as
applicable to petitioner, the April 26, 1997 Memorandum issued by PCMC
to Raoul Rodrigo, Donald Kwoks successor as company executive vicepresident. The said memo granted Rodrigo unlimited sick and vacation
leave credits but disallowed the cash conversion thereof. Before he
became executive vice-president, Rodrigo was senior vice-president and
enjoyed the commutation of his unused vacation and sick leaves.
We note that the April 26, 1997 memo was issued to Rodrigo when
petitioner was already retired from PCMC. While said memorandum was
particularly directed to Rodrigo, however, this does not necessarily mean
that petitioner, as former executive vice-president, was then not prohibited
from converting his earned vacation and sick leaves into cash since he was
not issued a similar memo. On the contrary, the memo simply affirms the
long-standing company practice of excluding PCMCs top two positions,
that of president and executive vice-president, from the commutation of
leaves. As heretofore discussed, among the perks of those occupying these
posts is the privilege of having unlimited leaves, which is totally
incompatible with the concept of converting unused leave credits into their
cash equivalents.28
We are not convinced by the petitioners claim that Lim capriciously
deprived him of his entitlement to the cash conversion of his accumulated

vacation and sick leave credits simply because of his estrangement from
his wife, who happens to be Lims daughter. The petitioner did not adduce
any evidence to show that he appealed to the respondent corporations
board of directors for the implementation of the said privilege which was
allegedly granted to him. Even if Lim was the president and chairman of
the respondent corporations board of directors, the rest of the
membership of the board could have overruled him and granted to the
petitioner his claim if, indeed, the latter was entitled thereto. Indeed, even
the petitioner admitted that, after his retirement, the board of directors
granted to him salary increase for two years prior to his retirement. If the
claim of the petitioner had been approved by the board of directors, for
sure, it would have approved the same despite his falling out with the
daughter of Lim.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of
merit. Costs against the petitioner. SO ORDERED.

There is grave abuse of discretion (1) when an act is done contrary to the
Constitution, the law or jurisprudence;1or (2) when it is executed
whimsically, capriciously or arbitrarily out of malice, ill will or personal
bias.2 In the present case, the Commission on Elections approved the
assailed Resolution and awarded the subject Contract not only in clear
violation of law and jurisprudence, but also in reckless disregard of its own
bidding rules and procedure. For the automation of the counting and
canvassing of the ballots in the 2004 elections, Comelec awarded the
Contract to "Mega Pacific Consortium" an entity that had not participated
in the bidding. Despite this grant, the poll body signed the actual
automation Contract with "Mega Pacific eSolutions, Inc.," a company that
joined the bidding but had not met the eligibility requirements.
Comelec awarded this billion-peso undertaking with inexplicable haste,
without adequately checking and observing mandatory financial, technical
and legal requirements. It also accepted the proferred computer hardware
and software even if, at the time of the award, they had undeniably failed
to pass eight critical requirements designed to safeguard the integrity of
elections, especially the following three items:
They failed to achieve the accuracy rating criteria of 99.9995
percent set-up by the Comelec itself

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 159139

January 13, 2004

INFORMATION TECHNOLOGY FOUNDATION OF THE PHILIPPINES,

MA. CORAZON M. AKOL, MIGUEL UY, EDUARDO H. LOPEZ, AUGUSTO
C. LAGMAN, REX C. DRILON, MIGUEL HILADO, LEY SALCEDO, and
MANUEL ALCUAZ JR., petitioners,
vs.
COMMISSION ON ELECTIONS; COMELEC CHAIRMAN BENJAMIN
ABALOS SR.; COMELEC BIDDING and AWARD COMMITTEE
CHAIRMAN EDUARDO D. MEJOS and MEMBERS GIDEON DE
GUZMAN, JOSE F. BALBUENA, LAMBERTO P. LLAMAS, and
BARTOLOME SINOCRUZ JR.; MEGA PACIFIC eSOLUTIONS, INC.; and
MEGA PACIFIC CONSORTIUM, respondents.
DECISION
PANGANIBAN, J.:

They were not able to detect previously downloaded results at

various canvassing or consolidation levels and to prevent these
from being inputted again
They were unable to print the statutorily required audit trails of
the count/canvass at different levels without any loss of data
Because of the foregoing violations of law and the glaring grave abuse of
discretion committed by Comelec, the Court has no choice but to exercise
its solemn "constitutional duty"3 to void the assailed Resolution and the
subject Contract. The illegal, imprudent and hasty actions of the
Commission have not only desecrated legal and jurisprudential norms, but
have also cast serious doubts upon the poll bodys ability and capacity to
conduct automated elections. Truly, the pith and soul of democracy -credible, orderly, and peaceful elections -- has been put in jeopardy by the
illegal and gravely abusive acts of Comelec.
The Case
Before us is a Petition4 under Rule 65 of the Rules of Court, seeking (1) to
declare null and void Resolution No. 6074 of the Commission on Elections
(Comelec), which awarded "Phase II of the Modernization Project of the
Commission to Mega Pacific Consortium (MPC);" (2) to enjoin the
implementation of any further contract that may have been entered into
by Comelec "either with Mega Pacific Consortium and/or Mega Pacific

eSolutions, Inc. (MPEI);" and (3) to compel Comelec to conduct a re-bidding

of the project.
The Facts
The following facts are not disputed. They were culled from official
documents, the parties pleadings, as well as from admissions during the
Oral Argument on October 7, 2003.
On June 7, 1995, Congress passed Republic Act 8046, 5 which authorized
Comelec to conduct a nationwide demonstration of a computerized
election system and allowed the poll body to pilot-test the system in the
March 1996 elections in the Autonomous Region in Muslim Mindanao
(ARMM).
On December 22, 1997, Congress enacted Republic Act 8436 6 authorizing
Comelec to use an automated election system (AES) for the process of
voting, counting votes and canvassing/consolidating the results of the
national and local elections. It also mandated the poll body to acquire
automated counting machines (ACMs), computer equipment, devices and
materials; and to adopt new electoral forms and printing materials.
Initially intending to implement the automation during the May 11, 1998
presidential elections, Comelec -- in its Resolution No. 2985 dated February
9, 19987 -- eventually decided against full national implementation and
limited the automation to the Autonomous Region in Muslim Mindanao
(ARMM). However, due to the failure of the machines to read correctly
some automated ballots in one town, the poll body later ordered their
manual count for the entire Province of Sulu.8
In the May 2001 elections, the counting and canvassing of votes for both
national and local positions were also done manually, as no additional
ACMs had been acquired for that electoral exercise allegedly because of
time constraints.
On October 29, 2002, Comelec adopted in its Resolution 02-0170 a
modernization program for the 2004 elections. It resolved to conduct
biddings for the three (3) phases of its Automated Election System;
namely, Phase I - Voter Registration and Validation System; Phase II Automated Counting and Canvassing System; and Phase III - Electronic
Transmission.
On January 24, 2003, President Gloria Macapagal-Arroyo issued Executive
Order No. 172, which allocated the sum of P2.5 billion to fund the AES for
the May 10, 2004 elections. Upon the request of Comelec, she authorized
the release of an additional P500 million.

On January 28, 2003, the Commission issued an "Invitation to Apply for

Eligibility and to Bid," which we quote as follows:
"INVITATION TO APPLY FOR ELIGIBILITY AND TO BID
The Commission on Elections (COMELEC), pursuant to the mandate
of Republic Act Nos. 8189 and 8436, invites interested offerors,
vendors, suppliers or lessors to apply for eligibility and to bid for
the procurement by purchase, lease, lease with option to purchase,
or otherwise, supplies, equipment, materials and services needed
for a comprehensive Automated Election System, consisting of
three (3) phases: (a) registration/verification of voters, (b)
automated counting and consolidation of votes, and (c) electronic
transmission of election results, with an approved budget of TWO
BILLION FIVE HUNDRED MILLION (Php2,500,000,000) Pesos.
Only bids from the following entities shall be entertained:
a. Duly licensed Filipino citizens/proprietorships;
b. Partnerships duly organized under the laws of the
Philippines and of which at least sixty percent (60%) of the
interest belongs to citizens of the Philippines;
c. Corporations duly organized under the laws of the
Philippines, and of which at least sixty percent (60%) of the
outstanding capital stock belongs to citizens of the
Philippines;
d. Manufacturers, suppliers and/or distributors forming
themselves into a joint venture, i.e., a group of two (2) or
more manufacturers, suppliers and/or distributors that
intend to be jointly and severally responsible or liable for a
particular contract, provided that Filipino ownership thereof
shall be at least sixty percent (60%); and
e. Cooperatives duly registered with the Cooperatives
Development Authority.
Bid documents for the three (3) phases may be obtained starting
10 February 2003, during office hours from the Bids and Awards
Committee (BAC) Secretariat/Office of Commissioner Resurreccion
Z. Borra, 7th Floor, Palacio del Governador, Intramuros, Manila,
upon payment at the Cash Division, Commission on Elections, in
cash or cashiers check, payable to the Commission on Elections, of
a non-refundable amount of FIFTEEN THOUSAND PESOS
(Php15,000.00) for each phase. For this purpose, interested
offerors, vendors, suppliers or lessors have the option to

participate in any or all of the three (3) phases of the

comprehensive Automated Election System.

4.) Performance bond shall be twenty percent (20%) of the bid

offer.

A Pre-Bid Conference is scheduled on 13 February 2003, at 9:00

a.m. at the Session Hall, Commission on Elections, Postigo Street,
Intramuros, Manila. Should there be questions on the bid
documents, bidders are required to submit their queries in writing
to the BAC Secretariat prior to the scheduled Pre-Bid Conference.

RESOLVED moreover, that:

Deadline for submission to the BAC of applications for eligibility

and bid envelopes for the supply of the comprehensive Automated
Election System shall be at the Session Hall, Commission on
Elections, Postigo Street, Intramuros, Manila on 28 February 2003
at 9:00 a.m.
The COMELEC reserves the right to review the qualifications of the
bidders after the bidding and before the contract is executed.
Should such review uncover any misrepresentation made in the
eligibility statements, or any changes in the situation of the bidder
to materially downgrade the substance of such statements, the
COMELEC shall disqualify the bidder upon due notice without any
obligation whatsoever for any expenses or losses that may be
incurred by it in the preparation of its bid." 9

1) A. Due to the decision that the eligibility requirements

and the rest of the Bid documents shall be released at the
same time, and the memorandum of Comm. Resurreccion
Z. Borra dated February 7, 2003, the documents to be
released on Friday, February 14, 2003 at 2:00 oclock p.m.
shall be the eligibility criteria, Terms of Reference (TOR)
and other pertinent documents;
B. Pre-Bid conference shall be on February 18,
2003; and
C. Deadline for the submission and receipt of the
Bids shall be on March 5, 2003.
2) The aforementioned documents will be available at the
following offices:
a) Voters Validation: Office of Comm. Javier

On February 11, 2003, Comelec issued Resolution No. 5929 clarifying

certain eligibility criteria for bidders and the schedule of activities for the
project bidding, as follows:
"1.) Open to Filipino and foreign corporation duly registered and
licensed to do business and is actually doing business in the
Philippines, subject to Sec. 43 of RA 9184 (An Act providing In the
Modernization Standardization and Regulation of the Procurement
Activities of the Government and for other purposes etc.)
2.) Track Record:
a) For counting machines should have been used in at
least one (1) political exercise with no less than Twenty
Million Voters;
b) For verification of voters the reference site of an
existing data base installation using Automated Fingerprint
Identification System (AFIS) with at least Twenty Million.
3.) Ten percent (10%) equity requirement shall be based on the
total project cost; and

b) Automated Counting Machines: Office of Comm.

