G.R. No.

138814

April 16, 2009

MAKATI STOCK EXCHANGE, INC., MA. VIVIAN

YUCHENGCO, ADOLFO M. DUARTE, MYRON C.
PAPA, NORBERTO C. NAZARENO, GEORGE UYTIOCO, ANTONIO A. LOPA, RAMON B. ARNAIZ,
LUIS J.L. VIRATA, and ANTONIO GARCIA, JR. v
MIGUEL V. CAMPOS, substituted by JULIA
ORTIGAS VDA. DE CAMPOS
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari under
Rule 45 seeking the reversal of the Decision [2] dated 11
February 1997 and Resolution dated 18 May 1999 of
the Court of Appeals in CA-G.R. SP No. 38455.
The facts of the case are as follows:
SEC Case No. 02-94-4678 was instituted on 10
February 1994 by respondent Miguel V. Campos, who
filed with the Securities, Investigation and Clearing
Department (SICD) of the Securities and Exchange
Commission (SEC), a Petition against herein petitioners
Makati Stock Exchange, Inc. (MKSE) and MKSE
directors, Ma. Vivian Yuchengco, Adolfo M. Duarte,
Myron C. Papa, Norberto C. Nazareno, George Uy-Tioco,
Antonio A, Lopa, Ramon B. Arnaiz, Luis J.L. Virata, and
Antonio Garcia, Jr.Respondent, in said Petition, sought:
(1) the nullification of the Resolution dated 3 June 1993
of the MKSE Board of Directors, which allegedly
deprived him of his right to participate equally in the
allocation of Initial Public Offerings (IPO) of
corporations registered with MKSE; (2) the delivery of
the IPO shares he was allegedly deprived of, for which
he would pay IPO prices; and (3) the payment of P2
million as moral damages, P1 million as exemplary
damages, and P500,000.00 as attorneys fees and
litigation expenses.
On 14 February 1994, the SICD issued an Order
granting respondents prayer for the issuance of a
Temporary Restraining Order to enjoin petitioners from
implementing or enforcing the 3 June 1993 Resolution
of the MKSE Board of Directors.
The SICD subsequently issued another Order
on 10 March 1994 granting respondents application for
a Writ of Preliminary Injunction, to continuously enjoin,
during the pendency of SEC Case No. 02-94-4678, the
implementation or enforcement of the MKSE Board
Resolution in question. Petitioners assailed this SICD
Order
dated 10
March
1994 in
a
Petition
for Certiorari filed with the SEC en banc, docketed as
SEC-EB No. 393.
On 11 March 1994, petitioners filed a Motion to
Dismiss respondents Petition in SEC Case No. 02-944678, based on the following grounds: (1) the Petition
became moot due to the cancellation of the license of
MKSE; (2) the SICD had no jurisdiction over the
Petition; and (3) the Petition failed to state a cause of
action.

The SICD denied petitioners Motion to Dismiss

in an Order dated 4 May 1994. Petitioners again
challenged the 4 May 1994 Order of SICD before the
SEC en bancthrough another Petition for Certiorari,
docketed as SEC-EB No. 403.
In an Order dated 31 May 1995 in SEC-EB No.
393, the SEC en banc nullified the 10 March 1994
Order of SICD in SEC Case No. 02-94-4678 granting a
Writ
of
Preliminary
Injunction
in
favor
of
respondent. Likewise, in an Order dated 14 August
1995 in SEC-EB No. 403, the SEC en banc annulled the
4 May 1994 Order of SICD in SEC Case No. 02-94-4678
denying petitioners Motion to Dismiss, and accordingly
ordered the dismissal of respondents Petition before
the SICD.
Respondent filed a Petition for Certiorari with
the Court of Appeals assailing the Orders of the SEC en
banc dated 31 May 1995 and 14 August 1995 in SECEB
No.
393
and
SEC-EB
No.
403,
respectively. Respondents Petition before the appellate
court was docketed as CA-G.R. SP No. 38455.
On 11 February 1997, the Court of Appeals
promulgated its Decision in CA-G.R. SP No. 38455,
granting respondents Petition for Certiorari, thus:
WHEREFORE, the petition in so far as it prays
for annulment of the Orders dated May 31,
1995 and August 14, 1995 in SEC-EB Case Nos.
393 and 403 is GRANTED. The said orders are
hereby rendered null and void and set aside.
Petitioners filed a Motion for Reconsideration of
the foregoing Decision but it was denied by the Court
of Appeals in a Resolution dated 18 May 1999.
Hence, the present Petition for Review raising
the following arguments:
I. THE SEC EN BANC DID NOT COMMIT GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK
OR EXCESS OF JURISDICTION WHEN IT
DISMISSED
THE
PETITION
FILED
BY
RESPONDENT BECAUSE ON ITS FACE, IT FAILED
TO STATE A CAUSE OF ACTION.
II. THE GRANT OF THE IPO ALLOCATIONS IN
FAVOR OF RESPONDENT WAS A MERE
ACCOMMODATION GIVEN TO HIM BY THE
BOARD OF [DIRECTORS] OF THE MAKATI STOCK
EXCHANGE, INC.
III. THE COURT OF APPEALS ERRED IN HOLDING
THAT THE SEC EN BANC COMMITTED GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK
OR EXCESS OF JURISDICTION WHEN IT MADE
AN EXTENDED INQUIRY AND PROCEEDED TO
MAKE A DETERMINATION AS TO THE TRUTH OF
RESPONDENTS ALLEGATIONS IN HIS PETITION
AND USED AS BASIS THE EVIDENCE ADDUCED
DURING THE HEARING ON THE APPLICATION
FOR THE WRIT OF PRELIMINARY INJUNCTION TO

DETERMINE THE EXISTENCE OR VALIDITY OF A

STATED CAUSE OF ACTION.
IV. IPO ALLOCATIONS GRANTED TO BROKERS
ARE NOT TO BE BOUGHT BY THE BROKERS FOR
THEMSELVES BUT ARE TO BE DISTRIBUTED TO
THE INVESTING PUBLIC. HENCE, RESPONDENTS
CLAIM FOR DAMAGES IS ILLUSORY AND HIS
PETITION A NUISANCE SUIT.[3]
On 18 September 2001, counsel for respondent
manifested to this Court that his client died on 7 May
2001. In a Resolution dated 24 October 2001, the Court
directed the substitution of respondent by his surviving
spouse, Julia Ortigas vda. de Campos.
Petitioners want this Court to affirm the
dismissal by the SEC en banc of respondents Petition in
SEC Case No. 02-94-4678 for failure to state a cause of
action. On the other hand, respondent insists on the
sufficiency of his Petition and seeks the continuation of
the proceedings before the SICD.
A cause of action is the act or omission by
which a party violates a right of another. [4] A complaint
states a cause of action where it contains three
essential elements of a cause of action, namely: (1) the
legal right of the plaintiff, (2) the correlative obligation
of the defendant, and (3) the act or omission of the
defendant in violation of said legal right. If these
elements are absent, the complaint becomes
vulnerable to dismissal on the ground of failure to state
a cause of action.
If a defendant moves to dismiss the complaint
on the ground of lack of cause of action, he is regarded
as having hypothetically admitted all the averments
thereof. The test of sufficiency of the facts found in a
complaint as constituting a cause of action is whether
or not admitting the facts alleged, the court can render
a valid judgment upon the same in accordance with the
prayer thereof. The hypothetical admission extends to
the relevant and material facts well pleaded in the
complaint
and
inferences
fairly
deducible
therefrom. Hence, if the allegations in the complaint
furnish sufficient basis by which the complaint can be
maintained, the same should not be dismissed
regardless of the defense that may be assessed by the
defendant.[5]
Given the foregoing, the issue of whether
respondents Petition in SEC Case No. 02-94-4678
sufficiently states a cause of action may be
alternatively stated as whether, hypothetically
admitting to be true the allegations in respondents
Petition in SEC Case No. 02-94-4678, the SICD may
render a valid judgment in accordance with the prayer
of said Petition.
A reading of the exact text of respondents
Petition in SEC Case No. 02-94-4678 is, therefore,
unavoidable. Pertinent portions of the said Petition
reads:

7. In recognition of petitioners invaluable services, the

general membership of respondent corporation [MKSE]
passed a resolution sometime in 1989 amending its
Articles of Incorporation, to include the following
provision therein:
ELEVENTH
WHEREAS,
Mr.
Miguel
Campos
is
the
only
surviving
incorporator of the Makati Stock
Exchange, Inc. who has maintained his
membership;
WHEREAS, he has unselfishly served
the Exchange in various capacities, as
governor from 1977 to the present and
as President from 1972 to 1976 and
again as President from 1988 to the
present;
WHEREAS, such dedicated service and
leadership which has contributed to the
advancement and well being not only
of the Exchange and its members but
also to the Securities industry, needs to
be recognized and appreciated;
WHEREAS, as such, the Board of
Governors in its meeting held on
February 09, 1989 has correspondingly
adopted a resolution recognizing his
valuable service to the Exchange,
reward the same, and preserve for
posterity such recognition by proposing
a resolution to the membership body
which would make him as Chairman
Emeritus for life and install in the
Exchange premises a commemorative
bronze plaque in his honor;
NOW,
THEREFORE,
for
and
in
consideration of the above premises,
the position of the Chairman Emeritus
to be occupied by Mr. Miguel Campos
during his lifetime and irregardless of
his continued membership in the
Exchange with the Privilege to attend
all membership meetings as well as the
meetings of the Board of Governors of
the Exchange, is hereby created.
8. Hence, to this day, petitioner is not only an
active member of the respondent corporation,
but its Chairman Emeritus as well.
9. Correspondingly, at all times material to this
petition, as an active member and Chairman
Emeritus of respondent corporation, petitioner
has always enjoyed the right given to all the
other members to participate equally in the
Initial Public Offerings (IPOs for brevity) of
corporations.
10. IPOs are shares of corporations offered for
sale to the public, prior to the listing in the
trading floor of the countrys two stock
exchanges. Normally, Twenty Five Percent
(25%) of these shares are divided equally
between the two stock exchanges which in turn

divide these equally among their members,

who pay therefor at the offering price.
11. However, on June 3, 1993, during a meeting
of the Board of Directors of respondentcorporation, individual respondents passed a
resolution to stop giving petitioner the IPOs he
is entitled to, based on the ground that these
shares were allegedly benefiting Gerardo O.
Lanuza, Jr., who these individual respondents
wanted to get even with, for having filed cases
before the Securities and Exchange (SEC) for
their disqualification as member of the Board of
Directors of respondent corporation.
12. Hence, from June 3, 1993 up to the present
time, petitioner has been deprived of his right
to subscribe to the IPOs of corporations listing
in the stock market at their offering prices.
13. The collective act of the individual
respondents in depriving petitioner of his right
to a share in the IPOs for the aforementioned
reason, is unjust, dishonest and done in bad
faith, causing petitioner substantial financial
damage.[6]
There is no question that the Petition in SEC
Case No. 02-94-4678 asserts a right in favor of
respondent, particularly, respondents alleged right to
subscribe to the IPOs of corporations listed in the stock
market at their offering prices; and stipulates the
correlative obligation of
petitioners
to
respect
respondents right, specifically, by continuing to allow
respondent to subscribe to the IPOs of corporations
listed in the stock market at their offering prices.
However,
the
terms right and obligation in
respondents Petition are not magic words that would
automatically lead to the conclusion that such Petition
sufficiently
states
a
cause
of
action. Right and obligation are
legal
terms
with
specific legal meaning. A right is a claim or title to an
interest in anything whatsoever that is enforceable by
law.[7] An obligation is defined in the Civil Code as a
juridical necessity to give, to do or not to do. [8] For
every right enjoyed by any person, there is a
corresponding obligation on the part of another person
to respect such right. Thus, Justice J.B.L. Reyes
offers[9] the definition given by Arias Ramos as a more
complete definition:
An obligation is a juridical relation whereby a
person (called the creditor) may demand from
another (called the debtor) the observance of
a determinative conduct (the giving, doing or
not doing), and in case of breach, may
demand satisfaction from the assets of the
latter.
The Civil Code enumerates the sources of
obligations:
Art. 1157. Obligations arise from:
(1) Law;
(2) Contracts;

(3) Quasi-contracts;
(4) Acts or omissions punished by law;
and
(5) Quasi-delicts.
Therefore, an obligation imposed on a person,
and the corresponding right granted to another, must
be rooted in at least one of these five sources. The
mere assertion of a right and claim of an obligation in
an initiatory pleading, whether a Complaint or Petition,
without identifying the basis or source thereof, is
merely a conclusion of fact and law.A pleading should
state the ultimate facts essential to the rights of action
or
defense
asserted,
as
distinguished
from
mere conclusions of fact or conclusions of law.[10] Thus,
a Complaint or Petition filed by a person claiming a
right to the Office of the President of this Republic, but
without stating the source of his purported right,
cannot be said to have sufficiently stated a cause of
action. Also, a person claiming to be the owner of a
parcel of land cannot merely state that he has a right
to the ownership thereof, but must likewise assert in
the Complaint either a mode of acquisition of
ownership or at least a certificate of title in his name.
In the case at bar, although the Petition in SEC
Case No. 02-94-4678 does allege respondents right to
subscribe to the IPOs of corporations listed in the stock
market at their offering prices, and petitioners
obligation to continue respecting and observing
such right, the Petition utterly failed to lay down the
source or basis of respondents right and/or petitioners
obligation.
Respondent merely quoted in his Petition the
MKSE Board Resolution, passed sometime in 1989,
granting him the position of Chairman Emeritus of
MKSE for life.However, there is nothing in the said
Petition from which the Court can deduce that
respondent, by virtue of his position as Chairman
Emeritus of MKSE, was granted by law, contract, or any
other legal source, the right to subscribe to the IPOs of
corporations listed in the stock market at their offering
prices.
A meticulous review of the Petition reveals that
the allocation of IPO shares was merely alleged to have
been done in accord with a practice normally observed
by the members of the stock exchange, to wit:
IPOs are shares of corporations offered for sale
to the public, prior to their listing in the trading
floor
of
the
countrys
two
stock
exchanges. Normally, Twenty-Five Percent
(25%) of these shares are divided equally
between the two stock exchanges which
in turn divide these equally among their
members, who pay therefor at the offering
price.[11] (Emphasis supplied)
A practice or custom is, as a general rule, not a
source of a legally demandable or enforceable right.
[12]
Indeed, in labor cases, benefits which were

voluntarily given by the employer, and which have

ripened into company practice, are considered as
rights that cannot be diminished by the employer.
[13]
Nevertheless, even in such cases, the source of the
employees right is not custom, but ultimately, the law,
since Article 100 of the Labor Code explicitly prohibits
elimination or diminution of benefits.
There is no such law in this case that converts
the practice of allocating IPO shares to MKSE members,
for subscription at their offering prices, into an
enforceable or demandable right. Thus, even if it is
hypothetically admitted that normally, twenty five
percent (25%) of the IPOs are divided equally between
the two stock exchanges -- which, in turn, divide their
respective allocation equally among their members,
including the Chairman Emeritus, who pay for IPO
shares at the offering price -- the Court cannot grant
respondents prayer for damages which allegedly
resulted from the MKSE Board Resolution dated 3 June
1993 deviating from said practice by no longer
allocating any shares to respondent.
Accordingly, the instant Petition should be
granted. The Petition in SEC Case No. 02-944678 should be dismissed for failure to state a cause of
action. It does not matter that the SEC en banc, in its
Order
dated 14
August
1995 in SEC-EB
No.
403, overstepped its bounds by not limiting itself to the
issue of whether respondents Petition before the SICD
sufficiently stated a cause of action. The SEC en
banc may have been mistaken in considering
extraneous evidence in granting petitioners Motion to
Dismiss, but its discussion thereof are merely
superfluous and obiter dictum. In the main, the SEC en
banc did correctly dismiss the Petition in SEC Case No.
02-94-4678 for its failure to state the basis for
respondents alleged right, to wit:
Private
respondent Campos has
failed
to
establish the basis or authority for his alleged
right to participate equally in the IPO
allocations of the Exchange. He cited paragraph
11 of the amended articles of incorporation of
the Exchange in support of his position but a
careful reading of the said provision shows
nothing therein that would bear out his
claim. The provision merely created the
position of chairman emeritus of the Exchange
but it mentioned nothing about conferring upon
the occupant thereof the right to receive IPO
allocations.[14]
With the dismissal of respondents Petition in
SEC Case No. 02-94-4678, there is no more need for
this Court to resolve the propriety of the issuance by
SCID of a writ of preliminary injunction in said case.
WHEREFORE, the Petition is GRANTED. The
Decision of the Court of Appeals dated 11 February
1997 and its Resolution dated 18 May 1999 in CA-G.R.
SP No. 38455 are REVERSED and SET ASIDE. The
Orders dated 31 May 1995 and 14 August 1995 of the

Securities and Exchange Commission en banc in SECEB Case No. 393 and No. 403, respectively, are hereby
reinstated. No pronouncement as to costs. SO
ORDERED.
G.R. No. 83748 May 12, 1989
FLAVIO K MACASAET & ASSOCIATES, INC.,vs.
COMMISSION ON AUDIT and PHILIPPINE TOURISM
AUTHORITY
MELENCIO-HERRERA, J.:
In this Petition for Certiorari, pursuant to Section 7,
Article IX of the 1987 Constitution, 1 petitioner, Flavio
K. Macasaet & Associates, Inc., prays that the ruling of
public respondent Commission on Audit (COA) denying
its claim for completion of payment of professional fees
be overturned. The facts follow. On 15 September 1977
respondent Philippine Tourism Authority (PTA) entered
into a Contract for "Project Design and Management
Services for the development of the proposed
Zamboanga Golf and Country Club, Calarian,
Zamboanga City" with petitioner company, but
originally with Flavio K Macasaet alone (hereinafter
referred to simply as the "Contract").
Under the Contract, PTA obligated itself to pay
petitioner a professional fee of seven (7%) of the actual
construction cost, as follows:
ARTICLE IV PROFESSIONAL FEE
In consideration for the professional services to be
performed by Designer under Article I of this
Agreement, the Authority shall pay seven percent (7%)
of the actual construction cost.
In addition, a Schedule of Payments was provided for
while the construction was in progress and up to its
final completion, thus:
ARTICLE V SCHEDULE OF PAYMENTS
1. Upon the execution of the Agreement but not more
than fifteen (15) days, a minimum payment equivalent
to 10 percent of the professional fee as provided in Art.
IV computed upon a reasonable estimated construction
cost of the project.
2. Upon the completion of the schematic design
services, but not more than 15 days after the
submission of the schematic design to the Authority, a
sum equivalent to 15% of the professional fee as
stated in Art. IV computed upon the reasonable
estimated construction cost of the project.
3. Upon completion of the design development
services, but not more than 15 days after submission

of the design development to the authority, a sum

equivalent to 20% of the professional fee as stated in
Art. IV, computed upon the reasonable estimated
construction cost.
4. Upon completion of the contract document services
but not more than 15 days after submission of the
contract document to the Authority, a sum equivalent
to 25% of the professional fee as stated in Art. IV, shall
be paid computed on the same basis as above.
5. Upon completion of the work and acceptance thereof
by the Authority, the balance of the professional fee,
computed on the final actual project cost shall be paid.
(Emphasis supplied)
Pursuant to the foregoing Schedule, the PTA made
periodic payments of the stipulated professional fees to
petitioner. And, upon completion of the project, PTA
paid petitioners what it perceived to be the balance of
the latter's professional fees.
It turned out, however, that after the project was
completed, PTA paid Supra Construction Company, the
main contractor, the additional sum of P3,148,198.26
representing the escalation cost of the contract price
due to the increase in the price of construction
materials.
Upon learning of the price escalation, petitioner
requested
payment
of
P219,302.47
additional
professional fee representing seven (7%) percent of
P3,148,198.26.
On 3 July 1985 PTA denied payment on the ground that
"the subject price escalation referred to increased cost
of construction materials and did not entail additional
work on the part of petitioner as to entitle it to
additional compensation under Article VI of the
contract." 2
Reconsiderations sought by the petitioner, up to
respondent COA, were to no avail. The latter expressed
the opinion that "to allow subject claim in the absence
of a showing that extra or additional services had been
rendered by claimant would certainly result in
overpayment to him to the prejudice of the
Government" (1st Indorsement, July 10, 1987, p. 3,
Rollo, p. 42).
Hence this Petition, to which we gave due course.
The basic issue for resolution is petitioner's entitlement
to additional professional fees, which, in turn, hinges
on whether or not the price escalation should be
included in the "final actual project cost."

Public respondents, through the Solicitor General,

maintain that petitioner had been paid its professional
fee upon completion of the project and that its claim
for additional payment is without any legal and factual
basis for, after all, no additional architectural services
were rendered other than the ones under the terms of
the Contract. On the other hand, petitioner anchors its
claim to additional professional fees, not on any
change in services rendered, but on Article IV, and
paragraph 5 of Article V, of the Contract, supra.
The very terminologies used in the Contract call for
affirmative relief in petitioner's favor.
Under Article IV of said Contract, petitioner was to be
entitled to seven (7%) of the "actual construction cost."
Under paragraphs 1, 2, 3, and 4, Article V, periodic
payments were to be based on a "reasonable
estimated construction cost." ultimately, under
paragraph 5, Article V, the balance of the professional
fee was to be computed on the basis of "the final
actual project cost."
The use of the terms "actual construction cost",
gradating into "final actual project cost" is not without
significance. The real intendment of the parties, as
shown by paragraph 5, Article V, of their Contract was
to base the ultimate balance of petitioner's
professional fees not on "actual construction cost"
alone but on the final actual project cost; not on
"construction cost" alone but on "project cost." By so
providing, the Contract allowed for flexibility based on
actuality and as a matter of equity for the contracting
parties. For evidently, the final actual project cost
would not necessarily tally with the actual construction
cost initially computed. The "final actual project cost"
covers the totality of all costs as actually and finally
determined, and logically includes the escalation cost
of the contract price.
It matters not that the price escalation awarded to the
construction company did not entail additional work for
petitioner. As a matter of fact, neither did it for the
main contractor. The increased cost of materials was
not the doing of either contracting party.
That an escalation clause was not specifically provided
for in the Contract is of no moment either for it may be
considered as already "built-in" and understood from
the very terms "actual construction cost," and
eventually "final actual project cost."
Article VI of the Contract, supra, has no bearing on the
present controversy either. It speaks of any major
change in the planning and engineering aspects
necessitating the award and payment of additional
compensation. Admittedly, there was no additional
work by petitioner, which required additional

compensation. Rather, petitioner's claim is for payment

of the balance of its professional fees based on the
"final actual project cost" and not for additional
compensation based on Article VI.
The terminologies in the contract being clear, leaving
no doubt as to the intention of the contracting parties,
their literal meaning control (Article 1370, Civil Code).
The price escalation cost must be deemed included in
the final actual project cost and petitioner held entitled
to the payment of its additional professional fees.
Obligations arising from contract have the force of law
between the contracting parties and should be
complied with in good faith (Article 11 59, Civil Code).
WHEREFORE, the ruling of respondent Commission on
Audit is hereby SET ASIDE and respondent Philippines
Tourism Authority is hereby ordered to pay petitioner
the additional amount of P219,302.47 to complete the
payment of its professional fee under their Contract for
Project Design and Management Services. SO
ORDERED.
G.R. No. 140047

July 13, 2004

PHILIPPINE
EXPORT
AND
FOREIGN
LOAN
GUARANTEE CORPORATION vs. V.P. EUSEBIO
CONSTRUCTION, INC.; 3-PLEX INTERNATIONAL,
INC.; VICENTE P. EUSEBIO; SOLEDAD C. EUSEBIO;
EDUARDO E. SANTOS; ILUMINADA SANTOS; AND
FIRST INTEGRATED BONDING AND INSURANCE
COMPANY, INC.
DAVIDE, JR., C.J.:
This case is an offshoot of a service contract entered
into by a Filipino construction firm with the Iraqi
Government for the construction of the Institute of
Physical Therapy-Medical Center, Phase II, in Baghdad,
Iraq, at a time when the Iran-Iraq war was ongoing.
In a complaint filed with the Regional Trial Court of
Makati City, docketed as Civil Case No. 91-1906 and
assigned to Branch 58, petitioner Philippine Export and
Foreign Loan Guarantee Corporation1 (hereinafter
Philguarantee) sought reimbursement from the
respondents of the sum of money it paid to Al Ahli
Bank of Kuwait pursuant to a guarantee it issued for
respondent V.P. Eusebio Construction, Inc. (VPECI).
The factual and procedural antecedents in this case are
as follows:
On 8 November 1980, the State Organization of
Buildings (SOB), Ministry of Housing and Construction,
Baghdad, Iraq, awarded the construction of the
Institute of Physical TherapyMedical Rehabilitation
Center, Phase II, in Baghdad, Iraq, (hereinafter the
Project) to Ajyal Trading and Contracting Company
(hereinafter Ajyal), a firm duly licensed with the Kuwait
Chamber of Commerce for a total contract price of
ID5,416,089/046 (or about US$18,739,668).2

On 7 March 1981, respondent spouses Eduardo and

Iluminada Santos, in behalf of respondent 3-Plex
International, Inc. (hereinafter 3-Plex), a local
contractor engaged in construction business, entered
into a joint venture agreement with Ajyal wherein the
former undertook the execution of the entire Project,
while the latter would be entitled to a commission of
4% of the contract price.3 Later, or on 8 April 1981,
respondent 3-Plex, not being accredited by or
registered with the Philippine Overseas Construction
Board (POCB), assigned and transferred all its rights
and interests under the joint venture agreement to
VPECI, a construction and engineering firm duly
registered with the POCB.4 However, on 2 May 1981, 3Plex and VPECI entered into an agreement that the
execution of the Project would be under their joint
management.5
The SOB required the contractors to submit (1) a
performance bond of ID271,808/610 representing 5%
of the total contract price and (2) an advance payment
bond of ID541,608/901 representing 10% of the
advance payment to be released upon signing of the
contract.6 To
comply
with
these
requirements,
respondents 3-Plex and VPECI applied for the issuance
of a guarantee with petitioner Philguarantee, a
government financial institution empowered to issue
guarantees for qualified Filipino contractors to secure
the performance of approved service contracts
abroad.7
Petitioner
Philguarantee
approved
respondents'
application. Subsequently, letters of guarantee8 were
issued by Philguarantee to the Rafidain Bank of
Baghdad covering 100% of the performance and
advance payment bonds, but they were not accepted
by SOB. What SOB required was a letter-guarantee
from Rafidain Bank, the government bank of Iraq.
Rafidain Bank then issued a performance bond in favor
of SOB on the condition that another foreign bank, not
Philguarantee, would issue a counter-guarantee to
cover its exposure. Al Ahli Bank of Kuwait was,
therefore, engaged to provide a counter-guarantee to
Rafidain Bank, but it required a similar counterguarantee in its favor from the petitioner. Thus, three
layers of guarantees had to be arranged.9
Upon the application of respondents 3-Plex and VPECI,
petitioner Philguarantee issued in favor of Al Ahli Bank
of Kuwait Letter of Guarantee No. 81-194F 10 (Performance Bond Guarantee) in the amount of
ID271,808/610 and Letter of Guarantee No. 81-195F11 (Advance Payment Guarantee) in the amount of
ID541,608/901, both for a term of eighteen months
from 25 May 1981. These letters of guarantee were
secured by (1) a Deed of Undertaking 12 executed by
respondents VPECI, Spouses Vicente P. Eusebio and
Soledad C. Eusebio, 3-Plex, and Spouses Eduardo E.
Santos and Iluminada Santos; and (2) a surety
bond13 issued by respondent First Integrated Bonding
and Insurance Company, Inc. (FIBICI). The Surety Bond
was later amended on 23 June 1981 to increase the
amount of coverage from P6.4 million to P6.967 million
and to change the bank in whose favor the petitioner's
guarantee was issued, from Rafidain Bank to Al Ahli
Bank of Kuwait.14

On 11 June 1981, SOB and the joint venture VPECI and

Ajyal executed the
service contract15 for the
construction of the Institute of Physical Therapy
Medical Rehabilitation Center, Phase II, in Baghdad,
Iraq, wherein the joint venture contractor undertook to
complete the Project within a period of 547 days or 18
months. Under the Contract, the Joint Venture would
supply manpower and materials, and SOB would refund
to the former 25% of the project cost in Iraqi Dinar and
the 75% in US dollars at the exchange rate of 1 Dinar
to 3.37777 US Dollars.16
The construction, which was supposed to start on 2
June 1981, commenced only on the last week of August
1981. Because of this delay and the slow progress of
the construction work due to some setbacks and
difficulties, the Project was not completed on 15
November 1982 as scheduled. But in October 1982,
upon foreseeing the impossibility of meeting the
deadline and upon the request of Al Ahli Bank, the joint
venture contractor worked for the renewal or extension
of the Performance Bond and Advance Payment
Guarantee. Petitioner's Letters of Guarantee Nos. 81194-F (Performance Bond) and 81-195-F (Advance
Payment Bond) with expiry date of 25 November 1982
were then renewed or extended to 9 February 1983
and 9 March 1983, respectively.17 The surety bond was
also extended for another period of one year, from 12
May 1982 to 12 May 1983.18 The Performance Bond
was further extended twelve times with validity of up
to 8 December 1986,19 while the Advance Payment
Guarantee was extended three times more up to 24
May 1984 when the latter was cancelled after full
refund or reimbursement by the joint venture
contractor.20 The surety bond was likewise extended to
8 May 1987.21
As of March 1986, the status of the Project was 51%
accomplished, meaning the structures were already
finished. The remaining 47% consisted in electromechanical works and the 2%, sanitary works, which
both required importation of equipment and
materials.22
On 26 October 1986, Al Ahli Bank of Kuwait sent a telex
call to the petitioner demanding full payment of its
performance bond counter-guarantee.
Upon receiving a copy of that telex message on 27
October 1986, respondent VPECI requested Iraq Trade
and Economic Development Minister Mohammad Fadhi
Hussein to recall the telex call on the performance
guarantee for being a drastic action in contravention of
its mutual agreement with the latter that (1) the
imposition of penalty would be held in abeyance until
the completion of the project; and (2) the time
extension would be open, depending on the
developments on the negotiations for a foreign loan to
finance the completion of the project.23It also wrote
SOB protesting the call for lack of factual or legal basis,
since the failure to complete the Project was due to (1)
the Iraqi government's lack of foreign exchange with
which to pay its (VPECI's) accomplishments and (2)
SOB's noncompliance for the past several years with
the provision in the contract that 75% of the billings
would be paid in US dollars. 24 Subsequently, or on 19
November 1986, respondent VPECI advised the

petitioner not to pay yet Al Ahli Bank because efforts

were being exerted for the amicable settlement of the
Project.25
On 14 April 1987, the petitioner received another telex
message from Al Ahli Bank stating that it had already
paid to Rafidain Bank the sum of US$876,564 under its
letter of guarantee, and demanding reimbursement by
the petitioner of what it paid to the latter bank plus
interest thereon and related expenses.26
Both petitioner Philguarantee and respondent VPECI
sought the assistance of some government agencies of
the Philippines. On 10 August 1987, VPECI requested
the Central Bank to hold in abeyance the payment by
the petitioner "to allow the diplomatic machinery to
take its course, for otherwise, the Philippine
government , through the Philguarantee and the
Central Bank, would become instruments of the Iraqi
Government in consummating a clear act of injustice
and inequity committed against a Filipino contractor."27
On 27 August 1987, the Central Bank authorized the
remittance for its account of the amount of
US$876,564 (equivalent to ID271, 808/610) to Al Ahli
Bank representing full payment of the performance
counter-guarantee for VPECI's project in Iraq. 28
On 6 November 1987, Philguarantee informed VPECI
that it would remit US$876,564 to Al Ahli Bank, and
reiterated the joint and solidary obligation of the
respondents to reimburse the petitioner for the
advances made on its counter-guarantee.29
The petitioner thus paid the amount of US$876,564 to
Al Ahli Bank of Kuwait on 21 January 1988. 30 Then, on 6
May 1988, the petitioner paid to Al Ahli Bank of Kuwait
US$59,129.83 representing interest and penalty
charges demanded by the latter bank.31
On 19 June 1991, the petitioner sent to the
respondents separate letters demanding full payment
of the amount of P47,872,373.98 plus accruing
interest, penalty charges, and 10% attorney's fees
pursuant to their joint and solidary obligations under
the deed of undertaking and surety bond. 32 When the
respondents failed to pay, the petitioner filed on 9 July
1991 a civil case for collection of a sum of money
against the respondents before the RTC of Makati City.
After due trial, the trial court ruled against
Philguarantee and held that the latter had no valid
cause of action against the respondents. It opined that
at the time the call was made on the guarantee which
was executed for a specific period, the guarantee had
already lapsed or expired. There was no valid renewal
or extension of the guarantee for failure of the
petitioner to secure respondents' express consent
thereto. The trial court also found that the joint venture
contractor incurred no delay in the execution of the
Project. Considering the Project owner's violations of
the contract which rendered impossible the joint
venture contractor's performance of its undertaking, no
valid call on the guarantee could be made.
Furthermore, the trial court held that no valid notice
was first made by the Project owner SOB to the joint

venture contractor before the call on the guarantee.

Accordingly, it dismissed the complaint, as well as the
counterclaims and cross-claim, and ordered the
petitioner to pay attorney's fees of P100,000 to
respondents VPECI and Eusebio Spouses and P100,000
to 3-Plex and the Santos Spouses, plus costs. 33
In its 14 June 1999 Decision, 34 the Court of Appeals
affirmed the trial court's decision, ratiocinating as
follows:
First, appellant cannot deny the fact that it was fully
aware of the status of project implementation as well
as the problems besetting the contractors, between
1982 to 1985, having sent some of its people to
Baghdad
during
that
period.
The
successive
renewals/extensions of the guarantees in fact, was
prompted by delays, not solely attributable to the
contractors, and such extension understandably
allowed by the SOB (project owner) which had not
anyway complied with its contractual commitment to
tender 75% of payment in US Dollars, and which still
retained overdue amounts collectible by VPECI.
Second, appellant was very much aware of the
violations committed by the SOB of its contractual
undertakings with VPECI, principally, the payment of
foreign currency (US$) for 75% of the total contract
price, as well as of the complications and injustice that
will result from its payment of the full amount of the
performance
guarantee,
as
evident
in
PHILGUARANTEE's letter dated 13 May 1987 .
Third, appellant was fully aware that SOB was in fact
still obligated to the Joint Venture and there was still an
amount collectible from and still being retained by the
project owner, which amount can be set-off with the
sum covered by the performance guarantee.
Fourth, well-apprised of the above conditions obtaining
at the Project site and cognizant of the war situation at
the time in Iraq, appellant, though earlier has made
representations with the SOB regarding a possible
amicable termination of the Project as suggested by
VPECI, made a complete turn-around and insisted on
acting in favor of the unjustified "call" by the foreign
banks.35
The petitioner then came to this Court via Rule 45 of
the Rules of Court claiming that the Court of Appeals
erred in affirming the trial court's ruling that
I...RESPONDENTS ARE NOT LIABLE UNDER THE DEED
OF UNDERTAKING THEY EXECUTED IN FAVOR OF
PETITIONER IN CONSIDERATION FOR THE ISSUANCE OF
ITS COUNTER-GUARANTEE AND THAT PETITIONER
CANNOT PASS ON TO RESPONDENTS WHAT IT HAD
PAID UNDER THE SAID COUNTER-GUARANTEE.
IIPETITIONER CANNOT CLAIM SUBROGATION.
IIIIT IS INIQUITOUS AND UNJUST FOR PETITIONER TO
HOLD RESPONDENTS LIABLE UNDER THEIR DEED OF
UNDERTAKING.36

The main issue in this case is whether the petitioner is

entitled to reimbursement of what it paid under Letter
of Guarantee No. 81-194-F it issued to Al Ahli Bank of
Kuwait based on the deed of undertaking and surety
bond from the respondents.
The petitioner asserts that since the guarantee it
issued was absolute, unconditional, and irrevocable the
nature and extent of its liability are analogous to those
of suretyship. Its liability accrued upon the failure of
the respondents to finish the construction of the
Institute of Physical Therapy Buildings in Baghdad.
By guaranty a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so. If
a person binds himself solidarily with the principal
debtor, the contract is called suretyship. 37
Strictly speaking, guaranty and surety are nearly
related, and many of the principles are common to
both. In both contracts, there is a promise to answer
for the debt or default of another. However, in this
jurisdiction, they may be distinguished thus:
1. A surety is usually bound with his principal by the
same instrument executed at the same time and on
the same consideration. On the other hand, the
contract of guaranty is the guarantor's own separate
undertaking often supported by a consideration
separate from that supporting the contract of the
principal; the original contract of his principal is not his
contract.
2. A surety assumes liability as a regular party to the
undertaking; while the liability of a guarantor is
conditional depending on the failure of the primary
debtor to pay the obligation.
3. The obligation of a surety is primary, while that of a
guarantor is secondary.
4. A surety is an original promissor and debtor from the
beginning, while a guarantor is charged on his own
undertaking.
5. A surety is, ordinarily, held to know every default of
his principal; whereas a guarantor is not bound to take
notice of the non-performance of his principal.
6. Usually, a surety will not be discharged either by the
mere indulgence of the creditor to the principal or by
want of notice of the default of the principal, no matter
how much he may be injured thereby. A guarantor is
often discharged by the mere indulgence of the
creditor to the principal, and is usually not liable unless
notified of the default of the principal. 38
In determining petitioner's status, it is necessary to
read Letter of Guarantee No. 81-194-F, which provides
in part as follows:
In consideration of your issuing the above performance
guarantee/counter-guarantee,
we
hereby

unconditionally and irrevocably guarantee, under our

Ref. No. LG-81-194 F to pay you on your first written or
telex demand Iraq Dinars Two Hundred Seventy One
Thousand Eight Hundred Eight and fils six hundred ten
(ID271,808/610)
representing
100%
of
the
performance bond required of V.P. EUSEBIO for the
construction of the Physical Therapy Institute, Phase II,
Baghdad, Iraq, plus interest and other incidental
expenses related thereto.
In the event of default by V.P. EUSEBIO, we shall
pay you 100% of the obligation unpaid but in no
case shall such amount exceed Iraq Dinars (ID)
271,808/610 plus interest and other incidental
expenses. (Emphasis supplied)39
Guided by the abovementioned distinctions between a
surety and a guaranty, as well as the factual milieu of
this case, we find that the Court of Appeals and the
trial court were correct in ruling that the petitioner is a
guarantor and not a surety. That the guarantee issued
by the petitioner is unconditional and irrevocable does
not make the petitioner a surety. As a guaranty, it is
still characterized by its subsidiary and conditional
quality because it does not take effect until the
fulfillment of the condition, namely, that the principal
obligor should fail in his obligation at the time and in
the form he bound himself.40 In other words, an
unconditional guarantee is still subject to the condition
that the principal debtor should default in his obligation
first before resort to the guarantor could be had. A
conditional guaranty, as opposed to an unconditional
guaranty, is one which depends upon some extraneous
event, beyond the mere default of the principal, and
generally upon notice of the principal's default and
reasonable diligence in exhausting proper remedies
against the principal.41
It appearing that Letter of Guarantee No. 81-194-F
merely stated that in the event of default by
respondent VPECI the petitioner shall pay, the
obligation assumed by the petitioner was simply that of
an unconditional guaranty, not conditional guaranty.
But as earlier ruled the fact that petitioner's guaranty
is unconditional does not make it a surety. Besides,
surety is never presumed. A party should not be
considered a surety where the contract itself stipulates
that he is acting only as a guarantor. It is only when the
guarantor binds himself solidarily with the principal
debtor that the contract becomes one of suretyship.42
Having determined petitioner's liability as guarantor,
the next question we have to grapple with is whether
the respondent contractor has defaulted in its
obligations that would justify resort to the guaranty.
This is a mixed question of fact and law that is better
addressed by the lower courts, since this Court is not a
trier of facts.
It is a fundamental and settled rule that the findings of
fact of the trial court and the Court of Appeals are
binding or conclusive upon this Court unless they are
not supported by the evidence or unless strong and
cogent reasons dictate otherwise. 43 The factual findings
of the Court of Appeals are normally not reviewable by
us under Rule 45 of the Rules of Court except when

they are at variance with those of the trial court. 44 The

trial court and the Court of Appeals were in unison that
the respondent contractor cannot be considered to
have defaulted in its obligations because the cause of
the delay was not primarily attributable to it.
A corollary issue is what law should be applied in
determining whether the respondent contractor
has defaultedin the performance of its obligations
under the service contract. The question of whether
there is a breach of an agreement, which
includes default or mora,45 pertains to the essential or
intrinsic validity of a contract. 46
No conflicts rule on essential validity of contracts is
expressly provided for in our laws. The rule followed by
most legal systems, however, is that the intrinsic
validity of a contract must be governed by the lex
contractus or "proper law of the contract." This is the
law voluntarily agreed upon by the parties (the lex loci
voluntatis) or the law intended by them either
expressly or implicitly (the lex loci intentionis). The law
selected may be implied from such factors as
substantial connection with the transaction, or the
nationality or domicile of the parties.47Philippine courts
would do well to adopt the first and most basic rule in
most legal systems, namely, to allow the parties to
select the law applicable to their contract, subject to
the limitation that it is not against the law, morals, or
public policy of the forum and that the chosen law
must bear a substantive relationship to the
transaction. 48
It must be noted that the service contract between
SOB and VPECI contains no express choice of the law
that would govern it. In the United States and Europe,
the two rules that now seem to have emerged as
"kings of the hill" are (1) the parties may choose the
governing law; and (2) in the absence of such a choice,
the applicable law is that of the State that "has the
most significant relationship to the transaction and the
parties."49 Another authority proposed that all matters
relating to the time, place, and manner of performance
and valid excuses for non-performance are determined
by the law of the place of performance or lex loci
solutionis, which is useful because it is undoubtedly
always connected to the contract in a significant way. 50
In this case, the laws of Iraq bear substantial
connection to the transaction, since one of the parties
is the Iraqi Government and the place of performance
is in Iraq. Hence, the issue of whether respondent
VPECI defaulted in its obligations may be determined
by the laws of Iraq. However, since that foreign law
was not properly pleaded or proved, the presumption
of identity or similarity, otherwise known as
the processual presumption, comes into play. Where
foreign law is not pleaded or, even if pleaded, is not
proved, the presumption is that foreign law is the same
as ours.51
Our law, specifically Article 1169, last paragraph, of the
Civil Code, provides: "In reciprocal obligations, neither
party incurs in delay if the other party does not comply
or is not ready to comply in a proper manner with what
is incumbent upon him."

