Vous êtes sur la page 1sur 112

Republic of the Philippines

SUPREME COURT
Manila
EN BANC

G.R. No. L-25071 March 29, 1972


GEORGE W. BATCHELDER, doing business under the name and style of Batchelder Equipment, plaintiff-appellant,
vs.
THE CENTRAL BANK OF THE PHILIPPINES, defendant-appellant.
Quasha, Asperilla, Blanco, Zafra, and Tayag for plaintiff-appellant.
F.E. Evangelista, Cruz-Espiritu & Associates for defendant-appellant.

FERNANDO, J.:p
In essence, the pivotal legal question presented by this appeal of defendant Central Bank of the Philippines, 1 is whether or not the issuance of a
monetary policy by it, thereafter implemented by the appropriate resolutions, as to the rate of exchange at which dollars after being surrendered and
sold to it could be re-acquired, creates a contractual obligation. It was the holding of the lower court that in law there was such a contract, the terms
of which had to be respected by defendant Central Bank. Such a conclusion is challenged in this appeal. For reasons to be hereinafter set forth, we
find that the lower court was far too generous in its appreciation of the claim of plaintiff George W. Batchelder. The law in our opinion does not go
that far, and accordingly, we reverse.
This is a suit filed by plaintiff George W. Batchelder to compel defendant Central Bank of the Philippines, now appellant, to resell to him
$170,210.60 at the preferred rate of exchange of two Philippine pesos for one American dollar, more specifically P2.00375, or, in the alternative, to
pay to him the difference between the peso cost of such amount at the market rate prevailing on the date of the satisfaction of the judgment in his
favor and the peso cost of $170,210.60 at said preferred rate. Plaintiff likewise sought compensatory damages consisting of actual expenses of
litigation and attorney's fees as well as exemplary damages.
Defendant Central Bank specifically denied in its answer certain facts set forth in the complaint and was quite insistent on the absence of any such
right on the part of plaintiff to re-acquire from it the sum of $170,210.60 at the preferred rate of exchange. It would follow accordingly that it was not
liable either to plaintiff for the difference between its peso cost at the rate prevailing on the date of the satisfaction of whatever judgment there may
be in plaintiff's favor and the peso cost of $170,210.60 at said preferred rate. There was likewise a denial of liability for compensatory and exemplary
damages, attorney's fees, and costs of the suit.
According to the appealed decision: "From the evidence on record, it appears that the plaintiff is an American citizen who has been permanently
residing in the Philippines and who is engaged in the construction business under the name and style of Batchelder Equipment. The defendant is a
government corporation duly organized and existing under Republic Act No. 265." 2 Then came this portion: "On December 9, 1949, the defendant
issued Central Bank Circular No. 20 imposing exchange contract in this jurisdiction ... . To implement the program of exchange controls, the
defendant issued subsequent circulars, one of which was Circular No. 44 dated June 12, 1953 ... . On July 16, 1959, Republic Act No. 2609 was
approvedwhich, among other things, provides that "the monetary authorities shall take steps for the adoption of a four-year program of gradual
decontrol." To implement this program of gradual decontrol, defendant Central Bank issued Circular No. 105 on April 25, 1960 ..., providing for the
gradual lifting of the restrictions on transactions involving gold and foreign exchange. Likewise, on the same date, it issued Circular No. 106 ...
governing the sale agent banks of foreign exchange in the free market. On September 12, 1960, Circular No. 105 was amended by Circular No.
111 ... and by Circular No. 117 ... on November 28, 1960. This last Circular No. 117 was amended by Circular No. 121 ... on March 2. 1961, which in
return, was amended by Circular No. 133 ... on January 21, 1962, providing, among others, that "only authorized agent banks may sell foreign
exchange for imports" and that "such exchange should be sold at the prevailing free market rate to any applicant, without requiring prior specific
licensing from the Central Bank." " 3 The appealed decision went on to state "that on March 30, 1960, the U.S. Navy accepted the proposal of the
plaintiff of March 18, 1960 in the sum of $188,000.00 for the construction of the Mindanao Weather Station, Bukidnon, Mindanao, Philippines, in
accordance with Bid Item 3, Yards and Docks Specifications No. 13374/59 ... ." 4
Reference was then therein made to the specific resolution of defendant Central Bank. Thus: "In connection with construction projects in U.S.
military bases in the Philippines, the defendant through its Monetary Board, promulgated Monetary Board Resolution No. 857 on June 17, 1960 ...
which, in part, provided: "I. General Policy Filipino and resident American contractors undertaking construction projects in U.S. military bases in
the Philippines shall be authorized to utilize ninety per cent (90%) of the proceeds of their contracts for the purchase of construction equipment, spare
parts and either supplies, regardless of commodity classification, to be used in projects inside the U.S. military bases in the Philippines, as well as for
payment of imports of construction equipment, materials and supplies, except those commodity items falling under "NEC" and "UI" categories,

either for resale or to be used in their projects outside the U.S. military bases; provided, that in the latter case (where the imported items will be used
outside of their projects in the U.S. military bases) the margin levy shall be imposed." " 5
There was moreover an implementation of the above resolution with the Central Bank issuing "its Memorandum to Authorized Agent Banks ID-FM
No. 11 dated June 23, 1960 ... . Under Resolution No. 857 of the Monetary Board, which was fully quoted in the Memorandum to Authorized Agent
Banks of the defendant ..., it was specifically provided that: "For imports against proceeds of contracts entered into prior to April 25, 1960, the
preferred buying rate shall govern, regardless of the present commodity classifications." " 6 There was however a modification arising from
Monetary Board Resolution No. 695 of April 28, 1961, which specified that the agent bank should, upon compliance with its terms, credit the
contractor's accounts in pesos, the buying rate being governed by the appropriate rules and regulations. 7
The following facts as found by the lower court are likewise relevant: "It appears that in compliance with defendant's Monetary Board Resolutions
Nos. 857 and 695 ..., plaintiff surrendered to the Central Bank, through the latter's authorized agents, his dollar earnings amounting to U.S.
$199,966.00 ... . The plaintiff also appears to have applied with the defendant for licences to utilize 90% of his surrendered earnings or the sum of
U.S. $25,847.84 ... or 21.41% of the amount applied for. The plaintiff demanded from the defendant that it be allowed to utilize the balance of the
90% of his surrendered dollar earnings. However, it was only on March 21, 1963, after the plaintiff had filed the complaint in the present case and
after full decontrol had been established through Circular No. 133 dated January 21, 1962 ..., that the defendant informed the plaintiff, through its
communication ..., that the lattercould utilize at the free market rate the balance of his said 90% of surrendered earnings which had not been
previously granted by the defendant for his importations.The present action, therefore, seeks to compel the defendant to permit the plaintiff to utilize
the said balance of his 90% surrendered earnings for importation at the preferred rate of exchange which is P2.00 per U.S. $1.00" 8
The appealed decision took note that in answer to the contention of defendant Central Bank that the Monetary Board Resolutions Nos. 857 and 695
relied upon simply laid down a mere policy without in any way giving rise to a valid and binding agreement to which the law should give effect,
plaintiff Batchelder would stress that the enunciation of the policy embodied in the appropriate resolution did give rise to a contract that must be
complied with. That argument found favor with the lower court, for in its opinion, "considering the facts surrounding the transaction between the
plaintiff and the defendant, the defendant is now bound by a contract, which could be implied from its stated policy, as enunciated in Monetary Board
Resolutions Nos. 857 and 695, and the plaintiff's reliance on said resolutions,to resell in favor of the plaintiff 90% of the U.S. dollars earned by him
under his U.S. Navy Contract aforementioned which were duly surrendered to the defendant." 9
The appealed decision recapitulated matters thus: "In short, it is apparent that by the issuance of its various resolutions and circulars aforementioned
the defendant had considered the plaintiff and other contractors similarly situated with contracts with the U.S. military authorities predating April 25,
1960, as exempted from decontrol, pursuant to defendant's Monetary Board Resolutions Nos. 857 and 695. Hence, they are entitled to the utilization
of the 90% of the U.S. dollars surrendered by them to the defendant at the preferred rate of exchange." 10
Judgment was thus rendered in favor of plaintiff George W. Batchelder, ordering defendant Central Bank "to resell to plaintiff U.S. $154,094.56 at
the rate of exchange Philippine peso P2.00375 per U.S. $1.00 or, in the alternative, to pay to the plaintiff in pesos the difference between the peso
cost of said U.S. $154,094.56 at the rate prevailing on the date of the satisfaction of judgment and the peso cost of said $154,094.56 at said preferred
rate." 11 As noted earlier, an appeal was interposed by defendant Central Bank, raising as a principal legal question that there was no such contractual
obligation by virtue of which it could be held liable. It is its contention that its refusal to honor plaintiff's claim is impressed with validity in
accordance with the governing provision of the existing rules and regulations governing the sale of foreign exchange. That, to repeat, is the crux of
the litigation now before us. The appeal which plaintiff did likewise interpose, complaining against the alleged failure of the lower court to grant him
actual expenses of litigation, attorney's fees as well as exemplary damages, is dependent on the disposition of such decisive issue posed as to the
existence of a valid contractual commitment on the part of defendant Central Bank.
After carefully going over the records of the case a well as the briefs of the parties, it is the conclusion of Court, as set forth at the outset, that the
governing principle of law applicable to actuation of administrative agencies, like the Central Bank, precludes a finding that under the circumstances
disclosed by the case, there was a contract in law giving rise to an obligation which must be fulfilled by such governmental body. A reversal, as
already mentioned, is thus indicated.
1. We start with fundamentals. The Civil Code expressly provides that a contract is a meeting of minds between two persons whereby one binds
himself with respect to the other to give something or render some service. 12 The above provision is practically a restatement, with slight
modification, of Article1254 of the Civil Code of Spain of 1889, formerly enforced in our jurisdiction. Such an article, in the opinion of Justice J.B.L.
Reyes, speaking for the Court, in A. Magsaysay, Inc. v. Cebu Portland Cement Co., 13 requires that "the area of agreement must extend to all points
that the parties deem material or there is no contract." 14 It is noteworthy that in his Outlines on Civil Law, with JudgeRicardo Puno as co-author, he
speaks highly of Article 1321 of the Civil Code of Italy. It reads thus: "A contract is the accord of two (or more) persons (with previously diverging
interests) for the purpose of creating, modifying or extinguishing a juridical relation between them." 15Likewise all commentators on the Civil Code
have agreed that the birth or perfection of a consensual contract, Article 1315, commences from the moment the parties come to an agreementon a
definite subject matter and valid consideration. Justice Capistrano, who was with the Code Commission, and Senators Ambrosio Padilla and Arturo
Tolentino,all three distinguished in the field of civil law, are substantially in agreement." 16
Planiol states the following: "The consent of the parties, that is to say, the accord of wills, is the essential element of every contract ... . The consent,
in the matter of contracts, is composed of a double operation. (1) The parties must commence by agreeing as to the contents the "convention" that is
to say, by making sufficiently precise the object and the essential conditions, and discussing the particular clauses which they desire to introduce to
modify or to complete the ordinary effects ... . (2) This first operation having been terminated, the parties are in accord on the projected contract:
there is between them what Littre calls the uniformity of opinions, which is one sense of the word "consent", but the contract is not included, it still
exists in a projected state. There remains to give its obligatory force by an act of will, expressing the individual adherence of each one of the parties
to the act thus prepared. ... . When all the necessary consents (sic) are obtained, and manifested in legal form, the contract is formed, the lien of law is