Borra
c) Electronic Transmission: Office of Comm.
Tancangco"10
On February 17, 2003, the poll body released the Request for Proposal
(RFP) to procure the election automation machines. The Bids and Awards
Committee (BAC) of Comelec convened a pre-bid conference on February
18, 2003 and gave prospective bidders until March 10, 2003 to submit
their respective bids.
Among others, the RFP provided that bids from manufacturers, suppliers
and/or distributors forming themselves into a joint venture may be
entertained, provided that the Philippine ownership thereof shall be at
least 60 percent.Joint venture is defined in the RFP as "a group of two or
more manufacturers, suppliers and/or distributors that intend to be jointly
and severally responsible or liable for a particular contract."11
Basically, the public bidding was to be conducted under a twoenvelope/two stage system. The bidders first envelope or the Eligibility
Envelope should establish the bidders eligibility to bid and its
qualifications to perform the acts if accepted. On the other hand, the

second envelope would be the Bid Envelope itself. The RFP outlines the
bidding procedures as follows:
"25. Determination of Eligibility of Prospective Bidders
"25.1 The eligibility envelopes of prospective Bidders shall
be opened first to determine their eligibility. In case any of
the requirements specified in Clause 20 is missing from the
first bid envelope, the BAC shall declare said prospective
Bidder as ineligible to bid. Bid envelopes of ineligible
Bidders shall be immediately returned unopened.
"25.2 The eligibility of prospective Bidders shall be
determined using simple pass/fail criteria and shall be
determined as either eligible or ineligible. If the
prospective Bidder is rated passed for all the legal,
technical and financial requirements, he shall be
considered eligible. If the prospective Bidder is rated
failed in any of the requirements, he shall be considered
ineligible.
"26. Bid Examination/Evaluation
"26.1 The BAC will examine the Bids to determine whether
they are complete, whether any computational errors have
been made, whether required securities have been
furnished, whether the documents have been properly
signed, and whether the Bids are generally in order.

Bid Price as calculated. Arithmetical errors will be rectified

on the following basis: If there is a discrepancy between
words and figures, the amount in words will prevail. If there
is a discrepancy between the unit price and the total price
that is obtained by multiplying the unit price and the
quantity, the unit price shall prevail and the total price
shall be corrected accordingly. If there is a discrepancy
between the Total Bid Price and the sum of the total prices,
the sum of the total prices prevail and the Total Bid Price
shall be corrected accordingly.
"26.5 Financial Proposals which do not clearly state the
Total Bid Price shall be rejected. Also, Total Bid Price as
calculated that exceeds the approved budget for the
contract shall also be rejected.
27. Comparison of Bids
27.1 The bid price shall be deemed to embrace all costs,
charges and fees associated with carrying out all the
elements of the proposed Contract, including but not
limited to, license fees, freight charges and taxes.
27.2 The BAC shall establish the calculated prices of all
Bids rated passed and rank the same in ascending order.
xxxxxxxxx
"29. Postqualification

"26.2 The BAC shall check the submitted documents of

each Bidder against the required documents enumerated
under Clause 20, to ascertain if they are all present in the
Second bid envelope (Technical Envelope). In case one (1)
or more of the required documents is missing, the BAC
shall rate the Bid concerned as failed and immediately
return to the Bidder its Third bid envelope (Financial
Envelope) unopened. Otherwise, the BAC shall rate the first
bid envelope as passed.
"26.3 The BAC shall immediately open the Financial
Envelopes of the Bidders whose Technical Envelopes were
passed or rated on or above the passing score. Only Bids
that are determined to contain all the bid requirements for
both components shall be rated passed and shall
immediately be considered for evaluation and comparison.
"26.4 In the opening and examination of the Financial
Envelope, the BAC shall announce and tabulate the Total

"29.1 The BAC will determine to its satisfaction whether the

Bidder selected as having submitted the lowest calculated
bid is qualified to satisfactorily perform the Contract.
"29.2 The determination will take into account the Bidders
financial, technical and production capabilities/resources. It
will be based upon an examination of the documentary
evidence of the Bidders qualification submitted by the
Bidder as well as such other information as the BAC deems
necessary and appropriate.
"29.3 A bid determined as not substantially responsive will
be rejected by the BAC and may not subsequently be made
responsive by the Bidder by correction of the nonconformity.
"29.4 The BAC may waive any informality or nonconformity or irregularity in a bid which does not constitute

a material deviation, provided such waiver does not

prejudice or affect the relative ranking of any Bidder.
"29.5 Should the BAC find that the Bidder complies with
the legal, financial and technical requirements, it shall
make an affirmative determination which shall be a
prerequisite for award of the Contract to the Bidder.
Otherwise, it will make a negative determination which will
result in rejection of the Bidders bid, in which event the
BAC will proceed to the next lowest calculated bid to make
a similar determination of that Bidders capabilities to
perform satisfactorily."12
Out of the 57 bidders,13 the BAC found MPC and the Total Information
Management Corporation (TIMC) eligible. For technical evaluation, they
were referred to the BACs Technical Working Group (TWG) and the
Department of Science and Technology (DOST).
In its Report on the Evaluation of the Technical Proposals on Phase II, DOST
said that both MPC and TIMC had obtained a number of failed marks in the
technical evaluation. Notwithstanding these failures, Comelec en banc, on
April 15, 2003, promulgated Resolution No. 6074 awarding the project to
MPC. The Commission publicized this Resolution and the award of the
project to MPC on May 16, 2003.
On May 29, 2003, five individuals and entities (including the herein
Petitioners Information Technology Foundation of the Philippines,
represented by its president, Alfredo M. Torres; and Ma. Corazon Akol)
wrote a letter14 to Comelec Chairman Benjamin Abalos Sr. They protested
the award of the Contract to Respondent MPC "due to glaring irregularities
in the manner in which the bidding process had been conducted." Citing
therein the noncompliance with eligibility as well as technical and
procedural requirements (many of which have been discussed at length in
the Petition), they sought a re-bidding.
In a letter-reply dated June 6, 2003,15 the Comelec chairman -- speaking
through Atty. Jaime Paz, his head executive assistant -- rejected the protest
and declared that the award "would stand up to the strictest scrutiny."
Hence, the present Petition.16
The Issues
In their Memorandum, petitioners raise the following issues for our
consideration:
"1. The COMELEC awarded and contracted with a non-eligible
entity; x x x

"2. Private respondents failed to pass the Technical Test as required

in the RFP. Notwithstanding, such failure was ignored. In effect, the
COMELEC changed the rules after the bidding in effect changing
the nature of the contract bidded upon.
"3. Petitioners have locus standi.
"4. Instant Petition is not premature. Direct resort to the Supreme
Court is justified."17
In the main, the substantive issue is whether the Commission on Elections,
the agency vested with the exclusive constitutional mandate to oversee
elections, gravely abused its discretion when, in the exercise of its
administrative functions, it awarded to MPC the contract for the second
phase of the comprehensive Automated Election System.
Before discussing the validity of the award to MPC, however, we deem it
proper to first pass upon the procedural issues: the legal standing of
petitioners and the alleged prematurity of the Petition.
This Courts Ruling
The Petition is meritorious.
First Procedural Issue:
Locus Standi of Petitioners
Respondents chorus that petitioners do not possess locus standi, inasmuch
as they are not challenging the validity or constitutionality of RA 8436.
Moreover, petitioners supposedly admitted during the Oral Argument that
no law had been violated by the award of the Contract. Furthermore, they
allegedly have no actual and material interest in the Contract and, hence,
do not stand to be injured or prejudiced on account of the award.
On the other hand, petitioners -- suing in their capacities as taxpayers,
registered voters and concerned citizens -- respond that the issues central
to this case are "of transcendental importance and of national interest."
Allegedly, Comelecs flawed bidding and questionable award of the
Contract to an unqualified entity would impact directly on the success or
the failure of the electoral process. Thus, any taint on the sanctity of the
ballot as the expression of the will of the people would inevitably affect
their faith in the democratic system of government. Petitioners further
argue that the award of any contract for automation involves disbursement
of public funds in gargantuan amounts; therefore, public interest requires
that the laws governing the transaction must be followed strictly.

We agree with petitioners. Our nations political and economic future

virtually hangs in the balance, pending the outcome of the 2004 elections.
Hence, there can be no serious doubt that the subject matter of this case is
"a matter of public concern and imbued with public interest";18 in other
words, it is of "paramount public interest"19and "transcendental
importance."20 This fact alone would justify relaxing the rule on legal
standing, following the liberal policy of this Court whenever a case involves
"an issue of overarching significance to our society."21Petitioners legal
standing should therefore be recognized and upheld.
Moreover, this Court has held that taxpayers are allowed to sue when there
is a claim of "illegal disbursement of public funds," 22 or if public money is
being "deflected to any improper purpose";23 or when petitioners seek to
restrain respondent from "wasting public funds through the enforcement of
an invalid or unconstitutional law."24 In the instant case, individual
petitioners, suing as taxpayers, assert a material interest in seeing to it
that public funds are properly and lawfully used. In the Petition, they claim
that the bidding was defective, the winning bidder not a qualified entity,
and the award of the Contract contrary to law and regulation. Accordingly,
they seek to restrain respondents from implementing the Contract and,
necessarily, from making any unwarranted expenditure of public funds
pursuant thereto. Thus, we hold that petitioners possess locus standi.
Second Procedural Issue:
Alleged Prematurity Due to Non-Exhaustion of Administrative
Remedies
Respondents claim that petitioners acted prematurely, since they had not
first utilized the protest mechanism available to them under RA 9184, the
Government Procurement Reform Act, for the settlement of disputes
pertaining to procurement contracts.
Section 55 of RA 9184 states that protests against decisions of the Bidding
and Awards Committee in all stages of procurement may be lodged with
the head of the procuring entity by filing a verified position paper and
paying a protest fee. Section 57 of the same law mandates that in no case
shall any such protest stay or delay the bidding process, but it must first be
resolved before any award is made.
On the other hand, Section 58 provides that court action may be resorted
to only after the protests contemplated by the statute shall have been
completed. Cases filed in violation of this process are to be dismissed for
lack of jurisdiction. Regional trial courts shall have jurisdiction over final
decisions of the head of the procuring entity, and court actions shall be
instituted pursuant to Rule 65 of the 1997 Rules of Civil Procedure.

the award of the Contract to it (MPC). According to respondents, the Report

should have been appealed to the Comelc en banc, pursuant to the
aforementioned sections of RA 9184. In the absence of such appeal, the
determination and recommendation of the BAC had become final.
The Court is not persuaded.
Respondent Comelec came out with its en banc Resolution No. 6074 dated
April 15, 2003, awarding the project to Respondent MPC even before the
BAC managed to issue its written report and recommendation on April 21,
2003. Thus, how could petitioners have appealed the BACs
recommendation or report to the head of the procuring entity (the
chairman of Comelec), when the Comelec en banc had already approved
the award of the contract to MPC even before petitioners learned of the
BAC recommendation?
It is claimed25 by Comelec that during its April 15, 2003 session, it received
and approved the verbal report and recommendation of the BAC for the
award of the Contract to MPC, and that the BAC subsequently re-affirmed
its verbal report and recommendation by submitting it in writing on April
21, 2003. Respondents insist that the law does not require that the BAC
Report be in writing before Comelec can act thereon; therefore, there is
allegedly nothing irregular about the Report as well as the en banc
Resolution.
However, it is obvious that petitioners could have appealed the BACs
report and recommendation to the head of the procuring entity (the
Comelec chair) only upon their discovery thereof, which at the very earliest
would have been on April 21, 2003, when the BAC actually put its report in
writing and finally released it. Even then, what would have been the use of
protesting/appealing the report to the Comelec chair, when by that time
the Commission en banc (including the chairman himself) had already
approved the BAC Report and awarded the Contract to MPC?
And even assuming arguendo that petitioners had somehow gotten wind of
the verbal BAC report on April 15, 2003 (immediately after the en banc
session), at that point the Commission en banc had already given its
approval to the BAC Report along with the award to MPC. To put it bluntly,
the Comelec en banc itself made it legally impossible for petitioners to
avail themselves of the administrative remedy that the Commission is so
impiously harping on. There is no doubt that they had not been accorded
the opportunity to avail themselves of the process provided under Section
55 of RA 9184, according to which a protest against a decision of the BAC
may be filedwith the head of the procuring entity. Nemo tenetur ad
impossible,26 to borrow private respondents favorite Latin excuse.27
Some Observations on the BAC Report to the Comelec

Respondents assert that throughout the bidding process, petitioners never

questioned the BAC Report finding MPC eligible to bid and recommending

We shall return to this issue of alleged prematurity shortly, but at this

interstice, we would just want to put forward a few observations regarding
the BAC Report and the Comelec en bancs approval thereof.
First, Comelec contends that there was nothing unusual about the fact that
the Report submitted by the BAC came only after the former had already
awarded the Contract, because the latter had been asked to render its
report and recommendation orally during the Commissions en banc
session on April 15, 2003. Accordingly, Comelec supposedly acted upon
such oral recommendation and approved the award to MPC on the same
day, following which the recommendation was subsequently reduced into
writing on April 21, 2003. While not entirely outside the realm of the
possible, this interesting and unique spiel does not speak well of the
process that Comelec supposedly went through in making a critical
decision with respect to a multi-billion-peso contract.