Default or mora on the part of the debtor is the delay

in the fulfillment of the prestation by reason of a cause
imputable to the former. 52 It is the non-fulfillment of an
obligation with respect to time.53

Iraq since these are not being locally manufactured.

Copy f the relevant portion of the Technical
Specification is hereto attached as Annex "C" and
made an integral part hereof;

It is undisputed that only 51.7% of the total work had

been accomplished. The 48.3% unfinished portion
consisted in the purchase and installation of electromechanical equipment and materials, which were
available from foreign suppliers, thus requiring US
Dollars for their importation. The monthly billings and
payments made by SOB54reveal that the agreement
between the parties was a periodic payment by the
Project owner to the contractor depending on the
percentage of accomplishment within the period. 55 The
payments were, in turn, to be used by the contractor to
finance the subsequent phase of the work. 56 However,
as explained by VPECI in its letter to the Department of
Foreign Affairs (DFA), the payment by SOB purely in
Dinars adversely affected the completion of the
project; thus:

10. Due to the lack of Foreign currency in Iraq for this

purpose, and if only to assist the Iraqi government in
completing the PROJECT, the Contractor without any
obligation on its part to do so but with the knowledge
and consent of SOB and the Ministry of Housing &
Construction of Iraq, offered to arrange on behalf of
SOB, a foreign currency loan, through the facilities of
Circle International S.A., the Contractor's Subcontractor and SACE MEDIO CREDITO which will act as
the guarantor for this foreign currency loan.

4. Despite protests from the plaintiff, SOB continued

paying the accomplishment billings of the Contractor
purely in Iraqi Dinars and which payment came only
after some delays.
5. SOB is fully aware of the following:

5.2 That Plaintiff is a foreign contractor in Iraq and as

such, would need foreign currency (US$), to finance the
purchase of various equipment, materials, supplies,
tools and to pay for the cost of project management,
supervision and skilled labor not available in Iraq and
therefore have to be imported and or obtained from
the Philippines and other sources outside Iraq.
5.3 That the Ministry of Labor and Employment of the
Philippines requires the remittance into the Philippines
of 70% of the salaries of Filipino workers working
abroad in US Dollars;
5.5 That the Iraqi Dinar is not a freely convertible
currency such that the same cannot be used to
purchase equipment, materials, supplies, etc. outside
of Iraq;
5.6 That most of the materials specified by SOB in the
CONTRACT are not available in Iraq and therefore have
to be imported;
5.7 That the government of Iraq prohibits the bringing
of local currency (Iraqui Dinars) out of Iraq and hence,
imported materials, equipment, etc., cannot be
purchased or obtained using Iraqui Dinars as medium
of acquisition.
8. Following the approved construction program of the
CONTRACT, upon completion of the civil works portion
of the installation of equipment for the building, should
immediately follow, however, the CONTRACT specified
that these equipment which are to be installed and to
form part of the PROJECT have to be procured outside

Arrangements were first made with Banco di Roma.

Negotiation started in June 1985. SOB is informed of
the developments of this negotiation, attached is a
copy of the draft of the loan Agreement between SOB
as the Borrower and Agent. The Several Banks, as
Lender, and counter-guaranteed by Istituto Centrale
Per II Credito A Medio Termine (Mediocredito) Sezione
Speciale
Per
L'Assicurazione
Del
Credito
All'Exportazione (Sace). Negotiations went on and
continued until it suddenly collapsed due to the
reported default by Iraq in the payment of its
obligations with Italian government, copy of the news
clipping dated June 18, 1986 is hereto attached as
Annex "D" to form an integral part hereof;
15. On September 15, 1986, Contractor received
information from Circle International S.A. that because
of the news report that Iraq defaulted in its obligations
with European banks, the approval by Banco di Roma
of the loan to SOB shall be deferred indefinitely, a copy
of the letter of Circle International together with the
news clippings are hereto attached as Annexes "F" and
"F-1", respectively.57
As found by both the Court of Appeals and the trial
court, the delay or the non-completion of the Project
was caused by factors not imputable to the respondent
contractor. It was rather due mainly to the persistent
violations by SOB of the terms and conditions of the
contract, particularly its failure to pay 75% of the
accomplished work in US Dollars. Indeed, where one
of the parties to a contract does not perform in a
proper manner the prestation which he is bound to
perform under the contract, he is not entitled to
demand the performance of the other party. A party
does not incur in delay if the other party fails to
perform the obligation incumbent upon him.
The petitioner, however, maintains that the payments
by SOB of the monthly billings in purely Iraqi Dinars did
not render impossible the performance of the Project
by VPECI. Such posture is quite contrary to its previous
representations. In his 26 March 1987 letter to the
Office of the Middle Eastern and African Affairs
(OMEAA), DFA, Manila, petitioner's Executive VicePresident Jesus M. Taedo stated that while VPECI had
taken every possible measure to complete the Project,
the war situation in Iraq, particularly the lack of foreign
exchange, was proving to be a great obstacle; thus:

VPECI has taken every possible measure for the

completion of the project but the war situation in Iraq
particularly the lack of foreign exchange is proving to
be
a
great
obstacle.
Our
performance
counterguarantee was called last 26 October 1986
when the negotiations for a foreign currency loan with
the Italian government through Banco de Roma bogged
down following news report that Iraq has defaulted in
its obligation with major European banks. Unless the
situation in Iraq is improved as to allay the bank's
apprehension, there is no assurance that the project
will ever be completed. 58
In order that the debtor may be in default it is
necessary that the following requisites be present: (1)
that the obligation be demandable and already
liquidated; (2) that the debtor delays performance; and
(3) that the creditor requires the performance because
it must appear that the tolerance or benevolence of the
creditor must have ended. 59
As stated earlier, SOB cannot yet demand complete
performance from VPECI because it has not yet itself
performed its obligation in a proper manner,
particularly the payment of the 75% of the cost of the
Project in US Dollars. The VPECI cannot yet be said to
have incurred in delay. Even assuming that there was
delay and that the delay was attributable to VPECI, still
the effects of that delay ceased upon the renunciation
by the creditor, SOB, which could be implied when the
latter granted several extensions of time to the
former. 60 Besides, no demand has yet been made by
SOB against the respondent contractor. Demand is
generally necessary even if a period has been fixed in
the obligation. And default generally begins from the
moment the creditor demands judicially or extrajudicially the performance of the obligation. Without
such demand, the effects of default will not arise. 61
Moreover, the petitioner as a guarantor is entitled to
the benefit of excussion, that is, it cannot be compelled
to pay the creditor SOB unless the property of the
debtor VPECI has been exhausted and all legal
remedies against the said debtor have been resorted
to by the creditor. 62 It could also set up compensation
as regards what the creditor SOB may owe the
principal debtor VPECI.63 In this case, however, the
petitioner has clearly waived these rights and remedies
by making the payment of an obligation that was yet to
be shown to be rightfully due the creditor and
demandable of the principal debtor.
As found by the Court of Appeals, the petitioner fully
knew that the joint venture contractor had collectibles
from SOB which could be set off with the amount
covered by the performance guarantee. In February
1987, the OMEAA transmitted to the petitioner a copy
of a telex dated 10 February 1987 of the Philippine
Ambassador in Baghdad, Iraq, informing it of the note
verbale sent by the Iraqi Ministry of Foreign Affairs
stating that the past due obligations of the joint
venture contractor from the petitioner would "be
deducted from the dues of the two contractors."64
Also, in the project situationer attached to the letter to
the OMEAA dated 26 March 1987, the petitioner raised

as among the arguments to be presented in support of

the cancellation of the counter-guarantee the fact that
the amount of ID281,414/066 retained by SOB from the
Project was more than enough to cover the counterguarantee of ID271,808/610; thus:
6.1 Present the following arguments in cancelling the
counterguarantee:
The Iraqi Government does not have the foreign
exchange to fulfill its contractual obligations of paying
75% of progress billings in US dollars.
It could also be argued that the amount of
ID281,414/066 retained by SOB from the proposed
project is more than the amount of the outstanding
counterguarantee.65
In a nutshell, since the petitioner was aware of the
contractor's outstanding receivables from SOB, it
should have set up compensation as was proposed in
its project situationer.
Moreover, the petitioner was very much aware of the
predicament of the respondents. In fact, in its 13 May
1987 letter to the OMEAA, DFA, Manila, it stated:
VPECI also maintains that the delay in the completion
of the project was mainly due to SOB's violation of
contract terms and as such, call on the guarantee has
no basis.
While PHILGUARANTEE is prepared to honor its
commitment under the guarantee, PHILGUARANTEE
does not want to be an instrument in any case of
inequity committed against a Filipino contractor. It is
for this reason that we are constrained to seek your
assistance not only in ascertaining the veracity of Al
Ahli Bank's claim that it has paid Rafidain Bank but
possibly averting such an event. As any payment
effected by the banks will complicate matters, we
cannot help underscore the urgency of VPECI's bid for
government intervention for the amicable termination
of the contract and release of the performance
guarantee. 66
But surprisingly, though fully cognizant of SOB's
violations of the service contract and VPECI's
outstanding receivables from SOB, as well as the
situation obtaining in the Project site compounded by
the Iran-Iraq war, the petitioner opted to pay the
second layer guarantor not only the full amount of the
performance bond counter-guarantee but also interests
and penalty charges.
This brings us to the next question: May the petitioner
as a guarantor secure reimbursement from the
respondents for what it has paid under Letter of
Guarantee No. 81-194-F?
As a rule, a guarantor who pays for a debtor should be
indemnified by the latter67 and would be legally
subrogated to the rights which the creditor has against
the debtor.68 However, a person who makes payment
without the knowledge or against the will of the debtor

has the right to recover only insofar as the payment

has been beneficial to the debtor. 69 If the obligation
was subject to defenses on the part of the debtor, the
same defenses which could have been set up against
the creditor can be set up against the paying
guarantor.70
From the findings of the Court of Appeals and the trial
court, it is clear that the payment made by the
petitioner guarantor did not in any way benefit the
principal debtor, given the project status and the
conditions obtaining at the Project site at that time.
Moreover, the respondent contractor was found to
have valid defenses against SOB, which are fully
supported by evidence and which have been
meritoriously set up against the paying guarantor, the
petitioner in this case. And even if the deed of
undertaking and the surety bond secured petitioner's
guaranty, the petitioner is precluded from enforcing
the same by reason of the petitioner's undue payment
on the guaranty. Rights under the deed of undertaking
and the surety bond do not arise because these
contracts depend on the validity of the enforcement of
the guaranty.
The petitioner guarantor should have waited for the
natural course of guaranty: the debtor VPECI should
have, in the first place, defaulted in its obligation and
that the creditor SOB should have first made a demand
from the principal debtor. It is only when the debtor
does not or cannot pay, in whole or in part, that the
guarantor should pay.71 When the petitioner guarantor
in this case paid against the will of the debtor VPECI,
the debtor VPECI may set up against it defenses
available against the creditor SOB at the time of
payment. This is the hard lesson that the petitioner
must learn.
As the government arm in pursuing its objective of
providing "the necessary support and assistance in
order to enable [Filipino exporters and contractors to
operate viably under the prevailing economic and
business conditions,"72 the petitioner should have
exercised
prudence
and
caution
under
the
circumstances. As aptly put by the Court of Appeals, it
would be the height of inequity to allow the petitioner
to pass on its losses to the Filipino contractor VPECI
which had sternly warned against paying the Al Ahli
Bank and constantly apprised it of the developments in
the Project implementation.
WHEREFORE, the petition for review on certiorari is
hereby DENIED for lack of merit, and the decision of
the Court of appeals in CA-G.R. CV No. 39302 is
AFFIRMED.No pronouncement as to costs. SO
ORDERED.
G.R. No. 117190. January 2, 1997
JACINTO TANGUILIG doing business under the
name and style J.M.T. ENGINEERING AND
GENERAL
MERCHANDISING, petitioner, vs. COURT
OF
APPEALS
and
VICENTE
HERCE
JR., respondents.

BELLOSILLO, J.:
This case involves the proper interpretation of the
contract entered into between the parties.
Sometime in April 1987 petitioner Jacinto M.
Tanguilig doing business under the name and style J.
M. T. Engineering and General Merchandising proposed
to respondent Vicente Herce Jr. to construct a windmill
system for him. After some negotiations they agreed
on the construction of the windmill for a consideration
of P60,000.00 with a one-year guaranty from the date
of completion and acceptance by respondent Herce Jr.
of the project. Pursuant to the agreement respondent
paid petitioner a down payment of P30,000.00 and an
installment payment of P15,000.00, leaving a balance
of P15,000.00.
On 14 March 1988, due to the refusal and failure
of respondent to pay the balance, petitioner filed a
complaint to collect the amount. In his Answer before
the trial court respondent denied the claim saying that
he had already paid this amount to the San Pedro
General Merchandising Inc. (SPGMI) which constructed
the deep well to which the windmill system was to be
connected. According to respondent, since the deep
well formed part of the system the payment he
tendered to SPGMI should be credited to his account by
petitioner. Moreover, assuming that he owed petitioner
a balance of P15,000.00, this should be offset by the
defects in the windmill system which caused the
structure to collapse after a strong wind hit their place.
[1]

Petitioner denied that the construction of a deep

well was included in the agreement to build the
windmill system, for the contract price of P60,000.00
was solely for the windmill assembly and its
installation, exclusive of other incidental materials
needed for the project. He also disowned any
obligation to repair or reconstruct the system and
insisted that he delivered it in good and working
condition to respondent who accepted the same
without protest. Besides, its collapse was attributable
to a typhoon, a force majeure, which relieved him of
any liability.
In finding for plaintiff, the trial court held that the
construction
of
the
deep well was not part of the windmill project as evide
nced clearly by the letter proposals submitted by
petitioner to respondent.[2] It noted that "[i]f the
intention of the parties is to include the construction of
the deep well in the project, the same should be stated
in the proposals. In the absence of such an agreement,
it could be safely concluded that the construction of
the deep well is not a part of the project undertaken by
the plaintiff."[3] With respect to the repair of the
windmill, the trial court found that "there is no clear

and convincing proof that the windmill system fell

down due to the defect of the construction."[4]

The second letter-proposal (Exh. "A") provides as

follows:

The Court of Appeals reversed the trial court. It

ruled that the construction of the deep well was
included in the agreement of the parties because the
term "deep well" was mentioned in both proposals. It
also gave credence to the testimony of respondent's
witness Guillermo Pili, the proprietor of SPGMI which
installed the deep well, that petitioner Tanguilig told
him that the cost of constructing the deep well would
be
deducted
from
the
contract
price
of P60,000.00. Upon these premises the appellate
court
concluded
that
respondent's
payment
of P15,000.00 to SPGMI should be applied to his
remaining balance with petitioner thus effectively
extinguishing his contractual obligation. However, it
rejected petitioner's claim of force majeure and
ordered the latter to reconstruct the windmill in
accordance with the stipulated one-year guaranty.

In connection with your Windmill system Supply of

Labor Materials and Installation, operated water pump,
we would like to quote to you as follows -

His motion for reconsideration having been denied

by the Court of Appeals, petitioner now seeks relief
from this Court. He raises two issues: firstly, whether
the agreement to construct the windmill system
included
the
installation
of
a
deep
well
and, secondly, whether petitioner is under obligation to
reconstruct the windmill after it collapsed.

F. O. B. Laguna

We reverse the appellate court on the first issue

but sustain it on the second.
The preponderance of evidence supports the
finding of the trial court that the installation of a deep
well was not included in the proposals of petitioner to
construct a windmill system for respondent. There were
in fact two (2) proposals: one dated 19 May 1987 which
pegged the contract price at P87,000.00 (Exh.
"1"). This was rejected by respondent. The other was
submitted three days later, i.e., on 22 May 1987 which
contained more specifications but proposed a
lower contract price of P60,000.00 (Exh. "A"). The
latter proposal was accepted by respondent and the
construction immediately followed. The pertinent
portions of the first letter-proposal (Exh. "1") are
reproduced hereunder In connection with your Windmill System and
Installation, we would like to quote to you as follows:
One (1) Set - Windmill suitable for 2 inches diameter
deepwell, 2 HP, capacity, 14 feet in diameter, with 20
pieces blade, Tower 40 feet high, including mechanism
which is not advisable to operate during extra-intensity
wind. Excluding cylinder pump.
UNIT CONTRACT PRICE P87,000.00

One (1) set - Windmill assembly for 2 inches or 3

inches deep-well pump, 6 Stroke, 14 feet diameter, 1lot blade materials, 40 feet Tower complete with
standard appurtenances up to Cylinder pump, shafting
U.S. adjustable International Metal.
One (1) lot - Angle bar, G. I. pipe, Reducer Coupling,
Elbow Gate valve, cross Tee coupling.
One (1) lot - Float valve.
One (1) lot - Concreting materials foundation.

Contract Price P60,000.00

Notably, nowhere in either proposal is the
installation of a deep well mentioned, even
remotely. Neither is there an itemization or description
of the materials to be used in constructing the deep
well. There is absolutely no mention in the two (2)
documents that a deep well pump is a component of
the proposed windmill system. The contract prices
fixed in both proposals cover only the features
specifically described therein and no other. While the
words "deep
well" and "deep
well
pump" are
mentioned in both, these do not indicate that a deep
well is part of the windmill system. They merely
describe the type of deep well pump for which the
proposed windmill would be suitable. As correctly
pointed
out
by petitioner,
the
words "deep
well"preceded by the prepositions "for" and "suitable
for" were meant only to convey the idea that the
proposed windmill would be appropriate for a deep well
pump with a diameter of 2 to 3 inches. For if the real
intent of petitioner was to include a deep well in the
agreement to construct a windmill, he would have used
instead the conjunctions "and" or "with." Since the
terms of the instruments are clear and leave no doubt
as to their meaning they should not be disturbed.
Moreover, it is a cardinal rule in the interpretation
of contracts that the intention of the parties shall be
accorded primordial consideration[5] and, in case of
doubt, their contemporaneous and subsequent acts
shall be principally considered.[6] An examination of
such contemporaneous and subsequent acts of
respondent as well as the attendant circumstances
does not persuade us to uphold him.

Respondent insists that petitioner verbally agreed

that the contract price of P60,000.00 covered the
installation of a deep well pump. He contends that
since petitioner did not have the capacity to install the
pump the latter agreed to have a third party do the
work the cost of which was to be deducted from the
contract price. To prove his point, he presented
Guillermo Pili of SPGMI who declared that petitioner
Tanguilig approached him with a letter from respondent
Herce Jr. asking him to build a deep well pump as "part
of the price/contract which Engineer (Herce) had with
Mr. Tanguilig."[7]
We are disinclined to accept the version of
respondent. The claim of Pili that Herce Jr. wrote him a
letter is unsubstantiated. The alleged letter was never
presented in court by private respondent for reasons
known only to him. But granting that this written
communication
existed,
it
could
not
have simply contained a request for Pili to install a
deep well; it would have also mentioned the party who
would pay for the undertaking. It strains credulity that
respondent would keep silent on this matter and leave
it all to petitioner Tanguilig to verbally convey to
Pilithat the deep well was part of the windmill
construction and that its payment would come from
the contract price of P60,000.00.
We find it also unusual that Pili would readily
consent to build a deep well the payment for which
would come supposedly from the windmill contract
price on the mere representation of petitioner, whom
he had never met before, without a written
commitment at least from the former. For if indeed the
deep well were part of the windmill project, the
contract for its installation would have been strictly a
matter between petitioner and Pili himself with the
former assuming the obligation to pay the price. That it
was respondent Herce Jr. himself who paid for the deep
well by handing over to Pili the amount of P15,000.00
clearly indicates that the contract for the deep well was
not part of the windmill project but a separate
agreement between respondent and Pili. Besides, if the
price
of P60,000.00
included
the
deep
well,
the obligation of respondent was to pay the entire
amount to petitioner without prejudice to any action
that Guillermo Pili or SPGMI may take, if any, against
the latter. Significantly, when asked why he tendered
payment directly to Pili and not to petitioner,
respondent explained, rather lamely, that he did it
"because he has (sic) the money, so (he) just paid the
money in his possession."[8]
Can respondent claim that Pili accepted his
payment on behalf of petitioner? No. While the law
is clear that "payment shall be made to the person
in whose favor the obligation hasbeen constituted,
or
his successor
in
interest, or any person authorized to receive it,".[9] It

does not appear from the record that Pili and/or

SPGMI was so authorized.
Respondent cannot claim the benefit of the law
concerning "payments made by a third person." [10] The
Civil Code provisions do not apply in the instant case
because no creditor-debtor relationship between
petitioner and Guillermo Pili and/or SPGMI has been
established regarding the construction of the deep
well. Specifically, witness Pili did not testify that he
entered into a contract with petitioner for the
construction of respondent's deep well. If SPGMI was
really commissioned by petitioner to construct the
deep well, an agreement particularly to this effect
should have been entered into.
The contemporaneous and subsequent acts of the
parties concerned effectively belie respondent's
assertions. These circumstances only show that the
construction of the well by SPGMI was for the sole
account of respondent and that petitioner merely
supervised the installation of the well because the
windmill was to be connected to it. There is no legal
nor factual basis by which this Court can impose upon
petitioner an obligation he did not expressly assume
nor ratify.
The second issue is not a novel one. In a long line
of cases[11] this Court has consistently held that in order
for a party to claim exemption from liability by reason
of fortuitous event under Art. 1174 of the Civil Code
the event should be the sole and proximate cause of
the loss or destruction of the object of the
contract. In Nakpil vs. Court of Appeals,[12] four (4)
requisites must concur: (a) the cause of the breach of
the obligation must be independent of the will of the
debtor; (b) the event must be either unforeseeable or
unavoidable; (c) the event must be such as to render it
impossible for the debtor to fulfill his obligation in a
normal manner; and, (d) the debtor must be free from
any participation in or aggravation of the injury to the
creditor.
Petitioner failed to show that the collapse of the
windmill
was
due
solely
to
a
fortuitous
event. Interestingly, the evidence does not disclose
that there was actually a typhoon on the day the
windmill collapsed. Petitioner merely stated that there
was a "strong wind." But a strong wind in this case
cannot
be
fortuitous
- unforeseeable
nor
unavoidable. On the contrary, a strong wind should be
present in places where windmills are constructed,
otherwise the windmills will not turn.
The appellate court correctly observed that "given
the newly-constructed windmill system, the same
would not have collapsed had there been no inherent
defect in it which could only be attributable to the
appellee."[13] It
emphasized
that

respondent had in his favor the

presumption that
"things have happened according to the ordinary
course of nature and the ordinary habits of life." [14] This
presumption has not been rebutted by petitioner.
Finally,
petitioner's
argument that private
respondent was already in default in the payment of
his outstanding balance of P15,000.00 and hence
should bear his own loss, is untenable. In reciprocal
obligations, neither party incurs in delay if the other
does not comply or is not ready to comply in a proper
manner with what is incumbent upon him. [15] When the
windmill failed to function properly it became
incumbent upon petitioner to institute the proper
repairs in accordance with the guaranty stated in the
contract. Thus, respondent cannot be said to have
incurred in delay; instead, it is petitioner who should
bear the expenses for the reconstruction of the
windmill. Article 1167 of the Civil Code is explicit on
this point that if a person obliged to do something fails
to do it, the same shall be executed at his cost.
WHEREFORE,
the
appealed
decision
is MODIFIED. Respondent VICENTE HERCE JR. is
directed to pay petitioner JACINTO M. TANGUILIG the
balance of P15,000.00 with interest at the legal rate
from the date of the filing of the complaint. In return,
petitioner is ordered to "reconstruct subject defective
windmill system, in accordance with the one-year
guaranty"[16]and to complete the same within three (3)
months from the finality of this decision. SO
ORDERED.
G.R. No. 115129. February 12, 1997
IGNACIO BARZAGA, petitioner,
APPEALS
and
ALVIAR, respondents.

vs. COURT OF
ANGELITO

BELLOSILLO, J.:
The Fates ordained that Christmas 1990 be bleak
for Ignacio Barzaga and his family. On the nineteenth of
December Ignacio's wife succumbed to a debilitating
ailment after prolonged pain and suffering. Forewarned
by her attending physicians of her impending death,
she expressed her wish to be laid to rest before
Christmas day to spare her family from keeping lonely
vigil over her remains while the whole of Christendom
celebrate the Nativity of their Redeemer.
Drained to the bone from the tragedy that befell
his family yet preoccupied with overseeing the wake
for his departed wife, Ignacio Barzaga set out to
arrange for her interment on the twenty-fourth of
December in obedience semper fidelis to her dying
wish. But her final entreaty, unfortunately, could not be
carried out. Dire events conspired to block his plans

that forthwith gave him and his family their gloomiest

Christmas ever.
This is Barzaga's story. On 21 December 1990, at
about three o`clock in the afternoon, he went to the
hardware store of respondent Angelito Alviar to inquire
about the availability of certain materials to be used in
the construction of a niche for his wife. He also asked if
the materials could be delivered at once. Marina
Boncales, Alviar's storekeeper, replied that she had yet
to verify if the store had pending deliveries that
afternoon because if there were then all subsequent
purchases would have to be delivered the following
day. With that reply petitioner left.
At seven o' clock the following morning, 22
December, Barzaga returned to Alviar's hardware store
to follow up his purchase of construction materials. He
told the store employees that the materials he was
buying would have to be delivered at the Memorial
Cemetery in Dasmarias, Cavite, by eight o'clock that
morning since his hired workers were already at the
burial site and time was of the essence. Marina
Boncales agreed to deliver the items at the designated
time, date and place. With this assurance, Barzaga
purchased the materials and paid in full the amount
of P2,110.00. Thereafter he joined his workers at the
cemetery, which was only a kilometer away, to await
the delivery.
The construction materials did not arrive at eight
o'clock as promised. At nine o' clock, the delivery was
still nowhere in sight. Barzaga returned to the
hardware store to inquire about the delay. Boncales
assured him that although the delivery truck was not
yet around it had already left the garage and that as
soon as it arrived the materials would be brought over
to the cemetery in no time at all. That left petitioner no
choice but to rejoin his workers at the memorial park
and wait for the materials.
By ten o'clock, there was still no delivery. This
prompted petitioner to return to the store to inquire
about the materials. But he received the same answer
from respondent's employees who even cajoled him to
go back to the burial place as they would just follow
with his construction materials.
After hours of waiting - which seemed
interminable to him - Barzaga became extremely
upset. He decided to dismiss his laborers for the
day. He proceeded to the police station, which was just
nearby, and lodged a complaint against Alviar. He had
his complaint entered in the police blotter. When he
returned again to the store he saw the delivery truck
already there but the materials he purchased were not
yet ready for loading. Distressed that Alviar's
employees were not the least concerned, despite his
impassioned pleas, Barzaga decided to cancel his

transaction with the store and look for construction

materials elsewhere.
In the afternoon of that day, petitioner was able to
buy from another store. But since darkness was
already setting in and his workers had left, he made up
his mind to start his project the following morning, 23
December. But he knew that the niche would not be
finish in time for the scheduled burial the following
day. His laborers had to take a break on Christmas Day
and they could only resume in the morning of the
twenty-sixth. The niche was completed in the afternoon
and Barzaga's wife was finally laid to rest. However, it
was two-and-a-half (2-1/2) days behind schedule.
On 21 January 1991, tormented perhaps by his
inability to fulfill his wife's dying wish, Barzaga wrote
private respondent Alviar demanding recompense for
the
damage
he
suffered.Alviar
did
not
respond. Consequently, petitioner sued him before the
Regional Trial Court.[1]
Resisting petitioner's claim, private respondent
contended that legal delay could not be validly
ascribed to him because no specific time of delivery
was agreed upon between them. He pointed out that
the invoices evidencing the sale did not contain any
stipulation as to the exact time of delivery and that
assuming that the materials were not delivered within
the period desired by petitioner, the delivery truck
suffered a flat tire on the way to the store to pick up
the materials. Besides, his men were ready to make
the delivery by ten-thirty in the morning of 22
December
but
petitioner
refused
to
accept
them. According to Alviar, it was this obstinate refusal
of petitioner to accept delivery that caused the delay in
the construction of the niche and the consequent
failure of the family to inter their loved one on the
twenty-fourth of December, and that, if at all, it was
petitioner and no other who brought about all his
personal woes.
Upholding the proposition that respondent
incurred in delay in the delivery of the construction
materials resulting in undue prejudice to petitioner, the
trial court ordered respondent Alviar to pay petitioner
(a) P2,110.00 as refund for the purchase price of the
materials with interest per annum computed at the
legal rate from the date of the filing of the complaint,
(b) P5,000.00 as temperate damages, (c) P20,000.00
as moral damages, (d) P5,000.00 as litigation
expenses, and (e) P5,000.00 as attorney's fees.
On appeal, respondent Court of Appeals reversed
the lower court and ruled that there was no contractual
commitment as to the exact time of delivery since this
was not indicated in the invoice receipts covering the
sale.[2]

The arrangement to deliver the materials merely

implied that delivery should be made within a
reasonable time but that the conclusion that since
petitioner's workers were already at the graveyard the
delivery had to be made at that precise moment,
is non-sequitur. The Court of Appeals also held that
assuming that there was delay, petitioner still had
sufficient time to construct the tomb and hold his wife's
burial as she wished.
We sustain the trial court. An assiduous scrutiny of
the record convinces us that respondent Angelito Alviar
was negligent and incurred in delay in the performance
of his contractual obligation. This sufficiently entitles
petitioner Ignacio Barzaga to be indemnified for the
damage he suffered as a consequence of delay or a
contractual breach. The law expressly provides that
those who in the performance of their obligation are
guilty of fraud, negligence, or delay and those who in
any manner contravene the tenor thereof, are liable for
damages.[3]
Contrary to the appellate court's factual
determination, there was a specific time agreed upon
for
the
delivery
of
the
materials
to
the
cemetery. Petitioner went to private respondent's store
on 21 December precisely to inquire if the materials he
intended
to
purchase
could
be
delivered
immediately. But he was told by the storekeeper that if
there were still deliveries to be made that afternoon his
order would be delivered the following day. With this in
mind Barzaga decided to buy the construction
materials the following morning after he was assured of
immediate delivery according to his time frame. The
argument that the invoices never indicated a specific
delivery time must fall in the face of the positive verbal
commitment
of
respondent's
storekeeper. Consequently it was no longer necessary
to indicate in the invoices the exact time the purchased
items were to be brought to the cemetery. In fact,
storekeeper Boncales admitted that it was her custom
not to indicate the time of delivery whenever she
prepared invoices.[4]
Private respondent invokes fortuitous event as his
handy excuse for that "bit of delay" in the delivery of
petitioner's purchases. He maintains that Barzaga
should have allowed his delivery men a little more time
to bring the construction materials over to the
cemetery since a few hours more would not really
matter and considering that his truck had a flat
tire. Besides, according to him, Barzaga still had
sufficient time to build the tomb for his wife.
This is a gratuitous assertion that borders on
callousness. Private respondent had no right to
manipulate petitioner's timetable and substitute it with
his own. Petitioner had a deadline to meet. A few hours
of delay was no piddling matter to him who in his

bereavement had yet to attend to other pressing family

concerns. Despite this, respondent's employees still
made light of his earnest importunings for an
immediate delivery. As petitioner bitterly declared in
court " x x x they (respondent's employees) were
making a fool out of me."[5]
We
also
find
unacceptable
respondent's
justification that his truck had a flat tire, for this event,
if indeed it happened, was forseeable according to the
trial court, and as such should have been reasonably
guarded against. The nature of private respondent's
business requires that he should be ready at all times
to meet contingencies of this kind. One piece of
testimony by respondent's witness Marina Boncales
has caught our attention - that the delivery truck
arrived a little late than usual because it came from a
delivery of materials in Langcaan, Dasmarias, Cavite.
[6]
Significantly, this information was withheld by
Boncales from petitioner when the latter was
negotiating with her for the purchase of construction
materials.Consequently, it is not unreasonable to
suppose that had she told petitioner of this fact and
that the delivery of the materials would consequently
be delayed, petitioner would not have bought the
materials from respondent's hardware store but
elsewhere which could meet his time requirement. The
deliberate suppression of this information by itself
manifests a certain degree of bad faith on the part of
respondent's storekeeper.
The appellate court appears to have belittled
petitioner's submission that under the prevailing
circumstances time was of the essence in the delivery
of the materials to the grave site.However, we find
petitioner's assertion to be anchored on solid
ground. The niche had to be constructed at the very
least on the twenty-second of December considering
that it would take about two (2) days to finish the job if
the interment was to take place on the twenty-fourth of
the month. Respondent's delay in the delivery of the
construction materials wasted so much time that
construction of the tomb could start only on the
twenty-third. It could not be ready for the scheduled
burial of petitioner's wife. This undoubtedly prolonged
the wake, in addition to the fact that work at the
cemetery had to be put off on Christmas day.
This case is clearly one of non-performance of a
reciprocal obligation.[7] In their contract of purchase
and sale, petitioner had already complied fully with
what was required of him as purchaser, i.e., the
payment of the purchase price of P2,110.00. It was
incumbent upon respondent to immediately fulfill his
obligation to deliver the goods otherwise delay would
attach.
We therefore sustain the award of moral
damages. It cannot be denied that petitioner and his

family suffered wounded feelings, mental anguish and

serious anxiety while keeping watch on Christmas day
over the remains of their loved one who could not be
laid to rest on the date she herself had chosen. There is
no gainsaying the inexpressible pain and sorrow
Ignacio Barzaga and his family bore at that moment
caused no less by the ineptitude, cavalier behavior and
bad faith of respondent and his employees in the
performance of an obligation voluntarily entered into.
We also affirm the grant of exemplary
damages. The lackadaisical and feckless attitude of the
employees of respondent over which he exercised
supervisory authority indicates gross negligence in the
fulfillment of his business obligations. Respondent
Alviar and his employees should have exercised
fairness and good judgment in dealing with petitioner
who was then grieving over the loss of his wife. Instead
of commiserating with him, respondent and his
employees contributed to petitioner's anguish by
causing him to bear the agony resulting from his
inability to fulfill his wife's dying wish.
We delete however the award of temperate
damages. Under Art. 2224 of the Civil Code, temperate
damages are more than nominal but less than
compensatory, and may be recovered when the court
finds that some pecuniary loss has been suffered but
the amount cannot, from the nature of the case, be
proved with certainty. In this case, the trial court found
that plaintiff suffered damages in the form of wages for
the hired workers for 22 December 1990 and expenses
incurred during the extra two (2) days of the wake. The
record however does not show that petitioner
presented proof of the actual amount of expenses he
incurred which seems to be the reason the trial court
awarded to him temperate damages instead. This is an
erroneous application of the concept of temperate
damages. While petitioner may have indeed suffered
pecuniary losses, these by their very nature could be
established with certainty by means of payment
receipts. As such, the claim falls unequivocally within
the
realm
of
actual
or
compensatory
damages. Petitioner's
failure
to
prove
actual
expenditure consequently conduces to a failure of his
claim. For in determining actual damages, the court
cannot rely on mere assertions, speculations,
conjectures or guesswork but must depend on
competent proof and on the best evidence obtainable
regarding the actual amount of loss.[8]
We affirm the award of attorney's fees and
litigation expenses. Award of damages, attorney's fees
and litigation costs is left to the sound discretion of the
court, and if such discretion be well exercised, as in
this case, it will not be disturbed on appeal.[9]
WHEREFORE, the decision of the Court of
Appeals is REVERSED and SET ASIDE except insofar as

it GRANTED on a motion for reconsideration the refund

by private respondent of the amount of P2,110.00 paid
by
petitioner
for
the
construction
materials. Consequently,
except
for
the
award
of P5,000.00 as temperate damages which we delete,
the decision of the Regional Trial Court granting
petitioner (a) P2,110.00 as refund for the value of
materials with interest computed at the legal rate per
annum from the date of the filing of the case;
(b) P20,000.00 as moral damages; (c) P10,000.00 as
exemplary damages; (d) P5,000.00 as litigation
expenses; and (4) P5,000.00 as attorney's fees, is
AFFIRMED. No costs.SO ORDERED.
G.R. No. 119121. August 14, 1998
NATIONAL
POWER
CORPORATION, petitioner,
vs. COURT OF APPEALS, Fifteenth Division
and
PHESCO
INCORPORATED, respondents.
ROMERO, J.:
On July 22, 1979, a convoy of four (4) dump trucks
owned by the National Power Corporation (NPC) left
Marawi city bound for Iligan city. Unfortunately, enroute
to its destination, one of the trucks with plate no. RFT9-6-673 driven by a certain Gavino Ilumba figured in a
head-on-collision with a Toyota Tamaraw. The incident
resulted in the death of three (3) persons riding in the
Toyota Tamaraw, as well as physical injuries to
seventeen other passengers.
On June 10, 1980, the heirs of the victims filed a
complaint for damages against National Power
Corporation (NPC) and PHESCO Incorporated (PHESCO)
before the then Court of First Instance of Lanao del
Norte, Marawi City. When defendant PHESCO filed its
answer to the complaint it contended that it was not
the owner of the dump truck which collided with the
Toyota Tamaraw but NPC. Moreover, it asserted that it
was merely a contractor of NPC with the main duty of
supplying workers and technicians for the latters
projects. On the other hand, NPC denied any liability
and countered that the driver of the dump truck was
the employee of PHESCO.
After trial on the merits, the trial court rendered a
decision dated July 25, 1988 absolving NPC of any
liability. The dispositive portion reads:
Consequently, in view of the foregoing consideration,
judgment is hereby rendered ordering PHESCO, Inc.
and Gavino Ilumba upon receipt hereof:
1. To pay jointly and severally the plaintiffs thru the
Dansalan College the sum of P954,154.55 representing

the actual or compensatory damages incurred by the

plaintiffs; and
2. To pay the sum of P50,000.00 representing Attorneys
fees.
SO ORDERED.
Dissatisfied, PHESCO appealed to the Court of
Appeals, which on November 10, 1994 reversed the
trial courts judgment. We quote the pertinent portion of
the decision:
A labor only contractor is considered merely as an
agent of the employer (Deferia vs. National Labor
Relations Commission, 194 SCRA 525). A finding that a
contractor is a labor only contractor is equivalent to a
finding that there is an employer-employee relationship
between the owner of the project and the employees of
the labor only contractor (Industrial Timer Corporation
vs. National Labor Relations Commission, 202 SCRA
465). So, even if Phesco hired driver Gavino Ilumba, as
Phesco is admittedly a labor only contractor of
Napocor, the statute itself establishes an employeremployee
relationship
between
the
employer
(Napocor) and the employee (driver Ilumba) of the
labor only contractor (Phesco). (Ecal vs. National Labor
Relations Commission, 195 SCRA 224).
Consequently, we hold Phesco not liable for the tort of
driver Gavino Ilumba, as there was no employment
relationship between Phesco and driver Gavino
Ilumba. Under Article 2180 of the Civil Code, to hold
the employer liable for torts committed by his
employees within the scope of their assigned task,
there must exist an employer-employee relationship.
(Martin vs. Court of Appeals, 205 SCRA 591).
WHEREFORE, we REVERSE the appealed decision. In
lieu thereof, the Court renders judgment sentencing
defendant National Power Corporation to pay plaintiffs
the sum of P174,889.20 plus P20,000.00 as attorneys
fees and costs. SO ORDERED.
Chagrined by the sudden turnaround, NPC filed a
motion for reconsideration of said decision which was,
however, denied on February 9, 1995.[1] Hence, this
petition.
The principal query to be resolved is, as between
NPC and PHESCO, who is the employer of Ilumba,
driver of the dumptruck which figured in the accident
and which should, therefore, would be liable for
damages to the victims. Specifically, NPC assigns the
sole error that:
THE COURT OF APPEALS DECISION FINDING THAT
PETITIONER NPC AS THE EMPLOYER OF THE DRIVER

GAVINO ILUMBA, AND CONSEQUENTLY, SENTENCING IT

TO PAY THE ACTUAL AND COMPENSATORY DAMAGES
SUSTAINED BY COMPLAINANTS, IS NOT IN ACCORD
WITH THE LAW OR WITH THE APPLICABLE RULINGS OF
THIS HONORABLE COURT.[2]

is related to NPCs principal business of power

generation. In sum, NPCs control over PHESCO in
matters concerning the performance of the latters work
is evident. It is enough that NPC has the right to wield
such power to be considered as the employer.[12]

As earlier stated, NPC denies that the driver of the

dump truck was its employee. It alleges that it did not
have the power of selection and dismissal nor the
power of control over Ilumba.[3] PHESCO, meanwhile,
argues that it merely acted as a recruiter of the
necessary workers for and in behalf of NPC.[4]

Under this factual milieu, there is no doubt that

PHESCO was engaged in labor-only contracting vis--vis
NPC and as such, it is considered merely an agent of
the latter. In labor-only contracting, an employeremployee relationship between the principal employer
and the employees of the labor-only contractor is
created. Accordingly, the principal employer is
responsible to the employees of the labor-only
contractor as if such employees had been directly
employed by the principal employer.[13] Since PHESCO
is only a labor-only contractor, the workers it supplied
to NPC, including the driver of the ill-fated truck, should
be considered as employees of NPC.[14] After all, it is
axiomatic that any person (the principal employer) who
enters into an agreement with a job contractor, either
for the performance of a specified work or for the
supply of manpower, assumes responsibility over the
employees of the latter.[15]

Before we decide who is the employer of Ilumba, it

is evidently necessary to ascertain the contractual
relationship between NPC and PHESCO. Was the
relationship one of employer and job (independent)
contractor or one of employer and labor only
contractor?
Job (independent) contracting is present if the
following conditions are met: (a) the contractor carries
on an independent business and undertakes the
contract work on his own account under his own
responsibility according to his own manner and
method, free from the control and direction of his
employer or principal in all matters connected with the
performance of the work except to the result thereof;
and (b) the contractor has substantial capital or
investments in the form of tools, equipment,
machineries, work premises and other materials which
are necessary in the conduct of his business. [5] Absent
these requisites, what exists is a labor only contract
under which the person acting as contractor is
considered merely as an agent or intermediary of the
principal who is responsible to the workers in the same
manner and to the same extent as if they had been
directly employed by him.[6] Taking into consideration
the above distinction and the provisions of the
Memorandum of Understanding entered into by
PHESCO and NPC, we are convinced that PHESCO was
engaged in labor only contracting.
It must be noted that under the Memorandum,
NPC had mandate to approve the critical path network
and rate of expenditure to be undertaken by PHESCO.
[7]
Likewise, the manning schedule and pay scale of the
workers hired by PHESCO were subject to confirmation
by NPC.[8] Then too, it cannot be ignored that if PHESCO
enters into any sub-contract or lease, again NPCs
concurrence is needed.[9] Another consideration is that
even in the procurement of tools and equipment that
will
be
used
by
PHESCO,
NPCs
favorable
recommendation is still necessary before these tools
and equipment can be purchased. [10] Notably, it is NPC
that will provide the money or funding that will be used
by PHESCO to undertake the project. [11]Furthermore, it
must be emphasized that the project being undertaken
by PHESCO, i.e., construction of power energy facilities,