tied. It is therefore the union of these adherences (sic) which constitute the contract and which gives birth to the obligations which are derived from
it. It is an act of volition, while the preliminary operation of discussion of the project is a work of the mind and reasoning. 17
In their Jurisprudence and Legal Philosophy, the late Professors Morris R. Cohen and Felix R. Cohen, father and son and jurists of note, noted that
the concepts found in the Civil Code of Spain showing basic contract rules are "equally valid in France, Chile, Columbia, Germany, Holland, Italy,
Mexico, Portugal and many other lands, and equally honored across eighteen and more centuries ... ." Even more impressive is their conclusion that
the views of such common law scholars as Maine, Williston, Pound, Holdsworth, Llewellyn, and Kessler, are not dissimilar. Thus Pollock could
describe the English common law quoting whole paragraphs from a German scholar's description of the law of ancient Rome. It is in that sense that
for them the Roman phrasing contrahitur obligatio "throws more light than volumes of exegesis: One contracts an obligation as one contracts
pneumonia or any otherdisability. Contract is that part of our legal burdens that we bring on ourselves." 18
If there be full cognizance of the implications of the controlling principles as thus expounded, impressive for their well-nigh unanimity of approach,
the conclusion reached by the lower court certainly cannot be accepted as correct.
2. As is so evident from the recital of facts made in the lower court and equally so in the brief of plaintiff Batchelder, as appellant, what was done by
the Central Bank was merely to issue in pursuance of its rule-making power the resolutions relied upon by plaintiff, which for him should be
impressed with a contractual character. Insofar as this aspect of the matter is concerned, his brief speaks for itself. "In July, 1959, the Republic of the
Philippines adopted a gradual decontrol program through the enactment of Republic Act No. 2609. To implement this legislation defendant Central
Bank issued Circular Nos. 105 and 106 both dated April 25, 1960 ... . The exchange rate under the decontrol program was higher than the prevailing
rate before decontrol of P2.00 per US$1.00. On March 30, 1960, plaintiff-appellant entered into a contract with the United States Navy for the
construction of a weather station in Bukidnon, Mindanao covered by U.S. Navy Contract No. NBy-13374 ... . On June 17, 1960, the defendantappellant through its governing Monetary Board promulgated Resolution No. 857 ... and implemented this resolution through its Memorandum to
Authorized Agent Banks, I.D.-FM No. 11 dated June 23, 1960 ... . Under Resolution No. 857 and the implementing circular aforesaid, Filipino and
American resident contractors for constructions in U.S. military bases in the Philippines whose contracts antedated April 25, 1960 were required to
surrender to the defendant-appellant Central Bank their dollar earnings under their respective contracts but were entitled to utilize 90% of their
surrendered dollars for importation at the preferred rate of commodities for use within or outside said U.S. military bases. The defendant-appellant
pursuant to the decontrol program also promulgated Circulars Nos. 111, 117, and 121, dated September 12, 1960 ..., November 28, 1960 ...;
and March 2, 1961 ..., respectively, and finally adopted full decontrol through its Circular No. 133 dated January 21, 1962 ... . Defendant-appellant
also promulgated Monetary Board Resolution No. 695 dated April 28, 1961 ... amending MB Resolution No. 857 of June 23, 1960, and implementing
the former through Memorandum ID-FM No. 30 on May 18, 1961 ... ." 19
There is no question that the Central Bank as a public corporation could enter into contracts. It is so provided for among the corporate powers vested
in it. Thus:"The Central Bank is hereby authorized to adopt, alter, and use a corporate seal which shall be judicially noticed; to make contracts; to
lease or own real personal property, and to sell or otherwise dispose of the same; to sue and be sued; and otherwise to do and perform any and all
things that may be necessary or proper to carry out the purposes of this Act." 20 No doubt would have arisen therefore if defendant Central Bank,
utilizing a power expressly granted, did enter into a contract with plaintiff. It could have done so, but it did not do so. How could it possibly be
maintained then that merely through the exercise of its regulatory power to implement statutory provisions, a contract as known to the law was
thereby created?.
Yet that is precisely what the lower court held in reaching such a conclusion. It was not only unmindful of the controlling doctrines as to when a
contract exists, but itwas equally oblivious of the competence lodged in an administrative agency like the Central Bank. Even the most cursory
perusal of Republic Act No. 265 would yield the irresistible conclusion that the establishment of the Central Bankwas intended to attain basic
objectives in the field of currency and finance. In the language of the Act: "It shall be the responsibility of the Central Bankof the Philippines to
administer the monetary and banking system of the Republic. It shall be the duty of the Central Bank to use the powers granted to it under this Act to
achieve the following objectives: (a) to maintain monetary stability in the Philippines; (b) to preserve the international value of the pesoand the
convertibility of the peso into other freely convertible currencies; and (c) to promote a rising level of production, employment and real income in the
Philippines." 21
It would be then to set at naught fundamental concepts in administrative law that accord due recognition to the vesting of quasi-legislative and quasijudicial power in administrative law for the purpose of attaining statutory objectives, especially now that government is saddled with greater
responsibilities due to the complex situation of the modern era, if the lower court is to be upheld. For if such be the case then, by the judiciary failing
to exercise due care in itsoversight of an administrative agency, substituting its own discretion for what usually is the more expert appraisal of such
an instrumentality, there may even be a frustration if not a nullification of the objective of the law.
Nor is this to deal unjustly with plaintiff. Defendant Central Bank in its motion to dismiss before the lower court was quite explicit as to why under
the circumstances, no right could be recognized as possessed by him. As set forth in such pleading: "We contend that Monetary Board Resolution No.
857, dated June 17, 1960, as amended by Monetary Board Resolution No. 695, dated April 28, 1961, does not give right to Filipino and resident
American contractors undertaking construction projects in U.S. military bases to reacquire at the preferred rate ninety per cent (90%) of the foreign
exchange sold or surrendered to defendant Central Bank thru the authorized agent banks. Nor does said resolution serve as a general authorization or
license granted by the Central Bank to utilize the ninety per cent (90%) of their dollar earnings. M.B. Resolution No. 857, as amended, merely laid
down a general policy on the utilization of the dollar earnings of Filipino and resident American contractors undertaking projects in U.S. military
bases, ... ." 22 Further, there is this equally relevant portion in such motion to dismiss: "It is clear from the aforecited provisions of said memorandum
that not all imports againt proceeds of contracts entered into prior to April 25, 1960 are entitled to the preferred buying rate of exchange. Only
imports against proceeds of contracts entered into prior to April 25, 1960, not otherwise classified as dollar-to-dollar transactions, are entitled to the
preferred rate of exchange. It is for this reason that the contractor is required to first file an application with defendant Central Bank (Import
Department) thru theAuthorized Agent Banks, for the purpose of determining whether the imports against proceeds of contracts entered intoprior to

April 25, 1960 are classified asdollar-to-dollar transactions (which are not entitled to the preferred rate of exchange), or not (which are entitled to the
preferred rate of exchange), and that if said imports are entitled to the preferred rate of exchange, defendant Central Bank would issue a license to the
contractor for authority to buy foreign exchange at the preferred rate for the payment of said imports." 33
Had there been greater care therefore on the part of the plaintiff to show why in his opinion he could assert a right in accordance not with a contract
binding on the Central Bank, because there is none, but by virtue of compliance with rules and regulations of an administrative tribunal, then perhaps
a different outcome would have been justified.
3. With the disposition of this Court makes on this appeal of defendant Central Bank, there is no need to consider at all the appeal of the plaintiff
insofar as the lower court denied his plea for the recovery of the actual expenses of litigation, attorney's fees and exemplary damages. Clearly there is
no ground for the award of such items sought.
WHEREFORE, the decision of the lower court of January 10, 1963 is reversed and the complaint of the plaintiff dismissed, without prejudice to his
taking the appropriate action to enforce whatever rights he possesses against defendant Central Bank in accordance with its valid and binding rules
and regulations. With costs against plaintiff.
Concepcion, C.J., Reyes, J.B.L., Makalintal, Zaldivar, Villamor and Makasiar, JJ., concur.
Castro, Teehankee and Barredo, JJ., concur in the result.

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. L-18841

January 27, 1969

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,


vs.
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, defendant-appellant.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Antonio A. Torres and Solicitor Camilo D. Quiason for plaintiffappellant.
Ponce Enrile, Siguion Reyna, Montecillo and Belo for defendant-appellant.
REYES, J.B.L., J.:
Direct appeals, upon a joint record on appeal, by both the plaintiff and the defendant from the dismissal, after hearing, by the Court of First Instance
of Manila, in its Civil Case No. 35805, of their respective complaint and counterclaims, but making permanent a preliminary mandatory injunction
theretofore issued against the defendant on the interconnection of telephone facilities owned and operated by said parties.
The plaintiff, Republic of the Philippines, is a political entity exercising governmental powers through its branches and instrumentalities, one of
which is the Bureau of Telecommunications. That office was created on 1 July 1947, under Executive Order No. 94, with the following powers and
duties, in addition to certain powers and duties formerly vested in the Director of Posts: 1awphil.t
SEC. 79. The Bureau of Telecommunications shall exercise the following powers and duties:
(a) To operate and maintain existing wire-telegraph and radio-telegraph offices, stations, and facilities, and those to be established to restore
the pre-war telecommunication service under the Bureau of Posts, as well as such additional offices or stations as may hereafter be
established to provide telecommunication service in places requiring such service;
(b) To investigate, consolidate, negotiate for, operate and maintain wire-telephone or radio telephone communication service throughout the
Philippines by utilizing such existing facilities in cities, towns, and provinces as may be found feasible and under such terms and conditions
or arrangements with the present owners or operators thereof as may be agreed upon to the satisfaction of all concerned;
(c) To prescribe, subject to approval by the Department Head, equitable rates of charges for messages handled by the system and/or for time
calls and other services that may be rendered by said system;
(d) To establish and maintain coastal stations to serve ships at sea or aircrafts and, when public interest so requires, to engage in the
international telecommunication service in agreement with other countries desiring to establish such service with the Republic of the
Philippines; and
(e) To abide by all existing rules and regulations prescribed by the International Telecommunication Convention relative to the accounting,
disposition and exchange of messages handled in the international service, and those that may hereafter be promulgated by said convention
and adhered to by the Government of the Republic of the Philippines. 1
The defendant, Philippine Long Distance Telephone Company (PLDT for short), is a public service corporation holding a legislative franchise, Act
3426, as amended by Commonwealth Act 407, to install, operate and maintain a telephone system throughout the Philippines and to carry on the
business of electrical transmission of messages within the Philippines and between the Philippines and the telephone systems of other countries. 2 The
RCA Communications, Inc., (which is not a party to the present case but has contractual relations with the parties) is an American corporation
authorized to transact business in the Philippines and is the grantee, by assignment, of a legislative franchise to operate a domestic station for the
reception and transmission of long distance wireless messages (Act 2178) and to operate broadcasting and radio-telephone and radio-telegraphic
communications services (Act 3180). 3
Sometime in 1933, the defendant, PLDT, and the RCA Communications, Inc., entered into an agreement whereby telephone messages, coming from
the United States and received by RCA's domestic station, could automatically be transferred to the lines of PLDT; and vice-versa, for calls collected
by the PLDT for transmission from the Philippines to the United States. The contracting parties agreed to divide the tolls, as follows: 25% to PLDT
and 75% to RCA. The sharing was amended in 1941 to 30% for PLDT and 70% for RCA, and again amended in 1947 to a 50-50 basis. The
arrangement was later extended to radio-telephone messages to and from European and Asiatic countries. Their contract contained a stipulation that
either party could terminate it on a 24-month notice to the other.4 On 2 February 1956, PLDT gave notice to RCA to terminate their contract on 2
February 1958. 5