Information Technology Foundation of the Philippines, represented by its

president, Alfredo M. Torres; and Ma. Corazon Akol.
Such letter-protest is sufficient compliance with the requirement to exhaust
administrative remedies particularly because it hews closely to the
procedure outlined in Section 55 of RA 9184.
And even without that May 29, 2003 letter-protest, the Court still holds that
petitioners need not exhaust administrative remedies in the light of Paat v.
Court of Appeals.29 Paat enumerates the instances when the rule on
exhaustion of administrative remedies may be disregarded, as follows:
"(1) when there is a violation of due process,
(2) when the issue involved is purely a legal question,

We can imagine that anyone else standing in the shoes of the Honorable
Commissioners would have been extremely conscious of the overarching
need for utter transparency. They would have scrupulously avoided the
slightest hint of impropriety, preferring to maintain an exacting regularity
in the performance of their duties, instead of trying to break a speed
record in the award of multi-billion-peso contracts. After all, between April
15 and April 21 were a mere six (6) days. Could Comelec not have waited
out six more days for the written report of the BAC, instead of rushing pellmell into the arms of MPC? Certainly, respondents never cared to explain
the nature of the Commissions dire need to act immediately without
awaiting the formal, written BAC Report.
In short, the Court finds it difficult to reconcile the uncommon dispatch
with which Comelec acted to approve the multi-billion-peso deal, with its
claim of having been impelled by only the purest and most noble of
motives.
At any rate, as will be discussed later on, several other factors combine to
lend negative credence to Comelecs tale.
Second, without necessarily ascribing any premature malice or
premeditation on the part of the Comelec officials involved, it should
nevertheless be conceded that this cart-before-the-horse maneuver
(awarding of the Contract ahead of the BACs written report) would
definitely serve as a clever and effective way of averting and frustrating
any impending protest under Section 55.
Having made the foregoing observations, we now go back to the question
of exhausting administrative remedies. Respondents may not have realized
it, but the letter addressed to Chairman Benjamin Abalos Sr. dated May 29,
200328 serves to eliminate the prematurity issue as it was an actual written
protest against the decision of the poll body to award the Contract. The
letter was signed by/for, inter alia, two of herein petitioners: the

(3) when the administrative action is patently illegal amounting to

lack or excess of jurisdiction,
(4) when there is estoppel on the part of the administrative agency
concerned,
(5) when there is irreparable injury,
(6) when the respondent is a department secretary whose acts as
an alter ego of the President bears the implied and assumed
approval of the latter,
(7) when to require exhaustion of administrative remedies would
be unreasonable,
(8) when it would amount to a nullification of a claim,
(9) when the subject matter is a private land in land case
proceedings,
(10) when the rule does not provide a plain, speedy and adequate
remedy, and
(11) when there are circumstances indicating the urgency of
judicial intervention."30
The present controversy precisely falls within the exceptions listed as Nos.
7, 10 and 11: "(7) when to require exhaustion of administrative remedies
would be unreasonable; (10) when the rule does not provide a plain,
speedy and adequate remedy, and (11) when there are circumstances

indicating the urgency of judicial intervention." As already stated, Comelec

itself made the exhaustion of administrative remedies legally impossible
or, at the very least, "unreasonable."
In any event, the peculiar circumstances surrounding the unconventional
rendition of the BAC Report and the precipitate awarding of the Contract by
the Comelec en banc -- plus the fact that it was racing to have its Contract
with MPC implemented in time for the elections in May 2004 (barely four
months away) -- have combined to bring about the urgent need for judicial
intervention, thus prompting this Court to dispense with the procedural
exhaustion of administrative remedies in this case.
Main Substantive Issue:
Validity of the Award to MPC
We come now to the meat of the controversy. Petitioners contend that the
award is invalid, since Comelec gravely abused its discretion when it did
the following:
1. Awarded the Contract to MPC though it did not even participate
in the bidding
2. Allowed MPEI to participate in the bidding despite its failure to
meet the mandatory eligibility requirements
3. Issued its Resolution of April 15, 2003 awarding the Contract to
MPC despite the issuance by the BAC of its Report, which formed
the basis of the assailed Resolution, only on April 21, 2003 31
4. Awarded the Contract, notwithstanding the fact that during the
bidding process, there were violations of the mandatory
requirements of RA 8436 as well as those set forth in Comelecs
own Request for Proposal on the automated election system
5. Refused to declare a failed bidding and to conduct a re-bidding
despite the failure of the bidders to pass the technical tests
conducted by the Department of Science and Technology
6. Failed to follow strictly the provisions of RA 8436 in the conduct
of the bidding for the automated counting machines
After reviewing the slew of pleadings as well as the matters raised during
the Oral Argument, the Court deems it sufficient to focus discussion on the
following major areas of concern that impinge on the issue of grave abuse
of discretion:

A. Matters pertaining to the identity, existence and eligibility of

MPC as a bidder
B. Failure of the automated counting machines (ACMs) to pass the
DOST technical tests
C. Remedial measures and re-testings undertaken by Comelec and
DOST after the award, and their effect on the present controversy
A.
Failure to Establish the Identity, Existence and Eligibility of the Alleged
Consortium as a Bidder
On the question of the identity and the existence of the real bidder,
respondents insist that, contrary to petitioners allegations, the bidder was
not Mega Pacific eSolutions, Inc. (MPEI), which was incorporated only on
February 27, 2003, or 11 days prior to the bidding itself. Rather, the bidder
was Mega Pacific Consortium (MPC), of which MPEI was but a part. As proof
thereof, they point to the March 7, 2003 letter of intent to bid, signed by
the president of MPEI allegedly for and on behalf of MPC. They also call
attention to the official receipt issued to MPC, acknowledging payment for
the bidding documents, as proof that it was the "consortium" that
participated in the bidding process.
We do not agree. The March 7, 2003 letter, signed by only one signatory -"Willy U. Yu, President, Mega Pacific eSolutions, Inc., (Lead Company/
Proponent) For: Mega Pacific Consortium" -- and without any further proof,
does not by itself prove the existence of the consortium. It does not show
that MPEI or its president have been duly pre-authorized by the other
members of the putative consortium to represent them, to bid on their
collective behalf and, more important, to commit them jointly and severally
to the bid undertakings. The letter is purely self-serving and
uncorroborated.
Neither does an official receipt issued to MPC, acknowledging payment for
the bidding documents, constitute proof that it was the purported
consortium that participated in the bidding. Such receipts are issued by
cashiers without any legally sufficient inquiry as to the real identity
orexistence of the supposed payor.
To assure itself properly of the due existence (as well as eligibility and
qualification) of the putative consortium, Comelecs BAC should have
examined the bidding documents submitted on behalf of MPC. They would
have easily discovered the following fatal flaws.

The only logical conclusion is that no such agreement was ever submitted
to the Comelec for its consideration, as part of the bidding process.
Two-Envelope,
Two-Stage System
As stated earlier in our factual presentation, the public bidding system
designed by Comelec under its RFP (Request for Proposal for the
Automation of the 2004 Election) mandated the use of a two-envelope,
two-stage system. A bidders first envelope (Eligibility Envelope) was
meant to establish its eligibility to bid and its qualifications and capacity to
perform the contract if its bid was accepted, while the second envelope
would be the Bid Envelope itself.
The Eligibility Envelope was to contain legal documents such as articles of
incorporation, business registrations, licenses and permits, mayors permit,
VAT certification, and so forth; technical documents containing
documentary evidence to establish the track record of the bidder and its
technical and production capabilities to perform the contract; and financial
documents, including audited financial statements for the last three years,
to establish the bidders financial capacity.
In the case of a consortium or joint venture desirous of participating in the
bidding, it goes without saying that the Eligibility Envelope would
necessarily have to include a copy of the joint venture agreement, the
consortium agreement or memorandum of agreement -- or a business plan
or some other instrument of similar import -- establishing the due
existence, composition and scope of such aggrupation. Otherwise, how
would Comelec know who it was dealing with, and whether these parties
are qualified and capable of delivering the products and services being
offered for bidding?32
In the instant case, no such instrument was submitted to Comelec during
the bidding process. This fact can be conclusively ascertained by
scrutinizing the two-inch thick "Eligibility Requirements" file submitted by
Comelec last October 9, 2003, in partial compliance with this Courts
instructions given during the Oral Argument. This file purports to replicate
the eligibility documents originally submitted to Comelec by MPEI allegedly
on behalf of MPC, in connection with the bidding conducted in March 2003.
Included in the file are the incorporation papers and financial statements of
the members of the supposed consortium and certain certificates, licenses
and permits issued to them.
However, there is no sign whatsoever of any joint venture agreement,
consortium agreement, memorandum of agreement, or business plan
executed among the members of the purported consortium.

It thus follows that, prior the award of the Contract, there was no
documentary or other basis for Comelec to conclude that a consortium had
actually been formed amongst MPEI, SK C&C and WeSolv, along with
Election.com and ePLDT.33 Neither was there anything to indicate the exact
relationships between and among these firms; their diverse roles,
undertakings and prestations, if any, relative to the prosecution of the
project, the extent of their respective investments (if any) in the supposed
consortium or in the project; and the precise nature and extent of their
respective liabilities with respect to the contract being offered for bidding.
And apart from the self-serving letter of March 7, 2003, there was not even
any indication that MPEI was the lead company duly authorized to act on
behalf of the others.
So, it necessarily follows that, during the bidding process, Comelec had no
basis at all for determining that the alleged consortium really existed and
was eligible and qualified; and that the arrangements among the members
were satisfactory and sufficient to ensure delivery on the Contract and to
protect the governments interest.
Notwithstanding such deficiencies, Comelec still deemed the "consortium"
eligible to participate in the bidding, proceeded to open its Second
Envelope, and eventually awarded the bid to it, even though -- per the
Comelecs own RFP -- the BAC should have declared the MPC ineligible to
bid and returned the Second (Bid) Envelope unopened.
Inasmuch as Comelec should not have considered MPEI et al. as comprising
a consortium or joint venture, it should not have allowed them to avail
themselves of the provision in Section 5.4 (b) (i) of the IRR for RA 6957 (the
Build-Operate-Transfer Law), as amended by RA 7718. This provision states
in part that a joint venture/consortium proponent shall be evaluated based
on the individual or collective experience of the member-firms of the joint
venture or consortium and of the contractor(s) that it has engaged for the
project. Parenthetically, respondents have uniformly argued that the said
IRR of RA 6957, as amended, have suppletory application to the instant
case.
Hence, had the proponent MPEI been evaluated based solely on its own
experience, financial and operational track record or lack thereof, it would
surely not have qualified and would have been immediately considered
ineligible to bid, as respondents readily admit.
At any rate, it is clear that Comelec gravely abused its discretion in
arbitrarily failing to observe its own rules, policies and guidelines with
respect to the bidding process, thereby negating a fair, honest and
competitive bidding.