However, NPC maintains that even assuming that

a labor only contract exists between it and PHESCO, its
liability will not extend to third persons who are injured
due to the tortious acts of the employee of the laboronly contractor.[16] Stated otherwise, its liability shall
only be limited to violations of the Labor Code and not
quasi-delicts.
To bolster its position, NPC cites Section 9(b), Rule
VII, Book III of the Omnibus Rules Implementing the
Labor Code which reads:
(b) Labor only contracting as defined herein is hereby
prohibited and the person acting as contractor shall be
considered merely as an agent or intermediary of the
employer who shall be responsible to the workers in
the same manner and extent as if the latter were
directly employed by him.
In other words, NPC posits the theory that its
liability is limited only to compliance with the
substantive labor provisions on working conditions, rest
periods, and wages and shall not extend to liabilities
suffered by third parties, viz.:
Consequently, the responsibilities of the employer
contemplated in a labor only contract, should,
consistent with the terms expressed in the rule, be
restricted to the workers. The same can not be
expanded to cover liabilities for damages to third
persons resulting from the employees tortious acts
under Article 2180 of the Civil Code.[17]

The reliance is misplaced. It bears stressing that

the action was premised on the recovery of damages
as a result of quasi-delict against both NPC and
PHESCO, hence, it is the Civil Code and not the Labor
Code which is the applicable law in resolving this case.
To be sure, the pronouncement of this Court
in Filamer Christian Institute v. IAC,[18] is most
instructive:
The present case does not deal with a labor dispute on
conditions of employment between an alleged
employee and an alleged employer. It invokes a claim
brought by one for damages for injury caused by the
patently negligent acts of a person, against both doeremployee and his employer. Hence, the reliance on the
implementing rule on labor to disregard the primary
liability of an employer under Article 2180 of the Civil
Code is misplaced. An implementing rule on labor
cannot be used by an employer as a shield to avoid
liability under the substantive provisions of the Civil
Code.
Corollarily from the above doctrine, the ruling
in Cuison v. Norton & Harrison Co.,[19] finds applicability
in the instant case, viz.:
It is well to repeat that under the civil law an employer
is only liable for the negligence of his employees in the
discharge of their respective duties. The defense of
independent contractor would be a valid one in the
Philippines just as it would be in the United
States. Here Ora was a contractor, but it does not
necessarily follow that he was an independent
contractor. The reason for this distinction is that the
employer retained the power of directing and
controlling the work. The chauffeur and the two
persons on the truck were the employees of Ora, the
contractor, but Ora, the contractor, was an employee
of Norton & Harrison Co., charged with the duty of
directing the loading and transportation of the
lumber. And it was the negligence in loading the
lumber and the use of minors on the truck which
caused the death of the unfortunate boy. On the
facts and the law, Ora was not an independent
contractor, but was the servant of the defendant, and
for his negligence defendant was responsible.
Given the above considerations, it is apparent that
Article 2180 of the Civil Code and not the Labor Code
will determine the liability of NPC in a civil suit for
damages instituted by an injured person for any
negligent act of the employees of the labor only
contractor. This is consistent with the ruling that a
finding that a contractor was a labor-only contractor is
equivalent to a finding that an employer-employee
relationship existed between the owner (principal
contractor) and the labor-only contractor, including the
latters workers.[20]

With respect to the liability of NPC as the direct

employer, Article 2180 of the Civil Code explicitly
provides:
Employers shall be liable for the damages caused by
their employees and household helpers acting within
the scope of their assigned tasks, even though the
former are not engaged in any business or industry.
In this regard, NPCs liability is direct, primary and
solidary with PHESCO and the driver. [21] Of course, NPC,
if the judgment for damages is satisfied by it, shall
have recourse against PHESCO and the driver who
committed the negligence which gave rise to the
action.[22]
Finally, NPC, even if it truly believed that it was
not the employer of the driver, could still have
disclaimed any liability had it raised the defense of due
diligence in the selection or supervision of PHESCO and
Ilumba.[23] However, for some reason or another, NPC
did not invoke said defense. Hence, by opting not to
present any evidence that it exercised due diligence in
the supervision of the activities of PHESCO and Ilumba,
NPC has foreclosed its right to interpose the same on
appeal in conformity with the rule that points of law,
theories, issues of facts and arguments not raised in
the proceedings below cannot be ventilated for the first
time on appeal.[24] Consequently, its liability stands.
WHEREFORE, in view of the foregoing, the assailed
decision of the Court of Appeals dated November 10,
1994 and its accompanying resolution dated February
9, 1995 are AFFIRMED without prejudice to the right of
NPC
to
demand
from
PHESCO
and
Ilumba
reimbursement of the damages it would be adjudged
to pay to complainants. No costs. SO ORDERED.
G.R. No. L-12219

March 15, 1918

AMADO PICART vs. FRANK SMITH, JR.,

STREET, J.:
In this action the plaintiff, Amado Picart, seeks to
recover of the defendant, Frank Smith, jr., the sum of
P31,000, as damages alleged to have been caused by
an automobile driven by the defendant. From a
judgment of the Court of First Instance of the Province
of La Union absolving the defendant from liability the
plaintiff has appealed.
The occurrence which gave rise to the institution of this
action took place on December 12, 1912, on the
Carlatan Bridge, at San Fernando, La Union. It appears
that upon the occasion in question the plaintiff was
riding on his pony over said bridge. Before he had
gotten half way across, the defendant approached from

the opposite direction in an automobile, going at the

rate of about ten or twelve miles per hour. As the
defendant neared the bridge he saw a horseman on it
and blew his horn to give warning of his approach. He
continued his course and after he had taken the bridge
he gave two more successive blasts, as it appeared to
him that the man on horseback before him was not
observing the rule of the road.
The plaintiff, it appears, saw the automobile coming
and heard the warning signals. However, being
perturbed by the novelty of the apparition or the
rapidity of the approach, he pulled the pony closely up
against the railing on the right side of the bridge
instead of going to the left. He says that the reason he
did this was that he thought he did not have sufficient
time to get over to the other side. The bridge is shown
to have a length of about 75 meters and a width of
4.80 meters. As the automobile approached, the
defendant guided it toward his left, that being the
proper side of the road for the machine. In so doing the
defendant assumed that the horseman would move to
the other side. The pony had not as yet exhibited
fright, and the rider had made no sign for the
automobile to stop. Seeing that the pony was
apparently quiet, the defendant, instead of veering to
the right while yet some distance away or slowing
down, continued to approach directly toward the horse
without diminution of speed. When he had gotten quite
near, there being then no possibility of the horse
getting across to the other side, the defendant quickly
turned his car sufficiently to the right to escape hitting
the horse alongside of the railing where it as then
standing; but in so doing the automobile passed in
such close proximity to the animal that it became
frightened and turned its body across the bridge with
its head toward the railing. In so doing, it as struck on
the hock of the left hind leg by the flange of the car
and the limb was broken. The horse fell and its rider
was thrown off with some violence. From the evidence
adduced in the case we believe that when the accident
occurred the free space where the pony stood between
the automobile and the railing of the bridge was
probably less than one and one half meters. As a result
of its injuries the horse died. The plaintiff received
contusions which caused temporary unconsciousness
and required medical attention for several days.
The question presented for decision is whether or not
the defendant in maneuvering his car in the manner
above described was guilty of negligence such as gives
rise to a civil obligation to repair the damage done; and
we are of the opinion that he is so liable. As the
defendant started across the bridge, he had the right
to assume that the horse and the rider would pass over
to the proper side; but as he moved toward the center
of the bridge it was demonstrated to his eyes that this
would not be done; and he must in a moment have
perceived that it was too late for the horse to cross

with safety in front of the moving vehicle. In the nature

of things this change of situation occurred while the
automobile was yet some distance away; and from this
moment it was not longer within the power of the
plaintiff to escape being run down by going to a place
of greater safety. The control of the situation had then
passed entirely to the defendant; and it was his duty
either to bring his car to an immediate stop or, seeing
that there were no other persons on the bridge, to take
the other side and pass sufficiently far away from the
horse to avoid the danger of collision. Instead of doing
this, the defendant ran straight on until he was almost
upon the horse. He was, we think, deceived into doing
this by the fact that the horse had not yet exhibited
fright. But in view of the known nature of horses, there
was an appreciable risk that, if the animal in question
was unacquainted with automobiles, he might get
exited and jump under the conditions which here
confronted him. When the defendant exposed the
horse and rider to this danger he was, in our opinion,
negligent in the eye of the law.
The test by which to determine the existence of
negligence in a particular case may be stated as
follows: Did the defendant in doing the alleged
negligent act use that person would have used in the
same situation? If not, then he is guilty of negligence.
The law here in effect adopts the standard supposed to
be supplied by the imaginary conduct of the discreet
paterfamilias of the Roman law. The existence of
negligence in a given case is not determined by
reference to the personal judgment of the actor in the
situation before him. The law considers what would be
reckless, blameworthy, or negligent in the man of
ordinary intelligence and prudence and determines
liability by that.
The question as to what would constitute the conduct
of a prudent man in a given situation must of course be
always determined in the light of human experience
and in view of the facts involved in the particular case.
Abstract speculations cannot here be of much value
but this much can be profitably said: Reasonable men
govern their conduct by the circumstances which are
before them or known to them. They are not, and are
not supposed to be, omniscient of the future. Hence
they can be expected to take care only when there is
something before them to suggest or warn of danger.
Could a prudent man, in the case under consideration,
foresee harm as a result of the course actually
pursued? If so, it was the duty of the actor to take
precautions to guard against that harm. Reasonable
foresight of harm, followed by ignoring of the
suggestion born of this prevision, is always necessary
before negligence can be held to exist. Stated in these
terms, the proper criterion for determining the
existence of negligence in a given case is this: Conduct
is said to be negligent when a prudent man in the
position of the tortfeasor would have foreseen that an

effect harmful to another was sufficiently probable to

warrant his foregoing conduct or guarding against its
consequences.
Applying this test to the conduct of the defendant in
the present case we think that negligence is clearly
established. A prudent man, placed in the position of
the defendant, would in our opinion, have recognized
that the course which he was pursuing was fraught
with risk, and would therefore have foreseen harm to
the horse and the rider as reasonable consequence of
that course. Under these circumstances the law
imposed on the defendant the duty to guard against
the threatened harm.
It goes without saying that the plaintiff himself was not
free from fault, for he was guilty of antecedent
negligence in planting himself on the wrong side of the
road. But as we have already stated, the defendant
was also negligent; and in such case the problem
always is to discover which agent is immediately and
directly responsible. It will be noted that the negligent
acts of the two parties were not contemporaneous,
since the negligence of the defendant succeeded the
negligence of the plaintiff by an appreciable interval.
Under these circumstances the law is that the person
who has the last fair chance to avoid the impending
harm and fails to do so is chargeable with the
consequences, without reference to the prior
negligence of the other party.
The decision in the case of Rkes vs. Atlantic, Gulf and
Pacific Co. (7 Phil. Rep., 359) should perhaps be
mentioned in this connection. This Court there held
that while contributory negligence on the part of the
person injured did not constitute a bar to recovery, it
could be received in evidence to reduce the damages
which would otherwise have been assessed wholly
against the other party. The defendant company had
there employed the plaintiff, as a laborer, to assist in
transporting iron rails from a barge in Manila harbor to
the company's yards located not far away. The rails
were conveyed upon cars which were hauled along a
narrow track. At certain spot near the water's edge the
track gave way by reason of the combined effect of the
weight of the car and the insecurity of the road bed.
The car was in consequence upset; the rails slid off;
and the plaintiff's leg was caught and broken. It
appeared in evidence that the accident was due to the
effects of the typhoon which had dislodged one of the
supports of the track. The court found that the
defendant company was negligent in having failed to
repair the bed of the track and also that the plaintiff
was, at the moment of the accident, guilty of
contributory negligence in walking at the side of the
car instead of being in front or behind. It was held that
while the defendant was liable to the plaintiff by reason
of its negligence in having failed to keep the track in
proper repair nevertheless the amount of the damages

should be reduced on account of the contributory

negligence in the plaintiff. As will be seen the
defendant's negligence in that case consisted in an
omission only. The liability of the company arose from
its responsibility for the dangerous condition of its
track. In a case like the one now before us, where the
defendant was actually present and operating the
automobile which caused the damage, we do not feel
constrained to attempt to weigh the negligence of the
respective parties in order to apportion the damage
according to the degree of their relative fault. It is
enough to say that the negligence of the defendant
was in this case the immediate and determining cause
of the accident and that the antecedent negligence of
the plaintiff was a more remote factor in the case.
A point of minor importance in the case is indicated in
the special defense pleaded in the defendant's answer,
to the effect that the subject matter of the action had
been previously adjudicated in the court of a justice of
the peace. In this connection it appears that soon after
the accident in question occurred, the plaintiff caused
criminal proceedings to be instituted before a justice of
the peace charging the defendant with the infliction of
serious injuries (lesiones graves). At the preliminary
investigation the defendant was discharged by the
magistrate and the proceedings were dismissed.
Conceding that the acquittal of the defendant at the
trial upon the merits in a criminal prosecution for the
offense mentioned would be res adjudicata upon the
question of his civil liability arising from negligence -- a
point upon which it is unnecessary to express an
opinion -- the action of the justice of the peace in
dismissing the criminal proceeding upon the
preliminary hearing can have no effect. (See U. S. vs.
Banzuela and Banzuela, 31 Phil. Rep., 564.)
From what has been said it results that the judgment of
the lower court must be reversed, and judgment is her
rendered that the plaintiff recover of the defendant the
sum of two hundred pesos (P200), with costs of other
instances. The sum here awarded is estimated to
include the value of the horse, medical expenses of the
plaintiff, the loss or damage occasioned to articles of
his apparel, and lawful interest on the whole to the
date of this recovery. The other damages claimed by
the plaintiff are remote or otherwise of such character
as not to be recoverable. So ordered.
G.R. No. 179337

April 30, 2008

JOSEPH SALUDAGA vs FAR EASTERN UNIVERSITY

and EDILBERTO C. DE JESUS in his capacity as
President of FEU
YNARES-SANTIAGO, J.:

This Petition for Review on Certiorari1 under Rule 45 of

the Rules of Court assails the June 29, 2007
Decision2 of the Court of Appeals in CA-G.R. CV No.
87050, nullifying and setting aside the November 10,
2004 Decision3 of the Regional Trial Court of Manila,
Branch 2, in Civil Case No. 98-89483 and dismissing
the complaint filed by petitioner; as well as its August
23,
2007
Resolution4 denying
the
Motion
for
Reconsideration.5
The antecedent facts are as follows:
Petitioner Joseph Saludaga was a sophomore law
student of respondent Far Eastern University (FEU)
when he was shot by Alejandro Rosete (Rosete), one of
the security guards on duty at the school premises on
August 18, 1996. Petitioner was rushed to FEU-Dr.
Nicanor Reyes Medical Foundation (FEU-NRMF) due to
the wound he sustained.6 Meanwhile, Rosete was
brought to the police station where he explained that
the shooting was accidental. He was eventually
released considering that no formal complaint was filed
against him.
Petitioner thereafter filed a complaint for damages
against respondents on the ground that they breached
their obligation to provide students with a safe and
secure environment and an atmosphere conducive to
learning. Respondents, in turn, filed a Third-Party
Complaint7 against
Galaxy
Development
and
Management Corporation (Galaxy), the agency
contracted by respondent FEU to provide security
services within its premises and Mariano D. Imperial
(Imperial), Galaxy's President, to indemnify them for
whatever would be adjudged in favor of petitioner, if
any; and to pay attorney's fees and cost of the suit. On
the other hand, Galaxy and Imperial filed a FourthParty Complaint against AFP General Insurance.8
On November 10, 2004, the trial court rendered a
decision in favor of petitioner, the dispositive portion of
which reads:
WHEREFORE, from the foregoing, judgment is hereby
rendered ordering:
1. FEU and Edilberto de Jesus, in his capacity as
president of FEU to pay jointly and severally Joseph
Saludaga the amount of P35,298.25 for actual
damages with 12% interest per annum from the filing
of the complaint until fully paid; moral damages of
P300,000.00, exemplary damages of P500,000.00,
attorney's fees of P100,000.00 and cost of the suit;
2. Galaxy Management and Development Corp. and its
president, Col. Mariano Imperial to indemnify jointly
and severally 3rd party plaintiffs (FEU and Edilberto de

Jesus in his capacity as President of FEU) for the abovementioned amounts;

3. And the 4th party complaint is dismissed for lack of
cause of action. No pronouncement as to costs. SO
ORDERED.9
Respondents appealed to the Court of Appeals which
rendered the assailed Decision, the decretal portion of
which provides, viz:
WHEREFORE, the appeal is hereby GRANTED. The
Decision dated November 10, 2004 is hereby
REVERSED and SET ASIDE. The complaint filed by
Joseph Saludaga against appellant Far Eastern
University and its President in Civil Case No. 98-89483
is DISMISSED.SO ORDERED.10
Petitioner filed a Motion for Reconsideration which was
denied; hence, the instant petition based on the
following grounds:
THE COURT OF APPEALS SERIOUSLY ERRED IN MANNER
CONTRARY TO LAW AND JURISPRUDENCE IN RULING
THAT:
5.1. THE SHOOTING INCIDENT IS A FORTUITOUS EVENT;
5.2. RESPONDENTS ARE NOT LIABLE FOR DAMAGES
FOR THE INJURY RESULTING FROM A GUNSHOT WOUND
SUFFERED BY THE PETITIONER FROM THE HANDS OF
NO LESS THAN THEIR OWN SECURITY GUARD IN
VIOLATION
OF
THEIR
BUILT-IN
CONTRACTUAL
OBLIGATION TO PETITIONER, BEING THEIR LAW
STUDENT AT THAT TIME, TO PROVIDE HIM WITH A SAFE
AND SECURE EDUCATIONAL ENVIRONMENT;
5.3. SECURITY GAURD, ALEJANDRO ROSETE, WHO
SHOT PETITIONER WHILE HE WAS WALKING ON HIS
WAY TO THE LAW LIBRARY OF RESPONDENT FEU IS NOT
THEIR EMPLOYEE BY VIRTUE OF THE CONTRACT FOR
SECURITY SERVICES BETWEEN GALAXY AND FEU
NOTWITHSTANDING THE FACT THAT PETITIONER, NOT
BEING A PARTY TO IT, IS NOT BOUND BY THE SAME
UNDER THE PRINCIPLE OF RELATIVITY OF CONTRACTS;
and
5.4. RESPONDENT EXERCISED DUE DILIGENCE IN
SELECTING GALAXY AS THE AGENCY WHICH WOULD
PROVIDE SECURITY SERVICES WITHIN THE PREMISES
OF RESPONDENT FEU.11
Petitioner is suing respondents for damages based on
the alleged breach of student-school contract for a safe
learning environment. The pertinent portions of
petitioner's Complaint read:

6.0. At the time of plaintiff's confinement, the

defendants or any of their representative did not
bother to visit and inquire about his condition. This
abject indifference on the part of the defendants
continued even after plaintiff was discharged from the
hospital when not even a word of consolation was
heard from them. Plaintiff waited for more than one (1)
year for the defendants to perform their moral
obligation but the wait was fruitless. This indifference
and total lack of concern of defendants served to
exacerbate plaintiff's miserable condition.x x x x
11.0. Defendants are responsible for ensuring the
safety of its students while the latter are within the
University premises. And that should anything
untoward happens to any of its students while they are
within the University's premises shall be the
responsibility of the defendants. In this case,
defendants, despite being legally and morally bound,
miserably failed to protect plaintiff from injury and
thereafter, to mitigate and compensate plaintiff for said
injury;
12.0. When plaintiff enrolled with defendant FEU, a
contract was entered into between them. Under this
contract, defendants are supposed to ensure that
adequate steps are taken to provide an atmosphere
conducive to study and ensure the safety of the
plaintiff while inside defendant FEU's premises. In the
instant case, the latter breached this contract when
defendant allowed harm to befall upon the plaintiff
when he was shot at by, of all people, their security
guard who was tasked to maintain peace inside the
campus.12
In Philippine School of Business Administration v. Court
of Appeals,13 we held that:
When an academic institution accepts students for
enrollment, there is established a contract between
them, resulting in bilateral obligations which both
parties are bound to comply with. For its part, the
school undertakes to provide the student with an
education that would presumably suffice to equip him
with the necessary tools and skills to pursue higher
education or a profession. On the other hand, the
student covenants to abide by the school's academic
requirements and observe its rules and regulations.
Institutions of learning must also meet the implicit or
"built-in" obligation of providing their students with an
atmosphere that promotes or assists in attaining its
primary undertaking of imparting knowledge. Certainly,
no student can absorb the intricacies of physics or
higher mathematics or explore the realm of the arts
and other sciences when bullets are flying or grenades
exploding in the air or where there looms around the
school premises a constant threat to life and limb.
Necessarily, the school must ensure that adequate

steps are taken to maintain peace and order within the

campus premises and to prevent the breakdown
thereof.14
It is undisputed that petitioner was enrolled as a
sophomore law student in respondent FEU. As such,
there was created a contractual obligation between the
two parties. On petitioner's part, he was obliged to
comply with the rules and regulations of the school. On
the other hand, respondent FEU, as a learning
institution is mandated to impart knowledge and equip
its students with the necessary skills to pursue higher
education or a profession. At the same time, it is
obliged to ensure and take adequate steps to maintain
peace and order within the campus.
It is settled that in culpa contractual, the mere proof of
the existence of the contract and the failure of its
compliance justify, prima facie, a corresponding right
of relief.15 In the instant case, we find that, when
petitioner was shot inside the campus by no less the
security guard who was hired to maintain peace and
secure the premises, there is a prima facie showing
that respondents failed to comply with its obligation to
provide a safe and secure environment to its students.
In order to avoid liability, however, respondents aver
that the shooting incident was a fortuitous event
because they could not have reasonably foreseen nor
avoided the accident caused by Rosete as he was not
their employee;16 and that they complied with their
obligation to ensure a safe learning environment for
their students by having exercised due diligence in
selecting the security services of Galaxy.
After a thorough review of the records, we find that
respondents failed to discharge the burden of proving
that they exercised due diligence in providing a safe
learning environment for their students. They failed to
prove that they ensured that the guards assigned in
the campus met the requirements stipulated in the
Security
Service
Agreement.
Indeed,
certain
documents about Galaxy were presented during trial;
however, no evidence as to the qualifications of Rosete
as a security guard for the university was offered.
Respondents also failed to show that they undertook
steps to ascertain and confirm that the security guards
assigned to them actually possess the qualifications
required in the Security Service Agreement. It was not
proven that they examined the clearances, psychiatric
test results, 201 files, and other vital documents
enumerated in its contract with Galaxy. Total reliance
on the security agency about these matters or failure
to check the papers stating the qualifications of the
guards is negligence on the part of respondents. A
learning institution should not be allowed to completely
relinquish or abdicate security matters in its premises
to the security agency it hired. To do so would result to

contracting away its inherent obligation to ensure a

safe learning environment for its students.
Consequently,
respondents'
defense
of force
majeure must fail. In order for force majeure to be
considered, respondents must show that no negligence
or misconduct was committed that may have
occasioned the loss. An act of God cannot be invoked
to protect a person who has failed to take steps to
forestall the possible adverse consequences of such a
loss. One's negligence may have concurred with an act
of God in producing damage and injury to another;
nonetheless, showing that the immediate or proximate
cause of the damage or injury was a fortuitous event
would not exempt one from liability. When the effect is
found to be partly the result of a person's participation
- whether by active intervention, neglect or failure to
act - the whole occurrence is humanized and removed
from the rules applicable to acts of God.17
Article 1170 of the Civil Code provides that those who
are negligent in the performance of their obligations
are liable for damages. Accordingly, for breach of
contract due to negligence in providing a safe learning
environment, respondent FEU is liable to petitioner for
damages. It is essential in the award of damages that
the claimant must have satisfactorily proven during the
trial the existence of the factual basis of the damages
and its causal connection to defendant's acts.18
In the instant case, it was established that petitioner
spent P35,298.25 for his hospitalization and other
medical expenses.19 While the trial court correctly
imposed interest on said amount, however, the case at
bar involves an obligation arising from a contract and
not a loan or forbearance of money. As such, the
proper rate of legal interest is six percent (6%) per
annum of the amount demanded. Such interest shall
continue to run from the filing of the complaint until
the finality of this Decision.20 After this Decision
becomes final and executory, the applicable rate shall
be twelve percent (12%) per annum until its
satisfaction.
The other expenses being claimed by petitioner, such
as transportation expenses and those incurred in hiring
a personal assistant while recuperating were however
not duly supported by receipts. 21 In the absence
thereof, no actual damages may be awarded.
Nonetheless, temperate damages under Art. 2224 of
the Civil Code may be recovered where it has been
shown that the claimant suffered some pecuniary loss
but the amount thereof cannot be proved with
certainty. Hence, the amount of P20,000.00 as
temperate damages is awarded to petitioner.
As regards the award of moral damages, 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.22 The testimony of petitioner about his
physical suffering, mental anguish, fright, serious
anxiety, and moral shock resulting from the shooting
incident23 justify the award of moral damages.
However, moral damages are in the category of an
award designed to compensate the claimant for actual
injury suffered and not to impose a penalty on the
wrongdoer. The award is not meant to enrich the
complainant at the expense of the defendant, but to
enable the injured party to obtain means, diversion, or
amusements that will serve to obviate the moral
suffering he has undergone. It is aimed at the
restoration, within the limits of the possible, of the
spiritual status quo ante, and should be proportionate
to the suffering inflicted. Trial courts must then guard
against the award of exorbitant damages; they should
exercise balanced restrained and measured objectivity
to avoid suspicion that it was due to passion, prejudice,
or corruption on the part of the trial court. 24 We deem it
just and reasonable under the circumstances to award
petitioner moral damages in the amount of
P100,000.00.
Likewise, attorney's fees and litigation expenses in the
amount of P50,000.00 as part of damages is
reasonable in view of Article 2208 of the Civil
Code.25 However, the award of exemplary damages is
deleted considering the absence of proof that
respondents acted in a wanton, fraudulent, reckless,
oppressive, or malevolent manner.
We note that the trial court held respondent De Jesus
solidarily liable with respondent FEU. In Powton
Conglomerate, Inc. v. Agcolicol,26 we held that:
[A] corporation is invested by law with a personality
separate and distinct from those of the persons
composing it, such that, save for certain exceptions,
corporate officers who entered into contracts in behalf
of the corporation cannot be held personally liable for
the liabilities of the latter. Personal liability of a
corporate director, trustee or officer along (although
not necessarily) with the corporation may so validly
attach, as a rule, only when - (1) he assents to a
patently unlawful act of the corporation, or when he is
guilty of bad faith or gross negligence in directing its
affairs, or when there is a conflict of interest resulting
in damages to the corporation, its stockholders or
other persons; (2) he consents to the issuance of
watered down stocks or who, having knowledge
thereof, does not forthwith file with the corporate
secretary his written objection thereto; (3) he agrees to
hold himself personally and solidarily liable with the
corporation; or (4) he is made by a specific provision of
law personally answerable for his corporate action. 27

None of the foregoing exceptions was established in

the instant case; hence, respondent De Jesus should
not be held solidarily liable with respondent FEU.
Incidentally, although the main cause of action in the
instant case is the breach of the school-student
contract, petitioner, in the alternative, also holds
respondents vicariously liable under Article 2180 of the
Civil Code, which provides:
Art. 2180. The obligation imposed by Article 2176 is
demandable not only for one's own acts or omissions,
but also for those of persons for whom one is
responsible. x x x
Employers shall be liable for the damages caused by
their employees and household helpers acting within
the scope of their assigned tasks, even though the
former are not engaged in any business or industry.x x
xx
The responsibility treated of in this article shall cease
when the persons herein mentioned prove that they
observed all the diligence of a good father of a family
to prevent damage.
We agree with the findings of the Court of Appeals that
respondents cannot be held liable for damages under
Art. 2180 of the Civil Code because respondents are
not the employers of Rosete. The latter was employed
by Galaxy. The instructions issued by respondents'
Security Consultant to Galaxy and its security guards
are ordinarily no more than requests commonly
envisaged in the contract for services entered into by a
principal and a security agency. They cannot be
construed as the element of control as to treat
respondents as the employers of Rosete.28
As held in Mercury Drug Corporation v. Libunao:29
In Soliman, Jr. v. Tuazon,30 we held that where the
security agency recruits, hires and assigns the works of
its watchmen or security guards to a client, the
employer of such guards or watchmen is such agency,
and not the client, since the latter has no hand in
selecting the security guards. Thus, the duty to
observe the diligence of a good father of a family
cannot be demanded from the said client:
[I]t is settled in our jurisdiction that where the
security agency, as here, recruits, hires and assigns the
work of its watchmen or security guards, the agency is
the employer of such guards or watchmen. Liability for
illegal or harmful acts committed by the security
guards attaches to the employer agency, and not to
the clients or customers of such agency. As a general
rule, a client or customer of a security agency has no
hand in selecting who among the pool of security

guards or watchmen employed by the agency shall be

assigned to it; the duty to observe the diligence of a
good father of a family in the selection of the guards
cannot, in the ordinary course of events, be demanded
from the client whose premises or property are
protected by the security guards.x x x x
The fact that a client company may give instructions or
directions to the security guards assigned to it, does
not, by itself, render the client responsible as an
employer of the security guards concerned and liable
for their wrongful acts or omissions.31
We now come to respondents' Third Party Claim
against Galaxy. In Firestone Tire and Rubber Company
of the Philippines v. Tempengko,32 we held that:
The third-party complaint is, therefore, a procedural
device whereby a 'third party' who is neither a party
nor privy to the act or deed complained of by the
plaintiff, may be brought into the case with leave of
court, by the defendant, who acts as third-party
plaintiff to enforce against such third-party defendant a
right for contribution, indemnity, subrogation or any
other relief, in respect of the plaintiff's claim. The thirdparty complaint is actually independent of and
separate and distinct from the plaintiff's complaint.
Were it not for this provision of the Rules of Court, it
would have to be filed independently and separately
from the original complaint by the defendant against
the third-party. But the Rules permit defendant to bring
in a third-party defendant or so to speak, to litigate his
separate cause of action in respect of plaintiff's claim
against a third-party in the original and principal case
with the object of avoiding circuitry of action and
unnecessary proliferation of law suits and of disposing
expeditiously in one litigation the entire subject matter
arising from one particular set of facts.33
Respondents and Galaxy were able to litigate their
respective claims and defenses in the course of the
trial of petitioner's complaint. Evidence duly supports
the findings of the trial court that Galaxy is negligent
not only in the selection of its employees but also in
their supervision. Indeed, no administrative sanction
was imposed against Rosete despite the shooting
incident; moreover, he was even allowed to go on
leave of absence which led eventually to his
disappearance.34 Galaxy
also
failed
to
monitor
petitioner's condition or extend the necessary
assistance, other than the P5,000.00 initially given to
petitioner. Galaxy and Imperial failed to make good
their pledge to reimburse petitioner's medical
expenses.
For these acts of negligence and for having supplied
respondent FEU with an unqualified security guard,
which resulted to the latter's breach of obligation to
petitioner, it is proper to hold Galaxy liable to

respondent FEU for such damages equivalent to the

above-mentioned amounts awarded to petitioner.

CARPIO, J.:
The Case

Unlike respondent De Jesus, we deem Imperial to be

solidarily liable with Galaxy for being grossly negligent
in directing the affairs of the security agency. It was
Imperial who assured petitioner that his medical
expenses will be shouldered by Galaxy but said
representations were not fulfilled because they
presumed that petitioner and his family were no longer
interested in filing a formal complaint against them.35
WHEREFORE, the petition is GRANTED. The June 29,
2007 Decision of the Court of Appeals in CA-G.R. CV
No. 87050 nullifying the Decision of the trial court and
dismissing the complaint as well as the August 23,
2007
Resolution
denying
the
Motion
for
Reconsideration are REVERSED and SET ASIDE. The
Decision of the Regional Trial Court of Manila, Branch 2,
in Civil Case No. 98-89483 finding respondent FEU
liable for damages for breach of its obligation to
provide students with a safe and secure learning
atmosphere,
is AFFIRMED with
the
following MODIFICATIONS:
a.
respondent
Far
Eastern
University
(FEU)
is ORDERED to pay petitioner actual damages in the
amount of P35,298.25, plus 6% interest per annum
from the filing of the complaint until the finality of this
Decision. After this decision becomes final and
executory, the applicable rate shall be twelve percent
(12%) per annum until its satisfaction;
b. respondent FEU is also ORDERED to pay petitioner
temperate damages in the amount of P20,000.00;
moral damages in the amount of P100,000.00; and
attorney's fees and litigation expenses in the amount
of P50,000.00;
c. the award of exemplary damages is DELETED.
The Complaint against respondent Edilberto C. De
Jesus is DISMISSED. The counterclaims of respondents
are likewise DISMISSED.
Galaxy Development and Management Corporation
(Galaxy) and its president, Mariano D. Imperial
are ORDERED to jointly and severally pay respondent
FEU damages equivalent to the above-mentioned
amounts awarded to petitioner. SO ORDERED.

Before us is a petition for review of the

Decision[1] of the Court of Appeals dated 27 October
1998 and its Resolution dated 11 May 1999. The
assailed decision reversed the Decision [2]of the
Regional Trial Court of Manila, Branch 8, absolving
petitioner Consolidated Bank and Trust Corporation,
now known as Solidbank Corporation (Solidbank), of
any liability. The questioned resolution of the appellate
court denied the motion for reconsideration of
Solidbank but modified the decision by deleting the
award of exemplary damages, attorneys fees,
expenses of litigation and cost of suit.
The Facts
Solidbank is a domestic banking corporation
organized and existing under Philippine laws. Private
respondent L.C. Diaz and Company, CPAs (L.C. Diaz), is
a professional partnership engaged in the practice of
accounting.
Sometime in March 1976, L.C. Diaz opened a
savings account with Solidbank, designated as Savings
Account No. S/A 200-16872-6.
On 14 August 1991, L.C. Diaz through its cashier,
Mercedes Macaraya (Macaraya), filled up a savings
(cash) deposit slip for P990 and a savings (checks)
deposit slip for P50.Macaraya instructed the messenger
of L.C. Diaz, Ismael Calapre (Calapre), to deposit the
money with Solidbank. Macaraya also gave Calapre the
Solidbank passbook.
Calapre went to Solidbank and presented to Teller
No. 6 the two deposit slips and the passbook. The teller
acknowledged receipt of the deposit by returning to
Calapre the duplicate copies of the two deposit
slips. Teller No. 6 stamped the deposit slips with the
words DUPLICATE and SAVING TELLER 6 SOLIDBANK
HEAD OFFICE. Since the transaction took time and
Calapre had to make another deposit for L.C. Diaz with
Allied
Bank,
he
left
the
passbook
with
Solidbank. Calapre then went to Allied Bank. When
Calapre returned to Solidbank to retrieve the passbook,
Teller No. 6 informed him that somebody got the
passbook.[3] Calapre went back to L.C. Diaz and
reported the incident to Macaraya.

G.R. No. 138569. September 11, 2003

THE

CONSOLIDATED
BANK
and
TRUST
CORPORATION, petitioner, vs. COURT OF
APPEALS and L.C. DIAZ and COMPANY,
CPAs, respondents.

Macaraya immediately prepared a deposit slip in

duplicate copies with a check of P200,000. Macaraya,
together with Calapre, went to Solidbank and
presented to Teller No. 6 the deposit slip and
check. The teller stamped the words DUPLICATE and
SAVING TELLER 6 SOLIDBANK HEAD OFFICE on the

duplicate copy of the deposit slip. When Macaraya

asked for the passbook, Teller No. 6 told Macaraya that
someone got the passbook but she could not
remember to whom she gave the passbook. When
Macaraya asked Teller No. 6 if Calapre got the
passbook, Teller No. 6 answered that someone shorter
than Calapre got the passbook. Calapre was then
standing beside Macaraya.
Teller No. 6 handed to Macaraya a deposit slip
dated 14 August 1991 for the deposit of a check
for P90,000 drawn on Philippine Banking Corporation
(PBC). This PBC check of L.C. Diaz was a check that it
had long closed.[4] PBC subsequently dishonored the
check because of insufficient funds and because the
signature in the check differed from PBCs specimen
signature. Failing to get back the passbook, Macaraya
went back to her office and reported the matter to the
Personnel Manager of L.C. Diaz, Emmanuel Alvarez.
The following day, 15 August 1991, L.C. Diaz
through its Chief Executive Officer, Luis C. Diaz (Diaz),
called up Solidbank to stop any transaction using the
same passbook until L.C. Diaz could open a new
account.[5] On the same day, Diaz formally wrote
Solidbank to make the same request. It was also on the
same day that L.C. Diaz learned of the unauthorized
withdrawal the day before, 14 August 1991,
of P300,000 from its savings account. The withdrawal
slip for the P300,000 bore the signatures of the
authorized signatories of L.C. Diaz, namely Diaz and
Rustico L. Murillo. The signatories, however, denied
signing the withdrawal slip. A certain Noel Tamayo
received the P300,000.
In an Information[6] dated 5 September 1991, L.C.
Diaz charged its messenger, Emerano Ilagan (Ilagan)
and one Roscon Verdazola with Estafa through
Falsification of Commercial Document. The Regional
Trial Court of Manila dismissed the criminal case after
the City Prosecutor filed a Motion to Dismiss on 4
August 1992.
On 24 August 1992, L.C. Diaz through its counsel
demanded from Solidbank the return of its
money. Solidbank refused.
On 25 August 1992, L.C. Diaz filed a
Complaint[7] for Recovery of a Sum of Money against
Solidbank with the Regional Trial Court of Manila,
Branch 8. After trial, the trial court rendered on 28
December 1994 a decision absolving Solidbank and
dismissing the complaint.
L.C. Diaz then appealed[8] to the Court of Appeals.
On 27 October 1998, the Court of Appeals issued its
Decision reversing the decision of the trial court.