Soon after its creation in 1947, the Bureau of Telecommunications set up its own Government Telephone System by utilizing its own appropriation
and equipment and by renting trunk lines of the PLDT to enable government offices to call private parties. 6 Its application for the use of these trunk
lines was in the usual form of applications for telephone service, containing a statement, above the signature of the applicant, that the latter will abide
by the rules and regulations of the PLDT which are on file with the Public Service Commission. 7 One of the many rules prohibits the public use of
the service furnished the telephone subscriber for his private use. 8 The Bureau has extended its services to the general public since 1948, 9 using the
same trunk lines owned by, and rented from, the PLDT, and prescribing its (the Bureau's) own schedule of rates. 10 Through these trunk lines, a
Government Telephone System (GTS) subscriber could make a call to a PLDT subscriber in the same way that the latter could make a call to the
former.
On 5 March 1958, the plaintiff, through the Director of Telecommunications, entered into an agreement with RCA Communications, Inc., for a joint
overseas telephone service whereby the Bureau would convey radio-telephone overseas calls received by RCA's station to and from local
residents. 11 Actually, they inaugurated this joint operation on 2 February 1958, under a "provisional" agreement. 12
On 7 April 1958, the defendant Philippine Long Distance Telephone Company, complained to the Bureau of Telecommunications that said bureau
was violating the conditions under which their Private Branch Exchange (PBX) is inter-connected with the PLDT's facilities, referring to the rented
trunk lines, for the Bureau had used the trunk lines not only for the use of government offices but even to serve private persons or the general public,
in competition with the business of the PLDT; and gave notice that if said violations were not stopped by midnight of 12 April 1958, the PLDT would
sever the telephone connections. 13 When the PLDT received no reply, it disconnected the trunk lines being rented by the Bureau at midnight on 12
April 1958. 14 The result was the isolation of the Philippines, on telephone services, from the rest of the world, except the United States. 15
At that time, the Bureau was maintaining 5,000 telephones and had 5,000 pending applications for telephone connection. 16 The PLDT was also
maintaining 60,000 telephones and had also 20,000 pending applications. 17Through the years, neither of them has been able to fill up the demand for
telephone service.
The Bureau of Telecommunications had proposed to the PLDT on 8 January 1958 that both enter into an interconnecting agreement, with the
government paying (on a call basis) for all calls passing through the interconnecting facilities from the Government Telephone System to the
PLDT. 18 The PLDT replied that it was willing to enter into an agreement on overseas telephone service to Europe and Asian countries provided that
the Bureau would submit to the jurisdiction and regulations of the Public Service Commission and in consideration of 37 1/2% of the gross
revenues. 19 In its memorandum in lieu of oral argument in this Court dated 9 February 1964, on page 8, the defendant reduced its offer to 33 1/3 %
(1/3) as its share in the overseas telephone service. The proposals were not accepted by either party.
On 12 April 1958, plaintiff Republic commenced suit against the defendant, Philippine Long Distance Telephone Company, in the Court of First
Instance of Manila (Civil Case No. 35805), praying in its complaint for judgment commanding the PLDT to execute a contract with plaintiff, through
the Bureau, for the use of the facilities of defendant's telephone system throughout the Philippines under such terms and conditions as the court might
consider reasonable, and for a writ of preliminary injunction against the defendant company to restrain the severance of the existing telephone
connections and/or restore those severed.
Acting on the application of the plaintiff, and on the ground that the severance of telephone connections by the defendant company would isolate the
Philippines from other countries, the court a quo, on 14 April 1958, issued an order for the defendant:
(1) to forthwith reconnect and restore the seventy-eight (78) trunk lines that it has disconnected between the facilities of the Government
Telephone System, including its overseas telephone services, and the facilities of defendant; (2) to refrain from carrying into effect its threat
to sever the existing telephone communication between the Bureau of Telecommunications and defendant, and not to make connection over
its telephone system of telephone calls coming to the Philippines from foreign countries through the said Bureau's telephone facilities and
the radio facilities of RCA Communications, Inc.; and (3) to accept and connect through its telephone system all such telephone calls
coming to the Philippines from foreign countries until further order of this Court.
On 28 April 1958, the defendant company filed its answer, with counterclaims.
It denied any obligation on its part to execute a contrary of services with the Bureau of Telecommunications; contested the jurisdiction of the Court
of First Instance to compel it to enter into interconnecting agreements, and averred that it was justified to disconnect the trunk lines heretofore leased
to the Bureau of Telecommunications under the existing agreement because its facilities were being used in fraud of its rights. PLDT further claimed
that the Bureau was engaging in commercial telephone operations in excess of authority, in competition with, and to the prejudice of, the PLDT,
using defendants own telephone poles, without proper accounting of revenues.
After trial, the lower court rendered judgment that it could not compel the PLDT to enter into an agreement with the Bureau because the parties
were not in agreement; that under Executive Order 94, establishing the Bureau of Telecommunications, said Bureau was not limited to servicing
government offices alone, nor was there any in the contract of lease of the trunk lines, since the PLDT knew, or ought to have known, at the time that
their use by the Bureau was to be public throughout the Islands, hence the Bureau was neither guilty of fraud, abuse, or misuse of the poles of the
PLDT; and, in view of serious public prejudice that would result from the disconnection of the trunk lines, declared the preliminary injunction
permanent, although it dismissed both the complaint and the counterclaims.
Both parties appealed.

Taking up first the appeal of the Republic, the latter complains of the action of the trial court in dismissing the part of its complaint seeking to
compel the defendant to enter into an interconnecting contract with it, because the parties could not agree on the terms and conditions of the
interconnection, and of its refusal to fix the terms and conditions therefor.
We agree with the court below that parties can not be coerced to enter into a contract where no agreement is had between them as to the principal
terms and conditions of the contract. Freedom to stipulate such terms and conditions is of the essence of our contractual system, and by express
provision of the statute, a contract may be annulled if tainted by violence, intimidation, or undue influence (Articles 1306, 1336, 1337, Civil Code of
the Philippines). But the court a quo has apparently overlooked that while the Republic may not compel the PLDT to celebrate a contract with it, the
Republic may, in the exercise of the sovereign power of eminent domain, require the telephone company to permit interconnection of the government
telephone system and that of the PLDT, as the needs of the government service may require, subject to the payment of just compensation to be
determined by the court. Nominally, of course, the power of eminent domain results in the taking or appropriation of title to, and possession of, the
expropriated property; but no cogent reason appears why the said power may not be availed of to impose only a burden upon the owner of
condemned property, without loss of title and possession. It is unquestionable that real property may, through expropriation, be subjected to an
easement of right of way. The use of the PLDT's lines and services to allow inter-service connection between both telephone systems is not much
different. In either case private property is subjected to a burden for public use and benefit. If, under section 6, Article XIII, of the Constitution, the
State may, in the interest of national welfare, transfer utilities to public ownership upon payment of just compensation, there is no reason why the
State may not require a public utility to render services in the general interest, provided just compensation is paid therefor. Ultimately, the beneficiary
of the interconnecting service would be the users of both telephone systems, so that the condemnation would be for public use.
The Bureau of Telecommunications, under section 78 (b) of Executive Order No. 94, may operate and maintain wire telephone or radio telephone
communications throughout the Philippines by utilizing existing facilities in cities, towns, and provinces under such terms and conditions or
arrangement with present owners or operators as may be agreed upon to the satisfaction of all concerned; but there is nothing in this section that
would exclude resort to condemnation proceedings where unreasonable or unjust terms and conditions are exacted, to the extent of crippling or
seriously hampering the operations of said Bureau.
A perusal of the complaint shows that the Republic's cause of action is predicated upon the radio telephonic isolation of the Bureau's facilities from
the outside world if the severance of interconnection were to be carried out by the PLDT, thereby preventing the Bureau of Telecommunications from
properly discharging its functions, to the prejudice of the general public. Save for the prayer to compel the PLDT to enter into a contract (and the
prayer is no essential part of the pleading), the averments make out a case for compulsory rendering of inter-connecting services by the telephone
company upon such terms and conditions as the court may determine to be just. And since the lower court found that both parties "are practically at
one that defendant (PLDT) is entitled to reasonable compensation from plaintiff for the reasonable use of the former's telephone facilities" (Decision,
Record on Appeal, page 224), the lower court should have proceeded to treat the case as one of condemnation of such services independently of
contract and proceeded to determine the just and reasonable compensation for the same, instead of dismissing the petition.
This view we have taken of the true nature of the Republic's petition necessarily results in overruling the plea of defendant-appellant PLDT that the
court of first instance had no jurisdiction to entertain the petition and that the proper forum for the action was the Public Service Commission. That
body, under the law, has no authority to pass upon actions for the taking of private property under the sovereign right of eminent domain.
Furthermore, while the defendant telephone company is a public utility corporation whose franchise, equipment and other properties are under the
jurisdiction, supervision and control of the Public Service Commission (Sec. 13, Public Service Act), yet the plaintiff's telecommunications network
is a public service owned by the Republic and operated by an instrumentality of the National Government, hence exempt, under Section 14 of the
Public Service Act, from such jurisdiction, supervision and control. The Bureau of Telecommunications was created in pursuance of a state policy
reorganizing the government offices
to meet the exigencies attendant upon the establishment of the free and independent Government of the Republic of the Philippines, and
for the purpose of promoting simplicity, economy and efficiency in its operation (Section 1, Republic Act No. 51)
and the determination of state policy is not vested in the Commission (Utilities Com. vs. Bartonville Bus Line, 290 Ill. 574; 124 N.E. 373).
Defendant PLDT, as appellant, contends that the court below was in error in not holding that the Bureau of Telecommunications was not empowered
to engage in commercial telephone business, and in ruling that said defendant was not justified in disconnecting the telephone trunk lines it had
previously leased to the Bureau. We find that the court a quo ruled correctly in rejecting both assertions.
Executive Order No. 94, Series of 1947, reorganizing the Bureau of Telecommunications, expressly empowered the latter in its Section 79,
subsection (b), to "negotiate for, operate and maintain wire telephone or radio telephone communication service throughout the Philippines", and, in
subsection (c), "to prescribe, subject to approval by the Department Head, equitable rates of charges for messages handled by the system and/or for
time calls and other services that may be rendered by the system". Nothing in these provisions limits the Bureau to non-commercial activities or
prevents it from serving the general public. It may be that in its original prospectuses the Bureau officials had stated that the service would be limited
to government offices: but such limitations could not block future expansion of the system, as authorized by the terms of the Executive Order, nor
could the officials of the Bureau bind the Government not to engage in services that are authorized by law. It is a well-known rule that erroneous
application and enforcement of the law by public officers do not block subsequent correct application of the statute (PLDT vs. Collector of Internal
Revenue, 90 Phil. 676), and that the Government is never estopped by mistake or error on the part of its agents (Pineda vs. Court of First Instance of
Tayabas, 52 Phil. 803, 807; Benguet Consolidated Mining Co. vs. Pineda, 98 Phil. 711, 724).
The theses that the Bureau's commercial services constituted unfair competition, and that the Bureau was guilty of fraud and abuse under its
contract, are, likewise, untenable.