Commissioners Not Aware of Consortium

In this regard, the Court is beguiled by the statements of Commissioner
Florentino Tuason Jr., given in open court during the Oral Argument last
October 7, 2003. The good commissioner affirmed that he was aware, of
his own personal knowledge, that there had indeed been a written
agreement among the "consortium" members,34although it was an internal
matter among them,35 and of the fact that it would be presented by
counsel for private respondent.36
However, under questioning by Chief Justice Hilario G. Davide Jr. and
Justice Jose C. Vitug, Commissioner Tuason in effect admitted that, while he
was the commissioner-in-charge of Comelecs Legal Department, he had
never seen, even up to that late date, the agreement he spoke of. 37 Under
further questioning, he was likewise unable to provide any information
regarding the amounts invested into the project by several members of the
claimed consortium.38 A short while later, he admitted that the Commission
had not taken a look at the agreement (if any).39
He tried to justify his position by claiming that he was not a member of the
BAC. Neither was he the commissioner-in-charge of the Phase II
Modernization project (the automated election system); but that, in any
case, the BAC and the Phase II Modernization Project Team did look into the
aspect of the composition of the consortium.
It seems to the Court, though, that even if the BAC or the Phase II Team
had taken charge of evaluating the eligibility, qualifications and credentials
of the consortium-bidder, still, in all probability, the former would have
referred the task to Commissioner Tuason, head of Comelecs Legal
Department. That task was the appreciation and evaluation of the legal
effects and consequences of the terms, conditions, stipulations and
covenants contained in any joint venture agreement, consortium
agreement or a similar document -- assuming of course that any of these
was available at the time. The fact that Commissioner Tuason was barely
aware of the situation bespeaks the complete absence of such document,
or the utter failure or neglect of the Comelec to examine it -- assuming it
was available at all -- at the time the award was made on April 15, 2003.
In any event, the Court notes for the record that Commissioner Tuason
basically contradicted his statements in open court about there being one
written agreement among all the consortium members, when he
subsequently referred40 to the four (4) Memoranda of Agreement (MOAs)
executed by them.41
At this juncture, one might ask: What, then, if there are four MOAs instead
of one or none at all? Isnt it enough that there are these corporations
coming together to carry out the automation project? Isnt it true, as
respondent aver, that nowhere in the RFP issued by Comelec is it required
that the members of the joint venture execute a single written agreement

to prove the existence of a joint venture. Indeed, the intention to be jointly

and severally liable may be evidenced not only by a single joint venture
agreement, but also by supplementary documents executed by the parties
signifying such intention. What then is the big deal?
The problem is not that there are four agreements instead of only one. The
problem is that Comelec never bothered to check. It never based its
decision on documents or other proof that would concretely establish the
existence of the claimed consortium or joint venture or agglomeration. It
relied merely on the self-serving representation in an uncorroborated letter
signed by only one individual, claiming that his company represented a
"consortium" of several different corporations. It concluded forthwith that a
consortium indeed existed, composed of such and such members, and
thereafter declared that the entity was eligible to bid.
True, copies of financial statements and incorporation papers of the alleged
"consortium" members were submitted. But these papers did not establish
the existence of a consortium, as they could have been provided by the
companies concerned for purposes other than to prove that they were part
of a consortium or joint venture. For instance, the papers may have been
intended to show that those companies were each qualified to be a subcontractor (and nothing more) in a major project. Those documents did not
by themselves support the assumption that a consortium or joint venture
existed among the companies.
In brief, despite the absence of competent proof as to the existence and
eligibility of the alleged consortium (MPC), its capacity to deliver on the
Contract, and the members joint and several liability therefor, Comelec
nevertheless assumed that such consortium existed and was eligible. It
then went ahead and considered the bid of MPC, to which the Contract was
eventually awarded, in gross violation of the formers own bidding rules
and procedures contained in its RFP. Therein lies Comelecs grave abuse of
discretion.
Sufficiency of the Four Agreements
Instead of one multilateral agreement executed by, and effective and
binding on, all the five "consortium members" -- as earlier claimed by
Commissioner Tuason in open court -- it turns out that what was actually
executed were four (4) separate and distinct bilateral
Agreements.42 Obviously, Comelec was furnished copies of these
Agreements only after the bidding process had been terminated, as these
were not included in the Eligibility Documents. These Agreements are as
follows:
A Memorandum of Agreement between MPEI and SK C&C
A Memorandum of Agreement between MPEI and WeSolv

 A "Teaming Agreement" between MPEI and Election.com Ltd.

A "Teaming Agreement" between MPEI and ePLDT
In sum, each of the four different and separate bilateral Agreements is
valid and binding only between MPEI and the other contracting party,
leaving the other "consortium" members total strangers thereto. Under this
setup, MPEI dealt separately with each of the "members," and the latter
(WeSolv, SK C&C, Election.com, and ePLDT) in turn had nothing to do with
one another, each dealing only with MPEI.
Respondents assert that these four Agreements were sufficient for the
purpose of enabling the corporations to still qualify (even at that late
stage) as a consortium or joint venture, since the first two Agreements had
allegedly set forth the joint and several undertakings among the parties,
whereas the latter two clarified the parties respective roles with regard to
the Project, with MPEI being the independent contractor and Election.com
and ePLDT the subcontractors.
Additionally, the use of the phrase "particular contract" in the Comelecs
Request for Proposal (RFP), in connection with the joint and several
liabilities of companies in a joint venture, is taken by them to mean that all
the members of the joint venture need not be solidarily liable for the entire
project or joint venture, because it is sufficient that the lead company and
the member in charge of a particular contract or aspect of the joint venture
agree to be solidarily liable.
At this point, it must be stressed most vigorously that the submission of
the four bilateral Agreements to Comelec after the end of the bidding
process did nothing to eliminate the grave abuse of discretion it had
already committed on April 15, 2003.
Deficiencies Have Not Been "Cured"
In any event, it is also claimed that the automation Contract awarded by
Comelec incorporates all documents executed by the "consortium"
members, even if these documents are not referred to therein. The basis of
this assertion appears to be the passages from Section 1.4 of the Contract,
which is reproduced as follows:
"All Contract Documents shall form part of the Contract even if
they or any one of them is not referred to or mentioned in the
Contract as forming a part thereof. Each of the Contract
Documents shall be mutually complementary and explanatory of
each other such that what is noted in one although not shown in
the other shall be considered contained in all, and what is required
by any one shall be as binding as if required by all, unless one item
is a correction of the other.

"The intent of the Contract Documents is the proper, satisfactory

and timely execution and completion of the Project, in accordance
with the Contract Documents. Consequently, all items necessary
for the proper and timely execution and completion of the Project
shall be deemed included in the Contract."
Thus, it is argued that whatever perceived deficiencies there were in the
supplementary contracts -- those entered into by MPEI and the other
members of the "consortium" as regards their joint and several
undertakings -- have been cured. Better still, such deficiencies have
supposedly been prevented from arising as a result of the above-quoted
provisions, from which it can be immediately established that each of the
members of MPC assumes the same joint and several liability as the other
members.
The foregoing argument is unpersuasive. First, the contract being referred
to, entitled "The Automated Counting and Canvassing Project Contract," is
between Comelec and MPEI, not the alleged consortium, MPC. To repeat, it
is MPEI -- not MPC -- that is a party to the Contract. Nowhere in that
Contract is there any mention of a consortium or joint venture, of members
thereof, much less of joint and several liability. Supposedly executed
sometime in May 2003,43 the Contract bears a notarization date of June 30,
2003, and contains the signature of Willy U. Yu signing as president of MPEI
(not for and on behalf of MPC), along with that of the Comelec chair. It
provides in Section 3.2 that MPEI (not MPC) is to supply the Equipment and
perform the Services under the Contract, in accordance with the
appendices thereof; nothing whatsoever is said about any consortium or
joint venture or partnership.
Second, the portions of Section 1.4 of the Contract reproduced above do
not have the effect of curing (much less preventing) deficiencies in the
bilateral agreements entered into by MPEI with the other members of the
"consortium," with respect to their joint and several liabilities. The term
"Contract Documents," as used in the quoted passages of Section 1.4, has
a well-defined meaning and actually refers only to the following
documents:
The Contract itself along with its appendices
The Request for Proposal (also known as "Terms of Reference")
issued by the Comelec, including the Tender Inquiries and Bid
Bulletins
The Tender Proposal submitted by MPEI
In other words, the term "Contract Documents" cannot be understood as
referring to or including the MOAs and the Teaming Agreements entered
into by MPEI with SK C&C, WeSolv, Election.com and ePLDT. This much is
very clear and admits of no debate. The attempt to use the provisions of

Section 1.4 to shore up the MOAs and the Teaming Agreements is simply
unwarranted.
Third and last, we fail to see how respondents can arrive at the conclusion
that, from the above-quoted provisions, it can be immediately established
that each of the members of MPC assumes the same joint and several
liability as the other members. Earlier, respondents claimed exactly the
opposite -- that the two MOAs (between MPEI and SK C&C, and between
MPEI and WeSolv) had set forth the joint and several undertakings among
the parties; whereas the two Teaming Agreements clarified the parties
respective roles with regard to the Project, with MPEI being the
independent contractor and Election.com and ePLDT the subcontractors.
Obviously, given the differences in their relationships, their respective
liabilities cannot be the same. Precisely, the very clear terms and
stipulations contained in the MOAs and the Teaming Agreements -- entered
into by MPEI with SK C&C, WeSolv, Election.com and ePLDT -- negate the
idea that these "members" are on a par with one another and are, as such,
assuming the same joint and several liability.
Moreover, respondents have earlier seized upon the use of the term
"particular contract" in the Comelecs Request for Proposal (RFP), in order
to argue that all the members of the joint venture did not need to be
solidarily liable for the entire project or joint venture. It was sufficient that
the lead company and the member in charge of a particular contract or
aspect of the joint venture would agree to be solidarily liable. The glaring
lack of consistency leaves us at a loss. Are respondents trying to establish
the same joint and solidary liability among all the "members" or not?
Enforcement of Liabilities Problematic
Next, it is also maintained that the automation Contract between Comelec
and the MPEI confirms the solidary undertaking of the lead company and
the consortium member concerned for each particular Contract, inasmuch
as the position of MPEI and anyone else performing the services
contemplated under the Contract is described therein as that of an
independent contractor.

complications that it would produce. Hence, the Article states that the role
or position of MPEI, or anyone else performing on its behalf, is that of an
independent contractor. It is obvious to the Court that respondents are
stretching matters too far when they claim that, because of this provision,
the Contract in effect confirms the solidary undertaking of the lead
company and the consortium member concerned for the particular phase
of the project. This assertion is an absolute non sequitur.
Enforcement of Liabilities Under the Civil Code Not Possible
In any event, it is claimed that Comelec may still enforce the liability of the
"consortium" members under the Civil Code provisions on partnership,
reasoning that MPEI et al. represented themselves as partners and
members of MPC for purposes of bidding for the Project. They are,
therefore, liable to the Comelec to the extent that the latter relied upon
such representation. Their liability as partners is solidary with respect to
everything chargeable to the partnership under certain conditions.
The Court has two points to make with respect to this argument. First, it
must be recalled that SK C&C, WeSolv, Election.com and ePLDT never
represented themselves as partners and members of MPC, whether for
purposes of bidding or for something else. It was MPEI alone that
represented them to be members of a "consortium" it supposedly headed.
Thus, its acts may not necessarily be held against the other "members."
Second, this argument of the OSG in its Memorandum 44 might possibly
apply in the absence of a joint venture agreement or some other writing
that discloses the relationship of the "members" with one another. But
precisely, this case does not deal with a situation in which there is nothing
in writing to serve as reference, leaving Comelec to rely on mere
representations and therefore justifying a falling back on the rules on
partnership. For, again, the terms and stipulations of the MOAs entered
into by MPEI with SK C&C and WeSolv, as well as the Teaming Agreements
of MPEI with Election.com and ePLDT (copies of which have been furnished
the Comelec) are very clear with respect to the extent and the limitations
of the firms respective liabilities.