On 11 May 1999, the Court of Appeals issued its

Resolution denying the motion for reconsideration of
Solidbank. The appellate court, however, modified its
decision by deleting the award of exemplary damages
and attorneys fees.
The Ruling of the Trial Court
In absolving Solidbank, the trial court applied the
rules on savings account written on the passbook. The
rules state that possession of this book shall raise the
presumption of ownership and any payment or
payments made by the bank upon the production of
the said book and entry therein of the withdrawal shall
have the same effect as if made to the depositor
personally.[9]
At the time of the withdrawal, a certain Noel
Tamayo was not only in possession of the passbook, he
also presented a withdrawal slip with the signatures of
the authorized signatories of L.C. Diaz. The specimen
signatures of these persons were in the signature
cards. The teller stamped the withdrawal slip with the
words Saving Teller No. 5. The teller then passed on the
withdrawal slip to Genere Manuel (Manuel) for
authentication. Manuel verified the signatures on the
withdrawal slip. The withdrawal slip was then given to
another officer who compared the signatures on the
withdrawal slip with the specimen on the signature
cards. The trial court concluded that Solidbank acted
with care and observed the rules on savings account
when it allowed the withdrawal of P300,000 from the
savings account of L.C. Diaz.
The trial court pointed out that the burden of proof
now shifted to L.C. Diaz to prove that the signatures on
the withdrawal slip were forged. The trial court
admonished L.C. Diaz for not offering in evidence the
National Bureau of Investigation (NBI) report on the
authenticity of the signatures on the withdrawal slip
for P300,000. The trial court believed that L.C. Diaz did
not offer this evidence because it is derogatory to its
action.
Another provision of the rules on savings account
states that the depositor must keep the passbook
under lock and key.[10] When another person presents
the passbook for withdrawal prior to Solidbanks receipt
of the notice of loss of the passbook, that person is
considered as the owner of the passbook. The trial
court ruled that the passbook presented during the
questioned transaction was now out of the lock and key
and presumptively ready for a business transaction.[11]
Solidbank did not have any participation in the
custody and care of the passbook. The trial court
believed that Solidbanks act of allowing the withdrawal
of P300,000 was not the direct and proximate cause of

the loss. The trial court held that L.C. Diazs negligence
caused the unauthorized withdrawal. Three facts
establish L.C. Diazs negligence: (1) the possession of
the passbook by a person other than the depositor L.C.
Diaz; (2) the presentation of a signed withdrawal
receipt by an unauthorized person; and (3) the
possession by an unauthorized person of a PBC check
long closed by L.C. Diaz, which check was deposited on
the day of the fraudulent withdrawal.
The trial court debunked L.C. Diazs contention that
Solidbank did not follow the precautionary procedures
observed by the two parties whenever L.C. Diaz
withdrew significant amounts from its account. L.C.
Diaz claimed that a letter must accompany
withdrawals of more than P20,000. The letter must
request Solidbank to allow the withdrawal and convert
the amount to a managers check. The bearer must also
have a letter authorizing him to withdraw the same
amount. Another person driving a car must accompany
the bearer so that he would not walk from Solidbank to
the office in making the withdrawal. The trial court
pointed out that L.C. Diaz disregarded these
precautions in its past withdrawal. On 16 July 1991,
L.C. Diaz withdrew P82,554 without any separate letter
of authorization or any communication with Solidbank
that the money be converted into a managers check.
The trial court further justified the dismissal of the
complaint by holding that the case was a last ditch
effort of L.C. Diaz to recover P300,000 after the
dismissal of the criminal case against Ilagan.
The dispositive portion of the decision of the trial
court reads:
IN VIEW OF THE FOREGOING, judgment is hereby
rendered DISMISSING the complaint.
The Court further renders judgment in favor of
defendant bank pursuant to its counterclaim the
amount of Thirty Thousand Pesos (P30,000.00) as
attorneys fees.
With costs against plaintiff. SO ORDERED.
The Ruling of the Court of Appeals
The Court of Appeals ruled that Solidbanks
negligence was the proximate cause of the
unauthorized withdrawal of P300,000 from the savings
account of L.C. Diaz. The appellate court reached this
conclusion after applying the provision of the Civil Code
on quasi-delict, to wit:
Article 2176. Whoever by act or omission causes
damage to another, there being fault or negligence, is
obliged to pay for the damage done. Such fault or

negligence, if there is no pre-existing contractual

relation between the parties, is called a quasi-delict
and is governed by the provisions of this chapter.
The appellate court held that the three elements of a
quasi-delict are present in this case, namely: (a)
damages suffered by the plaintiff; (b) fault or
negligence of the defendant, or some other person for
whose acts he must respond; and (c) the connection of
cause and effect between the fault or negligence of the
defendant and the damage incurred by the plaintiff.
The Court of Appeals pointed out that the teller of
Solidbank
who
received
the
withdrawal
slip
for P300,000 allowed the withdrawal without making
the necessary inquiry. The appellate court stated that
the teller, who was not presented by Solidbank during
trial, should have called up the depositor because the
money to be withdrawn was a significant amount. Had
the teller called up L.C. Diaz, Solidbank would have
known that the withdrawal was unauthorized. The teller
did not even verify the identity of the impostor who
made the withdrawal. Thus, the appellate court found
Solidbank liable for its negligence in the selection and
supervision of its employees.
The appellate court ruled that while L.C. Diaz was
also negligent in entrusting its deposits to its
messenger and its messenger in leaving the passbook
with the teller, Solidbank could not escape liability
because of the doctrine of last clear chance. Solidbank
could have averted the injury suffered by L.C. Diaz had
it called up L.C. Diaz to verify the withdrawal.
The appellate court ruled that the degree of
diligence required from Solidbank is more than that of
a good father of a family. The business and functions of
banks are affected with public interest. Banks are
obligated to treat the accounts of their depositors with
meticulous care, always having in mind the fiduciary
nature of their relationship with their clients. The Court
of Appeals found Solidbank remiss in its duty, violating
its fiduciary relationship with L.C. Diaz.
The dispositive portion of the decision of the Court
of Appeals reads:
WHEREFORE, premises considered, the decision
appealed from is hereby REVERSED and a new one
entered.
1. Ordering defendant-appellee Consolidated Bank and
Trust Corporation to pay plaintiff-appellant the sum of
Three Hundred Thousand Pesos (P300,000.00), with
interest thereon at the rate of 12% per annum from the
date of filing of the complaint until paid, the sum
of P20,000.00 as exemplary damages, and P20,000.00

as attorneys fees and expenses of litigation as well as

the cost of suit; and
2. Ordering the dismissal of defendant-appellees
counterclaim in the amount of P30,000.00 as attorneys
fees. SO ORDERED.[13]
Acting on the motion for reconsideration of Solidbank,
the appellate court affirmed its decision but modified
the award of damages. The appellate court deleted the
award of exemplary damages and attorneys fees.
Invoking Article 2231[14] of the Civil Code, the appellate
court ruled that exemplary damages could be granted
if the defendant acted with gross negligence. Since
Solidbank was guilty of simple negligence only, the
award of exemplary damages was not justified.
Consequently, the award of attorneys fees was also
disallowed pursuant to Article 2208 of the Civil
Code. The expenses of litigation and cost of suit were
also not imposed on Solidbank.
The dispositive portion of the Resolution reads as
follows:
WHEREFORE, foregoing considered, our decision dated
October 27, 1998 is affirmed with modification by
deleting the award of exemplary damages and
attorneys fees, expenses of litigation and cost of suit.
SO ORDERED.[15]
Hence, this petition.
The Issues
Solidbank seeks the review of the decision and
resolution of the Court of Appeals on these grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONER BANK SHOULD SUFFER THE LOSS BECAUSE
ITS TELLER SHOULD HAVE FIRST CALLED PRIVATE
RESPONDENT BY TELEPHONE BEFORE IT ALLOWED THE
WITHDRAWAL OF P300,000.00 TO RESPONDENTS
MESSENGER EMERANO ILAGAN, SINCE THERE IS NO
AGREEMENT BETWEEN THE PARTIES IN THE OPERATION
OF THE SAVINGS ACCOUNT, NOR IS THERE ANY
BANKING LAW, WHICH MANDATES THAT A BANK
TELLER SHOULD FIRST CALL UP THE DEPOSITOR
BEFORE ALLOWING A WITHDRAWAL OF A BIG AMOUNT
IN A SAVINGS ACCOUNT.
II. THE COURT OF APPEALS ERRED IN APPLYING THE
DOCTRINE OF LAST CLEAR CHANCE AND IN HOLDING
THAT PETITIONER BANKS TELLER HAD THE LAST
OPPORTUNITY TO WITHHOLD THE WITHDRAWAL WHEN
IT IS UNDISPUTED THAT THE TWO SIGNATURES OF
RESPONDENT ON THE WITHDRAWAL SLIP ARE GENUINE
AND PRIVATE RESPONDENTS PASSBOOK WAS DULY
PRESENTED, AND CONTRARIWISE RESPONDENT WAS

NEGLIGENT IN THE SELECTION AND SUPERVISION OF

ITS MESSENGER EMERANO ILAGAN, AND IN THE
SAFEKEEPING OF ITS CHECKS AND OTHER FINANCIAL
DOCUMENTS.
III. THE COURT OF APPEALS ERRED IN NOT FINDING
THAT THE INSTANT CASE IS A LAST DITCH EFFORT OF
PRIVATE RESPONDENT TO RECOVER ITS P300,000.00
AFTER FAILING IN ITS EFFORTS TO RECOVER THE SAME
FROM ITS EMPLOYEE EMERANO ILAGAN.
IV. THE COURT OF APPEALS ERRED IN NOT MITIGATING
THE DAMAGES AWARDED AGAINST PETITIONER UNDER
ARTICLE 2197 OF THE CIVIL CODE, NOTWITHSTANDING
ITS FINDING THAT PETITIONER BANKS NEGLIGENCE
WAS ONLY CONTRIBUTORY.[16]
The Ruling of the Court
The petition is partly meritorious.
Solidbanks Fiduciary Duty under the Law
The rulings of the trial court and the Court of
Appeals conflict on the application of the law. The trial
court pinned the liability on L.C. Diaz based on the
provisions of the rules on savings account, a
recognition of the contractual relationship between
Solidbank and L.C. Diaz, the latter being a depositor of
the former. On the other hand, the Court of Appeals
applied the law on quasi-delict to determine who
between the two parties was ultimately negligent. The
law on quasi-delict or culpa aquiliana is generally
applicable when there is no pre-existing contractual
relationship between the parties.
We hold that Solidbank is liable for breach of
contract due to negligence, or culpa contractual.
The contract between the bank and its depositor is
governed by the provisions of the Civil Code on simple
loan.[17] Article 1980 of the Civil Code expressly
provides that x x x savings x x x deposits of money in
banks and similar institutions shall be governed by the
provisions concerning simple loan. There is a debtorcreditor relationship between the bank and its
depositor.The bank is the debtor and the depositor is
the creditor. The depositor lends the bank money and
the bank agrees to pay the depositor on demand. The
savings deposit agreement between the bank and the
depositor is the contract that determines the rights and
obligations of the parties.
The law imposes on banks high standards in view
of the fiduciary nature of banking. Section 2 of Republic
Act No. 8791 (RA 8791), [18] which took effect on 13 June
2000, declares that the State recognizes the fiduciary
nature of banking that requires high standards of

integrity and performance.[19] This new provision in the

general banking law, introduced in 2000, is a statutory
affirmation of Supreme Court decisions, starting with
the 1990 case of Simex International v. Court of
Appeals,[20] holding that the bank is under obligation
to treat the accounts of its depositors with meticulous
care, always having in mind the fiduciary nature of
their relationship.[21]
This fiduciary relationship means that the banks
obligation to observe high standards of integrity and
performance is deemed written into every deposit
agreement between a bank and its depositor. The
fiduciary nature of banking requires banks to assume a
degree of diligence higher than that of a good father of
a family. Article 1172 of the Civil Code states that the
degree of diligence required of an obligor is that
prescribed by law or contract, and absent such
stipulation then the diligence of a good father of a
family.[22] Section 2 of RA 8791 prescribes the statutory
diligence required from banks that banks must observe
high standards of integrity and performance in
servicing their depositors. Although RA 8791 took
effect almost nine years after the unauthorized
withdrawal of the P300,000 from L.C. Diazs savings
account, jurisprudence[23] at the time of the withdrawal
already imposed on banks the same high standard of
diligence required under RA No. 8791.
However, the fiduciary nature of a bank-depositor
relationship does not convert the contract between the
bank and its depositors from a simple loan to a trust
agreement, whether express or implied. Failure by the
bank to pay the depositor is failure to pay a simple
loan, and not a breach of trust. [24] The law simply
imposes on the bank a higher standard of integrity
and performance in complying with its obligations
under the contract of simple loan, beyond those
required of non-bank debtors under a similar contract
of simple loan.
The fiduciary nature of banking does not convert a
simple loan into a trust agreement because banks do
not accept deposits to enrich depositors but to earn
money for themselves. The law allows banks to offer
the lowest possible interest rate to depositors while
charging the highest possible interest rate on their own
borrowers. The interest spread or differential belongs
to the bank and not to the depositors who are
not cestui que trust of banks. If depositors are cestui
que trust of banks, then the interest spread or income
belongs to the depositors, a situation that Congress
certainly did not intend in enacting Section 2 of RA
8791.
Solidbanks
Obligation

Breach

of

its

Contractual

Article 1172 of the Civil Code provides that

responsibility
arising
from
negligence
in
the
performance of every kind of obligation is demandable.
For breach of the savings deposit agreement due to
negligence, or culpa contractual, the bank is liable to
its depositor.
Calapre left the passbook with Solidbank because
the transaction took time and he had to go to Allied
Bank for another transaction. The passbook was still in
the hands of the employees of Solidbank for the
processing of the deposit when Calapre left
Solidbank. Solidbanks rules on savings account require
that the deposit book should be carefully guarded by
the depositor and kept under lock and key, if possible.
When the passbook is in the possession of Solidbanks
tellers during withdrawals, the law imposes on
Solidbank and its tellers an even higher degree of
diligence in safeguarding the passbook.
Likewise, Solidbanks tellers must exercise a high
degree of diligence in insuring that they return the
passbook only to the depositor or his authorized
representative. The tellers know, or should know, that
the rules on savings account provide that any person in
possession of the passbook is presumptively its
owner. If the tellers give the passbook to the wrong
person, they would be clothing that person
presumptive ownership of the passbook, facilitating
unauthorized withdrawals by that person. For failing to
return the passbook to Calapre, the authorized
representative of L.C. Diaz, Solidbank and Teller No. 6
presumptively failed to observe such high degree of
diligence in safeguarding the passbook, and in insuring
its return to the party authorized to receive the same.
In culpa contractual, once the plaintiff proves a
breach of contract, there is a presumption that the
defendant was at fault or negligent. The burden is on
the defendant to prove that he was not at fault or
negligent. In contrast, in culpa aquiliana the plaintiff
has the burden of proving that the defendant was
negligent. In the present case, L.C. Diaz has
established that Solidbank breached its contractual
obligation to return the passbook only to the
authorized representative of L.C. Diaz. There is thus a
presumption that Solidbank was at fault and its teller
was negligent in not returning the passbook to
Calapre. The burden was on Solidbank to prove that
there was no negligence on its part or its employees.
Solidbank failed to discharge its burden. Solidbank
did not present to the trial court Teller No. 6, the teller
with whom Calapre left the passbook and who was
supposed to return the passbook to him. The record
does not indicate that Teller No. 6 verified the identity
of the person who retrieved the passbook. Solidbank
also failed to adduce in evidence its standard
procedure in verifying the identity of the person

retrieving the passbook, if there is such a procedure,

and that Teller No. 6 implemented this procedure in the
present case.
Solidbank is bound by the negligence of its
employees
under
the
principle
of respondeat
superior or command responsibility. The defense of
exercising the required diligence in the selection and
supervision of employees is not a complete defense
in culpa contractual, unlike in culpa aquiliana.[25]
The bank must not only exercise high standards of
integrity and performance, it must also insure that its
employees do likewise because this is the only way to
insure that the bank will comply with its fiduciary
duty. Solidbank failed to present the teller who had the
duty to return to Calapre the passbook, and thus failed
to prove that this teller exercised the high standards of
integrity and performance required of Solidbanks
employees.
Proximate
Withdrawal

Cause

of

the

Unauthorized

Another point of disagreement between the trial

and appellate courts is the proximate cause of the
unauthorized withdrawal. The trial court believed that
L.C. Diazs negligence in not securing its passbook
under lock and key was the proximate cause that
allowed the impostor to withdraw the P300,000. For the
appellate court, the proximate cause was the tellers
negligence in processing the withdrawal without first
verifying with L.C. Diaz. We do not agree with either
court.
Proximate cause is that cause which, in natural
and continuous sequence, unbroken by any efficient
intervening cause, produces the injury and without
which the result would not have occurred.[26] Proximate
cause is determined by the facts of each case upon
mixed considerations of logic, common sense, policy
and precedent.[27]
L.C. Diaz was not at fault that the passbook
landed in the hands of the impostor. Solidbank was in
possession of the passbook while it was processing the
deposit. After completion of the transaction, Solidbank
had the contractual obligation to return the passbook
only to Calapre, the authorized representative of L.C.
Diaz. Solidbank failed to fulfill its contractual obligation
because it gave the passbook to another person.
Solidbanks failure to return the passbook to
Calapre made possible the withdrawal of the P300,000
by the impostor who took possession of the
passbook. Under Solidbanks rules on savings account,
mere possession of the passbook raises the
presumption of ownership. It was the negligent act of

Solidbanks Teller No. 6 that gave the impostor

presumptive ownership of the passbook. Had the
passbook not fallen into the hands of the impostor, the
loss of P300,000 would not have happened. Thus, the
proximate cause of the unauthorized withdrawal was
Solidbanks negligence in not returning the passbook to
Calapre.
We do not subscribe to the appellate courts theory
that the proximate cause of the unauthorized
withdrawal was the tellers failure to call up L.C. Diaz to
verify the withdrawal. Solidbank did not have the duty
to call up L.C. Diaz to confirm the withdrawal. There is
no arrangement between Solidbank and L.C. Diaz to
this effect. Even the agreement between Solidbank and
L.C. Diaz pertaining to measures that the parties must
observe whenever withdrawals of large amounts are
made does not direct Solidbank to call up L.C. Diaz.
There is no law mandating banks to call up their
clients whenever their representatives withdraw
significant amounts from their accounts. L.C. Diaz
therefore had the burden to prove that it is the usual
practice of Solidbank to call up its clients to verify a
withdrawal of a large amount of money. L.C. Diaz failed
to do so.
Teller No. 5 who processed the withdrawal could
not have been put on guard to verify the
withdrawal. Prior to the withdrawal of P300,000, the
impostor deposited with Teller No. 6 theP90,000 PBC
check, which later bounced. The impostor apparently
deposited a large amount of money to deflect suspicion
from the withdrawal of a much bigger amount of
money. The appellate court thus erred when it imposed
on Solidbank the duty to call up L.C. Diaz to confirm
the withdrawal when no law requires this from banks
and when the teller had no reason to be suspicious of
the transaction.
Solidbank continues to foist the defense that
Ilagan made the withdrawal. Solidbank claims that
since Ilagan was also a messenger of L.C. Diaz, he was
familiar with its teller so that there was no more need
for the teller to verify the withdrawal. Solidbank relies
on the following statements in the Booking and
Information Sheet of Emerano Ilagan:
xxx Ilagan also had with him (before the withdrawal) a
forged check of PBC and indicated the amount of
P90,000 which he deposited in favor of L.C. Diaz and
Company. After successfully withdrawing this large sum
of money, accused Ilagan gave alias Rey (Noel Tamayo)
his share of the loot. Ilagan then hired a taxicab in the
amount of P1,000 to transport him (Ilagan) to his home
province at Bauan, Batangas.Ilagan extravagantly and
lavishly spent his money but a big part of his loot was
wasted in cockfight and horse racing. Ilagan was

apprehended and meekly

[28]
(Emphasis supplied.)

admitted

his

guilt.

L.C. Diaz refutes Solidbanks contention by pointing

out that the person who withdrew the P300,000 was a
certain Noel Tamayo. Both the trial and appellate
courts stated that this Noel Tamayo presented the
passbook with the withdrawal slip.
We uphold the finding of the trial and appellate
courts that a certain Noel Tamayo withdrew
the P300,000. The Court is not a trier of facts. We find
no justifiable reason to reverse the factual finding of
the trial court and the Court of Appeals. The tellers who
processed the deposit of the P90,000 check and the
withdrawal of the P300,000 were not presented during
trial to substantiate Solidbanks claim that Ilagan
deposited the check and made the questioned
withdrawal. Moreover, the entry quoted by Solidbank
does not categorically state that Ilagan presented the
withdrawal slip and the passbook.

of contributory negligence in allowing a withdrawal slip

signed by its authorized signatories to fall into the
hands of an impostor. Thus, the liability of Solidbank
should be reduced.
In Philippine Bank of Commerce v. Court of
Appeals,[33] where the Court held the depositor guilty
of contributory negligence, we allocated the damages
between the depositor and the bank on a 40-60
ratio. Applying the same ruling to this case, we hold
that L.C. Diaz must shoulder 40% of the actual
damages awarded by the appellate court. Solidbank
must pay the other 60% of the actual damages.
WHEREFORE, the decision of the Court of
Appeals
is AFFIRMED with MODIFICATION. Petitioner
Solidbank Corporation shall pay private respondent L.C.
Diaz and Company, CPAs only 60% of the actual
damages awarded by the Court of Appeals. The
remaining 40% of the actual damages shall be borne
by private respondent L.C. Diaz and Company,
CPAs.Proportionate costs. SO ORDERED.

Doctrine of Last Clear Chance

G.R. No. 150255. April 22, 2005
The doctrine of last clear chance states that where
both parties are negligent but the negligent act of one
is appreciably later than that of the other, or where it is
impossible to determine whose fault or negligence
caused the loss, the one who had the last clear
opportunity to avoid the loss but failed to do so, is
chargeable with the loss. [29] Stated differently, the
antecedent negligence of the plaintiff does not
preclude him from recovering damages caused by the
supervening negligence of the defendant, who had the
last fair chance to prevent the impending harm by the
exercise of due diligence.[30]
We do not apply the doctrine of last clear chance
to the present case. Solidbank is liable for breach of
contract due to negligence in the performance of its
contractual obligation to L.C. Diaz. This is a case
of culpa contractual, where neither the contributory
negligence of the plaintiff nor his last clear chance to
avoid the loss, would exonerate the defendant from
liability.[31]Such contributory negligence or last clear
chance by the plaintiff merely serves to reduce the
recovery of damages by the plaintiff but does not
exculpate the defendant from his breach of contract.[32]
Mitigated Damages
Under Article 1172, liability (for culpa contractual)
may be regulated by the courts, according to the
circumstances. This means that if the defendant
exercised the proper diligence in the selection and
supervision of its employee, or if the plaintiff was guilty
of contributory negligence, then the courts may reduce
the award of damages. In this case, L.C. Diaz was guilty

SCHMITZ
TRANSPORT
&
BROKERAGE
CORPORATION v TRANSPORT VENTURE,
INC., INDUSTRIAL INSURANCE COMPANY,
LTD., and BLACK SEA SHIPPING AND
DODWELL
now
INCHCAPE
SHIPPING
SERVICES
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. 92-63132[3] 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.
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-913747-TIS.[5]

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]
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.
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 receipt[15] 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]
Industrial Insurance faulted the defendants for
undertaking the unloading of the cargoes while
typhoon signal No. 1 was raised in Metro Manila. [17]

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:
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 than P1,000,000. 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 Resolution [27] 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 morning[39] is, however, a material fact which the
appellate court failed to properly consider and
appreciate[40] 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.x x x
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.x x x
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.x x x
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.,
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]
[46]

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.
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 handler [48] 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 1739[53] 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
checkers [54] and
a
[55]
supervisor
on board the vessel to counter-check the
operations of TVI, it failed 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 Appeals[64] 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.
G.R. NO. 146224

January 26, 2007

VIRGINIA REAL vs SISENANDO H. BELO

AUSTRIA-MARTINEZ, J.:
Before the Court is a petition for review on certiorari
under Rule 45 of the Revised Rules of Court assailing
the Resolution1 dated June 16, 2000 of the Court of
Appeals (CA) which dismissed outright the petition for
review of Virginia Real (petitioner) in CA-G.R. SP No.
58799, and the CA Resolution2 dated November 27,
2000 which denied her Motion for Reconsideration.
The facts of the case:
Petitioner owned and operated the Wasabe Fastfood
stall located at the Food Center of the Philippine
Women's University (PWU) along Taft Avenue, Malate,
Manila. Sisenando H. Belo (respondent) owned and
operated the BS Masters fastfood stall, also located at
the Food Center of PWU.
Around 7:00 o'clock in the morning of January 25,
1996, a fire broke out at petitioner's Wasabe Fastfood
stall. The fire spread and gutted other fastfood stalls in
the area, including respondent's stall. An investigation
on the cause of the fire by Fire Investigator SFO1 Arnel
C. Pinca (Pinca) revealed that the fire broke out due to
the leaking fumes coming from the Liquefied Petroleum
Gas (LPG) stove and tank installed at petitioner's stall.
For the loss of his fastfood stall due to the fire,
respondent demanded compensation from petitioner.
However, petitioner refused to accede to respondent's
demand.
Hence, respondent filed a complaint for damages
against petitioner before the Metropolitan Trial Court,
Branch 24, Manila (MeTC), docketed as Civil Case No.
152822.3 Respondent alleged that petitioner failed to
exercise due diligence in the upkeep and maintenance
of her cooking equipments, as well as the selection and
supervision of her employees; that petitioner's
negligence was the proximate cause of the fire that
gutted the fastfood stalls.4

In her Answer dated September 23, 1996, petitioner

denied liability on the grounds that the fire was a
fortuitous event and that she exercised due diligence in
the selection and supervision of her employees.5
After trial, the MeTC rendered its Decision 6 dated April
5, 1999 in favor of the respondent, the dispositive
portion of which reads:
WHEREFORE, in light of the foregoing, judgment is
hereby rendered in favor of the plaintiff and against the
defendant ordering the latter:
1) To pay the plaintiff the sum of P50,000.00
representing temperate or moderate damages; and
2) To pay the plaintiff the sum of P25,000.00 as and for
attorney's fees and litigation expenses.
The counterclaim filed by the defendant is hereby
DENIED FOR LACK OF MERIT. SO ORDERED.7
The MeTC held that the investigation conducted by the
appropriate authority revealed that the fire broke out
due to the leaking fumes coming from the LPG stove
and tank installed at petitioner's fastfood stall; that
factual circumstances did not show any sign of
interference by any force of nature to infer that the fire
occurred due to fortuitous event; that the petitioner
failed to exercise due diligence, precaution, and
vigilance in the conduct of her business, particularly, in
maintaining the safety of her cooking equipment as
well as in the selection and supervision of her
employees; that even if petitioner passes the fault to
her employees, Article 2180 of the Civil Code finds
application; that in the absence of supporting
evidence, the amount of actual damages and
unrealized profits prayed for by respondent cannot be
granted; that, nonetheless, respondent is entitled to
temperate damages since respondent sustained
pecuniary loss, though its true value cannot, from the
very nature of the case, be proved with certainty.
Dissatisfied, petitioner filed an appeal with the
Regional Trial Court, Branch 43, Manila (RTC), docketed
as Civil Case No. 99-94606, insisting that the fire was a
fortuitous event. On November 26, 1999, the RTC
affirmed the Decision of the MeTC but increased the
amount of temperate damages awarded to the
respondent from P50,000.00 to P80,000.00.8
Petitioner filed a Motion for Reconsideration contending
that the increase in the award of temperate damages is
unreasonable since she also incurred losses from the
fire.
In its Order dated April 12, 2000, the RTC denied
petitioner's Motion for Reconsideration holding that it

cannot disregard evidence showing that the fire

originated from petitioner's fastfood stall; that the
increased amount of temperate damages awarded to
respondent is not a full compensation but only a fair
approximate of what he lost due to the negligence of
petitioner's workers.9
Petitioner then filed a Petition for Review with the CA,
docketed as CA-G.R. SP No. 58799. 10 On June 16, 2000,
the CA issued a Resolution dismissing the petition for
being "procedurally flawed/deficient."11 The CA held
that the attached RTC Decision was not certified as a
true copy by the Clerk of Court; that a certified true
copy of the MeTC Decision was not attached; that
material portions of the record, such as the position
papers of the parties and affidavits of witnesses, as
would support the material allegations of the petition
were also not attached.12
On July 14, 2000, petitioner filed her Motion for
Reconsideration,13 attaching
photocopies
of
the
Decisions of the RTC and MeTC as certified correct by
the Clerk of Court.14
On November 27, 2000, the CA issued its Resolution
denying petitioner's Motion for Reconsideration.15
Hence, the present petition raising the following issues:
1. Whether the submitted certified true copy of the
appealed decision of the Regional Trial Court as
authenticated by a court employee other than the
Clerk of Court who was not around at that time said
copy was secured constitutes compliance with the
Rules?
2. Whether the submission of a certified true copy of
the Metropolitan Trial Court's judgment is still an
indispensable requirement in filing a petition for review
before the Court of Appeals despite the fact that said
judgment was already modified by the above decision
of the Regional Trial Court and it is the latter decision
that is the proper subject of the petition for review?
3. Whether the submission of copies of the respective
position papers of the contending parties is still an
indispensable requirement in filing a petition for review
before the Court of Appeals despite the fact that the
contents thereof are already quoted in the body of the
verified petition and in the subject judgment of the
Metropolitan Trial Court?
4. Whether the herein petitioner could be held liable for
damages as a result of the fire that razed not only her
own food kiosk but also the adjacent foodstalls at the
Food Center premises of the Philippine Women's
University, including that of the respondent?

5. Whether the Regional Trial Court could increase the

amount of damages awarded by the Metropolitan Trial
Court in favor of the respondent who has not even filed
an appeal therefrom?16
Petitioner submits that rules of procedure should not
be applied in a very harsh, inflexible and technically
unreasonable sense.
While admitting that the RTC Decision and Order were
not certified by the Clerk of Court himself, petitioner
insists that they were certified as authentic copies by
Administrative Officer IV Gregorio B. Paraon of the RTC.
As to the MeTC Decision, petitioner contends that the
submission of a certified true copy thereof is not an
indispensable requirement because that judgment is
not the subject of the petition for review.
In any case, petitioner submits that she
substantially complied with the requirements of
rule when she attached with her Motion
Reconsideration the copies of the Decisions of the
and MeTC as certified correct by the Clerk of Court.

had
the
for
RTC

Anent the non-submission of the position papers of the

parties, petitioner maintains that the contents of said
position papers were lengthily quoted verbatim in the
petition and in the attached copy of the MeTC Decision.
On the submission of affidavits of witnesses, petitioner
contends that it was not necessary because the case
before the MeTC was not covered by summary
proceedings.
On the merits of her petition before the CA, petitioner
avers that she should not be held liable for a fire which
was a fortuitous event since the fire could not be
foreseen and the spread of the fire to the adjacent
fastfood stalls was inevitable.
Lastly, she argues that the RTC cannot increase the
amount of temperate damages since the respondent
did not appeal from the judgment of the MeTC.
Respondent opted not to file a Comment, manifesting
that the petition contains no new arguments which
would require a comment since the arguments are but
a rehash of those raised and decided by the lower
courts.17
The Court gave due course to the petition and required
both parties to submit their respective memoranda. 18 In
compliance therewith, petitioner submitted her
Memorandum.19 On the other hand, respondent filed a
Manifestation stating that since no new issues have
been raised by the petitioner in her petition and in
order not to be redundant, he adopts as his

memorandum the memoranda he filed in the MeTC and

the RTC.20
In his Memoranda before the MeTC and RTC,
respondent emphasized the evidence he presented to
establish his cause of action against petitioner,
principally the testimony of Fire Investigator SFO1
Arnel G. Pinca stating that the fire originated from the
LPG stove and tank in petitioner's fastfood stall.
The requirements as to form and content of a petition
for review of a decision of the RTC are laid down in
Section 2 of Rule 42 of the Revised Rules of Court,
thus:
Sec. 2. Form and contents. - The petition shall be filed
in seven (7) legible copies, with the original copy
intended for the court being indicated as such by the
petitioner, and shall (a) state the full names of the
parties to the case, without impleading the lower
courts or judges thereof either as petitioners or
respondents; (b) indicate the specific material dates
showing that it was filed on time; (c) set forth concisely
a statement of the matters involved, the issues raised,
the specification of errors of fact or law, or both,
allegedly committed by the Regional Trial Court, and
the reasons or arguments relied upon for the allowance
of the appeal; (d) be accompanied by clearly legible
duplicate originals or true copies of the judgments or
final orders of both lower courts, certified correct by
the clerk of court of the Regional Trial Court, the
requisite number of plain copies thereof and of the
pleadings and other material portions of the record as
would support the allegations of the petition.
(Emphasis supplied) x x x x
Under Section 3 of the same Rule, failure to comply
with the above requirements "shall be sufficient ground
for the dismissal thereof."
However, Section 6, Rule 1 of the Revised Rules of
Court also provides that rules shall be liberally
construed in order to promote their objective of
securing a just, speedy and inexpensive disposition of
every action and proceeding. Indeed, rules of
procedure should be used to promote, not frustrate
justice.21
In the present case, petitioner's submission of copies of
the RTC Decision and Order certified as correct by the
Administrative Officer IV of the RTC is insufficient
compliance with the requirements of the rule.
Petitioner failed to show that the Clerk of Court was
officially on leave and the Administrative Officer was
officially designated as officer-in-charge. The rule is
explicit in its mandate that the legible duplicate
originals or true copies of the judgments or final orders

of both lower courts must be certified correct by the

Clerk of Court.
Nonetheless, a strict application of the rule in this case
is not called for. This Court has ruled against the
dismissal of appeals based solely on technicalities in
several cases, especially when the appellant had
substantially
complied
with
the
formal
requirements.22 There is ample jurisprudence holding
that the subsequent and substantial compliance of a
party may call for the relaxation of the rules of
procedure.23 When the CA dismisses a petition outright
and the petitioner files a motion for the reconsideration
of such dismissal, appending thereto the requisite
pleadings, documents or order/resolution, this would
constitute substantial compliance with the Revised
Rules of Court.24
Thus, in the present case, there was substantial
compliance when petitioner attached in her Motion for
Reconsideration a photocopy of the Decision of the RTC
as certified correct by the Clerk of Court of the RTC. In
like manner, there was substantial compliance when
petitioner attached, in her Motion for Reconsideration,
a photocopy of the Decision of the MeTC as certified
correct by the Clerk of Court of the RTC.
On the necessity of attaching position papers and
affidavits of witnesses, Section 2 of Rule 42 of the
Revised Rules of Court requires attachments if these
would support the allegations of the petition. 25 In the
present case, there was no compelling need to attach
the position papers of the parties since the Decisions of
the MeTC and RTC already stated their respective
arguments. As to the affidavits, the Court notes that
they were presented by the respondent as part of the
testimony of his witness Fire Investigator Pinca and
therefore would not support the allegations of the
petitioner.
Truly, in dismissing the petition for review, the CA had
committed grave abuse of discretion amounting to lack
of jurisdiction in putting a premium on technicalities at
the expense of a just resolution of the case.
The Court's pronouncement in Republic of the
Philippines v. Court of Appeals26 is worth echoing:
"cases should be determined on the merits, after full
opportunity to all parties for ventilation of their causes
and defenses, rather than on technicality or some
procedural imperfections. In that way, the ends of
justice would be better served."27Thus, what should
guide judicial action is that a party litigant is given the
fullest opportunity to establish the merits of his action
or defense rather than for him to lose life, honor or
property on mere technicalities.28

The next most logical step would then be for the Court
to simply set aside the challenged resolutions, remand
the case to the CA and direct the latter to resolve on
the merits of the petition in CA-G.R. SP No. 58799. But,
that would further delay the case. Considering the
issues raised which can be resolved on the basis of the
pleadings and documents filed, and the fact that
petitioner herself has asked the Court to decide her
petition on the merits, the Court deems it more
practical and in the greater interest of justice not to
remand the case to the CA but, instead, to resolve the
controversy once and for all.29
The Court shall now address the issue of whether the
fire was a fortuitous event.
Jurisprudence defines the elements of a "fortuitous
event" as follows: (a) the cause of the unforeseen and
unexpected occurrence must be independent of human
will; (b) it must be impossible to foresee the event
which constitutes the caso fortuito, or if it can be
foreseen, it must be impossible to avoid; (c) the
occurrence must be such as to render it impossible for
the debtor to fulfill his obligation in a normal manner;
and (d) the obligor must be free from any participation
in the aggravation of the injury resulting to the
creditor. 30
Article 1174 of the Civil Code provides that no person
shall be responsible for a fortuitous event which could
not be foreseen, or which, though foreseen, was
inevitable. In other words, there must be an entire
exclusion of human agency from the cause of injury or
loss.31
It is established by evidence that the fire originated
from leaking fumes from the LPG stove and tank
installed at petitioner's fastfood stall and her
employees failed to prevent the fire from spreading
and destroying the other fastfood stalls, including
respondent's fastfood stall. Such circumstances do not
support petitioner's theory of fortuitous event.
Petitioner's bare allegation is far from sufficient proof
for the Court to rule in her favor. It is basic in the rule
of evidence that bare allegations, unsubstantiated by
evidence, are not equivalent to proof. 32 In short, mere
allegations are not evidence.33
The Civil Code provides:
Art. 2176. Whoever by act or omission causes damage
to another, there being fault or negligence, is obliged
to pay for the damage done. x x x
Art. 2180. The obligation imposed by Article 2176 is
demandable not only for one's own acts or omissions,

but also for those of persons for whom one is

responsible. x x x
The owners and managers of an establishment or
enterprise are likewise responsible for damages caused
by their employees in the service of the branches in
which the latter are employed or on the occasion of
their functions.
Employers shall be liable for the damages caused by
their employees and household helpers acting within
the scope of their assigned tasks, even though the
former are not engaged in any business or industry. x x
xx
The responsibility treated of in this article shall cease
when the persons herein mentioned prove that they
observed all the diligence of a good father of a family
to prevent damage.
Whenever an employee's negligence causes damage
or injury to another, there instantly arises a
presumption juris tantum that the employer failed to
exercise diligentissimi patris families in the selection
(culpa in eligiendo) or supervision (culpa in vigilando)
of its employees.34 To avoid liability for a quasi-delict
committed by his employee, an employer must
overcome the presumption by presenting convincing
proof that he exercised the care and diligence of a
good father of a family in the selection and supervision
of his employee.35
In this case, petitioner not only failed to show that she
submitted proof that the LPG stove and tank in her
fastfood stall were maintained in good condition and
periodically checked for defects but she also failed to
submit proof that she exercised the diligence of a good
father of a family in the selection and supervision of
her employees. For failing to prove care and diligence
in the maintenance of her cooking equipment and in
the selection and supervision of her employees, the
necessary inference was that petitioner had been
negligent.36
As to the award of temperate damages, the increase in
the amount thereof by the RTC is improper. The RTC
could no longer examine the amounts awarded by the
MeTC since respondent did not appeal from the
Decision of the MeTC. 37 It is well-settled that a party
who does not appeal from the decision may not obtain
any affirmative relief from the appellate court other
than what he has obtained from the lower court, if any,
whose decision is brought up on appeal.38 While there
are exceptions to this rule, such as if they involve (1)
errors affecting the lower court's jurisdiction over the
subject matter, (2) plain errors not specified, and (3)
clerical errors,39 none apply here.

WHEREFORE, the petition is GRANTED. The assailed

Resolutions dated June 16, 2000 and November 27,
2000
of
the
Court
of
Appeals
are REVERSED and SET ASIDE. The Decision dated
November 26, 1999 of the Regional Trial Court, Branch
43, Manila is AFFIRMED with MODIFICATION that the
temperate
damages
awarded
is
reduced
from P80,000.00 to P50,000.00 as awarded by the
Metropolitan Trial Court, Branch 24, Manila in its
Decision dated April 5, 1999.No costs. SO ORDERED.
G.R. No. 147324

May 25, 2004

PHILIPPINE
COMMUNICATIONS
SATELLITE
CORPORATION vs GLOBE TELECOM, INC. (formerly
Globe Mckay Cable and Radio Corporation)
x-----------------------------x
GLOBE
TELECOM,
INC.
vs
PHILIPPINE
COMMUNICATION SATELLITE CORPORATION
TINGA, J.:
Before the Court are two Petitions for Review assailing
the Decision of the Court of Appeals, dated 27 February
2001, in CA-G.R. CV No. 63619.1
The facts of the case are undisputed.
For several years prior to 1991, Globe Mckay Cable and
Radio Corporation, now Globe Telecom, Inc. (Globe),
had been engaged in the coordination of the provision
of various communication facilities for the military
bases of the United States of America (US) in Clark Air
Base, Angeles, Pampanga and Subic Naval Base in Cubi
Point, Zambales. The said communication facilities
were installed and configured for the exclusive use of
the US Defense Communications Agency (USDCA), and
for security reasons, were operated only by its
personnel or those of American companies contracted
by it to operate said facilities. The USDCA contracted
with said American companies, and the latter, in turn,
contracted with Globe for the use of the
communication facilities. Globe, on the other hand,
contracted with local service providers such as the
Philippine
Communications
Satellite
Corporation
(Philcomsat) for the provision of the communication
facilities.
On 07 May 1991, Philcomsat and Globe entered into an
Agreement whereby Philcomsat obligated itself to
establish, operate and provide an IBS Standard B earth
station (earth station) within Cubi Point for the
exclusive use of the USDCA.2 The term of the contract
was for 60 months, or five (5) years. 3 In turn, Globe
promised to pay Philcomsat monthly rentals for each
leased circuit involved.4

At the time of the execution of the Agreement, both

parties knew that the Military Bases Agreement
between the Republic of the Philippines and the US
(RP-US Military Bases Agreement), which was the basis
for the occupancy of the Clark Air Base and Subic
Naval Base in Cubi Point, was to expire in 1991. Under
Section 25, Article XVIII of the 1987 Constitution,
foreign military bases, troops or facilities, which include
those located at the US Naval Facility in Cubi Point,
shall not be allowed in the Philippines unless a new
treaty is duly concurred in by the Senate and ratified
by a majority of the votes cast by the people in a
national referendum when the Congress so requires,
and such new treaty is recognized as such by the US
Government.
Subsequently, Philcomsat installed and established the
earth station at Cubi Point and the USDCA made use of
the same.
On 16 September 1991, the Senate passed and
adopted Senate Resolution No. 141, expressing its
decision not to concur in the ratification of the Treaty of
Friendship, Cooperation and Security and its
Supplementary Agreements that was supposed to
extend the term of the use by the US of Subic Naval
Base, among others.5 The last two paragraphs of the
Resolution state:
FINDING that the Treaty constitutes a defective
framework for the continuing relationship between the
two countries in the spirit of friendship, cooperation
and sovereign equality: Now, therefore, be it Resolved
by the Senate, as it is hereby resolved, To express its
decision not to concur in the ratification of the Treaty of
Friendship, Cooperation and Security and its
Supplementary Agreements, at the same time
reaffirming its desire to continue friendly relations with
the government and people of the United States of
America.6
On 31 December 1991, the Philippine Government sent
a Note Verbale to the US Government through the US
Embassy, notifying it of the Philippines termination of
the RP-US Military Bases Agreement. The Note
Verbalestated that since the RP-US Military Bases
Agreement, as amended, shall terminate on 31
December 1992, the withdrawal of all US military
forces from Subic Naval Base should be completed by
said date.
In a letter dated 06 August 1992, Globe notified
Philcomsat of its intention to discontinue the use of the
earth station effective 08 November 1992 in view of
the withdrawal of US military personnel from Subic
Naval Base after the termination of the RP-US Military
Bases Agreement. Globe invoked as basis for the letter
of termination Section 8 (Default) of the Agreement,
which provides:

Neither party shall be held liable or deemed to

be in default for any failure to perform its
obligation under this Agreement if such failure
results directly or indirectly from force majeure
or fortuitous event. Either party is thus
precluded from performing its obligation until
such force majeure or fortuitous event shall
terminate. For the purpose of this paragraph,
force majeure shall mean circumstances
beyond the control of the party involved
including, but not limited to, any law, order,
regulation, direction or request of the
Government of the Philippines, strikes or other
labor difficulties, insurrection riots, national
emergencies, war, acts of public enemies, fire,
floods, typhoons or other catastrophies or acts
of God.
Philcomsat sent a reply letter dated 10 August 1992 to
Globe, stating that "we expect [Globe] to know its
commitment to pay the stipulated rentals for the
remaining terms of the Agreement even after [Globe]
shall have discontinue[d] the use of the earth station
after November 08, 1992."7 Philcomsat referred to
Section 7 of the Agreement, stating as follows:
7. DISCONTINUANCE OF SERVICE
Should [Globe] decide to discontinue with the use of
the earth station after it has been put into operation, a
written notice shall be served to PHILCOMSAT at least
sixty (60) days prior to the expected date of
termination. Notwithstanding the non-use of the earth
station, [Globe] shall continue to pay PHILCOMSAT for
the rental of the actual number of T1 circuits in use,
but in no case shall be less than the first two (2) T1
circuits, for the remaining life of the agreement.
However, should PHILCOMSAT make use or sell the
earth station subject to this agreement, the obligation
of [Globe] to pay the rental for the remaining life of the
agreement shall be at such monthly rate as may be
agreed upon by the parties.8
After the US military forces left Subic Naval Base,
Philcomsat sent Globe a letter dated 24 November
1993 demanding payment of its outstanding
obligations under the Agreement amounting to
US$4,910,136.00 plus interest and attorneys fees.
However, Globe refused to heed Philcomsats demand.
On 27 January 1995, Philcomsat filed with the Regional
Trial Court of Makati a Complaint against Globe,
praying that the latter be ordered to pay liquidated
damages under the Agreement, with legal interest,
exemplary damages, attorneys fees and costs of suit.
The case was raffled to Branch 59 of said court.