First, the competition is merely hypothetical, the demand for telephone service being very much more than the supposed competitors can supply. As
previously noted, the PLDT had 20,000 pending applications at the time, and the Bureau had another 5,000. The telephone company's inability to
meet the demands for service are notorious even now. Second, the charter of the defendant expressly provides:
SEC. 14. The rights herein granted shall not be exclusive, and the rights and power to grant to any corporation, association or person other
than the grantee franchise for the telephone or electrical transmission of message or signals shall not be impaired or affected by the granting
of this franchise: (Act 3436)
And third, as the trial court correctly stated, "when the Bureau of Telecommunications subscribed to the trunk lines, defendant knew or should have
known that their use by the subscriber was more or less public and all embracing in nature, that is, throughout the Philippines, if not abroad"
(Decision, Record on Appeal, page 216).
The acceptance by the defendant of the payment of rentals, despite its knowledge that the plaintiff had extended the use of the trunk lines to
commercial purposes, continuously since 1948, implies assent by the defendant to such extended use. Since this relationship has been maintained for
a long time and the public has patronized both telephone systems, and their interconnection is to the public convenience, it is too late for the
defendant to claim misuse of its facilities, and it is not now at liberty to unilaterally sever the physical connection of the trunk lines.
..., but there is high authority for the position that, when such physical connection has been voluntarily made, under a fair and workable
arrangement and guaranteed by contract and the continuous line has come to be patronized and established as a great public convenience,
such connection shall not in breach of the agreement be severed by one of the parties. In that case, the public is held to have such an interest
in the arrangement that its rights must receive due consideration. This position finds approval in State ex rel. vs. Cadwaller, 172 Ind. 619,
636, 87 N.E. 650, and is stated in the elaborate and learned opinion of Chief Justice Myers as follows: "Such physical connection cannot be
required as of right, but if such connection is voluntarily made by contract, as is here alleged to be the case, so that the public acquires an
interest in its continuance, the act of the parties in making such connection is equivalent to a declaration of a purpose to waive the primary
right of independence, and it imposes upon the property such a public status that it may not be disregarded" citing Mahan v. Mich. Tel.
Co., 132 Mich. 242, 93 N.W. 629, and the reasons upon which it is in part made to rest are referred to in the same opinion, as follows:
"Where private property is by the consent of the owner invested with a public interest or privilege for the benefit of the public, the owner
can no longer deal with it as private property only, but must hold it subject to the right of the public in the exercise of that public interest or
privilege conferred for their benefit." Allnut v. Inglis (1810) 12 East, 527. The doctrine of this early case is the acknowledged law. (ClintonDunn Tel. Co. v. Carolina Tel. & Tel. Co., 74 S.E. 636, 638).
It is clear that the main reason for the objection of the PLDT lies in the fact that said appellant did not expect that the Bureau's telephone system
would expand with such rapidity as it has done; but this expansion is no ground for the discontinuance of the service agreed upon.
The last issue urged by the PLDT as appellant is its right to compensation for the use of its poles for bearing telephone wires of the Bureau of
Telecommunications. Admitting that section 19 of the PLDT charter reserves to the Government
the privilege without compensation of using the poles of the grantee to attach one ten-pin cross-arm, and to install, maintain and operate
wires of its telegraph system thereon; Provided, however, That the Bureau of Posts shall have the right to place additional cross-arms and
wires on the poles of the grantee by paying a compensation, the rate of which is to be agreed upon by the Director of Posts and the grantee;

the defendant counterclaimed for P8,772.00 for the use of its poles by the plaintiff, contending that what was allowed free use, under the
aforequoted provision, was one ten-pin cross-arm attachment and only for plaintiff's telegraph system, not for its telephone system; that said section
could not refer to the plaintiff's telephone system, because it did not have such telephone system when defendant acquired its franchise. The
implication of the argument is that plaintiff has to pay for the use of defendant's poles if such use is for plaintiff's telephone system and has to pay
also if it attaches more than one (1) ten-pin cross-arm for telegraphic purposes.
As there is no proof that the telephone wires strain the poles of the PLDT more than the telegraph wires, nor that they cause more damage than the
wires of the telegraph system, or that the Government has attached to the poles more than one ten-pin cross-arm as permitted by the PLDT charter,
we see no point in this assignment of error. So long as the burden to be borne by the PLDT poles is not increased, we see no reason why the
reservation in favor of the telegraph wires of the government should not be extended to its telephone lines, any time that the government decided to
engage also in this kind of communication.
In the ultimate analysis, the true objection of the PLDT to continue the link between its network and that of the Government is that the latter
competes "parasitically" (sic) with its own telephone services. Considering, however, that the PLDT franchise is non-exclusive; that it is well-known
that defendant PLDT is unable to adequately cope with the current demands for telephone service, as shown by the number of pending applications
therefor; and that the PLDT's right to just compensation for the services rendered to the Government telephone system and its users is herein
recognized and preserved, the objections of defendant-appellant are without merit. To uphold the PLDT's contention is to subordinate the needs of the
general public to the right of the PLDT to derive profit from the future expansion of its services under its non-exclusive franchise.
WHEREFORE, the decision of the Court of First Instance, now under appeal, is affirmed, except in so far as it dismisses the petition of the Republic
of the Philippines to compel the Philippine Long Distance Telephone Company to continue servicing the Government telephone system upon such
terms, and for a compensation, that the trial court may determine to be just, including the period elapsed from the filing of the original complaint or

petition. And for this purpose, the records are ordered returned to the court of origin for further hearings and other proceedings not inconsistent with
this opinion. No costs.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Fernando, Capistrano, Teehankee and Barredo, JJ., concur.

Republic of the Philippines


SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-40424 June 30, 1980
R. MARINO CORPUS, petitioner,
vs.
COURT OF APPEALS and JUAN T. DAVID, respondents

MAKASIAR, J.:
This is a petition for review on certiorari of the decision of the Court of Appeals promulgated on February 14, 1975 in CA-G.R. No. 40583-R,
affirming the decision of the court of Instance of Manila, Branch V. dated september 4, 1967, in Civil Case no. 61802 entitled "Juan T.
David,plaintiff, versus R. Mariano Corpus, defendant', for the recovery of attorneys fees for professional services rendered by the plaintiff, private
respondent herein, to defendant, petitioner herein.
A
Having been close friends, aside from being membres Civil Liberties Union, petitioner Corpus intimately calls respondent David by his nickname
"Juaning" and the latter addresses the former simply as "Marino".
The factual setting of this case is stated in the decision of the lower court, thus:
It appears that in March, 1958, the defendant was charged administratively by several employee of the Central Bank Export
Department of which the defendant is the director. The defendant was represented by Atty. Rosauro Alvarez. Pending the
investigation and effective March 18, 1958, he defendant was suspended from office. After the investigating committee found the
administrative charges to be without merit, and subsequently recommended the immediate reinstatement of the defendant, the
then Governor of Central Bank, Miguel Cuaderno, Sr., recommended that the defendant be considered resigned as on the ground
that he had lost confidence in him. The Monetary Board, by a resolution of July 20, 1959, declared the defendant as resigned as
of the date of suspension.
On August 18, 1959, the defendant, thru Atty. Alvarez, filed the Court of First Instance of Manila a petition for certiorari,
mandamus and quo warranto with preliminary mandatory injuction and damages against Miguel Cuaderno, Sr., the Central Bank
and Mario Marcos who was appointed to the position of the defendant, said case having been docketed as Civil Case No. 41226
and assigned to Branch VII presided over by Judge Gregorio T. Lantin. On September 7, 1959, the respondent filed a motion to
dismiss the petition, alleging among other grounds, the failure of the defendant to exhaust, available administrative remedies
(Exh. X). On September 25, 1959, the defendant, thru Atty. Alvarez, filed his opposition to the said motion. On March 17, 1960,
during the course of the presentation of the evidence for the petition for a writ of preliminary mandatory injunction, Atty. Alvarez
manifested that the defendant was abandoning his prayer for a writ of preliminary mandatory injunction and asked for a ruling on
the motion to dismiss. On June 14, 1960, Judge Lantin dismissed Civil Case No. 41226 for failure to exhaust she administrative
remedies available to the herein defendant.
On June 24, 1960, Atty. Alverez received a copy of the order of dismissal It was at this state that the plaintiff entered into the case
under circumstances about which the parties herein have given divergent versions.
According to the plaintiff, six or seven days prior to the expiration of the period for appeal from the order of dismissal, he
chanced to meet the late Rafael Corpus, father of the defendant, at the Taza de Oro coffee shop. After they talked about the
defendant's having lost his case before Judge Lantin, and knowing that the plaintiff and the defendant were both members of the
Civil Liberties Union, Rafael Corpus requested the plaintiff to go over the case and further said that he would send his son, the
herein defendant, to the plaintiff to find out what could be done about the case. The defendant called up the plaintiff the following
morning for an appointment, and the plaintiff agreed to am him in the latter's office. At said conference, the defendant requested
the plaintiff to handle the case because Atty. Alvarez had already been disenchanted and wanted to give up the case. Although at
first reluctant to handle the case, the plaintiff finally agreed on condition that he and Atty. Alverez would collaborate in the case.
The defendant's version of how the plaintiff came into the case is as follows:

After the order of dismissal issued by Judge Lantin was published in the newspapers, the plaintiff sought a conference with the
defendant at Taza de Oro, but the defendant told him that he would rather meet the plaintiff at the Swiss Inn. Even before the case
was dismissed the plaintiff had shown interest in the same by being present during the hearings of said case in the sala of Judge
Lantin When the plaintiff and the defendant met at the Swiss Inn, the plaintiff handed the defendant a memorandum prepared by
him on how he can secure the reversal of the order of dismissal by means of a formula stated in said memorandum. During the
said occasion the plaintiff scribbled some notes on a paper napkin (Exhibit 19). On June 28, 1960, the defendant wrote the
plaintiff, sending with it a copy of the order of Judge Lantin dated June 14, 1960 (Exhibit S Inasmuch as said letter, Exhibit S
already mentions the 'memorandum' of the plaintiff, the defendant contends that it was not six or seven days prior to the
expiration of the period of appeal (which should be on or about July 2 or 3, 1960) but on a date even earlier than June 28, 1960
that the plaintiff and the defendant met together to discuss the latter's case.
Laying aside for the moment the true circumstances under which the plaintiff started rendering professional services to the
defendant, the undisputed evidence shows that on July 7, 1960, the plaintiff filed a motion for reconsideration of the order of
dismissal under the joint signatures of the plaintiff and Atty. Alverez (Exhibit B). The plaintiff argued the said motion during the
hearing thereof On August 8, 1960, he file a 13-page 'Memorandum of Authorities in support of said motion for reconsideration
(Exhibit C). A 3-page supplemental memorandum of authorities was filed by the plaintiff on September 6, 1960 (Exhibit D)
On November 15, 1960, Judge Lantin denied the motion for reconsideration. On November 19, 1960, the plaintiff perfected the
appeal from the order of dismissal dated June 14, 1960. For purposes of said appeal the plaintiff prepared a 232-page brief and
submitted the same before the Supreme Court in Baguio City on April 20, 1961. The plaintiff was the one who orally argued the
case before the Supreme Court. In connection with the trip to Baguio for the said oral argument, the plaintiff used his car hich
broke down and necessitated extensive repairs paid for by the plaintiff himself.
On March 30, 1962, the Supreme Court promulgated its decision reversing the order of dismissal and remanding the case for
further proceedings. On April 18, 1962, after the promulgation of the decision of the Supreme Court reversing the dismissal of
the case the defendant wrote the plaintiff the following letter, Exhibit 'Q'. .
xxxxxxxxx
Dear Juaning
Will you please accept the attached check in the amount of TWO THOUSAND P2,000.00) PESOS for legal services in the
handling of L-17860 recently decided by the Court? I wish I could give more but as yu know we were banking on a SC decision
reinstating me and reimburse my backstage I had been wanting to offer some token of my appreciation of your legal fight for and
in my behalf, and it was only last week that I received something on account of a pending claim.
Looking forward to a continuation of the case in the lower court, I remain
Sincerely yours, Illegible
xxxxxxxxx
In a reply letter dated April 25, 1962, the plaintiff returned the check, explaining said act as follows:
April 25, 1962
My dear Marino:
Yesterday, I received your letter of April 18th with its enclosure. I wished thank you for your kind thoughts, however, please
don't take offense if I have to return the check. I will explain.
When I decided to render professional services in your case, I was motivated by the value to me of the very intimate relations
which you and I have enjoyed during the past many years. It was nor primarily, for a professional fee.
Although we were not fortunate to have obtained a decision in your case which should have put an end to it. I feel that we have
reason to be jubilant over the outcome, because, the final favorable outcome of the case seems certain irrespective of the length
of time required to terminate the same.
Your appreciation of the efforts I have invested in your case is enough compensation therefor, however, when you shall have
obtained a decision which would have finally resolved the case in your favor, remembering me then will make me happy. In the
meantime, you will make me happier by just keeping the check.
Sincerely yours,