The Court does not see, however, how this conclusion was arrived at. In
the first place, the contractual provision being relied upon by respondents
is Article 14, "Independent Contractors," which states: "Nothing contained
herein shall be construed as establishing or creating between the
COMELEC and MEGA the relationship of employee and employer or
principal and agent, it being understood that the position of MEGA and of
anyone performing the Services contemplated under this Contract, is that
of an independent contractor."

In the case of WeSolv and SK C&C, their MOAs state that their liabilities,
while joint and several with MPEI, are limited only to the particular areas of
work wherein their services are engaged or their products utilized. As for
Election.com and ePLDT, their separate "Teaming Agreements" specifically
ascribe to them the role of subcontractor vis--vis MPEI as contractor and,
based on the terms of their particular agreements, neither Election.com
nor ePLDT is, with MPEI, jointly and severally liable to Comelec. 45 It follows
then that in the instant case, there is no justification for anyone, much less
Comelec, to resort to the rules on partnership and partners liabilities.

Obviously, the intent behind the provision was simply to avoid the creation
of an employer-employee or a principal-agent relationship and the

Eligibility of a Consortium Based on the Collective Qualifications of

Its Members

Respondents declare that, for purposes of assessing the eligibility of the

bidder, the members of MPC should be evaluated on a collective basis.
Therefore, they contend, the failure of MPEI to submit financial statements
(on account of its recent incorporation) should not by itself disqualify MPC,
since the other members of the "consortium" could meet the criteria set
out in the RFP.
Thus, according to respondents, the collective nature of the undertaking of
the members of MPC, their contribution of assets and sharing of risks, and
the community of their interest in the performance of the Contract lead to
these reasonable conclusions: (1) that their collective qualifications should
be the basis for evaluating their eligibility; (2) that the sheer enormity of
the project renders it improbable to expect any single entity to be able to
comply with all the eligibility requirements and undertake the project by
itself; and (3) that, as argued by the OSG, the RFP allows bids from
manufacturers, suppliers and/or distributors that have formed themselves
into a joint venture, in recognition of the virtual impossibility of a single
entitys ability to respond to the Invitation to Bid.
Additionally, argues the Comelec, the Implementing Rules and Regulations
of RA 6957 (the Build-Operate-Transfer Law) as amended by RA 7718 would
be applicable, as proponents of BOT projects usually form joint ventures or
consortiums. Under the IRR, a joint venture/consortium proponent shall be
evaluated based on the individual or the collective experience of the
member-firms of the joint venture/consortium and of the contractors the
proponent has engaged for the project.
Unfortunately, this argument seems to assume that the "collective" nature
of the undertaking of the members of MPC, their contribution of assets and
sharing of risks, and the "community" of their interest in the performance
of the Contract entitle MPC to be treated as a joint venture or consortium;
and to be evaluated accordingly on the basis of the members collective
qualifications when, in fact, the evidence before the Court suggest
otherwise.
This Court in Kilosbayan v. Guingona46 defined joint venture as "an
association of persons or companies jointly undertaking some commercial
enterprise; generally, all contribute assets and share risks. It requires a
community of interest in the performance of the subject matter, a right to
direct and govern the policy in connection therewith, and [a] duty, which
may be altered by agreement to share both in profit and losses."
Going back to the instant case, it should be recalled that the automation
Contract with Comelec was not executed by the "consortium" MPC -- or by
MPEI for and on behalf of MPC -- but by MPEI, period. The said Contract
contains no mention whatsoever of any consortium or members thereof.
This fact alone seems to contradict all the suppositions about a joint
undertaking that would normally apply to a joint venture or consortium:

that it is a commercial enterprise involving a community of interest, a

sharing of risks, profits and losses, and so on.
Now let us consider the four bilateral Agreements, starting with the
Memorandum of Agreement between MPEI and WeSolv Open Computing,
Inc., dated March 5, 2003. The body of the MOA consists of just seven (7)
short paragraphs that would easily fit in one page! It reads as follows:
"1. The parties agree to cooperate in successfully implementing
the Project in the substance and form as may be most beneficial to
both parties and other subcontractors involved in the Project.
"2. Mega Pacific shall be responsible for any contract negotiations
and signing with the COMELEC and, subject to the latters approval,
agrees to give WeSolv an opportunity to be present at meetings
with the COMELEC concerning WeSolvs portion of the Project.
"3. WeSolv shall be jointly and severally liable with Mega Pacific
only for the particular products and/or services supplied by the
former for the Project.
"4. Each party shall bear its own costs and expenses relative to this
agreement unless otherwise agreed upon by the parties.
"5. The parties undertake to do all acts and such other things
incidental to, necessary or desirable or the attainment of the
objectives and purposes of this Agreement.
"6. In the event that the parties fail to agree on the terms and
conditions of the supply of the products and services including but
not limited to the scope of the products and services to be supplied
and payment terms, WeSolv shall cease to be bound by its
obligations stated in the aforementioned paragraphs.
"7. Any dispute arising from this Agreement shall be settled
amicably by the parties whenever possible. Should the parties be
unable to do so, the parties hereby agree to settle their dispute
through arbitration in accordance with the existing laws of the
Republic of the Philippines." (Underscoring supplied.)
Even shorter is the Memorandum of Agreement between MPEI and SK C&C
Co. Ltd., dated March 9, 2003, the body of which consists of only six (6)
paragraphs, which we quote:
"1. All parties agree to cooperate in achieving the Consortiums
objective of successfully implementing the Project in the substance
and form as may be most beneficial to the Consortium members
and in accordance w/ the demand of the RFP.

"2. Mega Pacific shall have full powers and authority to represent
the Consortium with the Comelec, and to enter and sign, for and in
behalf of its members any and all agreement/s which maybe
required in the implementation of the Project.
"3. Each of the individual members of the Consortium shall be
jointly and severally liable with the Lead Firm for the particular
products and/or services supplied by such individual member for
the project, in accordance with their respective undertaking or
sphere of responsibility.
"4. Each party shall bear its own costs and expenses relative to this
agreement unless otherwise agreed upon by the parties.
"5. The parties undertake to do all acts and such other things
incidental to, necessary or desirable for the attainment of the
objectives and purposes of this Agreement.
"6. Any dispute arising from this Agreement shall be settled
amicably by the parties whenever possible. Should the parties be
unable to do so, the parties hereby agree to settle their dispute
through arbitration in accordance with the existing laws of the
Republic of the Philippines." (Underscoring supplied.)
It will be noted that the two Agreements quoted above are very similar in
wording. Neither of them contains any specifics or details as to the exact
nature and scope of the parties respective undertakings, performances
and deliverables under the Agreement with respect to the automation
project. Likewise, the two Agreements are quite bereft of pesos-andcentavos data as to the amount of investments each party contributes, its
respective share in the revenues and/or profit from the Contract with
Comelec, and so forth -- all of which are normal for agreements of this
nature. Yet, according to public and private respondents, the participation
of MPEI, WeSolv and SK C&C comprises fully 90 percent of the entire
undertaking with respect to the election automation project, which is worth
about P1.3 billion.
As for Election.com and ePLDT, the separate "Teaming Agreements" they
entered into with MPEI for the remaining 10 percent of the entire project
undertaking are ironically much longer and more detailed than the MOAs
discussed earlier. Although specifically ascribing to them the role of
subcontractor vis--vis MPEI as contractor, these Agreements are,
however, completely devoid of any pricing data or payment terms. Even
the appended Schedules supposedly containing prices of goods and
services are shorn of any price data. Again, as mentioned earlier, based on
the terms of their particular Agreements, neither Election.com nor ePLDT -with MPEI -- is jointly and severally liable to Comelec.

It is difficult to imagine how these bare Agreements -- especially the first

two -- could be implemented in practice; and how a dispute between the
parties or a claim by Comelec against them, for instance, could be resolved
without lengthy and debilitating litigations. Absent any clear-cut statement
as to the exact nature and scope of the parties respective undertakings,
commitments, deliverables and covenants, one party or another can easily
dodge its obligation and deny or contest its liability under the Agreement;
or claim that it is the other party that should have delivered but failed to.
Likewise, in the absence of definite indicators as to the amount of
investments to be contributed by each party, disbursements for expenses,
the parties respective shares in the profits and the like, it seems to the
Court that this situation could readily give rise to all kinds of
misunderstandings and disagreements over money matters.
Under such a scenario, it will be extremely difficult for Comelec to enforce
the supposed joint and several liabilities of the members of the
"consortium." The Court is not even mentioning the possibility of a
situation arising from a failure of WeSolv and MPEI to agree on the scope,
the terms and the conditions for the supply of the products and services
under the Agreement. In that situation, by virtue of paragraph 6 of its MOA,
WeSolv would perforce cease to be bound by its obligations -- including its
joint and solidary liability with MPEI under the MOA -- and could forthwith
disengage from the project. Effectively, WeSolv could at any time
unilaterally exit from its MOA with MPEI by simply failing to agree. Where
would that outcome leave MPEI and Comelec?
To the Court, this strange and beguiling arrangement of MPEI with the
other companies does not qualify them to be treated as a consortium or
joint venture, at least of the type that government agencies like the
Comelec should be dealing with. With more reason is it unable to agree to
the proposal to evaluate the members of MPC on a collective basis.
In any event, the MPC members claim to be a joint venture/consortium;
and respondents have consistently been arguing that the IRR for RA 6957,
as amended, should be applied to the instant case in order to allow a
collective evaluation of consortium members. Surprisingly, considering
these facts, respondents have not deemed it necessary for MPC members
to comply with Section 5.4 (a) (iii) of the IRR for RA 6957 as amended.
According to the aforementioned provision, if the project proponent is a
joint venture or consortium, the members or participants thereof are
required to submit a sworn statement that, if awarded the contract, they
shall bind themselves to be jointly, severally and solidarily liable for the
project proponents obligations thereunder. This provision was supposed to
mirror Section 5 of RA 6957, as amended, which states: "In all cases, a
consortium that participates in a bid must present proof that the members
of the consortium have bound themselves jointly and severally to assume
responsibility for any project. The withdrawal of any member of the

consortium prior to the implementation of the project could be a ground for

per precinct?
the cancellation of the contract." The Court has certainly not seen any joint
and several undertaking by the MPC members that even approximates the
tenor of that which is described above. We fail to see why respondents 3. Prints election returns without any loss of date
should invoke the IRR if it is for their benefit, but refuse to comply with it during generation of such reports?
otherwise.
4. Uninterruptible back-up power system, that
will engage immediately to allow operation of at
B.
least 10 minutes after outage, power surge or
abnormal electrical occurrences?
DOST Technical Tests Flunked by the Automated Counting
5. Machine reads two-sided ballots in one pass?
Machines

Note: This
particular
requiremen
needs furthe
verification

Let us now move to the second subtopic, which deals with the substantive
issue: the ACMs failure to pass the tests of the Department of Science and
Technology (DOST).
After respondent "consortium" and the other bidder, TIM, had submitted
their respective bids on March 10, 2003, the Comelecs BAC -- through its
Technical Working Group (TWG) and the DOST -- evaluated their technical
6. Machine can detect previously counted ballots
proposals. Requirements that were highly technical in nature and that
and prevent previously counted ballots from
required the use of certain equipment in the evaluation process were
being counted more than once?
referred to the DOST for testing. The Department reported thus:
7. Stores results of counted votes by precinct in
external (removable) storage device?
TEST RESULTS MATRIX

Note: This
particular
requiremen
needs furthe
verification

47

Technical Evaluation of Automated Counting Machine

KEY REQUIREMENTS
QUESTIONS

Does the machine have an accuracy rating of

least 99.995 percent

MEGA-PACIFIC
CONSORTIUM
YES

NO

TOTAL
8. Data stored in external media is encrypted?
INFORMATION
MANAGEMENT
YES

NORMAL environmental conditions

HARSH environmental conditions

Note: This
particular
requiremen
needs furthe
verification

NO

COLD environmental condition

Accurately records and reports the date and

me of the start and end of counting of ballots

9. Physical key or similar device allows, limits, or

restricts operation of the machine?