Globe filed an Answer to the Complaint, insisting that it

was constrained to end the Agreement due to the
termination of the RP-US Military Bases Agreement and
the non-ratification by the Senate of the Treaty of
Friendship
and
Cooperation,
which
events
constituted force majeure under the Agreement. Globe
explained that the occurrence of said events exempted
it from paying rentals for the remaining period of the
Agreement.
On 05 January 1999, the trial court rendered
its Decision, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby
rendered as follows:
1. Ordering the defendant to pay the plaintiff the
amount of Ninety Two Thousand Two Hundred Thirty
Eight US Dollars (US$92,238.00) or its equivalent in
Philippine Currency (computed at the exchange rate
prevailing at the time of compliance or payment)
representing rentals for the month of December 1992
with interest thereon at the legal rate of twelve percent
(12%) per annum starting December 1992 until the
amount is fully paid;
2. Ordering the defendant to pay the plaintiff the
amount of Three Hundred Thousand (P300,000.00)
Pesos as and for attorneys fees;
3. Ordering the DISMISSAL of defendants counterclaim
for lack of merit; and
4. With costs against the defendant.
SO ORDERED. Both parties appealed
courts Decision to the Court of Appeals.

the

trial

Philcomsat claimed that the trial court erred in ruling

that: (1) the non-ratification by the Senate of the Treaty
of Friendship, Cooperation and Security and its
Supplementary
Agreements
constitutes force
majeure which exempts Globe from complying with its
obligations under the Agreement; (2) Globe is not liable
to pay the rentals for the remainder of the term of the
Agreement; and (3) Globe is not liable to Philcomsat for
exemplary damages.
Globe, on the other hand, contended that the RTC erred
in holding it liable for payment of rent of the earth
station for December 1992 and of attorneys fees. It
explained that it terminated Philcomsats services on
08 November 1992; hence, it had no reason to pay for
rentals beyond that date.
On 27 February 2001, the Court of Appeals
promulgated
its Decision dismissing
Philcomsats
appeal for lack of merit and affirming the trial courts

finding
that
certain
events
constituting force
majeure under Section 8 the Agreement occurred and
justified the non-payment by Globe of rentals for the
remainder of the term of the Agreement.
The appellate court ruled that the non-ratification by
the Senate of the Treaty of Friendship, Cooperation and
Security, and its Supplementary Agreements, and the
termination by the Philippine Government of the RP-US
Military Bases Agreement effective 31 December 1991
as stated in the Philippine Governments Note
Verbale to the US Government, are acts, directions, or
requests of the Government of the Philippines which
constitute force majeure. In addition, there were
circumstances beyond the control of the parties, such
as the issuance of a formal order by Cdr. Walter Corliss
of the US Navy, the issuance of the letter notification
from ATT and the complete withdrawal of all US military
forces and personnel from Cubi Point, which prevented
further use of the earth station under the Agreement.
However, the Court of Appeals ruled that although
Globe sought to terminate Philcomsats services by 08
November 1992, it is still liable to pay rentals for the
December 1992, amounting to US$92,238.00 plus
interest, considering that the US military forces and
personnel completely withdrew from Cubi Point only on
31 December 1992.10
Both parties filed their respective Petitions for
Review assailing the Decision of the Court of Appeals.
In G.R. No. 147324,11 petitioner Philcomsat raises the
following assignments of error:
A. THE HONORABLE COURT OF APPEALS ERRED IN
ADOPTING
A
DEFINITION
OF FORCE
MAJEUREDIFFERENT
FROM
WHAT
ITS
LEGAL
DEFINITION FOUND IN ARTICLE 1174 OF THE CIVIL
CODE, PROVIDES, SO AS TO EXEMPT GLOBE TELECOM
FROM COMPLYING WITH ITS OBLIGATIONS UNDER THE
SUBJECT AGREEMENT.
B. THE HONORABLE COURT OF APPEALS ERRED IN
RULING THAT GLOBE TELECOM IS NOT LIABLE TO
PHILCOMSAT FOR RENTALS FOR THE REMAINING TERM
OF THE AGREEMENT, DESPITE THE CLEAR TENOR OF
SECTION 7 OF THE AGREEMENT.
C. THE HONORABLE OCURT OF APPEALS ERRED IN
DELETING THE TRIAL COURTS AWARD OF ATTORNEYS
FEES IN FAVOR OF PHILCOMSAT.
D. THE HONORABLE COURT OF APPEALS ERRED IN
RULING THAT GLOBE TELECOM IS NOT LIABLE TO
PHILCOMSAT FOR EXEMPLARY DAMAGES.12

Philcomsat argues that the termination of the RP-US

Military Bases Agreement cannot be considered a
fortuitous event because the happening thereof was
foreseeable. Although the Agreement was freely
entered into by both parties, Section 8 should be
deemed ineffective because it is contrary to Article
1174 of the Civil Code. Philcomsat posits the view that
the validity of the parties definition of force majeure in
Section 8 of the Agreement as "circumstances beyond
the control of the party involved including, but not
limited to, any law, order, regulation, direction or
request of the Government of the Philippines, strikes or
other labor difficulties, insurrection riots, national
emergencies, war, acts of public enemies, fire, floods,
typhoons or other catastrophies or acts of God," should
be deemed subject to Article 1174 which defines
fortuitous events as events which could not be
foreseen, or which, though foreseen, were inevitable. 13
Philcomsat further claims that the Court of Appeals
erred in holding that Globe is not liable to pay for the
rental of the earth station for the entire term of the
Agreement because it runs counter to what was plainly
stipulated by the parties in Section 7 thereof.
Moreover, said ruling is inconsistent with the appellate
courts pronouncement that Globe is liable to pay
rentals for December 1992 even though it terminated
Philcomsats services effective 08 November 1992,
because the US military and personnel completely
withdrew from Cubi Point only in December 1992.
Philcomsat points out that it was Globe which proposed
the five-year term of the Agreement, and that the other
provisions of the Agreement, such as Section
4.114 thereof, evince the intent of Globe to be bound to
pay rentals for the entire five-year term.15
Philcomsat also maintains that contrary to the
appellate courts findings, it is entitled to attorneys
fees and exemplary damages.16
In its Comment to Philcomsats Petition, Globe asserts
that Section 8 of the Agreement is not contrary to
Article 1174 of the Civil Code because said provision
does not prohibit parties to a contract from providing
for other instances when they would be exempt from
fulfilling their contractual obligations. Globe also claims
that the termination of the RP-US Military Bases
Agreement constitutes force majeure and exempts it
from complying with its obligations under the
Agreement.17 On the issue of the propriety of awarding
attorneys fees and exemplary damages to Philcomsat,
Globe maintains that Philcomsat is not entitled thereto
because in refusing to pay rentals for the remainder of
the term of the Agreement, Globe only acted in
accordance with its rights.18
In G.R. No. 147334,19 Globe, the petitioner therein,
contends that the Court of Appeals erred in finding it
liable for the amount of US$92,238.00, representing

rentals for December 1992, since Philcomsats services

were actually terminated on 08 November 1992. 20
In its Comment, Philcomsat claims that Globes petition
should be dismissed as it raises a factual issue which is
not cognizable by the Court in a petition for review
on certiorari.21
On
15
August
2001,
the
a Resolution giving
due
Philcomsats Petition in G.R. No.

Court
course

issued
to

147324 and required the parties to submit their

respective memoranda.22
Similarly, on 20 August 2001, the Court issued
a Resolution giving due course to the Petition filed by
Globe in G.R. No. 147334 and required both parties
to submit their memoranda.23
Philcomsat
and
Globe
thereafter
filed
their
respective Consolidated
Memoranda in
the
two
cases, reiterating their arguments in their respective
petitions.
The Court is tasked to resolve the following issues: (1)
whether the termination of the RP-US Military Bases
Agreement, the non-ratification of the Treaty of
Friendship, Cooperation and Security, and the
consequent withdrawal of US military forces and
personnel
from
Cubi
Point
constitute force
majeure which would exempt Globe from complying
with its obligation to pay rentals under its Agreement
with Philcomsat; (2) whether Globe is liable to pay
rentals under the Agreement for the month of
December 1992; and (3) whether Philcomsat is entitled
to attorneys fees and exemplary damages.
No reversible error was committed by the Court of
Appeals in issuing the assailed Decision; hence the
petitions are denied.
There is no merit is Philcomsats argument that Section
8 of the Agreement cannot be given effect because the
enumeration
of
events
constituting force
majeure therein unduly expands the concept of a
fortuitous event under Article 1174 of the Civil Code
and is therefore invalid.
In support of its position, Philcomsat contends that
under Article 1174 of the Civil Code, an event must be
unforeseen in order to exempt a party to a contract
from complying with its obligations therein. It insists
that since the expiration of the RP-US Military Bases
Agreement, the non-ratification of the Treaty of
Friendship, Cooperation and Security and the
withdrawal of US military forces and personnel from
Cubi Point were not unforeseeable, but were

possibilities known to it and Globe at the time they

entered into the Agreement, such events cannot
exempt Globe from performing its obligation of paying
rentals for the entire five-year term thereof.
However, Article 1174, which exempts an obligor from
liability on account of fortuitous events or force
majeure, refers not only to events that are
unforeseeable, but also to those which are
foreseeable, but inevitable:
Art. 1174. Except in cases specified by the law, or
when it is otherwise declared by stipulation, or when
the nature of the obligation requires the assumption of
risk, no person shall be responsible for those events
which, could not be foreseen, or which, though
foreseen were inevitable.
A fortuitous event under Article 1174 may either be an
"act of God," or natural occurrences such as floods or
typhoons,24 or an "act of man," such as riots, strikes or
wars.25
Philcomsat and Globe agreed in Section 8 of the
Agreement that the following events shall be deemed
events constituting force majeure:
1. Any law, order, regulation, direction or request of the
Philippine Government;
2. Strikes or other labor difficulties;
3. Insurrection;
4. Riots;
5. National emergencies;

long as the same do not run counter to the law, morals,

good customs, public order or public policy.27
Article 1159 of the Civil Code also provides that
"[o]bligations arising from contracts have the force of
law between the contracting parties and should be
complied with in good faith."28 Courts cannot stipulate
for the parties nor amend their agreement where the
same does not contravene law, morals, good customs,
public order or public policy, for to do so would be to
alter the real intent of the parties, and would run
contrary to the function of the courts to give force and
effect thereto.29
Not being contrary to law, morals, good customs,
public order, or public policy, Section 8 of the
Agreement which Philcomsat and Globe freely agreed
upon has the force of law between them.30
In order that Globe may be exempt from noncompliance with its obligation to pay rentals under
Section 8, the concurrence of the following elements
must be established: (1) the event must be
independent of the human will; (2) the occurrence
must render it impossible for the debtor to fulfill the
obligation in a normal manner; and (3) the obligor must
be free of participation in, or aggravation of, the injury
to the creditor.31
The Court agrees with the Court of Appeals and the
trial court that the abovementioned requisites are
present in the instant case. Philcomsat and Globe had
no control over the non-renewal of the term of the RPUS Military Bases Agreement when the same expired in
1991, because the prerogative to ratify the treaty
extending the life thereof belonged to the Senate.
Neither did the parties have control over the
subsequent withdrawal of the US military forces and
personnel from Cubi Point in December 1992:

6. War;
7. Acts of public enemies;
8. Fire, floods, typhoons or other catastrophies or acts
of God;
9. Other circumstances beyond the control of the
parties.
Clearly, the foregoing are either unforeseeable, or
foreseeable but beyond the control of the parties.
There is nothing in the enumeration that runs contrary
to, or expands, the concept of a fortuitous event under
Article 1174.
Furthermore, under Article 130626 of the Civil Code,
parties to a contract may establish such stipulations,
clauses, terms and conditions as they may deem fit, as

Obviously the non-ratification by the Senate of the RPUS Military Bases Agreement (and its Supplemental
Agreements) under its Resolution No. 141. (Exhibit "2")
on September 16, 1991 is beyond the control of the
parties. This resolution was followed by the sending on
December 31, 1991 o[f] a "Note Verbale" (Exhibit
"3") by the Philippine Government to the US
Government notifying the latter of the formers
termination of the RP-US Military Bases Agreement (as
amended) on 31 December 1992 and that accordingly,
the withdrawal of all U.S. military forces from Subic
Naval Base should be completed by said date.
Subsequently, defendant [Globe] received a formal
order from Cdr. Walter F. Corliss II Commander USN
dated July 31, 1992 and a notification from ATT dated
July 29, 1992 to terminate the provision of T1s services
(via an IBS Standard B Earth Station) effective
November 08, 1992. Plaintiff [Philcomsat] was

furnished with copies of the said order and letter by the

defendant on August 06, 1992.
Resolution No. 141 of the Philippine Senate and the
Note Verbale of the Philippine Government to the US
Government are acts, direction or request of the
Government of the Philippines and circumstances
beyond the control of the defendant. The formal order
from Cdr. Walter Corliss of the USN, the letter
notification from ATT and the complete withdrawal of
all the military forces and personnel from Cubi Point in
the year-end 1992 are also acts and circumstances
beyond the control of the defendant.
Considering the foregoing, the Court finds and so holds
that the afore-narrated circumstances constitute "force
majeure or fortuitous event(s) as defined under
paragraph 8 of the Agreement.
From the foregoing, the Court finds that the defendant
is exempted from paying the rentals for the facility for
the remaining term of the contract.
As a consequence of the termination of the RP-US
Military Bases Agreement (as amended) the continued
stay of all US Military forces and personnel from Subic
Naval Base would no longer be allowed, hence, plaintiff
would no longer be in any position to render the
service it was obligated under the Agreement. To put it
blantly (sic), since the US military forces and personnel
left or withdrew from Cubi Point in the year end
December 1992, there was no longer any necessity for
the plaintiff to continue maintaining the IBS
facility. 32 (Emphasis in the original.)
The aforementioned events made impossible the
continuation of the Agreement until the end of its fiveyear term without fault on the part of either party. The
Court of Appeals was thus correct in ruling that the
happening of such fortuitous events rendered Globe
exempt from payment of rentals for the remainder of
the term of the Agreement.
Moreover, it would be unjust to require Globe to
continue paying rentals even though Philcomsat cannot
be compelled to perform its corresponding obligation
under the Agreement. As noted by the appellate court:
We also point out the sheer inequity of PHILCOMSATs
position. PHILCOMSAT would like to charge GLOBE
rentals for the balance of the lease term without there
being any corresponding telecommunications service
subject of the lease. It will be grossly unfair and
iniquitous to hold GLOBE liable for lease charges for a
service that was not and could not have been rendered
due to an act of the government which was clearly
beyond GLOBEs control. The binding effect of a
contract on both parties is based on the principle that

the obligations arising from contracts have the force of

law between the contracting parties, and there must be
mutuality between them based essentially on their
equality under which it is repugnant to have one party
bound by the contract while leaving the other party
free therefrom (Allied Banking Corporation v. Court
of Appeals, 284 SCRA 357).33
With respect to the issue of whether Globe is liable for
payment of rentals for the month of December 1992,
the Court likewise affirms the appellate courts ruling
that Globe should pay the same.
Although Globe alleged that it terminated the
Agreement with Philcomsat effective 08 November
1992 pursuant to the formal order issued by Cdr.
Corliss of the US Navy, the date when they actually
ceased using the earth station subject of the
Agreement
was
not
established
during
the
trial.34 However, the trial court found that the US
military forces and personnel completely withdrew
from Cubi Point only on 31 December 1992. 35 Thus,
until that date, the USDCA had control over the earth
station and had the option of using the same.
Furthermore, Philcomsat could not have removed or
rendered ineffective said communication facility until
after 31 December 1992 because Cubi Point was
accessible only to US naval personnel up to that time.
Hence, the Court of Appeals did not err when it
affirmed the trial courts ruling that Globe is liable for
payment of rentals until December 1992.
Neither did the appellate court commit any error in
holding that Philcomsat is not entitled to attorneys
fees and exemplary damages.
The award of attorneys fees is the exception rather
than the rule, and must be supported by factual, legal
and equitable justifications.36 In previously decided
cases, the Court awarded attorneys fees where a party
acted in gross and evident bad faith in refusing to
satisfy the other partys claims and compelled the
former to litigate to protect his rights;37 when the
action filed is clearly unfounded, 38 or where moral or
exemplary damages are awarded.39 However, in cases
where both parties have legitimate claims against each
other and no party actually prevailed, such as in the
present case where the claims of both parties were
sustained in part, an award of attorneys fees would
not be warranted.40
Exemplary damages may be awarded in cases
involving contracts or quasi-contracts, if the erring
party acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner. 41 In the present
case, it was not shown that Globe acted wantonly or
oppressively in not heeding Philcomsats demands for
payment of rentals. It was established during the trial
of the case before the trial court that Globe had valid

grounds for refusing to comply with its contractual

obligations after 1992.
WHEREFORE, the Petitions are DENIED for lack of
merit. The assailed Decision of the Court of Appeals in
CA-G.R. CV No. 63619 is AFFIRMED. SO ORDERED.
G.R. No. 117009 October 11, 1995
SECURITY BANK & TRUST COMPANY and ROSITO
C.
MANHIT
vs. COURT OF APPEALS and YSMAEL C. FERRER
PADILLA, J.:

on the part of the contractor whatsoever or any act of

the government and its instrumentalities which directly
or indirectly affects the increase of the cost of the
project, OWNER shall equitably make the appropriate
adjustment on mutual agreement of both parties.
Ysmael C. Ferrer then filed a complaint for breach of
contract with damages. The trial court ruled for Ferrer
and ordered defendants SBTC and Rosito C. Manhit to
pay:
a) P259,417.23 for the increase in price of labor and
materials plus 12% interest thereon per annumfrom 15
August 1980 until fully paid;

In this petition for review under Rule 45 of the Rules of

Court, petitioners seek a review and reversal of the
decision * of respondent Court of Appeals in CA-G.R. CV
No. 40450, entitled "Ysmael C. Ferrer v. Security Bank
and Trust Company, et. al." dated 31 August 1994,
which affirmed the decision ** of the Regional Trial
Court, Branch 63, Makati in Civil Case No. 42712, a
complaint for breach of contract with damages.

b) P24,000.00 as actual damages;

Private respondent Ysmael C. Ferrer was contracted by

herein petitioners Security Bank and Trust Company
(SBTC) and Rosito C. Manhit to construct the building of
SBTC in Davao City for the price of P1,760,000.00. The
contract dated 4 February 1980 provided that Ferrer
would finish the construction in two hundred (200)
working days. Respondent Ferrer was able to complete
the construction of the building on 15 August 1980
(within the contracted period) but he was compelled by
a drastic increase in the cost of construction materials
to incur expenses of about P300,000.00 on top of the
original cost. The additional expenses were made
known to petitioner SBTC thru its Vice-President Fely
Sebastian and Supervising Architect Rudy de la Rama
as early as March 1980. Respondent Ferrer made
timely demands for payment of the increased cost.
Said demands were supported by receipts, invoices,
payrolls and other documents proving the additional
expenses.

f) costs of suit.

In March 1981, SBTC thru Assistant Vice-President

Susan Guanio and a representative of an architectural
firm consulted by SBTC, verified Ferrer's claims for
additional cost. A recommendation was then made to
settle Ferrer's claim but only for P200,000.00. SBTC,
instead of paying the recommended additional amount,
denied ever authorizing payment of any amount
beyond the original contract price. SBTC likewise
denied any liability for the additional cost based on
Article IX of the building contract which states:
If at any time prior to the completion of the work to be
performed hereunder, increase in prices of construction
materials and/or labor shall supervene through no fault

c) P20,000.00 as moral damages;

d) P20,000.00 as exemplary damages;
e) attorney's fees equivalent to 25% of the principal
amount due; and

On appeal, the Court of Appeals affirmed the trial court

decision.
In the present petition for review, petitioners assign the
following errors to the appellate court:
. . . IN HOLDING THAT PLAINTIFF-APPELLEE HAS, BY
PREPONDERANCE OF EVIDENCE SUFFICIENTLY PROVEN
HIS CLAIM AGAINST THE DEFENDANTS-APPELLANTS.
. . . IN INTERPRETING AN OTHERWISE CLEAR AND
UNAMBIGUOUS PROVISION OF THE CONSTRUCTION
CONTRACT.
. . . IN DISREGARDING THE EXPRESS PROVISION OF
THE CONSTRUCTION CONTRACT, THE LOWER COURT
VIOLATED
DEFENDANTS-APPELLANTS'
CONSTITUTIONAL GUARANTY OF NON IMPAIRMENT OF
THE OBLIGATION OF CONTRACT. 1
Petitioners argue that under the aforequoted Article IX
of the building contract, any increase in the price of
labor and/or materials resulting in an increase in
construction cost above the stipulated contract price
will not automatically make petitioners liable to pay for
such increased cost, as any payment above the
stipulated contract price has been made subject to the
condition that the "appropriate adjustment" will be
made "upon mutual agreement of both parties". It is
contended that since there was no mutual agreement
between the parties, petitioners' obligation to pay

amounts above the original contract price never

materialized.
Respondent Ysmael C. Ferrer, through counsel, on the
other hand, opposed the arguments raised by
petitioners. It is of note however that the pleadings
filed with this Court by counsel for Ferrer hardly refute
the arguments raised by petitioners, as the contents of
said pleadings are mostly quoted portions of the
decision of the Court of Appeals, devoid of adequate
discussion of the merits of respondent's case. The
Court, to be sure, expects more diligence and legal
know-how from lawyers than what has been exhibited
by counsel for respondent in the present case. Under
these circumstances, the Court had to review the entire
records of this case to evaluate the merits of the issues
raised by the contending parties.
Article 22 of the Civil Code which embodies the
maxim, Nemo
ex
alterius
incommodo
debet
lecupletari (no man ought to be made rich out of
another's injury) states:
Art. 22. Every person who through an act of
performance by another, or any other means, acquires
or comes into possession of something at the expense
of the latter without just or legal ground, shall return
the same to him.
The above-quoted article is part of the chapter of the
Civil Code on Human Relations, the provisions of which
were formulated as "basic principles to be observed for
the rightful relationship between human beings and for
the stability of the social order, . . . designed to
indicate certain norms that spring from the fountain of
good conscience, . . . guides for human conduct [that]
should run as golden threads through society to the
end that law may approach its supreme ideal which is
the sway and dominance of justice." 2
In the present case, petitioners' arguments to support
absence of liability for the cost of construction beyond
the original contract price are not persuasive.
Under the previously quoted Article IX of the
construction contract, petitioners would make the
appropriate adjustment to the contract price in case
the cost of the project increases through no fault of the
contractor (private respondent). Private respondent
informed petitioners of the drastic increase in
construction cost as early as March 1980.
Petitioners in turn had the increased cost evaluated
and audited. When private respondent demanded
payment of P259,417.23, petitioner bank's VicePresident Rosito C. Manhit and the bank's architectural
consultant were directed by the bank to verify and
compute private respondent's claims of increased cost.

A recommendation was then made to settle private

respondent's claim for P200,000.00. Despite this
recommendation and several demands from private
respondent, SBTC failed to make payment. It denied
authorizing anyone to make a settlement of private
respondent's claim and likewise denied any liability,
contending that the absence of a mutual agreement
made private respondent's demand premature and
baseless.
Petitioners' arguments are specious.
It is not denied that private respondent incurred
additional expenses in constructing petitioner bank's
building due to a drastic and unexpected increase in
construction cost. In fact, petitioner bank admitted
liability for increased cost when a recommendation was
made to settle private respondent's claim for
P200,000.00. Private respondent's claim for the
increased amount was adequately proven during the
trial by receipts, invoices and other supporting
documents.
Under Article 1182 of the Civil Code, a conditional
obligation shall be void if its fulfillment depends upon
the sole will of the debtor. In the present case, the
mutual agreement, the absence of which petitioner
bank relies upon to support its non-liability for the
increased construction cost, is in effect a condition
dependent on petitioner bank's sole will, since private
respondent would naturally and logically give consent
to such an agreement which would allow him recovery
of the increased cost.
Further, it cannot be denied that petitioner bank
derived benefits when private respondent completed
the construction even at an increased cost.
Hence, to allow petitioner bank to acquire the
constructed building at a price far below its actual
construction cost would undoubtedly constitute unjust
enrichment for the bank to the prejudice of private
respondent. Such unjust enrichment, as previously
discussed, is not allowed by law.
Finally, with respect to the award of attorney's fees to
respondent, the Court has previously held that, "even
with the presence of an agreement between the
parties, the court may nevertheless reduce attorney's
fees though fixed in the contract when the amount
thereof
appears
to
be
unconscionable
or
unreasonable." 3 As previously noted, the diligence and
legal know-how exhibited by counsel for private
respondent hardly justify an award of 25% of the
principal amount due, which would be at least
P60,000.00. Besides, the issues in this case are far
from complex and intricate. The award of attorney's
fees is thus reduced to P10,000.00.

WHEREFORE, with the above modification in respect of

the amount of attorney's fees, the appealed decision of
the Court of Appeals in CA G.R. CV No. 40450 is
AFFIRMED. SO ORDERED.
G.R. No. 174012

November 14, 2008

MACTAN-CEBU
INTERNATIONAL
AIRPORT
AUTHORITY
vs.
BENJAMIN TUDTUD, BIENVENIDO TUDTUD, DAVID
TUDTUD, JUSTINIANO BORGA, JOSE BORGA, and
FE
DEL
ROSARIO,
represented
by
LYDIA
ADLAWAN, Attorney-in-fact
CARPIO MORALES, J.:
The predecessors-in-interest of respondents Benjamin
Tudtud et al. were the owners of a parcel of land in
Cebu City, identified as Lot No. 988 of the Banilad
Estate and covered by Transfer Certificate of Title (TCT)
No. 27692.
In 1949, the National Airports Corporation (NAC), a
public corporation of the Republic of the Philippines,
embarked on a program to expand the Cebu Lahug
Airport. For this purpose, it sought to acquire, by
negotiated sale or expropriation, several lots adjoining
the then existing airport.
By virtue of a judgment rendered by the third branch of
the Court of First Instance in Civil Case No. R-1881, the
NAC acquired Lot No. 988, among other lots. TCT No.
26792 covering Lot No. 988 was thus cancelled and
TCT No. 27919 was issued in its stead in the name of
the Republic of the Philippines. No structures related to
the operation of the Cebu Lahug Airport were
constructed on Lot No. 988.
Lot No. 988 was later transferred to the Air Transport
Office (ATO), and still later to petitioner Mactan Cebu
International Airport Authority (MCIAA) in 1990 via
Republic Act No. 6958.
When the Mactan International Airport at Lapu Lapu
City was opened for commercial flights, the Cebu
Lahug Airport was closed and abandoned and a
significant area thereof was purchased by the Cebu
Property Ventures, Inc. for development as a
commercial complex.
By letter of October 7, 1996 to the general manager of
the MCIAA, Lydia Adlawan, acting as attorney-in-fact of
the original owners of Lot No. 988, demanded to
repurchase the lot at the same price paid at the time of
the taking, without interest, no structures or
improvements having been erected thereon and the
Cebu Lahug Airport having been closed and

abandoned, hence, the purpose for which the lot was

acquired no longer existed.1
As the demand remained unheeded, respondents,
represented by their attorney-in-fact Lydia Adlawan,
filed a Complaint2 before the Regional Trial Court (RTC)
of Cebu City, docketed as Civil Case No. CEB-19464,
for reconveyance and damages with application for
preliminary injunction/restraining order against the
MCIAA.
Respondents anchored their complaint on the
assurance they claimed was made by the NAC that the
original owners and/or their successors-in-interest
would be entitled to repurchase the lot when and in the
event that it was no longer used for airport purposes. 3
In its Answer with Counterclaim,4 the MCIAA countered
that, inter alia, the decision in Civil Case No. R-1881 did
not lay any condition that the lots subject of
expropriation would revert to their owners in case the
expansion of the Cebu Lahug Airport would not
materialize.5
To prove their claim, respondents presented witnesses
who
testified
that
the
NAC
promised
their
predecessors-in-interest-original owners of Lot No. 988
that it would be returned to them should the expansion
of the Cebu Lahug Airport not materialize. 6 And
respondents invoked this Court's ruling in MCIAA v.
Court of Appeals7 involving another lot acquired by the
NAC for the expansion of the Cebu Lahug Airport. In
that case, although the deed of sale between the
therein respondent Melba Limbaco's predecessor-ininterest and NAC did not contain a provision for the
repurchase of the therein subject lot should the
purpose for its acquisition ceased to exist, this Court
allowed Melba Limbaco to recover the lot based on
parole evidence that the NAC promised the right of
repurchase to her predecessor-in-interest.8
The MCIAA disputed the applicability to the present
case of the immediately-cited MCIAA ruling, the NAC
having acquired Lot No. 988 not by a deed of sale but
by
virtue
of
a
final judicial
decree
of
expropriation which cannot be modified by parole
evidence.9
After trial, Branch 20 of the Cebu City RTC rendered
judgment in favor of respondents, disposing as follows:
WHEREFORE, premises considered, judgment is hereby
rendered
in
favor
of
plaintiffs
as
against
defendant ordering the latter to reconvey the entire
subject
real
property covered
by
T.C.T.
No.
27919 within 15 days from receipt of this decision. SO
ORDERED.10 (Underscoring supplied)

On appeal,11 the Court of Appeals, by Decision of May

8, 200612 affirmed the RTC decision. Its Motion for
Reconsideration13 having been denied,14 the MCIAA
filed the present petition,15 faulting the appellate court
in "disregarding" the following considerations:
I.THE JUDGMENT OF EXPROPRIATION IN CIVIL CASE NO.
R-1881 WAS ABSOLUTE AND UNCONDITIONAL.
II. RESPONDENTS' CLAIM OF ALLEGED VERBAL
ASSURANCES FROM THE GOVERNMENT VIOLATES THE
STATUTE OF FRAUDS.
III.
THE
BEST
EVIDENCE
SHOWING
THE UNCONDITIONAL ACQUISITION OF LOT 988 IS THE
CERTIFICATE OF TITLE.16 (Underscoring supplied)
In insisting that the judgment in Civil Case No. R-1881
was absolute and unconditional, the MCIAA cites Fery
v. Municipality of Cabanatuan17 which held that:
x x x If x x x the decree of expropriation gives to the
entity a fee simple title, then, of course, the land
becomes the absolute property of the expropriator,
whether it be the State, a province, or municipality,
and in that case the non-user does not have the effect
of defeating the title acquired by the expropriation
proceedings.
When land has been acquired for public use in fee
simple, unconditionally, either by the exercise of
eminent domain or by purchase, the former owner
retains no rights in the land, and the public use may be
abandoned, or the land may be devoted to a different
use, without any impairment of the estate or title
acquired,
or
any
reversion
to
the
former
owner.18 (Italics in the original; underscoring supplied)
MCIAA in fact offers the text of the trial court's decision
in R-1881, inviting attention to the dispositive portion
thereof, to prove that the judgment of expropriation
entered in favor of the government is absolute and
unconditional, and that there is nothing in the decision
that would show that the government made any
assurance or stipulation whatsoever to reconvey the
subject lot in case the expansion of the Lahug airport
would not materialize.19
But also in Fery, this Court, passing on the question of
whether a private land which is expropriated for a
particular public use, but which particular public use is
abandoned, may be returned to its former owner, held:
The answer to that question depends upon the
character of the title acquired by the expropriator x x
x. If, for example, land is expropriated for a particular
purpose, with the condition that when that purpose is
ended or abandoned the property shall return to its

former owner, then, of course, when the purpose is

terminated or abandoned, the former owner reacquires
the property so expropriated. If, for example, land is
expropriated for a public street and the expropriation is
granted upon conditions that the city can only use it for
a public street, then, of course, when the city abandons
its use as a public street, it returns to the former
owner, unless there is some statutory provision to the
contrary.20 (Underscoring supplied)
That nothing in the trial court's decision in Civil Case
No. R-1881 indicates a condition attached to the
expropriation of the subject lot, this Court, in Heirs of
Timoteo Moreno v. MCIAA21 involving the rights of
another former owner of lots also involved in Civil Case
No. R-1881, noting the following portion of the body of
the said trial court's decision:
As for the public purpose of the expropriation
proceeding, it cannot now be doubted. Although the
Mactan Airport is being constructed, it does not take
away the actual usefulness and importance of the
Lahug Airport: it is handling the air traffic both civilian
and military. From it aircrafts fly to Mindanao and
Visayas and pass through it on their return flights to
the North and Manila. Then, no evidence was adduced
to show how soon is the Mactan Airport to be placed in
operation and whether the Lahug Airport will be closed
immediately thereafter. It is for the other departments
of the Government to determine said matters. The
Court cannot substitute its judgment for those of the
said departments and agencies. In the absence of such
a showing, the Court will presume that the Lahug
Airport will continue to be in operation, 22
held: While the trial court in Civil Case No. R-1881
could have simply acknowledged the presence of
public purpose for the exercise of eminent domain
regardless of the survival of Lahug Airport, the trial
court in its Decision chose not to do so but instead
prefixed its finding of public purpose upon its
understanding that "Lahug Airport will continue to be
in operation." Verily, these meaningful statements in
the body of the Decision warrant the conclusion that
the expropriated properties would remain to be so until
it was confirmed that Lahug Airport was no longer "in
operation". This inference further implies two (2)
things: (a) after the Lahug Airport ceased its
undertaking as such and the expropriated lots were not
being used for any airport expansion project, the
rights vis--vis the expropriated Lots Nos. 916 and 920
as between the State and their former owners,
petitioners herein, must be equitably adjusted; and,
(b) the foregoing unmistakable declarations in
the body of the Decision should merge with and
become
an
intrinsic
part
of
the fallo thereof which under the premises is
clearly inadequate since the dispositive portion

is not in accord with the findings as contained in

the body thereof.23
On the Heirs of Moreno's motion for reconsideration,
this Court affirmed its decision, emphasizing that
"the fallo of the decision in Civil Case No. R-1881 must
be read in reference to the other portions of the
decision in which it forms a part[,]"24 and that "[a]
reading of the Court's judgment must not be confined
to the dispositive portion alone; rather, it should
be meaningfully construed in unanimity with the ratio
decidendi thereof to grasp the true intent and meaning
of a decision."25
The MCIAA goes on, however, to cite MCIAA v. Court of
Appeals and Chiongbian26 wherein this Court rejected
testimonial evidence of an assurance of a right to
repurchase property acquired by the NAC under the
judgment in still the same Civil Case No. R-1881. The
MCIAA's reliance on this case is misplaced. As this
Court noted in Heirs of Timoteo Moreno v. MCIAA,27 the
respondent Chiongbianput forth inadmissible and
inconclusive evidence, Chiongbian's testimony as well
as that of her witness as to the existence of the
agreement being hearsay.28
In contrast, in the case at bar, respondents' witness
respondent Justiniano Borga himself, who represented
his mother-one of the original owners of subject lot
during the negotiations between the NAC and the
landowners, declared that the original owners did not
oppose the expropriation of the lot upon the assurance
of the NAC that they would reacquire it if it is no longer
needed by the airport.29
Another witness for respondent, Eugenio Amores, an
employee of the NAC, declared that in the course of
some meetings with the landowners when he
accompanied the NAC legal team and was requested to
jot down what transpired thereat, he personally heard
the NAC officials give the assurance claimed by
respondents.30
The MCIAA nevertheless urges this Court to reject
respondents' testimonial evidence, citing Article 1403
(2)(e) of the Civil Code which places agreements for
the sale of real property or an interest therein within
the coverage of the Statute of Frauds.

prevent fraud. However, if a contract has been totally

or partially performed, the exclusion of parol evidence
would promote fraud or bad faith, for it would enable
the defendant to keep the benefits already delivered
by him from the transaction in litigation, and, at the
same time, evade the obligations, responsibilities or
liabilities
assumed
or
contracted
by
him
thereby.33 (Underscoring supplied)
A word on MCIAA's argument that MCIAA v. Court of
Appeals, supra, does not apply to the present case. As
reflected in the earlier-quoted ruling in Fery, the mode
of acquisition for public purpose of a land - whether by
expropriation or by contract - is not material in
determining whether the acquisition is with or without
condition.
In fine, the decision in favor of respondents must be
affirmed. The rights and duties between the MCIAA and
respondents are governed by Article 1190 of the Civil
Code34 which provides:
When the conditions have for their purpose the
extinguishment of an obligation to give, the parties,
upon the fulfillment of said conditions, shall return to
each other what they have received.
In case of the loss, deterioration, or improvement of
the thing, the provisions which, with respect to the
debtor, are laid down in the preceding article [Article
1189] shall be applied to the party who is bound to
return.x x x x
While the MCIAA is obliged to reconvey Lot No. 988 to
respondents, respondents must return to the MCIAA
what they received as just compensation for the
expropriation of Lot No. 988, plus legal interest to be
computed from default,35 which in this case runs from
the time the MCIAA complies with its obligation to the
respondents.36
Respondents must likewise pay the MCIAA the
necessary expenses it may have incurred in sustaining
Lot No. 988 and the monetary value of its services in
managing it to the extent that respondents were
benefited thereby.

The Statute of Frauds applies, however, only to

executory contracts.31 It does not apply to contracts
which
have
been
completely
or
partially
performed,32 the rationale thereof being as follows:

Following Article 118737 of the Civil Code, the MCIAA

may keep whatever income or fruits it may have
obtained from Lot No. 988, and respondents need not
account for the interests that the amounts they
received as just compensation may have earned in the
meantime.

x x x In executory contracts there is a wide field for

fraud because unless they be in writing there is no
palpable evidence of the intention of the contracting
parties. The statute has precisely been enacted to

In accordance with the earlier-quoted Article 1190 of

the Civil Code vis--vis Article 1189 which provides that
"[i]f a thing is improved by its nature, or by time, the
improvement shall inure to the benefit of the creditor x

x x," respondents, as creditors, do not have to settle as

part of the process of restitution the appreciation in
value of Lot 988 which is a natural consequence of
nature and time.
WHEREFORE, the petition is, in light of the foregoing
disquisition, DENIED. The May 8, 2006 Decision of the
Court of Appeals affirming that of Branch 20 of the
Cebu City Regional Trial Court is AFFIRMED with
MODIFICATION as follows:
1. Respondents are ORDERED to return to the MCIAA
the just compensation they received for the
expropriation of Lot No. 988 plus legal interest in the
case of default, to be computed from the time the
MCIAA complies with its obligation to reconvey Lot No.
988 to them;
2. Respondents are ORDERED to pay the MCIAA the
necessary expenses it incurred in sustaining Lot No.
988 and the monetary value of its services to the
extent that respondents were benefited thereby;
3. The MCIAA is ENTITLED to keep whatever fruits and
income it may have obtained from Lot No. 988; and
4. Respondents are also ENTITLED to keep whatever
interests the amounts they received as just
compensation may have earned in the meantime, as
well as the appreciation in value of Lot No. 988 which is
a natural consequence of nature and time;
In light of the foregoing modifications, the case is
REMANDED to Branch 20 the Regional Trial Court of
Cebu City only for the purpose of receiving evidence on
the amounts that respondents will have to pay to the
MCIAA in accordance with this Court's decision. SO
ORDERED.
G.R. No. 23769

September 16, 1925

SONG FO & COMPANY vs HAWAIIAN PHILIPPINE

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

a total of P35,317.93, with legal interest from the date

of the presentation of the complaint, and with costs.
From the judgment of the Court of First Instance the
defendant only has appealed. In this court it has made
the following assignment of errors: "I. The lower court
erred in finding that appellant had agreed to sell to the
appellee 400,000, and not only 300,000, gallons of
molasses. II. The lower court erred in finding that the
appellant rescinded without sufficient cause the
contract for the sale of molasses executed by it and
the appellee. III. The lower court erred in rendering
judgment in favor of the appellee and not in favor of
the appellant in accordance with the prayer of its
answer and cross-complaint. IV. The lower court erred
in denying appellant's motion for a new trial." The
specified errors raise three questions which we will
consider in the order suggested by the appellant.
1. Did the defendant agree to sell to the plaintiff
400,000 gallons of molasses or 300,000 gallons of
molasses? The trial court found the former amount to
be correct. The appellant contends that the smaller
amount was the basis of the agreement.
The contract of the parties is in writing. It is found
principally in the documents, Exhibits F and G. The First
mentioned exhibit is a letter addressed by the
administrator of the Hawaiian-Philippine Co. to Song Fo
& Company on December 13, 1922. It reads:

SILAY,

Messrs.
Iloilo, Iloilo.

OCC.
NEGROS,
December 13, 1922

SONG

FO

AND

P.I.

CO.

DEAR SIRS: Confirming our conversation we had today

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

Regarding the payment for our molasses, Mr. Song Fo

gave us to understand that you would pay us at the
end of each month for molasses delivered to you.
Hoping that this is satisfactory and awaiting your
answer regarding this matter, we remain.
Yours very truly,

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

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

HAWAIIAN-PHILIPPINE
BY
Administrator.

Exhibit G is the
answer
of
the
manager of Song
Fo & Company to
the
HawaiianPhilippine Co. on
December
16,
1922. This letter
reads:

confirm all the arrangements you have stated and in

order to make the contract clear, we hereby quote
below our old contract as amended, as per our new
arrangements.

R.

Date of delivery

C.

COMPANY
PITCAIRN

(c) For services of one locomotive and flat cars

necessary for our six tanks at the rate of P48 for the
round trip dock to central and central to dock. This
service to be restricted to one trip for the six tanks.

Account and date thereof

Date of receipt
of account by
plaintiff

Date
payment

1922

1923

FO
&
COMPANY
__________________________
Manager.
1923

P206.16

Dec. 26/22

Jan. 5

Feb. 20

206.16

Jan. 3/23

do

Do

Jan. 5

206.16

Jan. 9/23

Mar. 7 or 8

Mar. 31

Feb. 12

206.16

Mar. 12/23

do

Do

Feb. 27

206.16

do

do

Do

Mar. 5

206.16

do

do

Do

Mar. 16

206.16

Mar. 20/23

Apr. 2/23

Apr. 19

Mar. 24

206.16

Mar. 31/23

do

Do

Mar. 29

206.16

do

do

Do

December 16th, 1922.