JUANING
xxxxxxxxx
When the case was remanded for further proceedings before Judge Lantin, the evidence for the defendant was presented by Atty.
'Alvarez with the plaintiff cooperating in the same-'On June 24, 1963, Judge Lantin rendered his decision in favor of the
defendant declaring illegal the resolution of the Monetary Board of July 20, 1959, and ordering the defendant's reinstatement
and the payment of his back salaries and allowances - The respondents in said Civil Case No. 41226 filed a motion for
reconsideration which was opposed by the herein plaintiff. The said decision was appealed by the respondents, as well as by the
herein defendant with respect to the award of P5, 000. 00 attorney's feed The plaintiff prepared two briefs for submission to the
Court of Appeals one as appellee (Exhibit H) and the other as appellant (Exhibit H-1). The Court of Appeal however, certified
the case to the Supreme Court in 1964.
On March 31, 1965, the Supreme Court rendered a decision affirming the judgment of the Court of first Instance of Manila.
On April 19, 1965 the plaintiffs law office made a formal de command upon the defendant for collection of 50% of the amount
recovered by the defendant as back salaries and other emoluments from the Central Bank (Exhibit N). This letter was written
after the defendant failed to appear at an appointment with the plaintiff so that they could go together to the Central Bank to
claim the possession of the office to which the defendant was reinstated and after a confrontation in the office of the plaintiff
wherein the plaintiff was remanding 50% of the back salaries and other emoluments amounting to P203,000.00 recoverable by
the defendant. The defendant demurred to this demand inasmuch as he had plenty of outstanding obligations and that his tax
liability for said back salaries was around P90,000.00, and that he expected to net only around P10,000.00 after deducting all
expenses and taxes.
On the same date, April 19,1965 the plaintiff wrote the Governor for of Central Bank requesting that the amount representing the
sack salaries of the defendant be made out in two one in favor of the defendant and the other representing the professional fees
equivalent to 50% of the said back salaries being claimed by the plaintiff (Exhibit 8). F to obtain the relief from the Governor of
Central Bank, the plaintiff instituted this action before this Court on July 20, 1965 (Emphasis supplied).
As therein defendant, herein petitioner Marino Corpus filed in August 5, 1965 an answer with counter-claim. On August 30, 1965, private respondent
Atty. Juan T. David, plaintiff therein, filed a reply with answer to the counterclaim of petitioner.
After due trial, the lower court rendered judgment on September 4, 1967, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered, ordering the defendant to pay plaintiff the sum of P30,000.00 in the concept of
professional fees, and to pay the costs (pp. 112-113, CA Record on Appeal p. 54, rec.)
After receipt on September 7, 1967 of a copy of the aforequoted judgment, petitioner Marino Corpus, defendant therein, filed on October 7, 1967 a
notice of appeal from said judgment to the Court of Appeals. In his appeal, he alleged that the lower court erred:
1. In not holding that the plaintiff's professional services were offered and rendered gratuitously;
2. Assuming that plaintiff is entitled to compensation in holding that he was entitled to attorney's fees in the amount of
P30,000.00 when at most he would be entitled to only P2,500.00;
3. In not dismissing plaintiff's complaint; and
4. In not awarding damages and attorney's fees to the defendant (p. 2, CA Decision, p. 26, rec.)
Likewise, private respondent Atty. Juan T. David, plaintiff therein, appealed to the Court of Appeals on October 9, 1967 assigning one error, to wit:
The lower court erred in ordering the defendant to pay the plaintiff only the sum of P30,000.00 in the concept of attorney's fees
(p. 1, CA Decision, p. 25, rec.).
On February 14, 1975, respondent Court of Appeals promulgated its decision affirming in toto the decision of the lower court, with costs against
petitioner Marino Corpus (Annex A, Petition for Certiorari, p. 25, rec.)
Hence, the instant petition for review on certiorari, petitioner contending that the respondent Court of Appeals erred in finding that petitioner
accepted private respondent's services "with the understanding of both that he (private respondent) was to be compensated" in money; and that the fee
of private respondent was contingent (pp. 3 & 5, Petition for Certiorari, pp. 17 & 19, rec.).
On October 1, 1975, the case was deemed submitted for decision (p. 177, rec.), after the parties filed their respective memoranda.

B
On January 31, 1978, private respondent Atty. Juan T. David filed a petition to remand the case to the court a quofor execution of the latter's decision
in Civil Case No. 61802, dated September 4, 1967, alleging that said decision is already deemed affirmed pursuant to Section 11(2), Article X of the
New Constitution by reason of the failure of this Tribunal to decide the case within 18 months. Then on July 7, 1978, another petition to remand the
case to the lower court to execution was filed by herein private respondent.
Subsequently, private respondent Atty. Juan T. David filed with The court a quo a motion dated September 13, 1978 for the issuance of a writ of
execution of the lower court's decision in the aforesaid civil case, also invoking Section 11 (2), Article X of the 1973 Constitution. In an order dated
September 19, 1978, the lower court, through Judge Jose H. Tecson, directed the issuance of a writ of execution. The writ of execution was issued on
October 2, 1978 and a notice of garnishment was also issued n October 13, 1978 to garnish the bank deposits of herein petitioner Marino Corpus in
the Commercial Bank and Trust Company, Makati Branch.
It appears that on October 13, 1978, herein petitioner filed a motion for reconsideration of the September 19, 1978 order. Private respondent Atty.
Juan T. David filed on October 19, 1978 an opposition to said motion and herein petitioner filed a reply on October 30, 1978. The lower court denied
said motion for reconsideration in its over dated November 7, 1978.
It appears also that in a letter dated October 18, 1978, herein petitioner Marino Corpus requested this Court to inquire into what appears to be an
irregularity in the issuance of the aforesaid garnishment notice to the Commercial Bank and Trust Company, by virtue of which his bank deposits
were garnished and he was prevented from making withdrawals from his bank account.
In OUR resolution of November 3, 1978, WE required private respondent Atty. Juan T. David and the Commercial Bank and Trust Company to
comment on petitioner's letter, and for the bank to explain why it did not honor petitioner's withdrawals from his bank deposits when no garnishment
order has been issued by the Supreme Court. This Court further inquired from the lower court whether it has issued any garnishment order during the
pendency of the present case.
On November 27, 1978, the Commercial Bank and Trust Company filed its comment which was noted in the Court's resolution of December 4, 1978.
In said resolution, the Court also required Judge Jose H. Tecson to comply with the resolution of November 3, 1978, inquiring as to whether he had
issued any garnishment order, and to explain why a writ of execution was issued despite the pendency of the present case before the Supreme Court.
Further, WE required private respondent Atty. Juan T. David Lo explain his failure to file his comment, and to file the same as directed by the
resolution of the Court dated November 3, 1978. Private respondent's compliance came on December 13, 1978, requesting to be excused from the
filing of his comment because herein petitioner's letter was unverified. Judge Tecson's compliance was filed on December 15, 1978, to which herein
petitioner replied on January 11, 1979.
In OUR resolution dated January 3, 1979, WE set aside the order of Judge Jose H. Tecson dated September 19, 1978, the writ of execution as well as
the notice of garnishment, and required private respondent Atty. Juan T. David to show cause why he should not be cited for contempt for his failure
to file his comment as directed by the resolution of the Court dated December 4, 1978, and for filing a motion for execution knowing that the case is
pending appeal and review before this Court Likewise, the Court required Judge Jose H. Tecson to show cause why he should not be cited for
contempt for issuing an order directing the issuance of a writ of execution and for issuing such writ despite the pendency of the present case in the
Supreme Court.
On January 12, 1979, Judge Jose H. Tecson filed his compliance explanation as directed by the aforesaid resolution of January 3, 1979, while private
respondent Atty. Juan T. David filed on January 30, 19 79 his compliance and motion for reconsideration after the Court has granted him an extension
of time to file his compliance.
Private respondent Atty. Juan T. David filed on February 28, 1979, a petition praying that the merits of his compliance be resolved by the Court en
banc. Subsequently, on March 26, 1979, another petition was filed by herein private respondent asking the Chief
Justice and the members of the First Division to inhibit themselves from participating in the determination of the merits of his compliance and for its
merits to be resolved by the Court en banc.
C
The main thrust of this petition for review is whether or not private respondent Atty. Juan T. David is entitled to attorney's fees.
Petitioner Marino Corpus contends that respondent David is not entitled to attorney's fees because there was no contract to that effect. On the other
hand, respondent David contends that the absence of a formal contract for the payment of the attorney's fees will not negate the payment thereof
because the contract may be express or implied, and there was an implied understanding between the petitioner and private respondent that the
former will pay the latter attorney's fees when a final decision shall have been rendered in favor of the petitioner reinstating him to -his former
position in the Central Bank and paying his back salaries.
I

WE find respondent David's position meritorious. While there was express agreement between petitioner Corpus and respondent David as regards
attorney's fees, the facts of the case support the position of respondent David that there was at least an implied agreement for the payment of
attorney's fees.
Petitioner's act of giving the check for P2,000.00 through his aforestated April 18, 1962 letter to respondent David indicates petitioner's commitment
to pay the former attorney's fees, which is stressed by expressing that "I wish I could give more but as you know we were banking on a SC decision
reinstating me and reimbursing my back salaries This last sentiment constitutes a promise to pay more upon his reinstatement and payment of his
back salaries. Petitioner ended his letter that he was "looking forward to a continuation of the case in the lower court, ... to which the certiorarimandamus-quo warranto case was remanded by the Supreme Court for further proceedings.
Moreover, respondent David's letter-reply of April 25, 1962 confirms the promise of petitioner Corpus to pay attorney's fees upon his reinstatement
and payment of back salaries. Said reply states that respondent David decided to be his counsel in the case because of the value to him of their
intimate relationship over the years and "not, primarily, for a professional fee." It is patent then, that respondent David agreed to render professional
services to petitioner Corpus secondarily for a professional fee. This is stressed by the last paragraph of said reply which states that "however, when
you shall have obtained a decision which would have finally resolved the case in your favor, remembering me then will make me happy. In the
meantime, you will make me happier by just keeping the check." Thereafter, respondent David continued to render legal services to petitioner
Corpus, in collaboration with Atty. Alverez until he and Atty. Alvarez secured the decision directing petitioner's reinstatement with back salaries,
which legal services were undisputedly accepted by, and benefited petitioner.
Moreover, there is no reason to doubt respondent David's assertion that Don Rafael Corpus, the late father of petitioner Corpus, requested respondent
to help his son, whose suit for reinstatement was dismissed by the lower court; that pursuant to such request, respondent conferred in his office with
petitioner, who requested respondent to handle the case as his lawyer, Atty. Alvarez, was already disenchanted and wanted to give up the case; and
that respondent agreed on the case. It would have been unethical for respondent to even offer his services when petitioner had a competent counsel in
the person of Atty. Alvarez, who has been teaching political, constitutional and administrative law for over twenty years.
Likewise, it appears that after the Supreme Court affirmed on March 31, 1965 the order of the lower court reinstating petitioner Corpus with back
salaries and awarding attorney's fees of P5,000.00, respondent David made a written demand on April 19, 1965 upon petitioner Corpus for the
payment of his attorney's fees in an amount equivalent to 50% of what was paid as back salaries (Exh. N p. 75, Folder of Exhibits, Civil Case No.
61802). Petitioner Corpus, in his reply dated May 7, 1965 to the aforesaid written demand, while disagreeing as to the amount of attorney's fees
demanded, did not categorically deny the right of respondent David to attorney's fees but on the contrary gave the latter the amount of P2,500.00,
which is one-half () of the court-awarded attorney's fees of P5,000.00, thus impliedly admitting the right of respondent David to attorney's fees
(Exh. K, p. 57, Folder of Exhibits, Civil Case No. 61802).
It is further shown by the records that in the motion filed on March 5, 1975 by petitioner Corpus before the Court of Appeals for the reconsideration
of its decision the order of the lower court granting P30,000.00 attorney's fee's to respondent David, he admitted that he was the first to acknowledge
that respondent David was entitled to tion for legal services rendered when he sent the chock for P2,000.00 in his letter of April 18, 1962, and he is
still to compensate the respondent but only to the extent of P10,000.00 (p. 44, rec.). This admission serves only to further emphasize the fact that
petitioner Corpus was aware all the time that he was liable to pay attorney's fees to respondent David which is therefore inconsistent with his position
that the services of respondent David were gratuitous, which did not entitle said respondent to compensation.
It may be advanced that respondent David may be faulted for not reducing the agreement for attorney's fees with petitioner Corpus in writing.
However, this should be viewed from their special relationship. It appears that both have been friends for several years and were co-members of the
Civil Liberties Union. In addition, respondent David and petitioner's father, the late Rafael Corpus, were also close friends. Thus, the absence of an
express contract for attorney's fees between respondent David and petitioner Corpus is no argument against the payment of attorney's fees,
considering their close relationship which signifies mutual trust and confidence between them.
II
Moreover, the payment of attorney's fees to respondent David may also be justified by virtue of the innominate contract of facio ut des (I do and you
give which is based on the principle that "no one shall unjustly enrich himself at the expense of another." innominate contracts have been elevated to
a codal provision in the New Civil Code by providing under Article 1307 that such contracts shall be regulated by the stipulations of the parties, by
the general provisions or principles of obligations and contracts, by the rules governing the most analogous nominate contracts, and by the customs of
the people. The rationale of this article was stated in the 1903 case of Perez vs. Pomar (2 Phil. 982). In that case, the Court sustained the claim of
plaintiff Perez for payment of services rendered against defendant Pomar despite the absence of an express contract to that effect, thus:
It does not appear that any written contract was entered into between the parties for the employment of the plaintiff as interpreter,
or that any other innominate contract was entered into but whethertheplaintiffsservicesweresolicitedorwhethertheywereoffered to
the defendant for his assistance, inasmuch as these services were accepted and made use of by the latter, we must consider that
there was a tacit and mutual consent as to the rendition of the services. This gives rise to the obligation upon the person benefited
by the services to make compensation therefor, since the bilateral obligation to render service as interpreter, on the one hand, and
on the other to pay for the service rendered, is thereby incurred. (Arts. 1088, 1089, and 1262 of the Civil Code).
xxxxxxxxx