10. CPU speed is at least 400mHz?

. Port to allow use of dot-matrix printers?

media?
Note: This
particular
requirement
needs further
verification

. Generates printouts of the election returns in

ormat specified by the COMELEC?

nerates printouts

format specified by COMELEC

. Prints election returns without any loss of

ta during generation of such report?

17. Does the system output a Zero City/Municipal

Canvass Report, which is printed on election day
prior to the conduct of the actual canvass
operation, that shows that all totals for all the
votes for all the candidates and other
information, are indeed zero or null?

18. Does the system consolidate results from all

precincts in the city/municipality using the data
storage device coming from the counting
machine?

requirement
needs further
verification

Note: This
particular
requiremen
needs furthe
verification

Note: This
particular
requiremen
needs furthe
verification

. Generates an audit trail of the counting

achine, both hard copy and soft copy?

rd copy

ft copy

. Does the City/Municipal Canvassing System

nsolidate results from all precincts within it
ing the encrypted soft copy of the data
nerated by the counting machine and stored
the removable data storage device?

. Does the City/Municipal Canvassing System

nsolidate results from all precincts within it
ing the encrypted soft copy of the data
nerated by the counting machine and
ansmitted through an electronic transmission

requiremen
needs furthe
verification

19. Isthe machine 100% accurate?

Note: This
particular
requirement
needs further
verification

20. Isthe Program able to detect previously

downloaded precinct results and prevent these
from
Note:
being
This inputted again into the System?
particular
requirement
needs further
verification

Note: This
particular

System is able to print the specified

21. The
reports and the audit trail without any loss of
data
Note:
during
This generation of the above-mentioned
reports?
particular

Note: This
particular
requiremen
needs furthe
verification

Note: This
particular
requiremen
needs furthe
verification

nts specified reports

dit Trail

. Can the result of the city/municipal

nsolidation be stored in a data storage device?

Audit Trail

. Is the system 100% accurate?

Note: This
particular
requiremen
needs furthe
verification

Note: This
particular
requirement
needs
further
27. Can
the results of the
verification
provincial/district/national
consolidation be stored
in a data storage device?

. Does the system consolidate results from all

ecincts in the provincial/district/ national using
e data storage device from different levels of
nsolidation?

Note: This
particular
requiremen
needs furthe
verification

Note: This
particular
requirement
needs further
verificationAccording to respondents, it was only after the TWG and the DOST had
conducted their separate tests and submitted their respective reports that
the BAC, on the basis of these reports formulated its
comments/recommendations on the bids of the consortium and TIM.

Note: ThisThe BAC, in its Report dated April 21, 2003, recommended that the Phase II
particularproject involving the acquisition of automated counting machines be
awarded to MPEI. It said:
requirement
needs further
verification
"After incisive analysis of the technical reports of the DOST and the

. Is the Program able to detect previously

wnloaded precinct results and prevent these
m being inputted again into the System?

Note: This
particular
requirement
needs further
verification

. The System is able to print the specified

ports and the audit trail without any loss of
ta during generation of the abovementioned
ports?

nts specified reports

Technical Working Group for Phase II Automated Counting

Machine, the BAC considers adaptability to advances in modern
technology to ensure an effective and efficient method, as well as
the security and integrity of the system.
"The results of the evaluation conducted by the TWG and that of
the DOST (14 April 2003 report), would show the apparent
advantage of Mega-Pacific over the other competitor, TIM.
"The BAC further noted that both Mega-Pacific and TIM obtained
some failed marks in the technical evaluation. In general, the
failed marks of Total Information Management as enumerated
above affect the counting machine itself which are material in
nature, constituting non-compliance to the RFP. On the other hand,
the failed marks of Mega-Pacific are mere formalities on certain
documentary requirements which the BAC may waive as clearly
indicated in the Invitation to Bid.

"In the DOST test, TIM obtained 12 failed marks and mostly
attributed to the counting machine itself as stated earlier. These
are requirements of the RFP and therefore the BAC cannot
disregard the same.
"Mega-Pacific failed in 8 items however these are mostly on the
software which can be corrected by reprogramming the software
and therefore can be readily corrected.
"The BAC verbally inquired from DOST on the status of the retest of
the counting machines of the TIM and was informed that the report
will be forthcoming after the holy week. The BAC was informed that
the retest is on a different parameters theyre being two different
machines being tested. One purposely to test if previously read
ballots will be read again and the other for the other features such
as two sided ballots.
"The said machine and the software therefore may not be
considered the same machine and program as submitted in the
Technical proposal and therefore may be considered an
enhancement of the original proposal.

Discount rate of 15% p.a. or 1.2532% per month.

Total Number of Automated Counting Machine 1,769 ACMs
(Nationwide)
TIM:
Total Bid Price Php1,297,860,560.00
Total Number of Automated Counting Machine 2,272 ACMs
(Mindanao and NCR only)
"Premises considered, it appears that the bid of Mega Pacific is the
lowest calculated responsive bid, and therefore, the Bids and
Awards Committee (BAC) recommends that the Phase II project re
Automated Counting Machine be awarded to Mega Pacific
eSolutions, Inc."48

"Advance information relayed to the BAC as of 1:40 PM of 15 April

2003 by Executive Director Ronaldo T. Viloria of DOST is that the
result of the test in the two counting machines of TIM contains
substantial errors that may lead to the failure of these machines
based on the specific items of the RFP that DOST has to certify.

The BAC, however, also stated on page 4 of its Report: "Based on the 14
April 2003 report (Table 6) of the DOST, it appears that both Mega-Pacific
and TIM (Total Information Management Corporation) failed to meet some
of the requirements. Below is a comparative presentation of the
requirements wherein Mega-Pacific or TIM or both of them failed: x x x."
What followed was a list of "key requirements," referring to technical
requirements, and an indication of which of the two bidders had failed to
meet them.

OPENING OF FINANCIAL BIDS

Failure to Meet the Required Accuracy Rating

"The BAC on 15 April 2003, after notifying the concerned bidders

opened the financial bids in their presence and the results were as
follows:

The first of the key requirements was that the counting machines were to
have an accuracy rating of at least 99.9995 percent. The BAC Report
indicates that both Mega Pacific and TIM failed to meet this standard.

Mega-Pacific:

The key requirement of accuracy rating happens to be part and parcel of

the Comelecs Request for Proposal (RFP). The RFP, on page 26, even
states that the ballot counting machines and ballot counting software
"must have an accuracy rating of 99.9995% (not merely 99.995%) or
better as certified by a reliable independent testing agency."

Option 1 Outright purchase: Bid Price if

Php1,248,949,088.00
Option 2 Lease option:
70% Down payment of cost of hardware or
Php642,755,757.07
Remainder payable over 50 months or a total of
Php642,755,757.07

When questioned on this matter during the Oral Argument, Commissioner

Borra tried to wash his hands by claiming that the required accuracy rating
of 99.9995 percent had been set by a private sector group in tandem with
Comelec. He added that the Commission had merely adopted the accuracy
rating as part of the groups recommended bid requirements, which it had
not bothered to amend even after being advised by DOST that such
standard was unachievable. This excuse, however, does not in any way
lessen Comelecs responsibility to adhere to its own published bidding
rules, as well as to see to it that the consortium indeed meets the accuracy

standard.Whichever accuracy rating is the right standard -- whether

99.995 or 99.9995 percent -- the fact remains that the machines of the socalled "consortium" failed to even reach the lesser of the two. On this basis
alone, it ought to have been disqualified and its bid rejected outright.

But that grim prospect is not all. The BAC Report, on pages 6 and 7,
indicate that the ACMs of both bidders wereunable to print the audit
trail without any loss of data. In the case of MPC, the audit trail system
was "not yet incorporated" into its ACMs.

At this point, the Court stresses that the essence of public bidding is
violated by the practice of requiring very high standards or unrealistic
specifications that cannot be met -- like the 99.9995 percent accuracy
rating in this case -- only to water them down after the bid has been award.
Such scheme, which discourages the entry of prospective bona fide
bidders, is in fact a sure indication of fraud in the bidding, designed to
eliminate fair competition. Certainly, if no bidder meets the mandatory
requirements, standards or specifications, then no award should be made
and a failed bidding declared.

This particular deficiency is significant, not only to this bidding but to the
cause of free and credible elections. The purpose of requiring audit trails is
to enable Comelec to trace and verify the identities of the ACM operators
responsible for data entry and downloading, as well as the times when the
various data were downloaded into the canvassing system, in order to
forestall fraud and to identify the perpetrators.

Failure of Software to Detect Previously Downloaded Data

Furthermore, on page 6 of the BAC Report, it appears that the "consortium"
as well as TIM failed to meet another key requirement -- for the counting
machines software program to be able to detect previously
downloaded precinct results and to prevent these from being
entered again into the counting machine. This same deficiency on the
part of both bidders reappears on page 7 of the BAC Report, as a result of
the recurrence of their failure to meet the said key requirement.
That the ability to detect previously downloaded data at different
canvassing or consolidation levels is deemed of utmost importance can be
seen from the fact that it is repeated three times in the RFP. On page 30
thereof, we find the requirement that the city/municipal canvassing system
software must be able to detect previously downloaded precinct results
and prevent these from being "inputted" again into the system. Again, on
page 32 of the RFP, we read that the provincial/district canvassing system
software must be able to detect previously downloaded city/municipal
results and prevent these from being "inputted" again into the system. And
once more, on page 35 of the RFP, we find the requirement that
the national canvassing system software must be able to detect previously
downloaded provincial/district results and prevent these from being
"inputted" again into the system.
Once again, though, Comelec chose to ignore this crucial deficiency, which
should have been a cause for the gravest concern. Come May 2004,
unscrupulous persons may take advantage of and exploit such deficiency
by repeatedly downloading and feeding into the computers results
favorable to a particular candidate or candidates.We are thus
confronted with the grim prospect of election fraud on a massive
scale by means of just a few key strokes. The marvels and woes of
the electronic age!
Inability to Print the Audit Trail

Thus, the RFP on page 27 states that the ballot counting machines and
ballot counting software must print an audit trail of all machine operations
for documentation and verification purposes. Furthermore, the audit trail
must be stored on the internal storage device and be available on demand
for future printing and verifying. On pages 30-31, the RFP also requires that
the city/municipal canvassing system software be able to print an audit
trail of the canvassing operations, including therein such data as the date
and time the canvassing program was started, the log-in of the authorized
users (the identity of the machine operators), the date and time the
canvass data were downloaded into the canvassing system, and so on and
so forth. On page 33 of the RFP, we find the same audit trail requirement
with respect to the provincial/district canvassing system software; and
again on pages 35-36 thereof, the same audit trail requirement with
respect to the national canvassing system software.
That this requirement for printing audit trails is not to be lightly brushed
aside by the BAC or Comelec itself as a mere formality or technicality can
be readily gleaned from the provisions of Section 7 of RA 8436, which
authorizes the Commission to use an automated system for elections.
The said provision which respondents have quoted several times, provides
that ACMs are to possess certain features divided into two classes: those
that the statute itself considers mandatory and other features or
capabilities that the law deems optional. Among those considered
mandatory are "provisions for audit trails"! Section 7 reads as follows: "The
System shall contain the following features: (a) use of appropriate ballots;
(b) stand-alone machine which can count votes and an automated system
which can consolidate the results immediately; (c) with provisions for
audit trails; (d) minimum human intervention; and (e) adequate
safeguard/security measures." (Italics and emphases supplied.)
In brief, respondents cannot deny that the provision requiring audit trails is
indeed mandatory, considering the wording of Section 7 of RA 8436.
Neither can Respondent Comelec deny that it has relied on the BAC Report,
which indicates that the machines or the software was deficient in that
respect. And yet, the Commission simply disregarded this shortcoming and

awarded the Contract to private respondent, thereby violating the very law
it was supposed to implement.

noted could possibly be remedied by re-programming the software.