Dec. 29

DEAR SIRS: We
are in receipt of
your
favours
dated the 9th and
the 13th inst. and
understood
all
their contents.
In connection to
yours of the 13th
inst. we regret to
hear
that
you
mentioned
Mr.
Song Fo the one
who visited your
Central, but it was
not for he was Mr.
Song Heng, the
representative
and the manager
of Messrs. Song
Fo & Co.
With reference to
the contents of
your letter dated
the 13th inst. we

very

SONG
By

Dec. 18

Messrs.
HAWAIIANPHILIPPINE
CO.,
Silay, Neg.
Occ., P.I.

of

Yours
truly,

1923

We agree with
appellant that
the
above
quoted

correspondence
is
susceptible
of
but
one
interpretation. The Hawaiian-Philippine Co. agreed to
deliver to Song Fo & Company 300,000 gallons of
molasses. The Hawaiian-Philippine Co. also believed it
possible to accommodate Song Fo & Company by
supplying the latter company with an extra 100,000
gallons. But the language used with reference to the
additional 100,000 gallons was not a definite promise.
Still less did it constitute an obligation.
If Exhibit T relied upon by the trial court shows
anything, it is simply that the defendant did not
consider itself obliged to deliver to the plaintiff
molasses in any amount. On the other hand, Exhibit A,
a letter written by the manager of Song Fo & Company
on October 17, 1922, expressly mentions an
understanding between the parties of a contract for
P300,000 gallons of molasses.
We sustain appellant's point of view on the first
question and rule that the contract between the parties
provided for the delivery by the Hawaiian-Philippine Co.
to song Fo & Company of 300,000 gallons of molasses.
2. Had the Hawaiian-Philippine Co. the right to rescind
the contract of sale made with Song Fo & Company?
The trial judge answers No, the appellant Yes.
Turning to Exhibit F, we note this sentence: "Regarding
the payment for our molasses, Mr. Song Fo (Mr. Song
Heng) gave us to understand that you would pay us at
the end of each month for molasses delivered to you."
In Exhibit G, we find Song Fo & Company stating that
they understand the contents of Exhibit F, and that
they confirm all the arrangements you have stated,
and in order to make the contract clear, we hereby
quote below our old contract as amended, as per our
new arrangements. (a) Price, at 2 cents per gallon
delivered at the central." In connection with the portion
of the contract having reference to the payment for the
molasses, the parties have agree on a table showing
the date of delivery of the molasses, the amount and
date thereof, the date of receipt of account by plaintiff,
and date of payment. The table mentioned is as
follows:
Some doubt has risen as to when Song Fo & Company
was expected to make payments for the molasses
delivered. Exhibit F speaks of payments "at the end of
each month." Exhibit G is silent on the point. Exhibit M,
a letter of March 28, 1923, from Warner, Barnes & Co.,
Ltd., the agent of the Hawaiian-Philippine Co. to Song
Fo & Company, mentions "payment on presentation of
bills for each delivery." Exhibit O, another letter from
Warner, Barnes & Co., Ltd. to Song Fo & Company
dated April 2, 1923, is of a similar tenor. Exhibit P, a
communication sent direct by the Hawaiian-Philippine
Co. to Song Fo & Company on April 2, 1923, by which
the Hawaiian-Philippine Co. gave notice of the
termination of the contract, gave as the reason for the
rescission, the breach by Song Fo & Company of this
condition: "You will recall that under the arrangements
made for taking our molasses, you were to meet our
accounts upon presentation and at each delivery." Not
far removed from this statement, is the allegation of
plaintiff in its complaint that "plaintiff agreed to pay

defendant, at the end of each month upon presentation

accounts."
Resolving such ambiguity as exists and having in mind
ordinary business practice, a reasonable deduction is
that Song Fo & Company was to pay the HawaiianPhilippine Co. upon presentation of accounts at the end
of each month. Under this hypothesis, Song Fo &
Company should have paid for the molasses delivered
in December, 1922, and for which accounts were
received by it on January 5, 1923, not later than
January 31 of that year. Instead, payment was not
made until February 20, 1923. All the rest of the
molasses was paid for either on time or ahead of time.
The terms of payment fixed by the parties are
controlling. The time of payment stipulated for in the
contract should be treated as of the essence of the
contract. Theoretically, agreeable to certain conditions
which could easily be imagined, the HawaiianPhilippine Co. would have had the right to rescind the
contract because of the breach of Song Fo & Company.
But actually, there is here present no outstanding fact
which would legally sanction the rescission of the
contract by the Hawaiian-Philippine Co.
The general rule is that rescission will not be permitted
for a slight or casual breach of the contract, but only
for such breaches as are so substantial and
fundamental as to defeat the object of the parties in
making the agreement. A delay in payment for a small
quantity of molasses for some twenty days is not such
a violation of an essential condition of the contract was
warrants rescission for non-performance. Not only this,
but the Hawaiian-Philippine Co. waived this condition
when it arose by accepting payment of the overdue
accounts and continuing with the contract. Thereafter,
Song Fo & Company was not in default in payment so
that the Hawaiian-Philippine co. had in reality no
excuse for writing its letter of April 2, 1923, cancelling
the contract. (Warner, Barnes & Co. vs. Inza [1922], 43
Phil., 505.)
We rule that the appellant had no legal right to rescind
the contract of sale because of the failure of Song Fo &
Company to pay for the molasses within the time
agreed upon by the parties. We sustain the finding of
the trial judge in this respect.
3. On the basis first, of a contract for 300,000 gallons
of molasses, and second, of a contract imprudently
breached by the Hawaiian-Philippine Co., what is the
measure of damages? We again turn to the facts as
agreed upon by the parties.
The first cause of action of the plaintiff is based on the
greater expense to which it was put in being compelled
to secure molasses from other sources. Three hundred
thousand gallons of molasses was the total of the
agreement, as we have seen. As conceded by the
plaintiff, 55,006 gallons of molasses were delivered by
the defendant to the plaintiff before the breach. This
leaves 244,994 gallons of molasses undelivered which
the plaintiff had to purchase in the open market. As
expressly conceded by the plaintiff at page 25 of its
brief, 100,000 gallons of molasses were secured from

the Central North Negros Sugar Co., Inc., at two

centavos a gallon. As this is the same price specified in
the contract between the plaintiff and the defendant,
the plaintiff accordingly suffered no material loss in
having to make this purchase. So 244,994 gallons
minus the 100,000 gallons just mentioned leaves as a
result 144,994 gallons. As to this amount, the plaintiff
admits that it could have secured it and more from the
Central Victorias Milling Company, at three and onehalf centavos per gallon. In other words, the plaintiff
had to pay the Central Victorias Milling company one
and one-half centavos a gallon more for the molasses
than it would have had to pay the Hawaiian-Philippine
Co. Translated into pesos and centavos, this meant a
loss to the plaintiff of approximately P2,174.91. As the
conditions existing at the central of the HawaiianPhilippine Co. may have been different than those
found at the Central North Negros Sugar Co., Inc., and
the Central Victorias Milling Company, and as not alone
through the delay but through expenses of
transportation and incidental expenses, the plaintiff
may have been put to greater cost in making the
purchase of the molasses in the open market, we
would concede under the first cause of action in round
figures P3,000.
The second cause of action relates to lost profits on
account of the breach of the contract. The only
evidence in the record on this question is the
stipulation of counsel to the effect that had Mr. Song
Heng, the manager of Song Fo & Company, been called
as a witness, he would have testified that the plaintiff
would have realized a profit of P14,948.43, if the
contract of December 13, 1922, had been fulfilled by
the defendant. Indisputably, this statement falls far
short of presenting proof on which to make a finding as
to damages.
In the first place, the testimony which Mr. Song Heng
would have given undoubtedly would follow the same
line of thought as found in the decision of the trial
court, which we have found to be unsustainable. In the
second place, had Mr. Song Heng taken the witnessstand and made the statement attributed to him, it
would have been insufficient proof of the allegations of
the complaint, and the fact that it is a part of the
stipulation by counsel does not change this result. And
lastly, the testimony of the witness Song Heng, it we
may dignify it as such, is a mere conclusion, not a
proven fact. As to what items up the more than
P14,000 of alleged lost profits, whether loss of sales or
loss of customers, or what not, we have no means of
knowing.
We rule that the plaintiff is entitled to recover damages
from the defendant for breach of contract on the first
cause of action in the amount of P3,000 and on the
second cause of action in no amount. Appellant's
assignments of error are accordingly found to be well
taken in part and not well taken in part.
Agreeable to the foregoing, the judgment appealed
from shall be modified and the plaintiff shall have and
recover from the defendant the sum of P3,000, with
legal interest form October 2, 1923, until payment.
Without special finding as to costs in either instance, it
is so ordered.

G.R. No. 126083

July 12, 2006

ANTONIO R. CORTES (in his capacity as

Administrator of the estate of Claro S. Cortes) vs
HON. COURT OF APPEALS and VILLA ESPERANZA
DEVELOPMENT CORPORATION
YNARES-SANTIAGO, J.:
The instant petition for review seeks the reversal of the
June 13, 1996 Decision1 of the Court of Appeals in CAG.R. CV No. 47856, setting aside the June 24, 1993
Decision2 of the Regional Trial Court of Makati, Branch
138, which rescinded the contract of sale entered into
by petitioner Antonio Cortes (Cortes) and private
respondent Villa Esperanza Development Corporation
(Corporation).
The antecedents show that for the purchase price of
P3,700,000.00, the Corporation as buyer, and Cortes as
seller, entered into a contract of sale over the lots
covered by Transfer Certificate of Title (TCT) No. 31113A, TCT No. 31913-A and TCT No. 32013-A, located at
Baclaran, Paraaque, Metro Manila. On various dates in
1983, the Corporation advanced to Cortes the total
sum of P1,213,000.00. Sometime in September 1983,
the parties executed a deed of absolute sale containing
the following terms:3
1. Upon execution of this instrument, the Vendee shall
pay unto the Vendor sum of TWO MILLION AND TWO
HUNDRED
THOUSAND
(P2,200,000.00)
PESOS,
Philippine Currency, less all advances paid by the
Vendee to the Vendor in connection with the sale;
2. The balance of ONE MILLION AND FIVE HUNDRED
THOUSAND [P1,500,000.00] PESOS, Phil. Currency shall
be payable within ONE (1) YEAR from date of execution
of this instrument, payment of which shall be secured
by an irrevocable standby letter of credit to be issued
by any reputable local banking institution acceptable to
the Vendor. x x x x
4. All expense for the registration of this document
with the Register of Deeds concerned, including the
transfer tax, shall be divided equally between the
Vendor and the Vendee. Payment of the capital gains
shall be exclusively for the account of the Vendor; 5%
commission of Marcosa Sanchez to be deducted upon
signing of sale.4
Said Deed was retained by Cortes for notarization.
On January 14, 1985, the Corporation filed the instant
case5 for specific performance seeking to compel
Cortes to deliver the TCTs and the original copy of the
Deed of Absolute Sale. According to the Corporation,
despite its readiness and ability to pay the purchase

price, Cortes refused delivery of the sought documents.

It thus prayed for the award of damages, attorney's
fees and litigation expenses arising from Cortes' refusal
to deliver the same documents.
In his Answer with counterclaim, 6 Cortes claimed that
the owner's duplicate copy of the three TCTs were
surrendered to the Corporation and it is the latter
which refused to pay in full the agreed down payment.
He added that portion of the subject property is
occupied by his lessee who agreed to vacate the
premises upon payment of disturbance fee. However,
due to the Corporation's failure to pay in full the sum of
P2,200,000.00, he in turn failed to fully pay the
disturbance fee of the lessee who now refused to pay
monthly rentals. He thus prayed that the Corporation
be ordered to pay the outstanding balance plus interest
and in the alternative, to cancel the sale and forfeit the
P1,213,000.00 partial down payment, with damages in
either case.
On June 24, 1993, the trial court rendered a decision
rescinding the sale and directed Cortes to return to the
Corporation the amount of P1,213,000.00, plus
interest. It ruled that pursuant to the contract of the
parties, the Corporation should have fully paid the
amount of P2,200,000.00 upon the execution of the
contract. It stressed that such is the law between the
parties because the Corporation failed to present
evidence that there was another agreement that
modified the terms of payment as stated in the
contract. And, having failed to pay in full the amount of
P2,200,000.00 despite Cortes' delivery of the Deed of
Absolute Sale and the TCTs, rescission of the contract is
proper.
In its motion for reconsideration, the Corporation
contended that the trial court failed to consider their
agreement that it would pay the balance of the down
payment when Cortes delivers the TCTs. The motion
was, however, denied by the trial court holding that the
rescission should stand because the Corporation did
not act on the offer of Cortes' counsel to deliver the
TCTs upon payment of the balance of the down
payment. Thus:
The Court finds no merit in the [Corporation's] Motion
for Reconsideration. As stated in the decision sought to
be reconsidered, [Cortes'] counsel at the pre-trial of
this case, proposed that if [the Corporation] completes
the down payment agreed upon and make
arrangement for the payment of the balances of the
purchase price, [Cortes] would sign the Deed of Sale
and turn over the certificate of title to the
[Corporation]. [The Corporation] did nothing to comply
with its undertaking under the agreement between the
parties.

WHEREFORE, in view of the foregoing considerations,

the Motion for Reconsideration is hereby DENIED. SO
ORDERED.7
On appeal, the Court of Appeals reversed the decision
of the trial court and directed Cortes to execute a Deed
of Absolute Sale conveying the properties and to
deliver the same to the Corporation together with the
TCTs, simultaneous with the Corporation's payment of
the balance of the purchase price of P2,487,000.00. It
found that the parties agreed that the Corporation will
fully pay the balance of the down payment upon
Cortes' delivery of the three TCTs to the Corporation.
The records show that no such delivery was made,
hence, the Corporation was not remiss in the
performance of its obligation and therefore justified in
not paying the balance. The decretal portion thereof,
provides:
WHEREFORE, premises considered, [the Corporation's]
appeal is GRANTED. The decision appealed from is
hereby REVERSED and SET ASIDE and a new judgment
rendered ordering [Cortes] to execute a deed of
absolute sale conveying to [the Corporation] the
parcels of land subject of and described in the deed of
absolute sale, Exhibit D. Simultaneously with the
execution of the deed of absolute sale and the delivery
of the corresponding owner's duplicate copies of TCT
Nos. 31113-A, 31931-A and 32013-A of the Registry of
Deeds for the Province of Rizal, Metro Manila, District
IV, [the Corporation] shall pay [Cortes] the balance of
the purchase price of P2,487,000.00. As agreed upon in
paragraph 4 of the Deed of Absolute Sale, Exhibit D,
under terms and conditions, "All expenses for the
registration of this document (the deed of sale) with
the Register of Deeds concerned, including the transfer
tax, shall be divided equally between [Cortes and the
Corporation]. Payment of the capital gains shall be
exclusively for the account of the Vendor; 5%
commission of Marcosa Sanchez to be deducted upon
signing of sale." There is no pronouncement as to
costs. SO ORDERED.8
Cortes filed the instant petition praying that the
decision of the trial court rescinding the sale be
reinstated.
There is no doubt that the contract of sale in question
gave rise to a reciprocal obligation of the parties.
Reciprocal obligations are those which arise from the
same cause, and which each party is a debtor and a
creditor of the other, such that the obligation of one is
dependent upon the obligation of the other. They are to
be performed simultaneously, so that the performance
of one is conditioned upon the simultaneous fulfillment
of the other.9
Article 1191 of the Civil Code, states: ART. 1191. The
power to rescind obligations is implied in reciprocal

ones, in case one of the obligors should not comply

with what is incumbent upon him. x x x x
As to when said failure or delay in performance arise,
Article 1169 of the same Code provides that

will be transferred in the name of the Corporation upon

full payment of the P2,200,000.00 down payment. Thus

ATTY. ANTARAN

ART. 1169 x x x x In reciprocal obligations, neither

party incurs in delay if the other does not comply or is
not ready to comply in a proper manner with what is
incumbent upon him. From the moment one of the
parties fulfills his obligation, delay by the other
begins. (Emphasis supplied)

Q Of course, you have it transferred in the name of the

plaintiff, the title?

The issue therefore is whether there is delay in the

performance of the parties' obligation that would justify
the rescission of the contract of sale. To resolve this
issue, we must first determine the true agreement of
the parties.

Q When you said upon full payment, are you referring

to the agreed down payment of P2,200,000.00?

The settled rule is that the decisive factor in evaluating

an agreement is the intention of the parties, as shown
not necessarily by the terminology used in the contract
but by their conduct, words, actions and deeds prior to,
during and immediately after executing the agreement.
As such, therefore, documentary and parol evidence
may be submitted and admitted to prove such
intention.10
In the case at bar, the stipulation in the Deed of
Absolute Sale was that the Corporation shall pay in full
the P2,200,000.00 down payment upon execution of
the contract. However, as correctly noted by the Court
of Appeals, the transcript of stenographic notes reveal
Cortes' admission that he agreed that the Corporation's
full payment of the sum of P2,200,000.00 would
depend upon his delivery of the TCTs of the three lots.
In fact, his main defense in the Answer is that, he
performed what is incumbent upon him by delivering to
the Corporation the TCTs and the carbon duplicate of
the Deed of Absolute Sale, but the latter refused to pay
in full the down payment.11 Pertinent portion of the
transcript, reads:

A Upon full payment. x x x x

ATTY. SARTE

A Yes, sir.13
By agreeing to transfer title upon full payment of
P2,200,000.00, Cortes' impliedly agreed to deliver the
TCTs to the Corporation in order to effect said transfer.
Hence, the phrase "execution of this instrument" 14 as
appearing in the Deed of Absolute Sale, and which
event would give rise to the Corporation's obligation to
pay in full the amount of P2,200,000.00, can not be
construed as referring solely to the signing of the deed.
The meaning of "execution" in the instant case is not
limited to the signing of a contract but includes as well
the performance or implementation or accomplishment
of the parties' agreement.15 With the transfer of titles
as the corresponding reciprocal obligation of payment,
Cortes' obligation is not only to affix his signature in
the Deed, but to set into motion the process that would
facilitate the transfer of title of the lots, i.e., to have
the Deed notarized and to surrender the original copy
thereof to the Corporation together with the TCTs.

[Q] Now, why did you deliver these three titles to the
plaintiff despite the fact that it has not been paid in full
the agreed down payment?

Having established the true agreement of the parties,

the Court must now determine whether Cortes
delivered the TCTs and the original Deed to the
Corporation. The Court of Appeals found that Cortes
never surrendered said documents to the Corporation.
Cortes testified that he delivered the same to Manny
Sanchez, the son of the broker, and that Manny told
him that her mother, Marcosa Sanchez, delivered the
same to the Corporation.

A Well, the broker told me that the down payment will

be given if I surrender the titles.

Q Do you have any proof to show that you have indeed

surrendered these titles to the plaintiff?

Q Do you mean to say that the plaintiff agreed to pay

in full the down payment of P2,200,000.00 provided
you surrender or entrust to the plaintiff the titles?

A Yes, sir.

A Yes, sir.12
What further confirmed the agreement to deliver the
TCTs is the testimony of Cortes that the title of the lots

Q I am showing to you a receipt dated October 29,

1983, what relation has this receipt with that receipt
that you have mentioned?

A That is the receipt of the real estate broker when she

received the titles.
Q On top of the printed name is Manny Sanchez, there
is a signature, do you know who is that Manny
Sanchez?

Q The defendant, Antonio Cortes testified during the

hearing on March 11, 1986 that he allegedly gave you
the title to the property in question, is it true?
A I did not receive the title.

A That is the son of the broker. x x x x

Q He likewise said that the title was delivered to your

son, do you know about that?

Q May we know the full name of the real estate broker?

A I do not know anything about that.19

A Marcosa Sanchez x x x x

What further strengthened the findings of the Court of

Appeals that Cortes did not surrender the subject
documents was the offer of Cortes' counsel at the pretrial to deliver the TCTs and the Deed of Absolute Sale
if the Corporation will pay the balance of the down
payment. Indeed, if the said documents were already
in the hands of the Corporation, there was no need for
Cortes' counsel to make such offer.

Q Do you know if the broker or Marcosa Sanchez

indeed delivered the titles to the plaintiff?
A That is what [s]he told me. She gave them to the
plaintiff. x x x x.16
ATTY. ANTARAN
Q Are you really sure that the title is in the hands of the
plaintiff? x x x x
Q It is in the hands of the broker but there is no
showing that it is in the hands of the plaintiff?
A Yes, sir.
COURT
Q How do you know that it was delivered to the plaintiff
by the son of the broker?
A The broker told me that she delivered the title to the
plaintiff.
ATTY. ANTARAN
Q Did she not show you any receipt that she delivered
to [Mr.] Dragon17 the title without any receipt?
A I have not seen any receipt.
Q So, therefore, you are not sure whether the title has
been delivered to the plaintiff or not. It is only upon the
allegation of the broker?
A Yes, sir.18
However, Marcosa Sanchez's unrebutted testimony is
that, she did not receive the TCTs. She also denied
knowledge of delivery thereof to her son, Manny, thus:

Since Cortes did not perform his obligation to have the

Deed notarized and to surrender the same together
with the TCTs, the trial court erred in concluding that he
performed his part in the contract of sale and that it is
the Corporation alone that was remiss in the
performance of its obligation. Actually, both parties
were in delay. Considering that their obligation was
reciprocal, performance thereof must be simultaneous.
The mutual inaction of Cortes and the Corporation
therefore gave rise to a compensation morae or default
on the part of both parties because neither has
completed
their
part
in
their
reciprocal
obligation.20 Cortes is yet to deliver the original copy of
the notarized Deed and the TCTs, while the Corporation
is yet to pay in full the agreed down payment of
P2,200,000.00. This mutual delay of the parties cancels
out the effects of default,21 such that it is as if no one is
guilty of delay.22
We find no merit in Cortes' contention that the failure
of the Corporation to act on the proposed settlement at
the pre-trial must be construed against the latter.
Cortes argued that with his counsel's offer to surrender
the original Deed and the TCTs, the Corporation should
have consigned the balance of the down payment. This
argument would have been correct if Cortes actually
surrendered the Deed and the TCTs to the Corporation.
With such delivery, the Corporation would have been
placed in default if it chose not to pay in full the
required down payment. Under Article 1169 of the Civil
Code, from the moment one of the parties fulfills his
obligation, delay by the other begins. Since Cortes did
not perform his part, the provision of the contract
requiring the Corporation to pay in full the down
payment never acquired obligatory force. Moreover,
the Corporation could not be faulted for not
automatically heeding to the offer of Cortes. For one,
its complaint has a prayer for damages which it may

not want to waive by agreeing to the offer of Cortes'

counsel. For another, the previous representation of
Cortes that the TCTs were already delivered to the
Corporation when no such delivery was in fact made, is
enough reason for the Corporation to be more cautious
in dealing with him.
The Court of Appeals therefore correctly ordered the
parties to perform their respective obligation in the
contract of sale, i.e., for Cortes to, among others,
deliver the necessary documents to the Corporation
and for the latter to pay in full, not only the down
payment, but the entire purchase price. And since the
Corporation did not question the Court of Appeal's
decision and even prayed for its affirmance, its
payment should rightfully consist not only of the
amount of P987,000.00, representing the balance of
the P2,200,000.00 down payment, but the total
amount of P2,487,000.00, the remaining balance in the
P3,700,000.00 purchase price.
WHEREFORE, the petition is DENIED and the June 13,
1996 Decision of the Court of Appeals in CA-G.R. CV
No. 47856, is AFFIRMED. SO ORDERED.
G.R. No. L-32811 March 31, 1980
FELIPE C. ROQUE vs NICANOR LAPUZ and THE
COURT OF APPEALS
GUERRERO, J.:
Appeal by certiorari from the Resolution of the
respondent court 1 dated October 12, 1970 in CA-G.R.
No. L-33998-R entitled "Felipe C. Roque, plaintiffappellee,
versus
Nicanor
Lapuz,
defendantappellant" amending its original decision of April 23,
1970 which affirmed the decision of the Court of First
Instance of Rizal (Quezon City Branch) in Civil Case No.
Q-4922 in favor of petitioner, and the Resolution of the
respondent court denying petitioner's motion for
reconsideration.
The facts of this case are as recited in the decision of
the Trial Court which was adopted and affirmed by the
Court of Appeals:
Sometime in 1964, prior to the approval by the
National Planning Commission of the consolidation and
subdivision plan of plaintiff's property known as the
Rockville Subdivision, situated in Balintawak, Quezon
City, plaintiff and defendant entered into an agreement
of sale covering Lots 1, 2 and 9, Block 1, of said
property, with an aggregate area of 1,200 square
meters, payable in 120 equal monthly installments at
the rate of P16.00, P15.00 per square meter,
respectively. In accordance with said agreement,
defendant paid to plaintiff the sum of P150.00 as

deposit and the further sum of P740.56 to complete

the payment of four monthly installments covering the
months of July, August, September, and October, 1954.
(Exhs. A and B). When the document Exhibit "A" was
executed on June 25, 1954, the plan covering plaintiff's
property was merely tentative, and the plaintiff
referred to the proposed lots appearing in the tentative
plan.
After the approval of the subdivision plan by the
Bureau of Lands on January 24, 1955, defendant
requested plaintiff that he be allowed to abandon and
substitute Lots 1, 2 and 9, the subject matter of their
previous agreement, with Lots 4 and 12, Block 2 of the
approved subdivision plan, of the Rockville Subdivision,
with a total area of 725 square meters, which are
corner lots, to which request plaintiff graciously
acceded.
The evidence discloses that defendant proposed to
plaintiff modification of their previous contract to sell
because he found it quite difficult to pay the monthly
installments on the three lots, and besides the two lots
he had chosen were better lots, being corner lots. In
addition, it was agreed that the purchase price of these
two lots would be at the uniform rate of P17.00 per
square (meter) payable in 120 equal monthly
installments, with interest at 8% annually on the
balance unpaid. Pursuant to this new agreement,
defendant occupied and possessed Lots 4 and 12,
Block 2 of the approved subdivision plan, and enclosed
them, including the portion where his house now
stands, with barbed wires and adobe walls.
However, aside from the deposit of P150.00 and the
amount of P740.56 which were paid under their
previous agreement, defendant failed to make any
further payment on account of the agreed monthly
installments for the two lots in dispute, under the new
contract to sell. Plaintiff demanded upon defendant not
only to pay the stipulated monthly installments in
arrears, but also to make up-to-date his payments, but
defendant, instead of complying with the demands,
kept on asking for extensions, promising at first that he
would pay not only the installments in arrears but also
make up-to-date his payment, but later on refused
altogether to comply with plaintiff's demands.
Defendant was likewise requested by the plaintiff to
sign the corresponding contract to sell in accordance
with his previous commitment. Again, defendant
promised that he would sign the required contract to
sell when he shall have made up-to-date the stipulated
monthly installments on the lots in question, but
subsequently backed out of his promise and refused to
sign any contract in noncompliance with what he had
represented on several occasions. And plaintiff relied
on the good faith of defendant to make good his

promise because defendant is a professional and had

been rather good to him (plaintiff).
On or about November 3, 1957, in a formal letter,
plaintiff demanded upon defendant to vacate the lots
in question and to pay the reasonable rentals thereon
at the rate of P60.00 per month from August, 1955.
(Exh. "B"). Notwithstanding the receipt of said letter,
defendant did not deem it wise nor proper to answer
the same.
In reference to the mode of payment, the Honorable
Court of Appeals found
Both parties are agreed that the period within which to
pay the lots in question is ten years. They however,
disagree on the mode of payment. While the appellant
claims that he could pay the purchase price at any
time within a period of ten years with a gradual
proportionate discount on the price, the appellee
maintains that the appellant was bound to pay monthly
installments.
On this point, the trial court correctly held that
It is further argued by defendant that under the
agreement to sell in question, he has the right or
option to pay the purchase price at anytime within a
period of ten years from 1954, he being entitled, at the
same time, to a graduated reduction of the price. The
Court is constrained to reject this version not only
because it is contradicted by the weight of evidence
but also because it is not consistent with what is
reasonable, plausible and credible. It is highly
improbable to expect plaintiff, or any real estate
subdivision owner for that matter, to agree to a sale of
his land which would be payable anytime in ten years
at the exclusive option of the purchaser. There is no
showing that defendant is a friend, a relative, or
someone to whom plaintiff had to be grateful, as would
justify an assumption that he would have agreed to
extend to defendant such an extra- ordinary
concession. Furthermore, the context of the document,
Exhibit "B", not to mention the other evidences on
records is indicative that the real intention of the
parties is for the payment of the purchase price of the
lot in question on an equal monthly installment basis
for a period of ten years (Exhibits "A", "II", "J" and "K").
On January 22, 1960, petitioner Felipe C, Roque
(plaintiff below) filed the complaint against defendant
Nicanor Lapuz (private respondent herein) with the
Court of First Instance of Rizal, Quezon City Branch, for
rescission and cancellation of the agreement of sale
between them involving the two lots in question and
prayed that judgment be rendered ordering the
rescission and cancellation of the agreement of sale,
the defendant to vacate the two parcels of land and

remove his house therefrom and to pay to the plaintiff

the reasonable rental thereof at the rate of P60.00 a
month from August 1955 until such time as he shall
have vacated the premises, and to pay the sum of
P2,000.00 as attorney's fees, costs of the suit and
award such other relief or remedy as may be deemed
just and equitable in the premises.
Defendant filed a Motion to Dismiss on the ground that
the complaint states no cause of action, which motion
was denied by the court. Thereafter, defendant filed his
Answer alleging that he bought three lots from the
plaintiff containing an aggregate area of 1,200 sq.
meters and previously known as Lots 1, 2 and 9 of
Block 1 of Rockville Subdivision at P16.00, P15.00 and
P15.00, respectively, payable at any time within ten
years. Defendant admits having occupied the lots in
question.
As affirmative and special defenses, defendant alleges
that the complaint states no cause of action; that the
present action for rescission has prescribed; that no
demand for payment of the balance was ever made;
and that the action being based on reciprocal
obligations, before one party may compel performance,
he must first comply what is incumbent upon him.
As counterclaim, defendant alleges that because of the
acts of the plaintiff, he lost two lots containing an area
of 800 sq. meters and as a consequence, he suffered
moral damages in the amount of P200.000.00; that due
to the filing of the present action, he suffered moral
damages amounting to P100,000.00 and incurred
expenses for attorney's fees in the sum of P5,000.00.
Plaintiff filed his Answer to the Counterclaim and
denied the material averments thereof.
After due hearing, the trial court rendered judgment,
the dispositive portion of which reads:
WHEREFORE, the Court renders judgment in favor of
plain. plaintiff and against the defendant, as follows:
(a) Declaring the agreement of sale between plaintiff
and defendant involving the lots in question (Lots 4
and 12, Block 2 of the approved subdivision plan of the
Rockville
Subdivision)
rescinded,
resolved
and
cancelled;
(b) Ordering defendant to vacate the said lots and to
remove his house therefrom and also to pay plaintiff
the reasonable rental thereof at the rate of P60.00 per
month from August, 1955 until he shall have actually
vacated the premises; and

(c) Condemning defendant to pay plaintiff the sum of

P2,000.00 as attorney's fees, as well as the costs of the
suit. (Record on Appeal, p. 118)
(a) Declaring the agreement of sale between plaintiff
and defendant involving the lots in question (Lots 4
and 12, Block 2 of the approved subdivision plan of the
Rockville
Subdivision)
rescinded,
resolved
and
cancelled;
(b) Ordering defendant to vacate the said lots and to
remove his house therefrom and also to pay plaintiff
the reasonable rental thereof at the rate of P60.00 per
month from August, 1955 until he shall have actually
vacated premises; and
(c) Condemning defendant to pay plaintiff the sum of
P2,000.00 as attorney's fees, as well as the costs of the
suit. (Record on Appeal. p. 118)
Not satisfied with the decision of the trial court,
defendant appealed to the Court of Appeals. The latter
court, finding the judgment appealed from being in
accordance with law and evidence, affirmed the same.
In its decision, the appellate court, after holding that
the findings of fact of the trial court are fully supported
by the evidence, found and held that the real intention
of the parties is for the payment of the purchase price
of the lots in question on an equal monthly installment
basis for the period of ten years; that there was
modification of the original agreement when defendant
actually occupied Lots Nos. 4 and 12 of Block 2 which
were corner lots that commanded a better price
instead of the original Lots Nos. 1, 2 and 9, Block I of
the Rockville Subdivision; that appellant's bare
assertion that the agreement is not rescindable
because the appellee did not comply with his obligation
to put up the requisite facilities in the subdivision was
insufficient to overcome the presumption that the law
has been obeyed by the appellee; that the present
action has not prescribed since Article 1191 of the New
Civil Code authorizing rescission in reciprocal
obligations upon noncompliance by one of the obligors
is the applicable provision in relation to Article 1149 of
the New Civil Code; and that the present action was
filed within five years from the time the right of action
accrued.
Defendant filed a Motion for Reconsideration of the
appellate court's decision on the following grounds:
First Neither the pleadings nor the evidence,
testimonial, documentary or circumstantial, justify the
conclusion as to the existence of an alleged
subsequent agreement novatory of the original
contract admittedly entered into between the parties:

Second There is nothing so unusual or extraordinary,

as would render improbable the fixing of ten ears as
the period within which payment of the stipulated price
was to be payable by appellant;
Third Appellee has no right, under the circumstances
on the case at bar, to demand and be entitled to the
rescission of the contract had with appellant;
Fourth Assuming that any action for rescission is
availability to appellee, the same, contrary to the
findings of the decision herein, has prescribed;
Fifth Assumming further that appellee's action for
rescission, if any, has not yet prescribed, the same is at
least barred by laches;
Sixth Assuming furthermore that a cause of action
for rescission exists, appellant should nevertheless be
entitled to tile fixing of a period within which to comply
with his obligation; and
Seventh At all events, the affirmance of the
judgment for the payment of rentals on the premises
from August, 1955 and he taxing of attorney's fees
against appellant
are not warranted b the
circumstances at bar. (Rollo, pp. 87-88)
Acting on the Motion for Reconsideration, the Court of
Appeals sustained the sixth ground raised by the
appellant, that assuming that a cause of action for
rescission exists, he should nevertheless be entitled to
the fixing of a period within which to comply with his
obligation. The Court of Appeals, therefore, amended
its original decision in the following wise and manner:
WHEREFORE, our decision dated April 23, 1970 is
hereby amended in the sense that the defendant
Nicanor Lapuz is hereby granted a period of ninety (90)
days from entry hereof within which to pay the balance
of the purchase price in the amount of P11,434,44 with
interest thereon at the rate of 8% per annum from
August 17, 1955 until fully paid. In the event that the
defendant fails to comply with his obligation as above
stated within the period fixed herein, our original
judgment stands.
Petitioner Roque, as plaintiff-appellee below, filed a
Motion for Reconsideration; the Court of Appeals
denied it. He now comes and appeals to this Court on a
writ of certiorari.
The respondent Court of Appeals rationalizes its
amending decision by considering that the house
presently erected on the land subject of the contract is
worth P45,000.00, which improvements introduced by
defendant on the lots subject of the contract are very
substantial, and thus being the case, "as a matter of

justice and equity, considering that the removal of

defendant's house would amount to a virtual forfeiture
of the value of the house, the defendant should be
granted a period within which to fulfill his obligations
under the agreement." Cited as authorities are the
cases of Kapisanan Banahaw vs. Dejarme and
Alvero, 55 Phil. 338, 344, where it is held that the
discretionary power of the court to allow a period
within which a person in default may be permitted to
perform the stipulation upon which the claim for
resolution of the contract is based should be exercised
without hesitation in a case where a virtual forfeiture of
valuable rights is sought to be enforced as an act of
mere reprisal for a refusal of the debtor to submit to a
usurious charge, and the case of Puerto vs. Go Ye
Pin, 47 O.G. 264, holding that to oust the defendant
from the lots without giving him a chance to recover
what his father and he himself had spent may amount
to a virtual forfeiture of valuable rights.
As further reasons for allowing a period within which
defendant could fulfill his obligation, the respondent
court held that there exists good reasons therefor,
having in mind that which affords greater reciprocity of
rights (Ramos vs. Blas, 51 O.G. 1920); that after
appellant had testified that plaintiff failed to comply
with his part of the contract to put up the requisite
facilities in the subdivision, plaintiff did not introduce
any evidence to rebut defendant's testimony but
simply relied. upon the presumption that the law has
been obeyed, thus said presumption had been
successfully rebutted as Exhibit "5-D" shows that the
road therein shown is not paved The Court, however,
concedes that plaintiff's failure to comply with his
obligation to put up the necessary facilities in the
subdivision will not deter him from asking fr the
rescission of the agreement since this obligation is not
correlative with defendant's obligation to buy the
property.
Petitioner assails the decision of the Court of Appeals
for the following alleged errors:
I. The Honorable Court of Appeals erred in applying
paragraph 3, Article 1191 of the Civil Code which refers
to reciprocal obligations in general and, pursuant
thereto, in granting respondent Lapuz a period of
ninety (90) days from entry of judgment within which
to pay the balance of the purchase price.
II. The Honorable Court of Appeals erred in not holding
that Article 1592 of the same Code, which specifically
covers sales of immovable property and which
constitutes an exception to the third paragraph of
Article 1191 of said Code, is applicable to the present
case.
III. The Honorable Court of Appeals erred in not holding
that respondent Lapuz cannot avail of the provisions of

Article 1191, paragraph 3 of the Civil Code aforesaid

because he did not raise in his answer or in any of the
pleadings he filed in the trial court the question of
whether or not he is entitled, by reason of a just cause,
to a fixing of a new period.
IV. Assuming arguendo that the agreement entered
into by and between petitioner and respondent Lapuz
was a mere promise to sell or contract to sell, under
which title to the lots in question did not pass from
petitioner to respondent, still the Honorable Court of
Appeals erred in not holding that aforesaid respondent
is not entitled to a new period within which to pay
petitioner the balance of P11,434.44 interest due on
the purchase price of P12.325.00 of the lots.
V. Assuming arguendo that paragraph 3, Article 1191 of
the Civil Code is applicable and may be availed of by
respondent,
the Honorable
Court of
Appeals
nonetheless erred in not declaring that aid respondent
has not shown the existence of a just cause which
would authorize said Court to fix a new period within
which to pay the balance aforesaid.
VI. The Honorable Court of Appeals erred in
reconsidering its original decision promulgated on April
23, 1970 which affirmed the decision of the trial court.
The above errors may, however, be synthesized into
one issue and that is, whether private respondent is
entitled to the Benefits of the third paragraph of Article
1191, New Civil Code, for the fixing of period within
which he should comply with what is incumbent upon
him, and that is to pay the balance of P11,434,44 with
interest thereon at the rate of 8% 1et annum from
August 17, 1955 until fully paid since private
respondent had paid only P150.00 as deposit and 4
months intallments amounting to P740.46, or a total of
P890.46, the total price of the two lots agreed upon
being P12,325.00.
For his part, petitioner maintains that respondent is not
entitled to the Benefits of paragraph 3, Article 1191,
NCC and that instead, Article 1592 of the New Civil
Code which specifically covers sales of immovable
property and which constitute an exception to the third
paragraph of Art. 1191 of aid Code, is the applicable
law to the case at bar.