... Whether the service was solicited or offered, the fact remains that Perez rendered to Pomar services as interpreter. As it does
not appear that he did this gratuitously, the duty is imposed upon the defendant, he having accepted the benefit of the service, to
pay a just compensation therefor, by virtue of the innominate contract of facio ut des implicitly established.
xxxxxxxxx
... because it is a well-known principle of law that no one should permitted to enrich himself to the damage of another" (emphasis
supplied; see also Tolentino, Civil Code of the Philippines, p. 388, Vol. IV 119621, citing Estate of Reguera vs. Tandra 81 Phil.
404 [1948]; Arroyo vs. Azur 76 Phil. 493119461; and Perez vs. Pomar. 2 Phil. 682 [1903]).
WE reiterated this rule in Pacific Merchandising Corp. vs. Consolacion Insurance & Surety Co., Inc. (73 SCRA 564 [1976]) citing the case of Perez
v. Pomar, supra thus:
Where one has rendered services to another, and these services are accepted by the latter, in the absence of proof that the service
was rendered gratuitously, it is but just that he should pay a reasonable remuneration therefor because 'it is a well-known
principle of law, that no one should be permitted to enrich himself to the damage of another (emphasis supplied).
Likewise, under American law, the same rule obtains (7 CJS 1079; FL Still & Co. v. Powell, 114 So 375).
III
There was no contract for contingent fee between Corpus and respondent David. Contingent fees depend on an express contract therefor. Thus, "an
attorney is not entitled to a percentage of the amount recovered by his client in the absence of an express contract to that effect" (7 C.J.S. 1063 citing
Thurston v. Travelers Ins. Co., 258 N.W. 66, 128 Neb. 141).
Where services were rendered without any agreement whatever as to the amount or terms of compensation, the attorney is not
acting under a contract for a contingent fee, and a letter by the attorney to the client stating that a certain sum would be a
reasonable amount to charge for his services and adding that a rate of not less than five percent nor more than ten would be
reasonable and customary does not convert the original agreement into a contract for a contingent fee (7 C.J.S. 1063 citing
Fleming v. Phinizy 134 S.E. 814).
While there was no express contract between the parties for the payment of attorney's fees, the fact remains that respondent David rendered legal
services to petitioner Corpus and therefore as aforestated, is entitled to compensation under the innominate contract of facio lit des And such being
the case, respondent David is entitled to a reasonable compensation.
IV
In determining a reasonable fee to be paid to respondent David as compensation for his services, on a quantum meruit basis, it is proper to consider
all the facts and circumstances obtaining in this case particularly the following:
The extent of the services rendered by respondent David should be considered together with the extent of the services of Petitioner's other counsel,
Atty. Rosauro Alvarez, It is undisputed that Atty. Rosauro Alvarez had rendered legal services as principal counsel for more shall six (6) years while
respondent David has rendered legal services as collaborating counsel for almost four (4) years. It appears that Atty. Alvarez started to render legal
services after the administrative case was filed on March 7, 1958 against petitioner Corpus. He represented petitioner Corpus in the hearing of said
case which was conducted from May 5, 1958 to October 8, 1958, involving 56 sessions, and this resulted in the complete exoneration by the
Investigating Committee of all the charges against the petitioner. It appears further that after the Monetary Board, in its resolution of July 20, 1959,
declared petitioner Corpus as being considered resigned from the service, Atty. Alvarez instituted on August 18, 1958 Civil Case No. 41126 in the
Court of First Instance of Manila for the setting aside of the aforestated resolution and for the reinstatement of petitioner Corpus. Atty. Alvarez
actively participated in the proceedings.
On the other hand, respondent David entered his appearance as counsel for petitioner Corpus sometime after the dismissal on June 14, 1960 of the
aforesaid civil case. From the time he entered his appearance, both he and Atty. Alvarez rendered legal services to petitioner Corpus in connection
with the appeals of the aforementioned civil case to the Court of Appeals and to the Supreme Court. The records disclose that in connection with the
appeal from the June 14, 1960 order of dismissal, respondent David prepared and signed pleadings although the same were made for and on behalf of
Atty. Alvarez and himself And it is not far-fetched to conclude that all appearances were made by both counsels considering that Atty. Alverez was
the principal counsel and respondent David was the collaborating counsel. Thus, when the case was called for oral argument on April 20, 1961 before
the Supreme Court, respondent David and Atty. Alverez appeared for petitioner Corpus although it was David who orally argued the case.
When the Supreme Court, in its decision of March 30, 1962, remanded the case to the lower court for further it was Atty. Alverez who conducted the
presentation of evidence while respondent David assisted him The records also review that respondent David prepared and signed for Atty. Alverez
and himself. certain pleadings, including a memorandum. Moreover, after the lower court rendered judgment on June 2 4, 1963 ordering the
reinstatement and payment of back salaries to petitioner Corpus and awarding him P5,000.00 by way of attorney's fees, both petitioner Corpus and
the respondents in said case appealed the judgment. At that stage, respondent David again prepared and signed for Atty. Alvarez and himself, the
necessary pleadings, including two appeal briefs. And in addition, he made oral arguments in the hearings of motions filed in the lower court before

the records of the case were forwarded to the appellate court. Furthermore, while it appears that it was Atty. Alvarez who laid down the basic theory
and foundation of the case of petitioner Corpus in the administrative case and later in the civil case, respondent David also advanced legal
propositions. Petitioner Corpus contends that said legal propositions were invariably rejected by the courts. This is, however, of no moment because
the fact remains that respondent David faithfully rendered legal services for the success of petitioner's case.
The benefits secured for petitioner Corpus may also be considered in ascertaining what should be the compensation of respondent David. It cannot be
denied that both Atty. Alvarez and respondent David were instrumental in obtaining substantial benefits for petitioner Corpus which consisted
primarily of his reinstatement, recovery of back salaries and the vindication of his honor and reputation. But, note should also be taken of the fact that
respondent David came at the crucial stage when the case of petitioner Corpus was dismissed by the lower court.
Atty. Rosauro Alvarez admittedly was paid by petitioner Corpus the sum of P20,000.00 or at most P22,500.00 (T.s.n., Jan. 11, 1967, pp. 34-35; T.s.n.,
Feb. 10, 1967, pp. 48-49). On the other hand, petitioner Corpus, after WE suggested on August 15, 1975 that they settle the case amicably has, in his
September 15, 1975 pleading filed before this Court (p. 166, rec.), manifested his willingness to pay P10,000.00 for the services of respondent David.
However, respondent David has not manifested his intention to accept the offer.
In his complaint in the instant case, he asked for P75,000.00 as his attorney's fees. The records reveal that petitioner Corpus actually received only
P150,158.50 as back salaries and emoluments after deducting taxes as well as retirement and life insurance premiums due to the GSIS. The amount
thus claimed by respondent David represents 50% of the amount actually received by petitioner Corpus. The lower court, however, awarded only
P30,000.00 and it was affirmed by the Court of Appeals.
Considering the aforestated circumstances, WE are of the opinion that the reasonable compensation of respondent David should be P20,000.00.
V
WE find private respondent Juan T. David and Judge Jose H. Tecson, Presiding Judge of the Court of First Instance of Manila, Branch V, guilty of
contempt of court.
Respondent David filed on or about September 13, 1978 a motion with the court a quo for the issuance of a writ of execution to enforce its decision
in Civil Case No 61802, subject of the present petition, knowing fully well that it was then still pending appeal before this Court. In addition, no
certification that the aforesaid decision is already deemed affirmed had as yet been issued by the Chief Justice pursuant to Section 11, paragraph 2,
Article X of the New Constitution; because respondent David's petitions filed with the Supreme Court on January 31, 1978 and on July 7, 1978 to
remand the case to the trial court for execution and for the issuance of such certification had not yet been acted upon as the same were still pending
consideration by this Court. In fact, this Court has not as of this time made any pronouncement on the aforesaid provision of the New Constitution.
This act of respondent David constitutes disrespect to, as well as disregard of, the authority of this Court as the final arbiter of all cases duly appealed
to it, especially constitutional questions. It must be emphasized that as a member of the Philippine Bar he is required "to observe and maintain the
respect due to the court of justice and judicial officers" (Section 20 (b), 138 of the Revised Rules of Court). Likewise, Canon 1 of. the Canons of
Professional Ethic expressly provide that: "It is the duty of the lawyer to maintain towards the Courts a respectful attitude, not for the sake of the
temporary incumbent of the judgement office, but for the maintenance of its supreme importance." And this Court had stressed that "the duty of an
attorney to the courts 'can only be maintained by rendering no service involving any disrespect to the judicial office which he is bound to uphold'"
(Rheem of the Philippines v. Ferrer, 20 SCRA 441, 444 [1967] citing the case of Lualhati v. Albert, 67 Phil. 86, 92 [1932]).
Moreover, this Court takes judicial notice of the fact that herein respondent David, in the previous case of Integrated Construction Services, Inc. and
Engineering Construction, Inc. v. Relova (65 SCRA 638 [1975]), had sent letters addressed to the then Chief Justice Querube C. Makalintal and later
to the late Chief Justice Fred Ruiz Castro, requesting for the issuance of certification on the basis of the aforementioned provision of the New
Constitution which were not given due consideration. And knowing this, respondent David should have been more prudent and cautious in g with the
court a quo any motion for execution.
Furthermore, there was even a taint of arrogance and defiance on the part of respondent David in not filing his comment to the letter- complaint dated
October 18, 1978 of petitioner Corpus, as required by this Court in its November 3, 1978 and December 4,1978 resolutions which were duly received
by him, and instead, he sent on December 13, 1978 a letter requesting to be excused from the filing of his comment on the lame excuse that
petitioner's letter-complaint was not verified.
On the part of Judge Jose H. Tecson, his presumptuous and precipitate act of granting the motion for execution of dent David likewise constitutes
disrespect to, as well as of, the authority of this Court because he know for a that the case was still pending apply as the had not yet been remanded to
it and that no certification has been issued by this Court. As a judicial officer, Judge Tecson is charged with the knowledge of the fact that this Court
has yet to make a definite pronouncement on Section 11, paragraph 2, Article X of the New Constitution. Judge Tecson should know that only the
Supreme Court can authoritatively interpret Section 11 (2) of Article X of the 1973 Constitution. Yet, Judge Tecson assumed the role of the Highest
Court of the Land. He should be reminded of what Justice Laurel speaking for the Court, has said in People v. Vera (65 Phil 56, 82 [1937]):
A becoming modesty of inferior courts demands conscious realization of the position that they occupy in the interrelation and
operation of the integrated judged system of the nation.