Apparently, Comelec did not care about the software, but focused only on
purchasing the machines.

C.
Inadequacy of Post Facto Remedial Measures
Respondents argue that the deficiencies relating to the detection of
previously downloaded data, as well as provisions for audit trails, are mere
shortcomings or minor deficiencies in software or programming, which can
be rectified. Perhaps Comelec simply relied upon the BAC Report, which
states on page 8 thereof that "Mega Pacific failed in 8 items[;] however
these are mostly on the software which can be corrected by reprogramming x x x and therefore can be readily corrected."
The undersigned ponentes questions, some of which were addressed to
Commissioner Borra during the Oral Argument, remain unanswered to this
day. First of all, who made the determination that the eight "fail" marks of
Mega Pacific were on account of the software -- was it DOST or TWG? How
can we be sure these failures were not the results of machine defects? How
was it determined that the software could actually be re-programmed and
thereby rectified? Did a qualified technical expert read and analyze
the source code49 for the programs and conclude that these could be saved
and remedied? (Such determination cannot be done by any other means
save by the examination and analysis of the source code.)
Who was this qualified technical expert? When did he carry out the study?
Did he prepare a written report on his findings? Or did the Comelec just
make a wild guess? It does not follow that all defects in software programs
can be rectified, and the programs saved. In the information technology
sector, it is common knowledge that there are many badly written
programs, with significant programming errors written into them; hence it
does not make economic sense to try to correct the programs; instead,
programmers simply abandon them and just start from scratch. Theres no
telling if any of these programs is unrectifiable, unless a qualified
programmer reads the source code.
And if indeed a qualified expert reviewed the source code, did he also
determine how much work would be needed to rectify the programs? And
how much time and money would be spent for that effort? Who would
carry out the work? After the rectification process, who would ascertain and
how would it be ascertained that the programs have indeed been properly
rectified, and that they would work properly thereafter? And of course, the
most important question to ask: could the rectification be done in time for
the elections in 2004?
Clearly, none of the respondents bothered to think the matter through.
Comelec simply took the word of the BAC as gospel truth, without even
bothering to inquire from DOST whether it was true that the deficiencies

What really adds to the Courts dismay is the admission made by

Commissioner Borra during the Oral Argument that the software currently
being used by Comelec was merely the "demo" version, inasmuch as the
final version that would actually be used in the elections was still being
developed and had not yet been finalized.
It is not clear when the final version of the software would be ready for
testing and deployment. It seems to the Court that Comelec is just keeping
its fingers crossed and hoping the final product would work. Is there a "Plan
B" in case it does not? Who knows? But all these software programs are
part and parcel of the bidding and the Contract awarded to the
Consortium. Why is it that the machines are already being brought in and
paid for, when there is as yet no way of knowing if the final version of the
software would be able to run them properly, as well as canvass and
consolidate the results in the manner required?
The counting machines, as well as the canvassing system, will never work
properly without the correct software programs. There is an old adage that
is still valid to this day: "Garbage in, garbage out." No matter how
powerful, advanced and sophisticated the computers and the servers are,
if the software being utilized is defective or has been compromised, the
results will be no better than garbage. And to think that what is at stake
here is the 2004 national elections -- the very basis of our democratic life.
Correction of Defects?
To their Memorandum, public respondents proudly appended 19
Certifications issued by DOST declaring that some 285 counting machines
had been tested and had passed the acceptance testing conducted by the
Department on October 8-18, 2003. Among those tested were some
machines that had failed previous tests, but had undergone adjustments
and thus passed re-testing.
Unfortunately, the Certifications from DOST fail to divulge in what manner
and by what standards or criteria the condition, performance and/or
readiness of the machines were re-evaluated and re-appraised and
thereafter given the passing mark. Apart from that fact, the remedial
efforts of respondents were, not surprisingly, apparently focused again on
the machines -- the hardware. Nothing was said or done about the software
-- the deficiencies as to detection and prevention of downloading and
entering previously downloaded data, as well as the capability to print an
audit trail. No matter how many times the machines were tested and retested, if nothing was done about the programming defects and
deficiencies, the same danger of massive electoral fraud remains. As

anyone who has a modicum of knowledge of computers would say, "Thats

elementary!"
And only last December 5, 2003, an Inq7.net news report quoted the
Comelec chair as saying that the new automated poll system would be
used nationwide in May 2004, even as the software for the system
remained unfinished. It also reported that a certain Titus Manuel of the
Philippine Computer Society, which was helping Comelec test the hardware
and software, said that the software for the counting still had to be
submitted on December 15, while the software for the canvassing was due
in early January.
Even as Comelec continues making payments for the ACMs, we keep
asking ourselves: who is going to ensure that the software would be tested
and would work properly?
At any rate, the re-testing of the machines and/or the 100 percent testing
of all machines (testing of every single unit) would not serve to eradicate
the grave abuse of discretion already committed by Comelec when it
awarded the Contract on April 15, 2003, despite the obvious and admitted
flaws in the bidding process, the failure of the "winning bidder" to qualify,
and the inability of the ACMs and the intended software to meet the bid
requirements and rules.
Comelecs Latest "Assurances" Are Unpersuasive
Even the latest pleadings filed by Comelec do not serve to allay our
apprehensions. They merely affirm and compound the serious violations of
law and gravely abusive acts it has committed. Let us examine them.
The Resolution issued by this Court on December 9, 2003 required
respondents to inform it as to the number of ACMs delivered and paid for,
as well as the total payment made to date for the purchase thereof. They
were likewise instructed to submit a certification from the DOST attesting
to the number of ACMs tested, the number found to be defective; and
"whether the reprogrammed software has been tested and found to have
complied with the requirements under Republic Act No. 8436."50
In its "Partial Compliance and Manifestation" dated December 29, 2003,
Comelec informed the Court that 1,991 ACMs had already been delivered
to the Commission as of that date. It further certified that it had already
paid the supplier the sum of P849,167,697.41, which corresponded to
1,973 ACM units that had passed the acceptance testing procedures
conducted by the MIRDC-DOST51 and which had therefore been accepted
by the poll body.
In the same submission, for the very first time, Comelec also disclosed to
the Court the following:

"The Automated Counting and Canvassing Project involves not only

the manufacturing of the ACM hardware but also the development
of three (3) types of software, which are intended for use in the
following:
1. Evaluation of Technical Bids
2. Testing and Acceptance Procedures
3. Election Day Use."
Purchase of the First Type of Software Without Evaluation
In other words, the first type of software was to be developed solely for the
purpose of enabling the evaluation of the bidders technical bid. Comelec
explained thus: "In addition to the presentation of the ACM hardware, the
bidders were required to develop a base software program that will
enable the ACM to function properly. Since the software program utilized
during the evaluation of bids is not the actual software program to be
employed on election day, there being two (2) other types of software
program that will still have to be developed and thoroughly tested prior to
actual election day use, defects in the base software that can be readily
corrected by reprogramming are considered minor in nature, and may
therefore be waived."
In short, Comelec claims that it evaluated the bids and made the decision
to award the Contract to the "winning" bidder partly on the basis of the
operation of the ACMs running a "base" software. That software was
therefore nothing but a sample or "demo" software, which would not be the
actual one that would be used on election day. Keeping in mind that the
Contract involves the acquisition of not just the ACMs or the hardware, but
also the software that would run them, it is now even clearer that the
Contract was awarded without Comelec having seen, much less evaluated,
the final product -- the software that would finally be utilized come election
day. (Not even the "near-final" product, for that matter).
What then was the point of conducting the bidding, when the software that
was the subject of the Contract was still to be created and could
conceivably undergo innumerable changes before being considered as
being in final form? And that is not all!
No Explanation for Lapses in the Second Type of Software
The second phase, allegedly involving the second type of software, is
simply denominated "Testing and Acceptance Procedures." As best as we
can construe, Comelec is claiming that this second type of software is
also to be developed and delivered by the supplier in connection with the
"testing and acceptance" phase of the acquisition process. The previous

pleadings, though -- including the DOST reports submitted to this Court -have not heretofore mentioned any statement, allegation or representation
to the effect that a particular set of software was to be developed and/or
delivered by the supplier in connection with the testing and acceptance of
delivered ACMs.
What the records do show is that the imported ACMs were subjected to the
testing and acceptance process conducted by the DOST. Since the initial
batch delivered included a high percentage of machines that had failed the
tests, Comelec asked the DOST to conduct a 100 percent testing; that is, to
test every single one of the ACMs delivered. Among the machines tested
on October 8 to 18, 2003, were some units that had failed previous tests
but had subsequently been re-tested and had passed. To repeat, however,
until now, there has never been any mention of a second set or type of
software pertaining to the testing and acceptance process.
In any event, apart from making that misplaced and uncorroborated claim,
Comelec in the same submission also professes (in response to the
concerns expressed by this Court) that the reprogrammed software
has been tested and found to have complied with the
requirements of RA 8436. It reasoned thus: "Since the software
program is an inherent element in the automated counting system, the
certification issued by the MIRDC-DOST that one thousand nine hundred
seventy-three (1,973) units passed the acceptance test procedures is an
official recognition by the MIRDC-DOST that the software component of the
automated election system, which has been reprogrammed to comply with
the provisions of Republic Act No. 8436 as prescribed in the Ad Hoc
Technical Evaluation Committees ACM Testing and Acceptance Manual,
has passed the MIRDC-DOST tests."

Project Director
"Dear Commissioner Borra:
"We are pleased to submit 11 DOST Test Certifications representing
11 lots and covering 158 units of automated counting machines
(ACMs) that we have tested from 02-12 December 2003.
"To date, we have tested all the 1,991 units of ACMs, broken down
as follow: (sic)
1st batch - 30 units 4th batch - 438 units
2nd batch - 288 units 5th batch - 438 units
3rd batch - 414 units 6th batch - 383 units
"It should be noted that a total of 18 units have failed the test. Out
of these 18 units, only one (1) unit has failed the retest.
"Thank you and we hope you will find everything in order.
"Very truly yours,
"ROLANDO T. VILORIA, CESO III
Executive Director cum

The facts do not support this sweeping statement of Comelec. A scrutiny of

the MIRDC-DOST letter dated December 15, 2003,52 which it relied upon,
does not justify its grand conclusion. For claritys sake, we quote in full the
letter-certification, as follows:
"15 December 2003
"HON. RESURRECCION Z. BORRA
Commissioner-in-Charge
Phase II, Modernization Project
Commission on Elections
Intramuros, Manila
Attention: Atty. Jose M. Tolentino, Jr.