In resolving petitioner's assignment of errors, it is well

that We lay clown the oda provisions and pertinent
rulings of the Supreme Court bearing on the crucial
issue of whether Art. 1191, paragraph 3 of the New
Civil Code applies to the case at Bar as held by the
appellate court and supported by the private
respondent, or Art. 1592 of the same Code which
petitioner strongly argues in view of the peculiar facts
and circumstances attending this case. Article 1191,
New Civil Code, provides:
Art. 1191. The power to rescind obligations is implied in
reciprocal ones, in case one at the obligors should not
comply with hat is incumbent upon him
The injured partner 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.
Article 1592 also provides:
Art. 1592. In the sale of immovable property, even
though it may have been stipulated that upon failure to
pay the price at the time agreed upon the rescission of
the contract shall of right take place, the vendee may
pay, even after the expiration of the period, as long as
no demand for rescission of the contract has been
made upon him either judicially or by a notarial act.
After the demand, the court may not grant him a new
term.
The controlling and latest jurisprudence is established
and settled in the celebrated case of Luzon Brokerage
Co., Inc. vs. Maritime Building Co., Inc. and Myers
Building Co., G.R. No. L-25885, January 31, 1972, 43
SCRA 93, originally decided in 1972, reiterated in the
Resolution on Motion to Reconsider dated August 18,
1972, 46 SCRA 381 and emphatically repeated in the
Resolution on Second Motion for Reconsideration
promulgated November 16, 1978, 86 SCRA 309, which
once more denied Maritimes Second Motion for
Reconsideration of October 7, 1972. In the original
decision, the Supreme Court speaking thru Justice J.B.L.
Reyes said:
Under the circumstances, the action of Maritime in
suspending payments to Myers Corporation was a
breach of contract tainted with fraud or malice (dolo),

as distinguished from mere negligence (culpa), "dolo"

being succinctly defined as a "conscious and intention
design to evade the normal fulfillment of existing
obligations" (Capistrano, Civil Code of the Philippines,
Vol. 3, page 38), and therefore incompatible with good
faith (Castan, Derecho Civil, 7th Ed., Vol. 3, page 129;
Diaz Pairo, Teoria de Obligaciones, Vol. 1, page 116).
Maritime having acted in bad faith, it was not entitled
to ask the court to give it further time to make
payment and thereby erase the default or breach that
it had deliberately incurred. Thus the lower court
committed no error in refusing to extend the periods
for payment. To do otherwise would be to sanction a
deliberate and reiterated infringement of the
contractual obligations incurred by Maritime, an
attitude repugnant to the stability and obligatory force
of contracts.
The decision reiterated the rule pointed out by the
Supreme Court in Manuel vs. Rodriguez, 109 Phil. 1, p.
10, that:
In contracts to sell, where ownership is retained by the
seller and is not to pass until the fun payment of the
price, such payment, as we said is a positive
suspensive condition, the failure of which is not a
breach, casual or serious, but simply an event that
prevented the obligation of the vendor to convey title
from acquiring binding i force in accordance with
Article 1117 of the Old Civil Code. To argue that there
was only a casual breach is to proceed from the
assumption that the contract is one of absolute sale,
where non-payment is a resolutory condition, which is
not the case." Continuing, the Supreme Court declared:
... appellant overlooks that its contract with appellee
Myers s not the ordinary sale envisaged by Article
1592, transferring ownership simultaneously with the
delivery of the real property sold, but one in which the
vendor retained ownership of the immovable object of
the sale, merely undertaking to convey it provided the
buyer strictly complied with the terms of the contract
(see paragraph [d], ante page 5). In suing to recover
possession of the building from Maritime appellee
Myers is not after the resolution or setting aside of the
contract and the restoration of the parties to the status
quo ante as contemplated by Article 1592, but
precisely enforcing the Provisions of the agreement
that it is no longer obligated to part with the ownership
or possession of the property because Maritime failed
to comply with the specific condition precedent, which
is to pay the installments as they fell due.
The distinction between contracts of sale and contracts
to sell with reserved title has been recognized by this
Court in repeated decisions upholding the power of
promisors under contracts to sell in case of failure of
the other party to complete payment, to extrajudicially

terminate the operation of the contract, refuse

conveyance and retain the sums or installments
already received, where such rights are expressly
provided for, as in the case at bar.
In the Resolution denying the first Motion for
Reconsideration, 46 SCRA 381, the Court again
speaking thru Justice J.B.L. Reyes, reiterated the rule
that in a contract to sell, the full payment of the price
through the punctual performance of the monthly
payments is a condition precedent to the execution of
the final sale 4nd to the transfer of the property from
the owner to the proposed buyer; so that there will be
no actual sale until and unless full payment is made.
The Court further ruled that in seeking to oust Maritime
for failure to pay the price as agreed upon, Myers was
not rescinding (or more properly, resolving) the
contract but precisely enforcing it according to its
expressed terms. In its suit, Myers was not seeking
restitution to it of the ownership of the thing sold (since
it was never disposed of), such restoration being the
logical consequence of the fulfillment of a resolutory
condition, expressed or implied (Art. 1190); neither was
it seeking a declaration that its obligation to sell was
extinguished. What is sought was a judicial declaration
that because the suspensive condition (full and
punctual payment) had not been fulfilled, its obligation
to sell to Maritime never arose or never became
effective and, therefore, it (Myers) was entitled to
repossess the property object of the contract,
possession being a mere incident to its right of
ownership.
The decision also stressed that "there can be no
rescission or resolution of an obligation as yet nonexistent, because the suspensive condition did not
happen. Article 1592 of the New Civil Code (Art. 1504
of Old Civil Code) requiring demand by suit or notarial
act in case the vendor of realty wants to rescind does
not apply to a contract to sell or promise to sell, where
title remains with the vendor until fulfillment to a
positive condition, such as full payment of the price."
(Manuel vs, Rodriguez, 109 Phil. 9)
Maritime's Second Motion for Reconsideration was
denied in the Resolution of the Court dated November
16, 1978, 86 SCRA 305, where the governing law and
precedents were briefly summarized in the strong and
emphatic language of Justice Teehankee, thus:
(a) The contract between the parties was a contract to
sell or conditional sale with title expressly reserved in
the vendor Myers Building Co., Inc. Myers until the
suspensive condition of full and punctual payment of
the full price shall have been met on pain of automatic
cancellation of the contract upon failure to pay any of
the monthly installments when due and retention of
the sums theretofore paid as rentals. When the

vendee, appellant Maritime, willfully and in bad faith

failed since March, 1961 to pay the P5,000. monthly
installments notwithstanding that it was punctually
collecting P10,000. monthly rentals from the lessee
Luzon Brokerage Co., Myers was entitled, as it did in
law and fact, to enforce the terms of the contract to
sell and to declare the same terminated and cancelled.
(b) Article 1592 (formerly Article 1504) of the new Civil
Code is not applicable to such contracts to self or
conditional sales and no error was committed by the
trial court in refusing to extend the periods for
payment.
(c) As stressed in the Court's decision, "it is irrelevant
whether appellant Maritime's infringement of its
contract was casual or serious" for as pointed out in
Manuel vs. Rodriguez, '(I)n contracts to self. whether
ownership is retained by the seller and is not to pass
until the full payment of the price, such payment, as
we said, is a positive suspensive condition, the failure
of which is not a breach, casual or serious, but simply
an event that prevented the obligation of the vendor to
convey title from acquiring binding force ...
(d) It should be noted, however, that Maritimes breach
was far from casual but a most serious breach of
contract ...
(e) Even if the contract were considered an
unconditional sale so that Article 1592 of the Civil Code
could be deemed applicable, Myers' answer to the
complaint for interpleaded in the court below
constituted a judicial demand for rescission of the
contract and by the very provision of the cited codal
article, 'after the demand, the court may not grant him
a new term for payment; and
(f) Assumming further that Article 1191 of the new Civil
Code governing rescission of reciprocal obligations
could be applied (although Article 1592 of the same
Code is controlling since it deals specifically with sales
of real property), said article provides that '(T)he court
shall decree the rescission claimed, unless there be
just cause authorizing the fixing of a period' and there
exists to "just cause" as shown above for the fixing of a
further period. ...
Under the first and second assignments of error which
petitioner jointly discusses, he argues that the
agreement entered into between him and the
respondent is a perfected contract of purchase and
sale within the meaning of Article 1475 of the New Civil
Code which provides that "the contract of sale is
perfected at the moment there is a meeting of minds
upon the thing which is the object of the contract and
upon the price. From that moment, the parties may

reciprocally demand performance, subject to the

provisions of the law governing the form of contract."
Petitioner contends that "(n)othing in the decision of
the courts below would show that ownership of the
property remained with plaintiff for so long as the
installments have not been fully paid. Which yields the
conclusion that, by the delivery of the lots to
defendant, ownership likewise was transferred to the
latter." (Brief for the Petitioner, p. 15) And he concludes
that the sale was consummated by the delivery of the
two lots, the subject thereof, by him to the respondent.
Under the findings of facts by the appellate court, it
appears that the two lots subject of the agreement
between the parties herein were delivered by the
petitioner to the private respondent who took
possession thereof and occupied the same and
thereafter built his house thereon, enclosing the lots
with adobe stone walls and barbed wires. But the
property being registered under the Land Registration
Act, it is the act of registration of the Deed of Sale
which could legally effect the transfer of title of
ownership to the transferee, pursuant to Section 50 of
Act 496. (Manuel vs. Rodriguez, et al., 109 Phil. 1;
Buzon vs. Lichauco, 13 Phil. 354; Tuazon vs.
Raymundo, 28 Phil. 635: Worcestor vs. Ocampo, 34
Phil. 646). Hence, We hold that the contract between
the petitioner and the respondent was a contract to sell
where the ownership or title is retained by the seller
and is not to pass until the full payment of the price,
such payment being a positive suspensive condition
and failure of which is not a breach, casual or serious,
but simply an event that prevented the obligation of
the vendor to convey title from acquiring binding force.
In the case at bar, there is no writing or document
evidencing the agreement originally entered into
between petitioner and private respondent except the
receipt showing the initial deposit of P150.00 as shown
in Exh. "A" and the payment of the 4- months
installment made by respondent corresponding to July,
1954 to October, 1954 in the sum of P740.56 as shown
in Exh. "B". Neither is there any writing or document
evidencing the modified agreement when the 3 lots
were changed to Lots 4 and 12 with a reduced area of
725 sq. meters, which are corner lots. This absence of
a formal deed of conveyance is a very strong indication
that the parties did not intend immediate transfer of
ownership and title, but only a transfer after full
payment of the price. Parenthetically, We must say that
the standard printed contracts for the sale of the lots in
the Rockville Subdivision on a monthly installment
basis showing the terms and conditions thereof are
immaterial to the case at bar since they have not been
signed by either of the parties to this case.
Upon the law and jurisprudence hereinabove cited and
considering the nature of the transaction or agreement

between petitioner and respondent which We affirm

and sustain to be a contract to sell, the following
resolutions of petitioner's assignment of errors
necessarily arise, and so We hold that:
1. The first and second assignments of errors are
without merit.
The overwhelming weight of authority culminating in
the Luzon Brokerage vs. Maritime cases has laid down
the rule that Article 1592 of the New Civil Code does
not apply to a contract to sell where title remains with
the vendor until full payment of the price as in the case
at bar. This is the ruling in Caridad Estates vs.
Santero, 71 Phil. 120; Aldea vs. Inquimboy 86 Phil.
1601; Jocon vs. Capitol Subdivision, Inc., L-6573, Feb.
28,
1955; Miranda
vs.
Caridad
Estates, L-2077
and Aspuria vs. Caridad Estates, L-2121 Oct. 3, 1950,
all reiterated in Manuel vs. Rodriguez, et al. 109 Phil. 1,
L-13435, July 27, 1960. We agree with the respondent
Court of Appeals that Art, 1191 of the New Civil Code is
the applicable provision where the obligee, like
petitioner herein, elects to rescind or cancel his
obligation to deliver the ownership of the two lots in
question for failure of the respondent to pay in fun the
purchase price on the basis of 120 monthly equal
installments, promptly and punctually for a period of
10 years.
2. We hold that respondent as obligor is not entitled to
the benefits of paragraph 3 of Art. 1191, NCC Having
been in default, he is not entitled to the new period of
90 days from entry of judgment within which to pay
petitioner the balance of P11,434.44 with interest due
on the purchase price of P12,325.00 for the two lots.
Respondent a paid P150.00 as deposit under Exh. "A"
and
P740.56
for
the
4-months
installments
corresponding to the months of July to October, 1954.
The judgment of the lower court and the Court of
Appeals held that respondent was under the obligation
to pay the purchase price of the lots m question on an
equal monthly installment basis for a period of ten
years, or 120 equal monthly installments. Beginning
November, 1954, respondent began to default in
complying with his obligation and continued to do so
for the remaining 116 monthly interest. His refusal to
pay further installments on the purchase price, his
insistence that he had the option to pay the purchase
price any time in ten years inspire of the clearness and
certainty of his agreement with the petitioner as
evidenced further by the receipt, Exh. "B", his dilatory
tactic of refusing to sign the necessary contract of sale
on the pretext that he will sign later when he shall
have updated his monthly payments in arrears but
which he never attempted to update, and his failure to
deposit or make available any amount since the
execution of Exh "B" on June 28, 1954 up to the
present or a period of 26 years, are all unreasonable

and unjustified which altogether manifest clear bad

faith and malice on the part of respondent puzzle
making inapplicable and unwarranted the benefits of
paragraph 3, Art. 1191, N.C.C. To allow and grant
respondent an additional period for him to pay the
balance of the purchase price, which balance is about
92% of the agreed price, would be tantamount to
excusing his bad faith and sanctioning the deliberate
infringement of a contractual obligation that is
repugnant and contrary to the stability, security and
obligatory force of contracts. Moreover, respondent's
failure to pay the succeeding 116 monthly installments
after paying only 4 monthly installments is a
substantial and material breach on his part, not merely
casual, which takes the case out of the application of
the benefits of pa paragraph 3, Art. 1191, N.C.C.
At any rate, the fact that respondent failed to comply
with the suspensive condition which is the full payment
of the price through the punctual performance of the
monthly payments rendered petitioner's obligation to
sell ineffective and, therefore, petitioner was entitled to
repossess the property object of the contract,
possession being a mere incident to his right of
ownership (Luzon Brokerage Co., Inc. vs. Maritime
Building Co., Inc., et al. 46 SCRA 381).
3. We further rule that there exists no just cause
authorizing the fixing of a new period within which
private respondent may pay the balance of the
purchase
price.
The
equitable
grounds
or
considerations which are the basis of the respondent
court in the fixing of an additional period because
respondent had constructed valuable improvements on
the land, that he has built his house on the property
worth P45,000.00 and placed adobe stone walls with
barbed wires around, do not warrant the fixing of an
additional period. We cannot sanction this claim for
equity of the respondent for to grant the same would
place the vendor at the mercy of the vendee who can
easily construct substantial improvements on the land
but beyond the capacity of the vendor to reimburse in
case he elects to rescind the contract by reason of the
vendee's default or deliberate refusal to pay or
continue paying the purchase price of the land. Under
this design, strategem or scheme, the vendee can
cleverly and easily "improve out" the vendor of his
land.
More than that, respondent has not been honest, fair
and reciprocal with the petitioner, hence it would not
be fair and reasonable to the petitioner to apply a
solution that affords greater reciprocity of rights which
the appealed decision tried to effect between the
parties. As matters stand, respondent has been
enjoying the possession and occupancy of the land
without paying the other 116 monthly installments as
they fall due. The scales of justice are already tipped in
respondent,s favor under the amended decision of the

respondent court. It is only right that We strive and

search for the application of the law whereby every
person must, in the exercise of his rights and in the
performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith
(Art. 19, New Civil Code)
In the case at bar, respondent has not acted in good
faith. With malice and deliberate intent, he has twisted
the clear import of his agreement with the petitioner in
order to suit his ends and delay the fulfillment of his
obligation to pay the land he had enjoyed for the last
26 years, more than twice the period of ten years that
he obliged himself to complete payment of the price.
4. Respondent's contention that petitioner has not
complied with his obligation to put up the necessary
facilities in the Rockville Subdivision is not sufficient
nor does it constitute good reason to justify the grant
of an additional period of 90 days from entry of
judgment within which respondent may pay the
balance of the purchase price agreed upon. The
Judgment of the appellate court concedes that
petitioner's failure to comply with his obligation to put
up the necessary facilities in the subdivision will not
deter him from asking for the rescission of the
agreement since his obligation is not correlative with
respondent's obligation to buy the property. Since this
is so conceded, then the right of the petitioner to
rescind the agreement upon the happening or in the
event that respondent fails or defaults in any of the
monthly installments would be rendered nugatory and
ineffective. The right of rescission would then depend
upon an extraneous consideration which the law does
not contemplate.
Besides, at the rate the two lots were sold to
respondent with a combined area of 725 sq. meters at
the uniform price of P17.00 per sq. meter making a
total price of P12,325.00, it is highly doubtful if not
improbable that aside from his obligation to deliver
title and transfer ownership to the respondent as a
reciprocal obligation to that of the respondent in
paying the price in full and promptly as the
installments fall due, petitioner would have assumed
the additional obligation "to provide the subdivision
with streets ... provide said streets with street
pavements concrete curbs and gutters, fillings as
required by regulations, adequate drainage facilities,
tree plantings, adequate water facilities" as required
under Ordinance No. 2969 of Quezon City approved
on May 11, 1956 (Answer of Defendant, Record on
Appeal, pp. 35-36) which was two years after the
agreement in question was entered intoJune, 1y54.
The fact remains, however, that respondent has not
protested to the petitioner nor to the authorities
concerned the alleged failure of petitioner to put up
and provide such facilities in the subdivision because

he knew too well that he has paid only the aggregate

sum of P890.56 which represents more or less 7% of
the agreed price of P12,325.00 and that he has not
paid the real estate taxes assessed by the government
on his house erected on the property under litigation.
Neither has respondent made any allegation in his
Answer and in all his pleadings before the court up to
the promulgation of the Resolution dated October 12,
1970 by the Court of Appeals, to the effect that he was
entitled to a new period within which to comply with
his obligation, hence the Court could not proceed to do
so unless the Answer is first amended. (Gregorio
Araneta, Inc. vs. Philippine Sugar Estates Development
Co., Ltd., G.R. No. L-22558, May 31, 1967, 20 SCRA
330, 335). It is quite clear that it is already too late in
the day for respondent to claim an additional period
within which to comply with his obligation.
Precedents there are in Philippine jurisprudence where
the Supreme Court granted the buyer of real property
additional period within which to complete payment of
the purchase price on grounds of equity and justice as
in (1) J.M. Tuazon Co., Inc. vs. Javier, 31 SCRA 829
where the vendee religiously satisfied the monthly
installments for eight years and paid a total of
P4,134.08 including interests on the principal
obligation of only P3,691.20, the price of the land; after
default, the vendee was willing to pay all arrears, in
fact offered the same to the vendor; the court granted
an additional period of 60 days -from receipt of
judgment for the vendee to make all installment in
arrears plus interest; (2) in Legarda Hermanos vs.
Saldaa, 55 SCRA 324, the Court ruled that where one
purchase, from a subdivision owner two lots and has
paid more than the value of one lot, the former is
entitled to a certificate of title to one lot in case of
default.
On the other hand there are also cases where
rescission was not granted and no new or additional
period was authorized. Thus, in Caridad Estates vs.
Santero, 71 Phil. 114, the vendee paid, totalling
P7,590.00 or about 25% of the purchase price of
P30,000.00 for the three lots involved and when the
vendor demanded revocation upon the vendee's
default two years after, the vendee offered to pay the
arears in check which the vendor refused; and the
Court sustained the revocation and ordered the vendee
ousted from the possession of the land. In Ayala y Cia
vs. Arcache, 98 Phil. 273, the total price of the land
was P457,404.00 payable in installments; the buyer
initially paid P100,000.00 or about 25% of the agreed
price; the Court ordered rescission in view of the
substantial breach and granted no extension to the
vendee to comply with his obligation.
The doctrinal rulings that "a slight or casual breach of
contract is not a ground for rescission. It must be so
substantial and fundamental to defeat the object of the

parties" (Gregorio Araneta Inc. vs. Tuazon de Paterno,

L-2886, August 22, 1962; Villanueva vs. Yulo, L-12985,
Dec. 29,1959); that "where time is not of the essence
of t agreement, a slight delay on the part of one party
in the performance of his obligation is not a sufficient
ground for the rescission of the agreement"( Biando vs.
Embestro L-11919, July 27, 1959; cases cited in Notes
appended to Universal Foods Corporation vs. Court of
Appeals, 33 SCRA 1), convince and persuade Us that in
the case at bar where the breach, delay or default was
committed as early as in the payment of the fifth
monthly installment for November, 1954, that such
failure continued and persisted the next month and
every month thereafter in 1955, 1956, 1957 and year
after year to the end of the ten-year period in 1964 (10
years is respondent's contention) and even to this
time, now more than twice as long a time as the
original period without respondent adding, or even
offering to add a single centavo to the sum he had
originally paid in 1954 which represents a mere 7% of
the total price agreed upon, equity and justice may not
be invoked and applied. One who seeks equity and
justice must come to court with clean hands, which can
hardly be said of the private respondent.
One final point, on the supposed substantial
improvements erected on the land, respondent's
house. To grant the period to the respondent because
of the substantial value of his house is to make the
land an accessory to the house. This is unjust and
unconscionable since it is a rule in Our Law that
buildings and constructions are regarded as mere
accessories to the land which is the principal, following
the Roman maxim "omne quod solo inadeficatur solo
cedit" (Everything that is built on the soil yields to the
soil).
Pursuant to Art. 1191, New Civil Code, petitioner is
entitled to rescission with payment of damages which
the trial court and the appellate court, in the latter's
original decision, granted in the form of rental at the
rate of P60.00 per month from August, 1955 until
respondent shall have actually vacated the premises,
plus P2,000.00 as attorney's fees. We affirm the same
to be fair and reasonable. We also sustain the right of
the petitioner to the possession of the land, ordering
thereby respondent to vacate the same and remove his
house therefrom.
WHEREFORE, IN VIEW OF THE FOREGOING, the
Resolution appealed from dated October 12, 1970 is
hereby REVERSED. The decision of the respondent
court dated April 23, 1970 is hereby REINSTATED and
AFFIRMED, with costs against private respondent. SO
ORDERED.
G.R. No. 127206. September 12, 2003

PERLA PALMA GIL, VICENTE HIZON, JR., and

ANGEL PALMA GIL vs HON. COURT OF APPEALS,
HEIRS
OF
EMILIO
MATULAC,
CONSTANCIO
MAGLANA, AGAPITO PACETES & The REGISTER
OF DEEDS OF DAVAO CITY
CALLEJO, SR., J.:
For review on appeal by certiorari are the
Decision[1] of the Court of Appeals in CA-G.R. CV. No.
43188 promulgated on March 19, 1996, and its
Resolution[2] dated October 17, 1996, denying the
petitioners Motion for Reconsideration of the said
decision.
The appealed decision affirmed in toto the
judgment of the Regional Trial Court, Davao City,
Branch 16, in Civil Case No. 15,356 which dismissed
the complaint of the herein petitioners.
The Antecedents
Concepcion Palma Gil, and her sister, Nieves
Palma Gil, married to Angel Villarica, were the coowners of a parcel of commercial land with an area of
829 square meters, identified as Lot No. 59-C, covered
by Transfer Certificate of Title (TCT) No. 432 located
in Davao City. The spouses Angel and Nieves Villarica
had constructed a two-storey commercial building on
the property. On October 13, 1953, Concepcion filed a
complaint against her sister Nieves with the then Court
of First Instance of Davao City, docketed as Civil Case
No. 1160 for specific performance, to compel the
defendant to cede and deliver to her an undivided
portion of the said property with an area of 256.2
square meters. After due proceedings, the court
rendered judgment on April 7, 1954 in favor of
Concepcion, ordering the defendant to deliver to the
plaintiff an undivided portion of the said property with
an area of 256.2 square meters:
A la vista de los datos expuestos, el Juzgado dicta
sentencia condenando a la demanda, Nieves Palma Gil
de Villarica, cumpla con los terminos del documento
(Exh. A) ordenando a aquella que otogue los
documentos necesarios traspasando a favor de la
demandante (CONCEPCION PALMA GIL), 256 metros
cuadrados con 20 centimetros del Lote No. 56-C
descrito mas particularmente en el Certificado de Titulo
No. 432.[3]
Nieves appealed to the Court of Appeals which
affirmed the assailed decision. In due course, the
decision became final and executory. On motion of the
plaintiff (Concepcion), the court issued a writ of
execution. Nieves, however, refused to execute the
requisite deed in favor of her sister. On April 27, 1956,
the court issued an order authorizing ex-officio Sheriff

Eriberto Unson to execute the requisite deed of

transfer to the plaintiff over an undivided portion of the
property with a total area of 256.2 square meters.
Instead of doing so, the sheriff had the property
subdivided into four lots namely, Lot 59-C-1, with an
area of 218 square meters; Lot 59-C-2, with an area of
38 square meters; Lot 59-C-3, with an area of 14
square meters; and Lot 59-C-4, with an area of 560
square meters, all covered by a subdivision plan. The
sheriff thereafter executed a Deed of Transfer
to Concepcion over Lot 59-C-1 and Lot 59-C-2 with a
total area of 256.2 square meters.
On October 24, 1956, Concepcion executed a
deed of absolute sale over Lot 59-C-1 in favor of
Iluminada Pacetes. In the said deed, the area of Lot 59C-1 appeared as 256 square meters although under the
subdivision plan, the area of the property was only 218
square meters. The vendee obliged herself to pay the
said amount, to wit:
1. The purchase price of P21,600.00 shall be paid as
follows: P7,500.00 to be paid upon the signing of this
instrument; and the balance of P14,100.00 to be paid
upon the delivery of the corresponding Certificate of
Title in the name of the VENDEE.[4]
Under the deed of absolute sale, the parties
further agreed as follows:
2. That the VENDOR shall, within the period of ONE
HUNDRED TWENTY (120) DAYS, from the signing of this
agreement, undertake and work for the issuance of the
corresponding Certificate of Title of the said Lot No. 59C-1 in her favor with the proper government office or
offices, to the end that the same can be duly
transferred in the name of the herein VENDEE, by
virtue thereof.
3. That pending the full and complete payment of the
purchase price to the VENDOR, the VENDEE shall
collect and receive any and all rentals and such other
income from the land above-described for her own
account and benefit, this right of the VENDEE to begin
from December 1, 1956.[5]
In the meantime, Nieves filed a motion in Civil
Case No. 1160 to compel the sheriff to report on his
compliance with the courts Order dated April 27, 1956.
The motion was denied. A motion for reconsideration of
the denial met the same fate. Nieves appealed to the
Court of Appeals, which appeal was docketed as CAG.R. No. 22438-R.
In a parallel development, Concepcion filed a
complaint for unlawful detainer against the spouses
Angel and Nieves Villarica with the Municipal Trial Court
docketed as Civil Case No. 2246. On October 4, 1956,

the court rendered judgment in favor of the plaintiff

and against the defendants, the decretal portion of
which reads as follows:
From the foregoing, it is indeed evident and clear that
the
herein defendants
have been unlawfully
withholding possession of the land from the plaintiff,
and hereby finds in favor of the plaintiff, and against
the defendants, ordering the latter to vacate the
premises described in the complaint, removing
whatever improvements they have constructed
thereon. The defendants are further judged to pay the
plaintiff the amount of ONE HUNDRED FIFTY PESOS
(P150.00) a month from the time of the filing of this
complaint until the lot is finally vacated in concept of
rentals, deprived of the plaintiff due to the unlawful
possession of the defendants, and to pay the costs of
this suit.[6]
The decision became final and executory but the
plaintiff did not file any motion for a writ of execution.
The spouses Angel and Nieves Villarica filed a
complaint on October 24, 1956 against the sheriff and
Concepcion with the Court of First Instance of Davao
City, docketed as Civil Case No. 2151 for the
nullification of the deed of transfer executed by the
sheriff.[7]
On December 21, 1956, Iluminada Pacetes filed a
motion to intervene in Civil Case No. 2151, as vendee
of the property subject of the case, which was granted
by the court. She then filed a motion to dismiss the
complaint. The court granted the motion. Nieves
appealed to the Court of Appeals which appeal was
docketed as CA-G.R. No. 22008-R. Nieves appeals in
Civil Cases Nos. 1160 and 2151 were certified by the
CA to this Court, docketed as G.R. No. L-15799 and G.R.
No. L-15801.
On the basis of the deed of transfer executed by
Sheriff Iriberto A. Unson, the Register of Deeds issued
TCT No. 7450 over Lot 59-C-1 and 59-C-2 on July 17,
1957 in the name of Concepcion, with a total area of
256.2 square meters. However, the latter failed to
transfer title to the property to and under the name of
Iluminada Pacetes. Consequently, the latter did not
remit the balance of the purchase price of the property
to Concepcion.
In the interim, the spouses Angel and Nieves
Villarica executed a real estate mortgage over Lot 59C-4 in favor of Prudential Bank as security for a
loan. On August 4, 1959, Concepcion died intestate
and was survived by Nieves Villarica and her nephews
and nieces. Iluminada filed a motion in Civil Case No.
1160 for her substitution as party-plaintiff in lieu of the

deceased Concepcion. On August 2, 1961, the court

issued an order granting the motion.
On August 31, 1961, this Court rendered judgment
in G.R. Nos. L-15799 and L-15801 setting aside the
deed of transfer executed by the sheriff in favor of
Concepcion Palma Gil, and remanding the records to
the trial court for further proceedings. [8] In compliance
with the Decision of this Court in G.R. No. L-15801, the
trial court conducted further proceedings in Civil Case
No. 1160 and discovered that the defendant had
mortgaged Lot 59-C-4 to the Prudential Bank.
Consequently, the court issued an order on February
17, 1964, declaring that the defendant had waived the
benefits of the Decision of the Court on August 31,
1961 in G.R. No. L-15801; thus, the conveyance of the
property made by Concepcion in favor of Iluminada
on October 24, 1956 must stand. Nieves filed a motion
for the reconsideration of the said order but the court
denied the same in an Order dated February 29, 1964.
Nieves appealed the order to the CA which dismissed
the appeal for her failure to file a record on appeal.
Nieves filed a petition for review with this Court
docketed as G.R. No. L-28363.
More than five years having elapsed without the
decision in Civil Case No. 2246 being enforced,
Iluminada filed a complaint docketed as Civil Case No.
4413 in the Court of First Instance of Davao City, for
the revival and execution of the decision of the
Municipal Trial Court in Civil Case No. 2246 (the
unlawful detainer case). The plaintiff therein averred
that,
as Concepcions
successor-in-interest,
she
acquired the right of action to enforce the decision in
Civil Case No. 2246. The defendants, on the other
hand, averred that Iluminada had not yet paid the
balance of the purchase price of Lot 59-C-1; hence, she
had not acquired title over the lot and the right to evict
the defendant. The deed of absolute sale executed
by Concepcionin favor of the plaintiff was an executory,
not an executed deed. On January 26, 1965, the court
rendered judgment in favor of the defendants and
dismissed the complaint. The decretal portion reads:
IN VIEW OF THE FOREGOING, the Court believes that
the plaintiff herein has not been properly and legally
subrogated to the rights and action of deceased
Concepcion Palma Gil and, hence, for these reasons the
Court dismisses this case without pronouncement as to
costs.
The counterclaim is also hereby ordered dismissed. [9]
On March 16, 1966, Iluminada Pacetes and
Agapito Pacetes executed a deed of absolute sale
over Lot 59-C-1 and Lot 59-C-2 in favor of Constancio
B. Maglana for P110,000.00, covered by TCT No. 7450.
[10]
The spouses-vendors undertook to secure title over

the lots under the name of the vendee within ninety

days.
On May 15, 1974, this Court denied the petition
for certiorari filed by Nieves in G.R. No. L-28363. [11] The
Court, in part, ruled:
But while the issue at bar exclusively involves the
timeliness of the appeal of the petitioners to the Court
of Appeals, this Court has nonetheless examined and
analyzed the substantive aspects of this case and is
satisfied that the ORDERS of the trial court complained
of are morally just.
Accordingly, the instant appeal is dismissed and the
resolution of the Court of Appeals dated July 31,
1967 and its resolution dated October 18, 1967 are
affirmed.[12]
The decision of the Court became final and
executory.
On May 5, 1975, the spouses Agapito and
Iluminada Pacetes filed a complaint against Nieves in
the Court of First Instance of Davao City, docketed as
Civil Case No. 8836 for the recovery of possession
of Lot 59-C-1 and Lot 59-C-2. The Pacetes spouses
claimed that Lot 59-C-2 was included in TCT No. 7450
under the name of Concepcion. The spouses prayed
that judgment be rendered in their favor after due
proceedings thus:

b. Pay Plaintiffs moral and exemplary damages in such

amount as the Honorable Court may fix considering the
facts and the law;
c. Pay Plaintiffs such expenses of litigation as may be
proven during the trial, and
d. Pay Plaintiffs expenses for services of counsel they
had to incurr (sic) in this complaint.
3. OTHER RELIEFS consonant with justice and equity
are prayed for.[13]
On May 10, 1977, Nieves Villarica executed a
lease agreement with Virginia Jorge and Anita Vergara
over Lots 59-C-1 and 59-C-2. The lessees took actual
possession of the leased property.
In their Answer to the complaint in Civil Case No.
8836, the defendants averred, by way of defense, that
the complaint was barred by the decision of the CFI in
Civil Case No. 4413, which ruled that the Deed of
Absolute Sale executed by Concepcion in favor of
Iluminada was merely an executory, but not an
executed contract. After the plaintiffs had rested their
case, the defendants filed a motion to dismiss
(demurrer to evidence). On October 29, 1975, the court
issued an order dismissing the complaint on the ground
that the action was barred by the decision of the court
in Civil Case No. 4413. [14] Thus, Virginia Jorge and Anita
Vergara continued to be in physical possession of the
property.

PRAYER
PREMISES CONSIDERED, it is most respectfully prayed
that:
1. During the pendency of this case, Defendant be
ordered:
a. To refrain from collecting rentals from the tenants or
occupants of the building erected in said Lot 59-C-1; in
that the tenants be directed to pay their rental to the
plaintiff;
b. To demolish her aforesaid building of strong
materials and vacate the premises of Lot 59-C-1
and Lot 59-C-2.
2. After hearing, Defendant be ordered to:
a. Pay the Plaintiffs the amount consisting of
compensation for the use of the land they have been
depribed (sic) of to receive and enjoy since October 24,
1956 due to the unwarranted and illegal occupation of
the said lots by defendant;

In the meantime, on August 8, 1977, Iluminada

consigned with the court in Civil Case No. 1160 the
amount of P11,983.00 only as payment of the purchase
price of the property. Iluminada was issued receipts for
the amount.[15] As successor-in-interest of Concepcion,
she likewise filed a motion for execution in Civil Case
No. 1160 for the eviction of the defendant Nieves
Villarica and all those acting for and in her behalf. The
court issued an order on August 19, 1977 granting the
motion. The
defendants
filed
a
motion
for
reconsideration of the order claiming that Iluminada
was not a party to the case which the court denied
on September 2, 1977. The defendant filed another
motion for reconsideration which was likewise denied
on September 16, 1977. The defendant filed a petition
for certiorari with the Court of Appeals docketed as CAG.R. No. 62957-R, which petition was dismissed
on August 26, 1980. The CA ruled that Iluminada
Pacetes was the real party-in-interest as the vendee of
the property. The defendant filed a petition with this
Court docketed as G.R. No. L-56399.
In the meantime, Iluminada filed a petition with
the RTC docketed as Miscellaneous Case No. 4715 for
the issuance of an owners duplicate of TCT No. 7450.

On March 22, 1978, the court granted the petition and

ordered the Register of Deeds to issue an owners
duplicate of the said title under the name of
Concepcion Gil. Iluminada presented the said order and
the deed of absolute sale executed by Concepcion in
her favor. On May 9, 1978, the Register of Deeds
issued TCT No. 61514 over Lot 59-C-1, with an area of
218 square meters, in the name of Iluminada Pacetes.
[16]

On April 21, 1980, TCT No. 73412 was issued by

the Register of Deeds of Davao City in favor of
Constancio Maglana over Lot 59-C-1 only.[17] The next
day, Constancio Maglana executed a deed of sale not
only over Lot 59-C-1 but also Lot 59-C-2, in favor of
Emilio Matulac for the purchase price of P150,000.00.
[18]
On the basis of the said deed, the Register of Deeds
issued TCT No. 80631 to and under the name of Emilio
Matulac over the two lots.
In the meantime, Angel Villarica had died on April
20, 1974. On July 7, 1981, his heirs, including his
widow Nieves, executed an Extra-Judicial Settlement of
Estate of Deceased in which the latter waived, ceded
and transferred to her children Teresita Magpantay,
Antero P.G. Villarica, Zenaida V. Alovera, Emperatriz V.
Garcia, Napoleon P.G. Villarica and Rupendo P.G.
Villarica her rights and interests over the property
covered by TCT No. 7450.[19]
On January 13, 1982, this Court affirmed the
resolution of the Court of Appeals, in CA-G.R. No.
62975-R and dismissed the petition for certiorari in
G.R. No. L-56399, thus, paving the way for the
execution of the decision of the trial court in Civil Case
No. 1160, per its Order dated August 19, 1977. Emilio
Matulac filed a motion for the issuance of a writ of
execution. The Court granted the motion on February
18, 1982. Nieves filed a motion for the reconsideration
of the order which the court denied in its Order
dated March 17, 1982. Virginia Jorge and Anita Vergara,
the lessees, filed a motion for reconsideration but the
court denied the motion. Nonetheless, the lessees were
allowed to stay in the property until April 9, 1982.
However, the lessees refused to vacate the property
after said date.
On April 10, 1982, Emilio Matulac filed a motion in
Civil Case No. 1160 for the issuance of a writ of
execution and an order of demolition. On April 20,
1982, the trial court issued an order granting the
motion for a writ of execution on April 30, 1982. The
court also issued a special order for the demolition of
the buildings on the property. The buildings on the
property, including the properties owned by Virginia
Jorge and Anita Vergara, were demolished on June 14,
1982. Emilio Matulac thereafter commenced the
construction of a building thereon. The defendant
Nieves Villarica, in the meantime, filed a motion in Civil

Case No. 1160 to annul the proceedings, including the

writ of execution issued by the court, and the issuance
of a restraining order.
For their part, Virginia Jorge and Anita Vergara
filed a petition for certiorari with this Court docketed as
G.R. No. L-60690 for the nullification of the aforesaid
orders and the writ of demolition issued by the trial
court in Civil Case No. 1160.
Three of the surviving heirs of Concepcion Gil,
namely, Perla Palma Gil, Vicente Hizon, Jr. and Angel
Palma Gil, through their first cousin, Atty. Vicente
Villarica, one of Nieves Villaricas children, filed on June
17, 1982, a complaint against Emilio Matulac,
Constancio Maglana, Agapito Pacetes, and the Register
of Deeds, with the Court of First Instance, docketed
as Civil Case No. 15,356 for the cancellation of the
deed of sale executed by Concepcion in favor of
Iliminada Pacetes; the deed of sale executed by the
latter in favor of Constancio Maglana; the deed of sale
executed by the latter in favor of Emilio Matulac, as
well as TCT Nos. 61514, 73412 and 80631 under the
respective names of the vendees.
The plaintiffs alleged, inter alia, that the deed of
absolute sale executed by Concepcion in favor of
Iluminada over Lots 59-C-1 and 59-C-2 was a contract
to sell, an executory contract, as declared by the Court
of First Instance in Civil Cases Nos. 4413 and 8836, and
not an executed contract; the defendant spouses
Agapito and Iluminada Pacetes failed to pay the
balance of the purchase price of the property during
the lifetime of Concepcion; hence, what was embodied
in the said deed was not fulfilled by the vendee.
Consequently, the sale is null and void.
The plaintiffs prayed for the issuance of a
temporary restraining order and a writ of preliminary
injunction to enjoin the defendant Emilio Matulac from
continuing with the construction of a building on the
property. The plaintiffs likewise prayed that after due
proceedings, judgment be rendered in their favor and
against the defendants, thus:
WHEREFORE, in view of the aforecited reasons it is
most respectfully prayed that:
1) An order be rendered immediately enjoining
defendant Matulac from doing further work in the
construction of the building and enjoining him from
entering the premises and the land subject of this
complaint and after trial making the injunction abovementioned permanent, ordering the removal of any
structure and other construction within the plaintiffs
above-described property and thereafter, upon said
defendants failure to do so authorizing plaintiffs to
order said removal at defendants expense.

2) Judgment be rendered ordering:

a. Defendant Register of Deeds to cancel TCT No. T61514, T-73412 and T-80631 and issued (sic) a new
Transfer Certificate of Title in the name of the abovementioned heirs of the late Concepcion Palma Gil
nullifying the deeds of sale, Annexes B, C, and D
hereof;
b. Defendants Pacetes, Maglana and Matulac jointly
and solidarily liable to plaintiffs for moral and
exemplary damages as may be granted by this
Honorable Court and the amount of P25,000.00 as
attorneys fees; and
c. Litigation expenses and other reliefs as may be
justified under this case.[20]
In his answer to the complaint, defendant Emilio
Matulac interposed the following special and
affirmative defenses: (a) he is the lawful owner of the
property; (b) the action is barred by the Decision of this
Court in G.R. No. L-56399; (c) the plaintiffs are
estopped from assailing the sale to him of the property;
and (d) he is a purchaser in good faith.
On November 29, 1982, the court issued an order
in Civil Case No. 1160, denying the motion for the
nullification of the proceedings and for a writ of
preliminary injunction. Nieves filed a motion for
reconsideration of the order. On February 18, 1983, the
court issued an order denying the motion. Nieves filed
a petition with the Court of Appeals for the nullification
of the same.
In the meantime, Emilio Matulac died intestate
and was substituted by his heirs Sonia Matulac,
Josephine Matulac and Gregorio Matulac.[21] A petition
was filed with the RTC of Davao City for the settlement
of his estate docketed as SP-No. 2747. The Court
appointed Sonia Matulac as administratrix of the
estate.
The CA rendered a decision granting the petition
and ordering the trial court to conduct further
proceedings to implement the August 19, 1977 Order.
Sonia Matulac filed a petition for review on certiorari
with this Court docketed as G.R. No. 85538 for the
nullification of the decision of the CA.
On November 24, 1989, this Court rendered a
Decision dismissing the petition in G.R. No. L-60690.
This Court said:
When We dismissed on September 16, 1974, the
petition for certiorari filed by defendants questioning
the orders, dated December 7, 1961 and December 17,
1964, in effect We had confirmed the sale by plaintiff in

Civil case No. 1160, Concepcion Palma Gil, of Lot 59-C1 and 59-C-2 to Illuminada Pacetes and affirmed the
ruling of the trial court that defendants had waived the
benefit of Our Resolution rendered on August 31, 1961.
[22]

Meanwhile, one of the plaintiffs, Perla Palma Gil in

Civil Case No. 15,356, was appointed by the court as
administratrix
of
the
estate
of Concepcion on December 29, 1989,[23] and filed in
the said case a motion to intervene as plaintiff in her
capacity as administratrix in behalf of all the heirs
of Concepcion.[24] The heirs of Emilio Matulac opposed
the motion considering that they, and not the estate
of Concepcion, owned the subject property; thus the
claim of the plaintiff should be filed in SP-No. 2747.
On April 7, 1990, the said motion was denied by the
trial court.[25] The said court declared:
Being already a plaintiff together with the other
plaintiffs in thise (sic) case, said intervention by
plaintiff Perla Palma Gil is not absolutely necessary and
imperative. It would only delay the early disposition of
the case if allowed.
On January 8, 1990, this Court dismissed the
petition in G.R. No. 85538. The petitioners filed a
motion for reconsideration and on July 2, 1992, this
Court granted the motion and reversed the decision of
the CA. This Court ruled in the said case as follows:
When Concepcion Palma Gil, plaintiff in Civil Case No.
1160 sold the land in question to Iluminada Pacetes
on October 24, 1956, the latter became the new owner
of the property. By virtue of the order of substitution
issued by the court, said new owner (Pacetes) became
a formal party---the party plaintiff. As the new party
plaintiff, Pacetes had the right to move for the issuance
of a writ of execution, which was correctly granted by
the trial court in the questioned Order dated August
19, 1977.
The subsequent transfers of the property from Pacetes
to Maglana, and then from Maglana to herein movant
Matulac, was acquired pendente lite. The latter
(Matulac) as the latest owner of the property, was, as
aptly put by the trial court, subrogated to all the rights
and obligations of Pacetes. He is thus the party who
now has a substantial interest in the property. Matulac
is a real party-in- interest subrogated to all the rights of
Iluminada Pacetes, including the right to the issuance
of a writ of execution in his name. Hence, the
questioned orders of the lower court dated November
29, 1982 and February 18, 1983 as well as the Writ of
Possession issued pursuant to the aforementioned
orders are valid. They do not in any way run counter to
the order of the lower court dated August 19, 1977,
which granted the motion for execution filed by
Pacetes, who, as earlier pointed out, was succeeded in

all his rights and interests, by herein petitioner,

Matulac.
Although the dispositive portion of the judgment
rendered in Civil Case No. 1160 did not award the
parties their respective shares in the property, the
power of the court to issue the order of execution
cannot be limited to what is stated in the dispositive
portion of the judgment. As held in Paylago vs. Nicolas
(189 SCRA 728 [1990]), the body of the decision must
be consulted in case of ambiguity in the dispositive
portion. Hence, in Jorge vs. Consolacion (supra), we
ruled that the execution of the judgment cannot be
limited to its dispositive portion, considering the
continued failure of the defendant Nieves Palma GilVillarica, to comply with what was required of her in the
judgment. Respondents deprived petitioner Concepcion
Palma Gil and her successors-in-interest of their legal
right to possess the land.[26](Underscoring supplied)
On June 11, 1993, the trial court rendered
judgment in Civil Case No. 15,356 in favor of the
defendants. The trial court ruled that this Court had
affirmed, in G.R. No. 85538 and G.R. No. L-60690, the
sales of the property from Concepcion Palma Gil to
Iluminada Pacetes, then to Constancio Maglana and to
Emilio Matulac; hence, the trial court was barred by the
rulings of this Court. The plaintiffs appealed to the CA
with the following assignment of errors:
I. The trial court erred in not holding that Iluminada
Pacetes had no right to sell or transfer the two (2)
parcels of land to Constancio Maglana;
II. That the trial court erred in not declaring the sale of
the properties in question from Iluminada Pacetes to
Constancio Maglana, thence, from Constancio Maglana
to Emilio Matulac NULL and VOID;
III. That the
complaint;

trial

court

erred

in

dismissing

the

IV. That the trial court erred in not ordering the

cancellation of transfer Certificate of Title No. T-80631
in the name of Emilio Matulac and the issuance of a
new title in the name of Concepcion Palma Gil;
V. That the trial court erred in not holding the appellees
liable for damages to the appellants.[27]
In the meantime, on June 29, 1994, the estate of
Emilio Matulac executed a deed of sale of real estate in
which the estate sold Lots 59-C-1 and 59-C-2 and the
building thereon to the Prudential Education Plan, Inc.
for P7,000,000.00.[28] On March 19, 1996, the CA
rendered a decision affirming the decision assailed
therein and dismissing the appeal. The CA ruled that
the deed of absolute sale executed by Concepcion in

favor of Iluminada Pacetes was a deed of absolute sale

over Lots 59-C-1 and 59-C-2, under which the
ownership over the property subject thereof was
transferred to the vendee. Moreover, the validity of the
sales of the subject lots by Concepcion to Iluminada, by
the latter to Constancio Maglana, and by the latter to
Emilio Matulac, had been confirmed by this Court in
G.R.
No.
L-60690
and
G.R.
No.
85538. Although Iluminada paid the balance of the
purchase price of the property only on August 8, 1977,
the payment was still timely, in light of Article 1592 of
the New Civil Code. Besides, the property had already
been sold to the respondents Constancio Maglana and
Emilio Matulac.
The appellants, now petitioners in this case, assert
that private respondents Agapito and Iluminada
Pacetes failed to pay the balance of the purchase price
in the amount of P14,100.00.They did consign and
deposit the amount of P11,983.00, but only on August
8, 1977, twenty one years from the execution of the
Deed of Absolute Sale in favor of the said spouses,
without the latter instituting an action for the
cancellation of their obligation. According to the
petitioners, the consignation made by Iluminada
Pacetes of the amount did not produce any legal effect.
Furthermore, private respondents Constancio Maglana
and Emilio Matulac were not purchasers in good faith
because at the time they purchased the respective
properties, the two-storey building constructed by the
spouses Angel and Nieves Villarica on the said property
was still existing. Hence, the decision of the CA should
be reversed and set aside.
In their Comment on the petition, private
respondents Constancio Maglana and Agapito Pacetes
averred that the action of the petitioners in the court a
quo was barred by the Decision of this Court in G.R. No.
L-60690 on November 24, 1989.
THE RULING OF THE COURT
The petition is denied due course.
We note that the petitioners failed to implead all
the compulsory heirs of the deceased Concepcion Gil in
their complaint. When she died intestate, Concepcion
Gil, a spinster, was survived by her sister Nieves, and
her nephews and nieces, three of whom are the
petitioners herein.
Upon Concepcions demise, all her rights and
interests over her properties, and the rights and
obligations under the Deed of Absolute Sale executed
in favor of Iluminada Pacetes, were transmitted to her
sister, and her nephews and nieces [29] by way
of succession, a mode of acquiring the property, rights
and obligation of the decedent to the extent of the

value of the inheritance of the heirs. The heirs stepped

into the shoes of the decedent upon the latters death.