It may also be added that the improvident act of respondent David in firing the motion for execution and the precipitate act of Judge Tecson in issuing
the writ of execution are intriguing as they invite suspicion that there was connivance between the two. Respondent David would seem to imply that
his claim for attorney's fees should be given preference over the other cams now pending in this Court. Certainly, such should not be the case because
there are cases which by their nature require immediate or preferential attention by this Tribunal like habeas corpus cases, labor cases and c cases
involving death sentence, let alone cases involving properties and property rights of poor litigants pending decision or resolution long before the New
Constitution of 1973. Nobility and exempt forbearance were expected of Atty. David, who is old and experienced in the practice of the legal
profession, from which he has derived a great measure. of economic well-being and independence
Consequently, the filing of the motion for immediate tion and the issuance of the writ of execution constitute a defiance and usurpation of the
jurisdiction of the Supreme Court. As a disciplinary measure for the preservation and vindication of the dignity of this Supreme Tribunal respondent
Atty. Juan T. David should be REPRIMANDED for his precipitate action of filing a motion for execution as well as Judge Jose H. Tecson for his
improvident issuance of a writ of execution while the case is pending appeal before the Supreme Court, and a repetition of said acts would be dealt
with more severely.
WHEREFORE, PETITIONER R. MARINO CORPUS IS HEREBY DIRECTED TO PAY RESPONDENT ATTY. JUAN T. DAVID THE SUM OF
TWENTY THOUSAND (P20,000.00) PESOS AS ATTORNEY'S FEES.
RESPONDENT ATTY. JUAN T. DAVID AND JUDGE JOSE H. TECSON OF THE COURT OF FIRST INSTANCE OF MANILA, BRANCH V,
ARE HEREBY DECLARED GUILTY OF CONTEMPT AND ARE HEREBY REPRIMANDED, WITH A WARNING THAT REPETITION TION
OF THE SAME OR SIMILAR ACTS WILL BE DEALT WITH MORE SEVERELY.
COSTS AGAINST PETITIONER.
SO ORDERED.
Teehankee (Chairman), Fernandez and Melencio-Herrera, JJ., concur.
De Castro, J., concurs in the result.
Guerrero, J., is on leave.

Republic of the Philippines


SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 192099

July 8, 2015

PAULINO M. EJERCITO, JESSIE M. EJERCITO and JOHNNY D. CHANG, Petitioners,


vs.
ORIENTAL ASSURANCE CORPORATION, Respondent.
DECISION
SERENO, CJ:
This is a Petition for Review on Certiorari1 filed by Paulino M. Ejercity, Jessie M. Ejercito and Johnny D. Chang (petitioners) under Rule 45 of the
1997 Rules of Civil Procedure assailing the Court of Appeals (CA) Decision dated 2 October 2009 2 and Resolution date 14 April 20103 in CA-G.R.
CV No. 90828. The Special Third Division of the CA reversed and set aside the Regional Trial Court (RTC) Decision in Civil Case No. 01-101999:
WHEREFORE, premises considered, the present appeal is hereby GRANTED. THE Decision dated February 2, 2007 of the Regional Trial Court of
Manila, Branch 36 in Civil Case No. 01-101999 is hereby SET ASIDE.
A new judgment is hereby entered ordering the defendants appellees Merissa C Somes, Paulino M. Ejercito, Jessie M. Ejercito and Johnny D. Chang
jointly and severally liable to pay plaintiff-appellant Oriental Assurance Corporation the following sums:
1. The principal amount of P3,000,000.00 with interest at the rate of 12% per annum from the time of the filing of the complaint until the
same shall have been fully paid:
2. Attorneys fees in the amount of P30,000.00; and
3. Costs of suit.
SO ORDERED
THE FACTS
The facts of the case, as found by the CA, are as follows:
On 10 May 1999, respondent Oriental Assurance Corporation, through its Executive Vice President Luz N. Cotoco issued a Surety Bond in favor of
FFV Travel & Tours, Inc. (Company). The bond was intended to guarantee the Companys payment of airline tickets purchased on credit from
participating members of International Air Transport Association (IATA) to the extent of 3million.
On the same day, petitioners and Merissa C. Somes (Somes) executed a Deed of Indemnity in favor of respondent. The Surety Bond was effective for
one year from its issuance until 10 May 2000. It was renewed for another year, from 10 May 2000 to 10 May 2001, as shown in Bond Endorsement
No. OAC-2000/0145 dated 17 April 2000. The corresponding renewal premium amounting to 15,024.54 was paid by the insured corporation under
Official Receipt No. 100262.
FFV Travel & Tours, Inc. has been declared in default for failure to pay its obligations amounting 5,484,086.97 and USD 18,760.98 as of 31 July
2000. Consequently, IATA demanded payment of the bond, and respondent heeded the demand on 28 November 2000 as evidenced by China Bank
Check No. 104949. IATA executed a Release of Claim on 29 November 2000 acknowledging payment of the surety bond.
Respondent sent demand letters to petitioners and Somes for reimbursement of the 3 million pursuant to the indemnity agreement.1wphi1 For their
failure to reimburse respondent, the latter filed a collection suit.
THE RTC RULING
After trial, the RTC rendered a Decision dismissing the complaint against petitioners of lack of merit and pronouncing Somes liable to pay the
amount of 3 million and interest per annum at the rate of 12% of the principal obligation from the date the complaint was filed up to the date the
obligation would have been fully paid.

The RTC found that there was no written agreement to show the intention of petitioners to renew the Deed of Indemnity. The absence thereof was
evidenced by the nonappearance of any signature on the Renewal Notice, which was not signed by Somes. However, she was held liable to pay the
surety value of the cost of tickets as she had paid the premium for the renewal of the Surety Bond and used the renewed bond by submitting it to
IATA.
THE CA RULING
The CA reversed the finding of the RTC and ruled that petitioners could not escape liability as they had authorized respondent to grant any renewals
or extensions pursuant to the indemnity agreement. The Deed of Indemnity contained a stipulation that the signatories (petitioners) were authorizing
the Company (respondent) to grant or consent to the grant of any extension, continuation, increase, modification, change or alteration, and/or renewal
of the original bond. Petitioners voluntarily signed the agreement and, are educated persons (Paulino, being a lawyer), so they could not have
misunderstood the legal effects of the undertaking they had signed.
ISSUES
Petitioners raise the following issues:
Whether or not the Honorable Court of Appeals erred in ruling that petitioners are liable to indemnify the respondent under the deed of indemnity
considering that petitioners did not give their consent to be bound thereby beyond the one (1) year effectivity period of the original surety bond.
Whether or not the Honorable Court of Appeal erred in ruling that petitioners are liable to pay the respondent attorneys fees considering that
petitioners did not breach their obligation under the deed of indemnity to indemnify the respondent during the one (1) year effectivity period of the
original surety bond.5
THE COURTS RULING
We find no merit in the Petition.
The contract of indemnity is the law between the parties. 6 it is a cardinal rule in the interpretation of a contract that if its terms are clear and leave no
doubt on the intention of the contracting parties, the literal meaning of its stipulation shall control. 7 the CA aptly found provisions in the contract that
could not exonerate petitioners from their liability.
The deed of indemnity contains the following stipulations:
INDEMNITY: To indemnify the COMPANY for any damages, payments, advances, prejudices, loss, costs and expenses of whatever kind and nature,
including counsel or attorneys fees, which the company may at any time sustain or incur as a consequence of having executed the above mentioned
Bond, it renewals, extensions modifications or substitutions and said attorneys fees shall not be less than fifteen (15%) per cent of the amount
claimed by the company in each action, the same to be due and payable irrespective of whether the case is settle judicially or extrajudicially.
Xxxx
MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH: - the said indemnities will be paid to the COMPANY as soon as demand
is received from the creditor or as soon as it becomes liable to make payment of any sum under the terms of the above-mentioned Bond, its renewals.
Extension, modifications or substitutions whether the said sum or sums or par thereof have been actually paid or not. We authorize the COMPANY to
accept in any case and at its entire discretion, from any of us, payment on account of the pending obligation, and to grant extensions to any of us, to
liquidate said obligations, without necessity of pervious knowledge or consent from the obligors.
Xxxx
INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY:
Any payment or disbursement made by the COMPANY on account of the above mentioned Bond, its renewals, extensions, modifications or
substitutions either in the belief that the Company was obligated to make such payment or in the belief that the company was obligated to make such
payment or in the belief that said payment was necessary in order to avoid greater losses or obligation for which the company might be liable by
virtue of the terms of the above mentioned Bond, its renewals, extensions, modifications or substitutions shall be final and will not be disputed by the
undersigned who jointly and severally bind themselves to indemnify the COMPANY of any and all such payments as stated in the preceding clauses.
WAIVER: -- the undersigned hereby waive all the rights, privileges, and benefits that they have or may have under Articles 2077, 2078, 2079, 2080
and 2081 of the Civil Code.
RENEWALS ALTERATIONS AND SUBSTITUTIONS: - the undersigned hereby empower and authorize the company to grant or consent to the
granting of any extension continuation increase modifications change alteration and/or renewal of the original bond herein referred to and to execute
or consent to the execution of any substitution for said bond with the same or different conditions and parties and the undersigned hereby hold

themselves jointly and severally liable to the company for the original bond hereinabove mentioned or for any extension, continuation, increase,
modification, change, alteration, renewal or substitution thereof until the full amount including principal interests premiums costs and other expenses
due to the company thereunder is fully paid up8
Clearly, as far as respondent is concerned, petitioners have expressly bound themselves to the contract, which provides for the term granting authority
to the company to renew the original bond. The terms of the contract are clear, explicit and unequivocal. Therefore, the subsequent acts of the
Company, through Somes, the led to the renewal of the surety bond are binding on petitioners as well.
The intention of Somes to renew the bond cannot be denied, as she paid the renewal premium and even submitted the renewed bond to IATA. 9
The claim of petitioners that they only consented to the one-year validity of the surety bond must be directed against Somes in a separate
action.1awp++i1 She allegedly convinced them that the bond was valid for on year only. The allegation of petitioners is an agreement outside of the
contract. In other words, respondent is not privy to the alleged agreement between Somes and petitioners. For respondent, there was a valid
indemnity agreement executed by the parties, and contained a proviso that became the basis for the authority to renew the original bond.
With regard to the contention that the Deed of Indemnity is a contract of adhesion, the Court has consistently held that contracts of adhesion are not
invalid per se and that their binding effects have been upheld on numerous occasions. 10 the pretension that petitioners did not consent to the renewal
of the bond is belied by the fact that the terms of the contract which they voluntarily entered into contained a clause granting authority to the
Company to grant or consent to the renewal of the bond. Having entered into the contract with full knowledge of its terms and conditions, petitioners
are stopped from asserting that they did so under the ignorance of the legal effect of the contract or the undertaking.
It is true that on some occasions, the Court has struck down such contract as void when the weaker party is imposed upon in dealing with the
dominant party is reduced to the alternative of accepting the contract or leaving it, completely deprived of the opportunity to bargain on equal
footing.13 this reasoning cannot be used in the instant case. One of the petitioners, Paulino M. Ejercito, is a lawyer who cannot feign ignorance of the
legal effect of his undertaking. Petitioners could have easily inserted a remark in the clause granting authority to the Company to renew the original
bond, if the renewal thereof was their intention.
The rule that ignorance of the contents of an instrument does not ordinarily affect the liability of the one who signs it 12 may also be applied to this
Indemnity Agreement. And the mistake of petitioners as to the legal effect of their obligation is ordinarily no reason for relieving them of liability. 13
WHEREFORE, premises considered the Petition is DENIED. The Court or Appeals Decision dated 2 October 2009 and Resolution dated 14 April
2010 in CA-G.R. CV No. 90828 are AFFIRMED.
SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 163512