Chairman, DOST-Technical Evaluation Committee"

Even a cursory glance at the foregoing letter shows that it is completely
bereft of anything that would remotely support Comelecs contention that
the "software component of the automated election system x x x has been
reprogrammed to comply with" RA 8436, and "has passed the MIRDC-DOST
tests." There is no mention at all of any software reprogramming. If the
MIRDC-DOST had indeed undertaken the supposed reprogramming and the
process turned out to be successful, that agency would have proudly
trumpeted its singular achievement.
How Comelec came to believe that such reprogramming had been
undertaken is unclear. In any event, the Commission is not forthright and
candid with the factual details. If reprogramming has been done, who
performed it and when? What exactly did the process involve? How can we
be assured that it was properly performed? Since the facts attendant to the
alleged reprogramming are still shrouded in mystery, the Court cannot give
any weight to Comelecs bare allegations.

The fact that a total of 1,973 of the machines has ultimately passed the
MIRDC-DOST tests does not by itself serve as an endorsement of the
soundness of the software program, much less as a proof that it has been
reprogrammed. In the first place, nothing on record shows that the tests
and re-tests conducted on the machines were intended to address the
serious deficiencies noted earlier. As a matter of fact, the MIRDC-DOST
letter does not even indicate what kinds of tests or re-tests were
conducted, their exact nature and scope, and the specific objectives
thereof.53 The absence of relevant supporting documents, combined with
the utter vagueness of the letter, certainly fails to inspire belief or to justify
the expansive confidence displayed by Comelec. In any event, it goes
without saying that remedial measures such as the alleged reprogramming
cannot in any way mitigate the grave abuse of discretion already
committed as early as April 15, 2003.
Rationale of Public Bidding Negated
by the Third Type of Software
Respondent Comelec tries to assuage this Courts anxiety in these words:
"The reprogrammed software that has already passed the requirements of
Republic Act No. 8436 during the MIRDC-DOST testing and acceptance
procedures will require further customization since the following additional
elements, among other things, will have to be considered before the final
software can be used on election day: 1. Final Certified List of Candidates x
x x 2. Project of Precincts x x x 3. Official Ballot Design and Security
Features x x x 4. Encryption, digital certificates and digital signatures x x
x. The certified list of candidates for national elective positions will be
finalized on or before 23 January 2004 while the final list of projects of
precincts will be prepared also on the same date. Once all the above
elements are incorporated in the software program, the Test Certification
Group created by the Ad Hoc Technical Evaluation Committee will conduct
meticulous testing of the final software before the same can be used on
election day. In addition to the testing to be conducted by said Test
Certification Group, the Comelec will conduct mock elections in selected
areas nationwide not only for purposes of public information but also to
further test the final election day program. Public respondent Comelec,
therefore, requests that it be given up to 16 February 2004 to comply with
this requirement."
The foregoing passage shows the imprudent approach adopted by Comelec
in the bidding and acquisition process. The Commission says that before
the software can be utilized on election day, it will require "customization"
through addition of data -- like the list of candidates, project of precincts,
and so on. And inasmuch as such data will become available only in
January 2004 anyway, there is therefore no perceived need on Comelecs
part to rush the supplier into producing the final (or near-final) version of
the software before that time. In any case, Comelec argues that the
software needed for the electoral exercise can be continuously developed,
tested, adjusted and perfected, practically all the way up to election day,

at the same time that the Commission is undertaking all the other distinct
and diverse activities pertinent to the elections.
Given such a frame of mind, it is no wonder that Comelec paid little
attention to the counting and canvassing software during the entire
bidding process, which took place in February-March 2003. Granted that
the software was defective, could not detect and prevent the re-use of
previously downloaded data or produce the audit trail -- aside from its
other shortcomings -- nevertheless, all those deficiencies could still be
corrected down the road. At any rate, the software used for bidding
purposes would not be the same one that will be used on election day, so
why pay any attention to its defects? Or to the Comelecs own bidding
rules for that matter?
Clearly, such jumbled ratiocinations completely negate the rationale
underlying the bidding process mandated by law.
At the very outset, the Court has explained that Comelec flagrantly
violated the public policy on public biddings (1) by allowing MPC/MPEI to
participate in the bidding even though it was not qualified to do so; and (2)
by eventually awarding the Contract to MPC/MPEI. Now, with the latest
explanation given by Comelec, it is clear that the Commission further
desecrated the law on public bidding by permitting the winning bidder to
change and alter the subject of the Contract (the software), in effect
allowing a substantive amendment without public bidding.
This stance is contrary to settled jurisprudence requiring the strict
application of pertinent rules, regulations and guidelines for public bidding
for the purpose of placing each bidder, actual or potential, on the same
footing. The essence of public bidding is, after all, an opportunity for fair
competition, and a fair basis for the precise comparison of bids. In common
parlance, public bidding aims to "level the playing field." That means each
bidder must bid under the same conditions; and be subject to the same
guidelines, requirements and limitations, so that the best offer or lowest
bid may be determined, all other things being equal.
Thus, it is contrary to the very concept of public bidding to permit a
variance between the conditions under which bids are invited and those
under which proposals are submitted and approved; or, as in this case, the
conditions under which the bid is won and those under which the awarded
Contract will be complied with. The substantive amendment of the contract
bidded out, without any public bidding -- after the bidding process had
been concluded -- is violative of the public policy on public biddings, as
well as the spirit and intent of RA 8436. The whole point in going through
the public bidding exercise was completely lost. The very rationale of
public bidding was totally subverted by the Commission.
From another perspective, the Comelec approach also fails to make sense.
Granted that, before election day, the software would still have to be

customized to each precinct, municipality, city, district, and so on, there

still was nothing at all to prevent Comelec from requiring prospective
suppliers/bidders to produce, at the very start of the bidding process, the
"next-to-final" versions of the software (the best software the suppliers
had) -- pre-tested and ready to be customized to the final list of candidates
and project of precincts, among others, and ready to be deployed
thereafter. The satisfaction of such requirement would probably have
provided far better bases for evaluation and selection, as between
suppliers, than the so-called demo software.Respondents contend that the
bidding suppliers counting machines were previously used in at least one
political exercise with no less than 20 million voters. If so, it stands to
reason that the software used in that past electoral exercise would
probably still be available and, in all likelihood, could have been adopted
for use in this instance. Paying for machines and software of that category
(already tried and proven in actual elections and ready to be adopted for
use) would definitely make more sense than paying the same hundreds of
millions of pesos for demo software and empty promises of usable
programs in the future.
But there is still another gut-level reason why the approach taken by
Comelec is reprehensible. It rides on the perilous assumption that nothing
would go wrong; and that, come election day, the Commission and the
supplier would have developed, adjusted and "re-programmed" the
software to the point where the automated system could function as
envisioned. But what if such optimistic projection does not materialize?
What if, despite all their herculean efforts, the software now being
hurriedly developed and tested for the automated system performs
dismally and inaccurately or, worse, is hacked and/or manipulated? 54 What
then will we do with all the machines and defective software already
paid for in the amount of P849 million of our tax money? Even more
important, what will happen to our country in case of failure of the
automation?
The Court cannot grant the plea of Comelec that it be given until February
16, 2004 to be able to submit a "certification relative to the additional
elements of the software that will be customized," because for us to do so
would unnecessarily delay the resolution of this case and would just give
the poll body an unwarranted excuse to postpone the 2004 elections. On
the other hand, because such certification will not cure the gravely abusive
actions complained of by petitioners, it will be utterly useless.
Is this Court being overly pessimistic and perhaps even engaging in
speculation? Hardly. Rather, the Court holds that Comelec should not have
gambled on the unrealistic optimism that the suppliers software
development efforts would turn out well. The Commission should have
adopted a much more prudent and judicious approach to ensure the
delivery of tried and tested software, and readied alternative courses of
action in case of failure. Considering that the nations future is at stake
here, it should have done no less.

Epilogue
Once again, the Court finds itself at the crossroads of our nations history.
At stake in this controversy is not just the business of a computer supplier,
or a questionable proclamation by Comelec of one or more public officials.
Neither is it about whether this country should switch from the manual to
the automated system of counting and canvassing votes. At its core is the
ability and capacity of the Commission on Elections to perform properly,
legally and prudently its legal mandate to implement the transition from
manual to automated elections.
Unfortunately, Comelec has failed to measure up to this historic task. As
stated at the start of this Decision, Comelec has not merely gravely abused
its discretion in awarding the Contract for the automation of the counting
and canvassing of the ballots. It has also put at grave risk the holding of
credible and peaceful elections by shoddily accepting electronic hardware
and software that admittedly failed to pass legally mandated technical
requirements. Inadequate as they are, the remedies it proffers post facto
do not cure the grave abuse of discretion it already committed (1) on April
15, 2003, when it illegally made the award; and (2) "sometime" in May
2003 when it executed the Contract for the purchase of defective machines
and non-existent software from a non-eligible bidder.
For these reasons, the Court finds it totally unacceptable and
unconscionable to place its imprimatur on this void and illegal transaction
that seriously endangers the breakdown of our electoral system. For this
Court to cop-out and to close its eyes to these illegal transactions, while
convenient, would be to abandon its constitutional duty of safeguarding
public interest.
As a necessary consequence of such nullity and illegality, the purchase of
the machines and all appurtenances thereto including the still-to-beproduced (or in Comelecs words, to be "reprogrammed") software, as well
as all the payments made therefor, have no basis whatsoever in law. The
public funds expended pursuant to the void Resolution and Contract must
therefore be recovered from the payees and/or from the persons who made
possible the illegal disbursements, without prejudice to possible criminal
prosecutions against them.
Furthermore, Comelec and its officials concerned must bear full
responsibility for the failed bidding and award, and held accountable for
the electoral mess wrought by their grave abuse of discretion in the
performance of their functions. The State, of course, is not bound by the
mistakes and illegalities of its agents and servants.
True, our country needs to transcend our slow, manual and archaic
electoral process. But before it can do so, it must first have a diligent and
competent electoral agency that can properly and prudently implement a
well-conceived automated election system.

At bottom, before the country can hope to have a speedy and fraud-free
automated election, it must first be able to procure the proper
computerized hardware and software legally, based on a transparent and
valid system of public bidding. As in any democratic system, the ultimate
goal of automating elections must be achieved by a legal, valid and aboveboard process of acquiring the necessary tools and skills therefor. Though
the Philippines needs an automated electoral process, it cannot accept just
any system shoved into its bosom through improper and illegal methods.
As the saying goes, the end never justifies the means. Penumbral
contracting will not produce enlightened results.

from implementing any other contract or agreement entered into with

regard to this project.

WHEREFORE, the Petition is GRANTED. The Court hereby

declares NULL and VOID Comelec Resolution No. 6074 awarding the
contract for Phase II of the AES to Mega Pacific Consortium (MPC). Also
declared null and void is the subject Contract executed between Comelec
and Mega Pacific eSolutions (MPEI).55 Comelec is furtherORDERED to refrain

SO ORDERED.

Let a copy of this Decision be furnished the Office of the Ombudsman

which shall determine the criminal liability, if any, of the public officials
(and conspiring private individuals, if any) involved in the subject
Resolution and Contract. Let the Office of the Solicitor General also take
measures to protect the government and vindicate public interest from the
ill effects of the illegal disbursements of public funds made by reason of
the void Resolution and Contract.