ATTY. QUITAIN: The best evidence would be the

complaint, Your Honor.

[30]

ATTY. GALLARDO:
In their complaint, the petitioners alleged that:
7. That upon the death of the late Concepcion Palma
Gil, her heirs namely: A. Children of the deceased Pilar
Palma Gil Rodriguez; B. Children of the deceased
Asuncion Palma Gil Hizon one of whom is plaintiff
Vicente Hizon, Jr.; C. Nieves Palma Gil Villarica; D.
David Palma Gil one of whom is plaintiff Angel Palma
Gil; E. Perla Palma Gil; and F. Children of the deceased
Jose Palma Gil, ipso facto became co-owners of the said
subject property by operation of law;[31]
When she testified, petitioner Palma Gil stated that:
ATTY. GALLARDO: With the Courts permission.
Q You said that you are one of the 3 plaintiffs in
this case?
A Yes, sir.
Q Now, aside from these 3 plaintiffs who are
supposed to be the heirs of the late Concepcion
Palma Gil, there are also other heirs who were not
included as plaintiffs in this case?
A Yes, because that time when they demolished
the building and I accompanied Atty. Villarica at
the site where they had the demolition, we found
out that during the confrontation that we have to
hurry and file the case right away. So we were not
able to contact all the heirs and I have
contacted . . .since 3 of us were there during the
demolition, so we decided that I will be one, and
Angel Palma Gil was also there and also Vicente
Hizon Jr. whom I contacted at the Apo View Hotel
and I contacted also Julian Rodriguez, another
cousin thru telephone and he told us to go ahead
and file the case. We cannot get all the heirs. We
cannot gather all of them and we will have a hard
time asking them to sign, so we just filed the case.
Q You are telling the court that the other heirs
were not included because they were not available
to sign the complaint?
A They were not there during the demolition.
Q When was the case filed?
A June 14, the demolition was on June 14, 1982.

Q It appears in the complaint that it was filed

sometime on June 16, 1982?
A We had it on June 14 the demolition, and we
filed it right away because we were in a hurry.
Q Since June 16, 1982 up to the present the other
heirs did not do anything to be included in the
complaint?
ATTY. QUITAIN: The best evidence would be the
motion for intervention and it would seem that
compaero is contending that there is a need to
include all heirs. Under the civil law on property
even one co-owner may file a case.[32]
Although the petitioners sought leave from the
trial court to amend their complaint to implead the
intestate estate of the deceased Concepcion Gil
through her administratrix Perla Palma Gil, as party
plaintiff, the trial court denied the petitioners plea. The
petitioners manifested to the trial court that they
would assign the denial of their plea as one of the
assigned errors in case of appeal to the CA. They failed
to do so. The petitioners were duty bound to implead
all their cousins as parties-plaintiffs; otherwise, the trial
court could not validly grant relief as to the present
parties and as to those who were not impleaded.[33]
Being indispensable parties, the absence of the
surviving sister, nephews and nieces of the decedent in
the complaint as parties-plaintiffs, and in this case, as
parties-petitioners, renders all subsequent actions of
the trial court null and void for want of authority to act,
not only as to the absent parties, but even as to those
present. Hence, the petition at bar should be
dismissed.[34]
Even if we were to brush aside this procedural
lapse and delve into the merits of the case, a denial in
due course is inevitable.
Article 1191[35] in tandem with Article 1592[36] of
the New Civil Code are central to the issues at bar.
Under the last paragraph of Article 1169 of the New
Civil Code, in reciprocal obligations, neither party
incurs in delay if the other does not comply or is not
ready to comply in a proper manner with what is
incumbent upon him. From the moment one of the
parties fulfills his obligation, delay in the other
begins. Thus, reciprocal obligations are to be
performed simultaneously so that the performance of
one is conditioned upon the simultaneous fulfillment of

the other.[37] The right of rescission of a party to an

obligation under Article 1191 of the New Civil Code is
predicated on a breach of faith by the other party that
violates the reciprocity between them.[38]
That the deed of absolute sale executed by
Concepcion Gil in favor of Iluminada Pacetes is
an executory contract and not an executed contract is
a settled matter. In a perfected contract of sale of
realty, the right to rescind the said contract depends
upon the fulfillment or non-fulfillment of the prescribed
condition. We ruled that the condition pertains in
reality to the compliance by one party of an
undertaking the fulfillment of which would give rise to
the demandability of the reciprocal obligation
pertaining to the other party.[39] The reciprocal
obligation envisaged would normally be, in the case of
the vendee, the payment by the vendee of the agreed
purchase price and in the case of the vendor, the
fulfillment of certain express warranties.[40]
In another case, we ruled that the non-payment of
the purchase price of property constitutes a very good
reason to rescind a sale for it violates the very essence
of the contract of sale. In Central Bank of the
Philippines v. Bichara,[41] we held that the non-payment
of the purchase price of property is a resolutory
condition for which the remedy is either rescission or
specific performance under Article 1191 of the New
Civil Code. This is true for reciprocal obligations where
the obligation is a resolutory condition of the other.
[42]
The vendee is entitled to retain the purchase price
or a part of the purchase price of realty if the vendor
fails to perform any essential obligation of the contract.
Such right is premised on the general principles of
reciprocal obligations.[43]
In this case, Concepcion Gil sold Lot 59-C-1 to
Iluminada Pacetes for P21,600.00 payable as follows:
1. The purchase price of P21,600.00 shall be paid as
follows: P7,500.00, to be paid upon the signing of this
instrument; and the balance of P14,100.00, to be paid
upon the delivery of the corresponding Certificate of
Title in the name of the VENDEE.
Concepcion Gil obliged herself to transfer title
over the property to and under the name of the vendee
within 120 days from the execution of the deed.
2. That the VENDOR shall, within the period of ONE
HUNDRED TWENTY (120) DAYS, from the signing of this
agreement, undertake and work for the issuance of the
corresponding Certificate of Title of the said Lot No. 59C-1 in her favor with the proper government office or
offices, to the end that the same can be duly
transferred in the name of the herein VENDEE, by
virtue thereof.

3. That pending the full and complete payment of the

purchase price to the VENDOR, the VENDEE shall
collect and receive any and all rentals and such other
income from the land above-described for her own
account and benefit, this right of the VENDEE to begin
from December 1, 1956.
That it is further stipulated that this contract shall be
binding upon the heirs, executors and administrators of
the respective parties hereof.
And I, CONCEPCION PALMA GIL, with all the personal
circumstances above-stated, hereby confirm all the
terms and conditions stipulated in this instrument. [44]
The vendee paid the downpayment of P7,500.00.
By the terms of the contract, the obligation of the
vendee to pay the balance of the purchase price
ensued only upon the issuance of the certificate of title
by the Register of Deeds over the property sold to and
under the name of the vendee, and the delivery
thereof by the vendor Concepcion Gil to the
latter. Concepcionfailed to secure a certificate of title
over the property. When she died intestate on August
4, 1959, her obligation to deliver the said title to the
vendee devolved upon her heirs, including the
petitioners. The said heirs, including the petitioners
failed to do so, despite the lapse of eighteen years
since Concepcions death.
Iluminada was not yet obliged on August 8,
1977 to pay the balance of the purchase price of the
property, but as a sign of good faith, she nevertheless
consigned the amount of P11,983.00, part of the
balance of the purchase price of P14,000.00, with the
court in Civil Case No. 1160. The court accepted the
consignation and she was issued receipts therefor. Still,
the heirs of Concepcion Gil, including the petitioners,
failed to deliver the said title to the vendee. Iluminada
was compelled to file, at her expense, a petition with
the RTC docketed as Miscellaneous Case No. 4715 for
the issuance of an owners duplicate of TCT No. 7450
covering the property sold which was granted by the
court on March 22, 1978. It was only on May 9,
1978 that Iluminada managed to secure TCT No. 61514
over the property under her name. Upon the failure of
the heirs to comply with the decedents prestation,
Iluminada Pacetes was impelled to resort to legal
means to protect her rights and interests.
The petitioners, as successors-in-interest of the
vendor, are not the injured parties entitled to a
rescission of the deed of absolute sale. It was
Concepcions heirs, including the petitioners, who were
obliged to deliver to the vendee a certificate of title
over the property under the latters name, free from all
liens and encumbrances within 120 days from the
execution of the deed of absolute sale on October 24,
1956, but had failed to comply with the obligation.

The consignation by the vendee of the purchase

price of the property is sufficient to defeat the right of
the petitioners to demand for a rescission of the said
deed of absolute sale.[45]
It bears stressing that when the vendee consigned
part of the purchase price with the Court and secured
title over the property in her name, the heirs of
Concepcion, including the petitioners, had not yet sent
any notarial demand for the rescission of the deed of
absolute sale to the vendee, or filed any action for the
rescission of the said deed with the appropriate court.
Although the vendee consigned with the Court
only the amount of P11,983.00, P2,017.00 short of the
purchase price of P14,000.00, it cannot be claimed
that Concepcion was an unpaid seller because under
the deed of sale, she was still obligated to transfer the
property in the name of the vendee, which she failed to
do so. According to Article 1167 of the New Civil Code:
Art. 1167. If a person obliged to do something fails to
do it, the same shall be executed at his cost.
This same rule shall be observed if he does it in
contravention of the tenor of the obligation.
Furthermore, it may be decreed that what has been
poorly done be undone. (1098)
The vendee (Iluminada) had to obtain the owners
duplicate of TCT No. 7450 and thereafter secure its
transfer in her name. Pursuant to Article 1167, the
expenses incurred by the vendee should be charged
against the amount of P2,617.00 due to the heirs of
Concepcion Gil as the vendors successors-in-interest.
In sum, the decision of the CA affirming the
decision of the RTC dismissing the complaint of the
petitioners is affirmed.
IN LIGHT OF ALL THE FOREGOING, the petition
for review is DENIED for lack of merit. SO ORDERED.
G.R. No. 135528. July 14, 2004
SPOUSES ORLANDO A. RAYOS and MERCEDES T.
RAYOS vs. THE COURT OF APPEALS and
SPOUSES ROGELIO and VENUS MIRANDA
CALLEJO, SR., J.:
This is a petition for review on certiorari of the
Decision[1] of the Court of Appeals[2] in CA-G.R. CV No.
46727 which affirmed the Decision [3] of the Regional
Trial Court of Makati, Branch 62, in Civil Case No.
15639 for specific performance and damages, and Civil
Case No. 15984 for sum of money and damages.

The two (2) cases stemmed from the following

antecedent facts:
On December 24, 1985, petitioner Orlando A.
Rayos, a practicing lawyer, and his wife, petitioner
Mercedes T. Rayos, secured a short-term loan from the
Philippine Savings Bank (PSB) payable within a period
of one (1) year in quarterly installments of P29,190.28,
the first quarterly payment to start on March 24,
1986. The loan was evidenced by a promissory note
which the petitioners executed on December 24, 1985.
[4]
To secure the payment of the loan, the petitionersspouses executed, on the same date, a Real Estate
Mortgage over their property covered by Transfer
Certificate of Title (TCT) No. 100156 located in Las Pias,
Metro Manila.[5]
On December 26, 1985, the petitioners, as
vendors, and the respondents, Spouses Miranda, as
vendees, executed a Deed of Sale with Assumption of
Mortgage over the subject property for the price
of P214,000.00. However, on January 29, 1986, the
petitioners-spouses, likewise, executed a Contract to
Sell the said property in favor of the respondents
for P250,000.00 with the following condition:
3. That upon full payment of the consideration hereof,
the SELLER shall execute a Deed of Absolute Sale in
favor of the BUYER that the payment of capital gains
tax shall be for the account of the SELLER and that
documentary stamps, transfer tax, registration
expenses for the transfer of title including the
notarization and preparation of this Contract and
subsequent documents if any are to be executed, real
estate taxes from January 1, 1986 and other
miscellaneous expenses shall be for the account of the
BUYER; the SELLER hereby represents that all
association dues has been paid but that subsequent to
the execution of this Contract the payment of the same
shall devolve upon the BUYER.[6]
The petitioners obliged themselves to execute a
deed of absolute sale over the property in favor of the
respondents upon the full payment of the purchase
price thereof.
Respondent Rogelio Miranda filed an application
dated May 4, 1986 with the PSB to secure the approval
of his assumption of the petitioners obligation on the
loan, and appended thereto a General Information
sheet.[7] Respondent Rogelio Miranda stated therein
that he was the Acting Municipal Treasurer of Las Pias
and had an unpaid account with the Manila Banking
Corporation in the amount of P18,777.31. The PSB
disapproved his application. Nevertheless, respondent
Rogelio Miranda paid the first quarterly installment on
the petitioners loan on March 21, 1986 in the amount
of P29,190.28. The said amount was paid for the
account of the petitioners. Respondent Rogelio

Miranda, likewise, paid the second quarterly

installment in the amount of P29,459.00 on June 23,
1986, also for the account of the petitioners.[8]
In the meantime, respondent Rogelio Miranda
secured the services of petitioner Orlando Rayos as his
counsel in a suit he filed against the Manila Banking
Corporation, relative to a loan from the bank in the
amount of P100,000.00. Both parties agreed to the
payment of attorneys fees, as follows:
Our agreement is as follows:
1.
You will pay me P700.00 as filing fee and other
miscellaneous expenses which I personally received
from you this morning;
2.
Award to you of any amount in terms of moral,
exemplary or actual and other forms of damages shall
accrue to you in the amount of 70% thereof;
3.
30% of the award to you in the concept of No. 2
hereof shall pertain to me as my contingent fee;
4.
All attorneys fees that the court shall award to
me or by the management of TMBC if they agree to
extrajudicially settle shall pertain exclusively to me;
5.
Execution of judgment expenses shall be for your
account;
6.
Should the case be appealed, my contingent fee
shall increase by 10% if the appeal is to the
Intermediate Appellate Court on questions of facts and
law, and if appealed from there to the Supreme Court,
then another 10% shall accrue to me.[9]
On May 14, 1986, petitioner Orlando Rayos filed
respondent Rogelio Mirandas complaint against the
bank with the Regional Trial Court of Makati, docketed
as Civil Case No. 13670. [10]In the meantime, the latter
paid the third quarterly installment on the PSB loan
account amounting to P29,215.66, for which the bank
issued a receipt for the account of the petitioners.
The parties executed a Compromise Agreement in
Civil Case No. 13670 in which they agreed that each
party shall pay for the respective fees of their
respective counsels.[11] The trial court rendered
judgment on October 23, 1986 based on the said
compromise agreement.[12] Petitioner Orlando Rayos
demanded the payment of attorneys fees in the
amount of P5,631.93, but respondent Rogelio Miranda
refused to pay.
On November 12, 1986, petitioner Orlando Rayos
wrote to respondent Rogelio Miranda and enclosed a
copy of his motion in Civil Case No. 13670 for the

annotation of his attorneys lien at the dorsal portion of

the latters title used as security for the loan with the
Manila
Banking
Corporation.[13] The
respondent
opposed the motion, claiming that the petitioner
agreed to render professional services on a contingent
basis.[14]
Petitioner Orlando Rayos again wrote respondent
Rogelio Miranda on November 30, 1986, reminding the
latter of the last quarterly payment of his loan with the
PSB. He also advised the respondent to thereafter
request the bank for the cancellation of the mortgage
on his property and to receive the owners duplicate of
his title over the same. Petitioner Orlando Rayos also
wrote that their dispute over his attorneys fees in Civil
Case No. 13670 should be treated differently.[15]
Petitioner Orlando Rayos then received a Letter
dated November 27, 1986 from the PSB, reminding him
that his loan with the bank would mature on December
24, 1986, and that it expected him to pay his loan on
or before the said date.[16] Fearing that the respondents
would not be able to pay the amount due, petitioner
Orlando Rayos paid P27,981.41[17] to the bank on
December
12,
1986,
leaving
the
balance
of P1,048.04. In a Letter dated December 18, 1986, the
petitioner advised the PSB not to turn over to the
respondents the owners duplicate of the title over the
subject property, even if the latter paid the last
quarterly installment on the loan, as they had not
assumed the payment of the same.[18]
On December 24, 1986, respondent Rogelio
Miranda arrived at the PSB to pay the last installment
on
the
petitioners
loan
in
the
amount
of P29,223.67. He informed the bank that the
petitioners had executed a deed of sale with
assumption of mortgage in their favor, and that he was
paying the balance of the loan, conformably to said
deed. On the other hand, the bank informed the
respondent that it was not bound by said deed, and
showed petitioner Orlando Rayos Letter dated
December 18, 1986. The respondent was also informed
that the petitioners had earlier paid the amount
of P27,981.41 on the loan. The bank refused
respondent Rogelio Mirandas offer to pay the loan, and
confirmed its refusal in a Letter dated December 24,
1986.[19]
On even date, respondent Rogelio Miranda wrote
the PSB, tendering the amount of P29,223.67 and
enclosed Interbank Check No. 01193344 payable to
PSB.[20] Thereafter, on December 29, 1986, the
petitioners paid the balance of their loan with the bank
in the amount of P1,081.39 and were issued a receipt
therefor.[21] On January 2, 1987, the PSB wrote
respondent Rogelio Miranda that it was returning his
check.[22]

On January 2, 1987, respondent Rogelio Miranda

filed a complaint against the petitioners and the PSB
for damages with a prayer for a writ of preliminary
attachment with the RTC of Makati. The case was
docketed as Civil Case No. 15639 and raffled to Branch
61 of the court. The respondent alleged inter alia that
the petitioners and the PSB conspired to prevent him
from paying the last quarterly payment of the
petitioners loan with the bank, despite the existence of
the deed of sale with assumption of mortgage
executed by him and the petitioners, and in refusing to
turn over the owners duplicate of TCT No. 100156,
thereby preventing the transfer of the title to the
property in his name. Respondent Rogelio Miranda
prayed that:

on January 3, 1986 that as soon as his payment to the

PSB of P29,223.67 was refunded, the owners duplicate
of the title would be released to him.[24] On January 5,
1986, petitioner Orlando Rayos wrote respondent
Rogelio Miranda, reiterating that he would release the
title in exchange for his cash settlement of P29,421.41.
[25]
The respondent failed to respond.

WHEREFORE, it is respectfully prayed that judgment be

rendered in favor of plaintiff and against defendants,
ordering the latter, jointly and severally, as follows:

In the meantime, the petitioners received the

complaint in Civil Case No. 15639 and filed their
Answer with Counterclaim in which they alleged that:

(a) To pay to plaintiff the sum of P267,197.33, with

legal interest from date of demand, as actual or
compensatory damages representing the unreturned
price of the land;

14. That plaintiff has no cause of action against

defendants Rayos, the latter are willing to deliver the
title sought by plaintiff under the terms set out in their
letters dated January 3, 5, 17, and 20, hereto marked
as Annexes 1, 1-A, 1-B and 1-C;[28]

(b) To pay to plaintiff the sum of P500,000.00 as

consequential damages;
(c) To pay to plaintiff the sum of P1,000,000.00 as
moral damages;
(d) To pay to plaintiff the sum of P100,000.00 as
exemplary damages by way of example or correction
for the public good;
(e) To pay to plaintiff the sum of P100,000.00 for and
as attorneys fees;
(f) To pay for the costs of suit; and
(g) That a Writ of Attachment be issued against the
properties of defendant Rayos spouses as security for
the satisfaction of any judgment that may be
recovered.
PLAINTIFF FURTHER PRAYS for such other remedies and
relief as are just or equitable in the premises.[23]
The trial court granted the respondents plea for a
writ
of
preliminary
attachment
on
a
bond
of P260,000.00. After posting the requisite bond, the
respondent also filed a criminal complaint against
petitioner Orlando Rayos for estafa with the Office of
the Provincial Prosecutor of Makati, docketed as I.S. No.
87-150. He, likewise, filed a complaint for disbarment
in this Court against petitioner Orlando Rayos,
docketed as Administrative Case No. 2974. Unaware of
the said complaint, the petitioner wrote the respondent

In the meantime, the PSB executed on January 8,

1987 a Release of Real Estate Mortgage in favor of the
petitioners,[26] and released the owners duplicate of
title of TCT No. 100156.[27] On January 17, 1987,
petitioner Orlando Rayos wrote respondent Rogelio
Miranda, reiterating his stance in his Letters of January
3 and 5, 1987.

Petitioner Orlando Rayos filed a complaint on

February 1, 1987 against respondent Rogelio Miranda
with the Regional Trial Court of Makati, docketed as
Civil Case No. 15984 for Specific Performance with
Damages
for the collection of
the amount
of P29,223.67 which he had paid to the PSB
on December 12 and 19, 1986, and his attorneys fees
in Civil Case No. 13670. The trial court consolidated the
cases in Branch 62 of the RTC.
Respondent Rogelio Miranda filed an Amended
Complaint in Civil Case No. 15639 for specific
performance with damages, impleading the officers of
the PSB as parties-defendants. He alleged that of the
purchase price of the property of P214,000.00, he had
paid the entirety thereof to the petitioners, and that
petitioner Orlando Rayos acted unethically in trying to
collect P5,631.93 from him as his attorneys fees in Civil
Case No. 13670, and in having such claim annotated at
the dorsal portion of his title over the property he
mortgaged to the Manila Banking Corporation.
Respondent Rogelio Miranda prayed that, after
due proceedings, judgment be rendered in his favor,
thus:
WHEREFORE, it is respectfully prayed that judgment be
rendered in favor of plaintiff and against defendants, as
follows:
(a) Ordering defendants spouses Orlando A. Rayos and
Mercedes T. Rayos to deliver forthwith to plaintiff the

Owners Duplicate of Transfer Certificate of Title No.

100156, Registry of Deeds for Pasay City;
(b) Ordering defendants, jointly and severally, to pay to
plaintiff the sum of P1,000,000.00 as moral damages;
(c) Ordering defendants, jointly and severally, to pay to
plaintiff the sum of P867,197.33 as exemplary
damages by way of example or correction for the
public good;
(d) Ordering defendants, jointly and severally, to pay to
plaintiff the sum of P100,000.00 for and as attorneys
fees;
(e) Ordering defendants, jointly, to pay the costs of
suit; and
(f) Ordering the issuance of a Writ of Attachment
against the properties of defendants Rayos spouses as
security for the satisfaction of any judgment that may
be recovered.
PLAINTIFF further prays for such other remedies and
relief as are just or equitable in the premises.[29]
In the meantime, petitioner Orlando Rayos filed an
Amended Complaint in Civil Case No. 15984
impleading his wife and that of respondent Rogelio
Miranda as parties to the case. On March 4, 1987, the
trial court issued an Order granting the petitioners
motion in Civil Case No. 15639 for the discharge of the
attachment on their property. [30] The court also denied
the respondents motion for reconsideration of the
Order of the court. The respondents, thereafter, filed a
petition for review with the Court of Appeals for the
nullification of the said Order.
On July 9, 1987, the public prosecutor dismissed
the charge of estafa against petitioner Orlando Rayos.
[31]
The respondents appealed the resolution to the
Department of Justice.
On May 26, 1987, the PSB and its officers filed
their Answer in Civil Case No. 15639, and alleged the
following by way of special and/or affirmative defenses,
thus:
27. The application for the plaintiff to assume the
mortgage loan of the defendants Spouses Rayos was
not approved, and it was NOT even recommended by
the Marketing Group of defendant PSBank for approval
by its Top Management, because the credit standing of
the plaintiff was found out to be not good;
28. The acceptance of the payments made by the
plaintiff for three (3) amortizations on the loan of
defendants Spouses Rayos was merely allowed upon

the insistence of the plaintiff, which payments were

duly and accordingly receipted, and said acceptance
was in accordance with the terms of the Real Estate
Mortgage executed by the defendants Spouses Rayos
in favor of the defendant PSBank and is also allowed by
law;[32]
The parties in Civil Case No. 15639 agreed to
submit the case for the trial courts decision on the
basis of their pleadings and their respective
affidavits. In a Resolution dated July 26, 1988, then
Undersecretary of Justice Silvestre Bello III affirmed the
Public Prosecutors resolution in I.S. No. 87-150.[33]
On January 30, 1989, the petitioners sold the
property to Spouses Mario and Enriqueta Ercia
for P144,000.00. The said spouses were not impleaded
as parties-defendants in Civil Case No. 15639. On May
18, 1989, the petitioners filed an amended complaint
in Civil Case No. 15984, appending thereto a copy of
the Contract to Sell in favor of the respondents. The
trial court admitted the said complaint.
On November 15, 1989, this Court rendered its
Decision dismissing the complaint for disbarment
against Rayos.[34]
On January 29, 1993, the trial court rendered
judgment, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby
rendered, as follows:
I. (a) In Civil Case No. 15639, this Court orders plaintiff
Rogelio Miranda to refund to spouses Orlando and
Mercedes T. Rayos the total sum of P29,069.45, Rayos
paid to PS Bank as the last amortization and as release
of mortgage fee, without any interest; and upon receipt
of the sum of P29,069.45 from Rogelio Miranda,
Spouses Orlando and Mercedes T. Rayos shall deliver to
Rogelio Miranda Transfer Certificate of Title No. 100156
of the Registry of Deeds of Pasay City; and, deliver to
Rogelio Miranda the possession of the parcel of land
described in the said title;
(b) Dismissing the complaint for damages of Plaintiff
Rogelio Miranda against Spouses Orlando and
Remedios (sic) T. Rayos, Philippine Savings Bank, Jose
Araullo, Cesar I. Valenzuela, Dionisio Hernandez, Nestor
E. Valenzuela, Raul T. Totanes, and Belinda Lim, for
insufficiency of evidence; while the counterclaims of PS
Bank, Jose Araullo, Cesar Valenzuela, Dionisio
Hernandez, Nestor E. Valenzuela, Raul Totanes, and
Belinda Lim, are likewise dismissed for insufficiency of
evidence.

(c) The counterclaims of Spouses Orlando and

Mercedes T. Rayos will be treated in Civil Case No.
15984;
II. In Civil Case No. 15984, this Court orders Defendant
Rogelio Miranda to pay to Plaintiff Orlando Rayos the
sum of P4,133.19 at 12% interest per annum, from the
date of the filing of the complaint on Feb. 11, 1987
until fully paid.
No costs in both cases.
SO ORDERED.[35]
The petitioners appealed the decision to the Court
of Appeals contending that:
I. THE COURT A QUO COMMITTED A GRAVE ERROR
IN NOT FINDING THAT ROGELIO A. MIRANDA
COMMITTED A BREACH OF CONTRACT IN NOT
PAYING THE FULL CONTINGENT FEE OF 30% IN
WRITING IN THE MANILABANK CASE AND BECAUSE
OF THAT BREACH, HE CANNOT NOW DEMAND
SPECIFIC PERFORMANCE AND THE COURT A
QUOSHOULD HAVE LEFT THE PARTIES AS THEY
ARE;
II. THE COURT A QUO SIMILARLY COMMITTED AN
ERROR IN NOT FINDING THAT THE DECISION IN
SEVA VS. ALFREDO BERWIN & CO. & MEDEL IS
APPLICABLE FOUR SQUARE WHEREBY HE WHO
BREACHES HIS CONTRACT IS NOT ENTITLED TO
SPECIFIC PERFORMANCE;[36]
On July 27, 1998, the Court of Appeals rendered
judgment affirming with modification the decision of
the RTC, thus:
WHEREFORE, premises considered, the appealed
decision of the Regional Trial Court of Makati City, is
hereby AFFIRMED, with the modification abovestated.
[37]

The petitioners filed the instant petition, and

ascribed the following errors on the appellate court:
I. THE COURT OF APPEALS (CA) COMMITTED AN
ERROR IN NOT FINDING THAT THE PRIVATE
RESPONDENT MIRANDA COMMITTED THE FIRST
BREACH FOR FAILURE TO ASSUME THE LOAN THUS
HE FAILED TO SURROGATE (sic) HIMSELF TO PSB.
II. THE CA COMMITTED AN ERROR IN FINDING
THAT
PETITIONERS
PRE-EMPTED
PRIVATE
RESPONDENT MIRANDA IN DEPOSITING THE LAST
AMORTIZATION WHEN MIRANDA HAD NO LEGAL
STANDING WITH PSB DUE TO THE LATTERS NONAPPROVAL OF THE ASSUMPTION OF THE LOAN.

III. THE CA COMMITTED AN ERROR IN FINDING

BOTH PARTIES GUILTY OF FIRST VIOLATING THE
OBLIGATIONS INCUMBENT UPON THEM EVEN
INFERRING THAT PETITIONERS COMMITTED THE
BREACH FIRST BUT LATER CONCLUDING THAT THE
BREACH WAS COMMITTED BY BOTH PARTIES. IT
DID NOT MAKE A CORRECT ASSESSMENT OF WHO
ACTUALLY COMMITTED THE FIRST BREACH.
IV. THE CA COMMITTED AN ERROR IN NOT
ALLOWING THE OFFSET IF ITS DECISION STOOD OF
THE AMOUNT OF P4,133.19 PLUS 12% INT. P.A.
FROM THE FILING OF THE COMPLAINT (CV 15984),
THUS, ENTIRELY DISREGARDING THE DECISION OF
THE TRIAL COURT IN SAID CASE ALLOWING ONLY
THE DECISION IN CV 15639.
V. THE CA COMMITTED AN ERROR IN NOT
APPLYING THE DECSION (sic) LAID DOWN IN SEVA
VS. ALFRED BERWIN & CO. AND MEDEL THAT A
PERSON HIMSELF AT FAULT CANNOT ENFORCE
SPECIFIC PERFORMANCE.[38]
The petitioners assert that the Court of Appeals
erred in not finding that the respondents first
committed a breach of their contract to sell upon their
failure to pay the amount due for the last quarterly
installment of their loan from the PSB. The petitioners
fault the Court of Appeals for not relying on the
resolution of Undersecretary Silvestre Bello III affirming
the dismissal of the criminal complaint for estafa in I.S.
No. 87-150, as cited by this Court in its decision
in Miranda v. Rayos,[39] where it was also held that
petitioner Orlando Rayos paid the last quarterly
installment because he thought that the respondents
would not be able to pay the same. The petitioners
argue that they had no other alternative but to pay the
last quarterly installment due on their loan with the
PSB, considering that they received a demand letter
from the bank on November 28, 1986, coupled by its
denial of the respondents request to assume the
payment of the loan. They insist that they did not block
the respondents payment of the balance of the loan
with the bank. The petitioners contend that even if the
parties committed a breach of their respective
obligations under the contract to sell, it behooved the
Court of Appeals to apply Article 1192 of the Civil Code
in the instant case, which reads:
The power to rescind obligation 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.

for paying the amortization due for the last quarterly

installment on their loan with the PSB:

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.

It is difficult to imagine that complainant would be so

nave as to be totally unaware of the provisions of the
original contract between the PSB and the spouses
Rayos. He is a degree holder (A.B. Pre-Law and B.S.C.)
and Acting Municipal Treasurer of Las Pias. In short, he
is not an ordinary layman. As a buyer with a knowledge
of law, it was unnatural for him to read the provisions
of the real estate mortgage wherein it is provided,
among others, that the sale of the property covered by
the mortgage does not in any manner relieve the
mortgagor of his obligation but that on the contrary,
both the vendor and the vendee, or the party in whose
favor the alienation or encumbrance is made shall be,
jointly and severally, liable for said mortgage
obligations. There is every reason to believe that it was
pursuant to the said provision in the real estate
mortgage that complainant tried to assume the loan
obligation of the Rayoses by filling up and submitted
the loan application (page 30, records) sent by Orland
Rayos. By signing the loan application and the general
information sheet (page 31, records) in connection with
said application, complainant showed that he knew
that there was a need to formally apply to the bank in
order for him to assume the mortgage.

The petition has no merit.

The assailed ruling of the Court of Appeals reads:
After due study, the Court finds that there was no basis
in fact and law for the appellants to usurp the payment
of the last amortization on the mortgage upon the
parcel of land it had conveyed to the Mirandas.Even if
the appellants wanted to keep their good credit
standing, they should not have preempted Miranda in
paying the final amortization. There is no sufficient
showing that Miranda was in danger of defaulting on
the said payment. In fact, it appears that he
approached the bank to tender payment, but he was
refused by the bank, because he was beaten to the
draw, so to speak, by the appellants. Appellants were
able to do so because, for some reasons, the Mirandas
assumption of the mortgage has not been approved by
the bank. In doing so, the appellants had unilaterally
cancelled the deed of sale with assumption of
mortgage, without the consent of the Mirandas. This
conduct by the appellants is, to say the least,
injudicious as under Article 1308 of the Civil Code,
contracts must bind both contracting parties and their
validity or compliance cannot be left to the will of one
of them.
Just as nobody can be forced to enter into a contract, in
the same manner, once a contract is entered into, no
party can renounce it unilaterally or without the
consent of the other. It is a general principle of law that
no one may be permitted to change his mind or
disavow and go back upon his own acts, or to proceed
contrary thereto, to the prejudice of the other party. In
a regime of law and order, repudiation of an agreement
validly entered into cannot be made without any
ground or reason in law or in fact for such repudiation.
In the same way that the Rayos spouses must respect
their contract with the Mirandas for the sale of real
property and assumption of mortgage, Rogelio Miranda
has to recognize his obligations under his agreement to
pay contingent attorneys fees to Orlando Rayos.[40]
The Court of Appeals erred in so ruling.
The findings and disquisitions of the Court of
Appeals cannot prevail over our findings in Miranda v.
Rayos,[41] a case which involves the same parties, and
where we held that the petitioners cannot be faulted

We find respondent spouses version that when

complainants application to assume the mortgage loan
was disapproved he begged that he be allowed to pay
the quarterly amortization credible, owing to the fact
that complainant made the payments for the account
of the Rayoses. Hence, complainant knew that since
his application to the PSB was not approved, there was
no substitution of parties and so he had to pay for the
account of respondent spouses as shown by the
receipts issued by the PSB.
As for the charge that Rayos paid the last installment
to block complainant from getting the title and
transferring the same to his name, respondents version
is more satisfactory and convincing. Respondent
Orland Rayos paid the last amortization when it
became apparent that complainant would not be able
to give the payment on the due date as he was still
trying to sell his Lancer car. Even if complainant was
able to pay the last installment of the mortgage loan,
the title would not be released to him as he knew very
well that his application to assume the mortgage was
disapproved and he had no personality as far as PSB
was concerned.[42]
Contrary to the ruling of the Court of Appeals, the
petitioners did not unilaterally cancel their contract to
sell with the respondents when they paid the total
amount of P29,062.80 to the PSB in December 1986.
[43]
In fact, the petitioners wrote the respondents on
January 3, 5 and 17, 1987, that they were ready to

execute the deed of absolute sale and turn over the

owners duplicate of TCT No. 100156 upon the
respondents
remittance
of
the
amount
of P29,223.67. The petitioners reiterated the same
stance in their Answer with Counterclaim in Civil Case
No. 15639. The petitioners cannot, likewise, be faulted
for refusing to execute a deed of absolute sale over the
property in favor of the respondents, and in refusing to
turn over the owners duplicate of TCT No. 100156
unless the respondents refunded the said amount. The
respondents were obliged under the contract to sell to
pay the said amount to the PSB as part of the purchase
price of the property. On the other hand, it cannot be
argued by the petitioners that the respondents
committed a breach of their obligation when they
refused to refund the said amount.
It bears stressing that the petitioners and the
respondents executed two interrelated contracts, viz:
the Deed of Sale with Assumption of Mortgage dated
December 26, 1985, and the Contract to Sell dated
January 29, 1986. To determine the intention of the
parties, the two contracts must be read and interpreted
together.[44] Under the two contracts, the petitioners
bound and obliged themselves to execute a deed of
absolute sale over the property and transfer title
thereon to the respondents after the payment of the
full purchase price of the property, inclusive of the
quarterly installments due on the petitioners loan with
the PSB:
3. That upon full payment of the consideration hereof,
the SELLER shall execute a Deed of Absolute Sale in
favor of the BUYER that the payment of capital gains
tax shall be for the account of the SELLER and that
documentary stamps, transfer tax, registration
expenses for the transfer of title including the
notarization and preparation of this Contract and
subsequent documents if any are to be executed, real
estate taxes from January 1, 1986 and other
miscellaneous expenses shall be for the account of the
BUYER; the SELLER hereby represents that all
association dues has been paid but that subsequent to
the execution of this Contract the payment of the same
shall devolve upon the BUYER.[45]
Construing the contracts together, it is evident
that the parties executed a contract to sell and not a
contract of sale. The petitioners retained ownership
without further remedies by the respondents[46] until
the payment of the purchase price of the property in
full. Such payment is a positive suspensive condition,
failure of which is not really a breach, serious or
otherwise, but an event that prevents the obligation of
the petitioners to convey title from arising, in
accordance with Article 1184 of the Civil Code.
[47]
In Lacanilao v. Court of Appeals,[48] we held that:

It is well established that where the seller promised to

execute a deed of absolute sale upon completion of
payment of the purchase price by the buyer, the
agreement is a contract to sell. In contracts to sell,
where ownership is retained by the seller until payment
of the price in full, such payment is a positive
suspensive condition, failure of which is not really a
breach but an event that prevents the obligation of the
vendor to convey title in accordance with Article 1184
of the Civil Code.
The non-fulfillment by the respondent of his
obligation to pay, which is a suspensive condition to
the obligation of the petitioners to sell and deliver the
title to the property, rendered the contract to sell
ineffective and without force and effect. [49] The parties
stand as if the conditional obligation had never
existed. Article 1191 of the New Civil Code will not
apply because it presupposes an obligation already
extant.[50] There can be no rescission of an obligation
that is still non-existing, the suspensive condition not
having happened.[51]
However, the respondents may reinstate the
contract to sell by paying the P29,223.67, and the
petitioners may agree thereto and accept the
respondents late payment.[52] In this case, the
petitioners had decided before and after the
respondents filed this complaint in Civil Case No.
15639 to accept the payment of P29,223.67, to
execute the deed of absolute sale over the property
and cause the transfer of the title of the subject
property to the respondents. The petitioners even filed
its amended complaint in Civil Case No. 15984 for the
collection of the said amount. The Court of Appeals
cannot, thus, be faulted for affirming the decision of
the trial court and ordering the petitioners to convey
the property to the respondents upon the latters
payment of the amount of P29,223.67, provided that
the property has not been sold to a third-party who
acted in good faith.
IN VIEW OF ALL THE FOREGOING, the petition
is DENIED DUE COURSE. The Decision of the Court of
Appeals in CA-G.R. CV No. 46727 is AFFIRMED, except
as to the factual finding that the petitioners usurped
the payment of the last amortization on the mortgage
upon the parcel of land. Costs against the petitioners.
SO ORDERED.