February 28, 2007

DAISY B. TIU, Petitioner


vs.
PLATINUM PLANS PHIL., INC., Respondent.
DECISION
QUISUMBING, J.:
For review on certiorari are the Decision1 dated January 20, 2004 of the Court of Appeals in CA-G.R. CV No. 74972, and its Resolution 2 dated May
4, 2004 denying reconsideration. The Court of Appeals had affirmed the decision 3dated February 28, 2002 of the Regional Trial Court (RTC) of Pasig
City, Branch 261, in an action for damages, ordering petitioner to pay respondent P100,000 as liquidated damages.
The relevant facts are as follows:
Respondent Platinum Plans Philippines, Inc. is a domestic corporation engaged in the pre-need industry. From 1987 to 1989, petitioner Daisy B. Tiu
was its Division Marketing Director.
On January 1, 1993, respondent re-hired petitioner as Senior Assistant Vice-President and Territorial Operations Head in charge of its Hongkong and
Asean operations. The parties executed a contract of employment valid for five years. 4
On September 16, 1995, petitioner stopped reporting for work. In November 1995, she became the Vice-President for Sales of Professional Pension
Plans, Inc., a corporation engaged also in the pre-need industry.
Consequently, respondent sued petitioner for damages before the RTC of Pasig City, Branch 261. Respondent alleged, among others, that petitioners
employment with Professional Pension Plans, Inc. violated the non-involvement clause in her contract of employment, to wit:
8. NON INVOLVEMENT PROVISION The EMPLOYEE further undertakes that during his/her engagement with EMPLOYER and in case of
separation from the Company, whether voluntary or for cause, he/she shall not, for the next TWO (2) years thereafter, engage in or be involved with
any corporation, association or entity, whether directly or indirectly, engaged in the same business or belonging to the same pre-need industry as the
EMPLOYER. Any breach of the foregoing provision shall render the EMPLOYEE liable to the EMPLOYER in the amount of One Hundred
Thousand Pesos (P100,000.00) for and as liquidated damages. 5
Respondent thus prayed for P100,000 as compensatory damages; P200,000 as moral damages; P100,000 as exemplary damages; and 25% of the total
amount due plus P1,000 per counsels court appearance, as attorneys fees.
Petitioner countered that the non-involvement clause was unenforceable for being against public order or public policy: First, the restraint imposed
was much greater than what was necessary to afford respondent a fair and reasonable protection. Petitioner contended that the transfer to a rival
company was an accepted practice in the pre-need industry. Since the products sold by the companies were more or less the same, there was nothing
peculiar or unique to protect. Second, respondent did not invest in petitioners training or improvement. At the time petitioner was recruited, she
already possessed the knowledge and expertise required in the pre-need industry and respondent benefited tremendously from it. Third, a strict
application of the non-involvement clause would amount to a deprivation of petitioners right to engage in the only work she knew.
In upholding the validity of the non-involvement clause, the trial court ruled that a contract in restraint of trade is valid provided that there is a
limitation upon either time or place. In the case of the pre-need industry, the trial court found the two-year restriction to be valid and reasonable. The
dispositive portion of the decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant, ordering the latter to pay the following:
1. the amount of One Hundred Thousand Pesos (P100,000.00) for and as damages, for the breach of the non-involvement provision (Item
No. 8) of the contract of employment;
2. costs of suit.

There being no sufficient evidence presented to sustain the grant of attorneys fees, the Court deems it proper not to award any.
SO ORDERED.6
On appeal, the Court of Appeals affirmed the trial courts ruling. It reasoned that petitioner entered into the contract on her own will and volition.
Thus, she bound herself to fulfill not only what was expressly stipulated in the contract, but also all its consequences that were not against good faith,
usage, and law. The appellate court also ruled that the stipulation prohibiting non-employment for two years was valid and enforceable considering
the nature of respondents business.
Petitioner moved for reconsideration but was denied. Hence, this appeal by certiorari where petitioner alleges that the Court of Appeals erred when:
A.
[IT SUSTAINED] THE VALIDITY OF THE NON-INVOLVEMENT CLAUSE IN PETITIONERS CONTRACT CONSIDERING THAT THE
PERIOD FIXED THEREIN IS VOID FOR BEING OFFENSIVE TO PUBLIC POLICY
B.
[IT SUSTAINED] THE AWARD OF LIQUIDATED DAMAGES CONSIDERING THAT IT BEING IN THE NATURE OF A PENALTY THE
SAME IS EXCESSIVE, INIQUITOUS OR UNCONSCIONABLE 7
Plainly stated, the core issue is whether the non-involvement clause is valid.
Petitioner avers that the non-involvement clause is offensive to public policy since the restraint imposed is much greater than what is necessary to
afford respondent a fair and reasonable protection. She adds that since the products sold in the pre-need industry are more or less the same, the
transfer to a rival company is acceptable. Petitioner also points out that respondent did not invest in her training or improvement. At the time she
joined respondent, she already had the knowledge and expertise required in the pre-need industry. Finally, petitioner argues that a strict application of
the non-involvement clause would deprive her of the right to engage in the only work she knows.
Respondent counters that the validity of a non-involvement clause has been sustained by the Supreme Court in a long line of cases. It contends that
the inclusion of the two-year non-involvement clause in petitioners contract of employment was reasonable and needed since her job gave her access
to the companys confidential marketing strategies. Respondent adds that the non-involvement clause merely enjoined her from engaging in pre-need
business akin to respondents within two years from petitioners separation from respondent. She had not been prohibited from marketing other
service plans.
As early as 1916, we already had the occasion to discuss the validity of a non-involvement clause. In Ferrazzini v. Gsell, 8 we said that such clause
was unreasonable restraint of trade and therefore against public policy. InFerrazzini, the employee was prohibited from engaging in any business or
occupation in the Philippines for a period of five years after the termination of his employment contract and must first get the written permission of
his employer if he were to do so. The Court ruled that while the stipulation was indeed limited as to time and space, it was not limited as to trade.
Such prohibition, in effect, forces an employee to leave the Philippines to work should his employer refuse to give a written permission.
In G. Martini, Ltd. v. Glaiserman,9 we also declared a similar stipulation as void for being an unreasonable restraint of trade. There, the employee was
prohibited from engaging in any business similar to that of his employer for a period of one year. Since the employee was employed only in
connection with the purchase and export of abaca, among the many businesses of the employer, the Court considered the restraint too broad since it
effectively prevented the employee from working in any other business similar to his employer even if his employment was limited only to one of its
multifarious business activities.
However, in Del Castillo v. Richmond,10 we upheld a similar stipulation as legal, reasonable, and not contrary to public policy. In the said case, the
employee was restricted from opening, owning or having any connection with any other drugstore within a radius of four miles from the employers
place of business during the time the employer was operating his drugstore. We said that a contract in restraint of trade is valid provided there is a
limitation upon either time or place and the restraint upon one party is not greater than the protection the other party requires.
Finally, in Consulta v. Court of Appeals,11 we considered a non-involvement clause in accordance with Article 1306 12 of the Civil Code. While the
complainant in that case was an independent agent and not an employee, she was prohibited for one year from engaging directly or indirectly in
activities of other companies that compete with the business of her principal. We noted therein that the restriction did not prohibit the agent from
engaging in any other business, or from being connected with any other company, for as long as the business or company did not compete with the
principals business. Further, the prohibition applied only for one year after the termination of the agents contract and was therefore a reasonable
restriction designed to prevent acts prejudicial to the employer.
Conformably then with the aforementioned pronouncements, a non-involvement clause is not necessarily void for being in restraint of trade as long
as there are reasonable limitations as to time, trade, and place.

In this case, the non-involvement clause has a time limit: two years from the time petitioners employment with respondent ends. It is also limited as
to trade, since it only prohibits petitioner from engaging in any pre-need business akin to respondents.1awphi1.net
More significantly, since petitioner was the Senior Assistant Vice-President and Territorial Operations Head in charge of respondents Hongkong and
Asean operations, she had been privy to confidential and highly sensitive marketing strategies of respondents business. To allow her to engage in a
rival business soon after she leaves would make respondents trade secrets vulnerable especially in a highly competitive marketing environment. In
sum, we find the non-involvement clause not contrary to public welfare and not greater than is necessary to afford a fair and reasonable protection to
respondent.13
In any event, Article 1306 of the Civil Code provides that parties to a contract may establish such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.
Article 115914 of the same Code also provides that obligations arising from contracts have the force of law between the contracting parties and should
be complied with in good faith. Courts cannot stipulate for the parties nor amend their agreement where the same does not contravene law, morals,
good customs, public order or public policy, for to do so would be to alter the real intent of the parties, and would run contrary to the function of the
courts to give force and effect thereto.15 Not being contrary to public policy, the non-involvement clause, which petitioner and respondent freely
agreed upon, has the force of law between them, and thus, should be complied with in good faith. 16
Thus, as held by the trial court and the Court of Appeals, petitioner is bound to pay respondent P100,000 as liquidated damages. While we have
equitably reduced liquidated damages in certain cases, 17 we cannot do so in this case, since it appears that even from the start, petitioner had not
shown the least intention to fulfill the non-involvement clause in good faith.
WHEREFORE, the petition is DENIED for lack of merit. The Decision dated January 20, 2004, and the Resolution dated May 4, 2004, of the Court
of Appeals in CA-G.R. CV No. 74972, are AFFIRMED. Costs against petitioner.
SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. L-15127

May 30, 1961

EMETERIO CUI, plaintiff-appellant,


vs.
ARELLANO UNIVERSITY, defendant-appellee.
G.A.S. Sipin, Jr., for plaintiff-appellant.
E. Voltaire Garcia for defendant-appellee.
CONCEPCION, J.:
Appeal by plaintiff Emeterio Cui from a decision of the Court of First Instance of Manila, absolving defendant Arellano University from plaintiff's
complaint, with costs against the plaintiff, and dismissing defendant's counter claim, for insufficiency of proof thereon.
In the language of the decision appealed from:
The essential facts of this case are short and undisputed. As established by the agreement of facts Exhibits X and by the respective oral and
documentary evidence introduced by the parties, it appears conclusive that plaintiff, before the school year 1948-1949 took up preparatory
law course in the defendant University. After finishing his preparatory law course plaintiff enrolled in the College of Law of the defendant
from the school year 1948-1949. Plaintiff finished his law studies in the defendant university up to and including the first semester of the
fourth year. During all the school years in which plaintiff was studying law in defendant law college, Francisco R. Capistrano, brother of
the mother of plaintiff, was the dean of the College of Law and legal counsel of the defendant university. Plaintiff enrolled for the last
semester of his law studies in the defendant university but failed to pay his tuition fees because his uncle Dean Francisco R. Capistrano
having severed his connection with defendant and having accepted the deanship and chancellorship of the College of Law of Abad Santos
University, plaintiff left the defendant's law college and enrolled for the last semester of his fourth year law in the college of law of the
Abad Santos University graduating from the college of law of the latter university. Plaintiff, during all the time he was studying law in
defendant university was awarded scholarship grants, for scholastic merit, so that his semestral tuition fees were returned to him after the
ends of semester and when his scholarship grants were awarded to him. The whole amount of tuition fees paid by plaintiff to defendant and
refunded to him by the latter from the first semester up to and including the first semester of his last year in the college of law or the fourth
year, is in total P1,033.87. After graduating in law from Abad Santos University he applied to take the bar examination. To secure
permission to take the bar he needed the transcripts of his records in defendant Arellano University. Plaintiff petitioned the latter to issue to
him the needed transcripts. The defendant refused until after he had paid back the P1,033 87 which defendant refunded to him as above
stated. As he could not take the bar examination without those transcripts, plaintiff paid to defendant the said sum under protest. This is the
sum which plaintiff seeks to recover from defendant in this case.
Before defendant awarded to plaintiff the scholarship grants as above stated, he was made to sign the following contract covenant and
agreement:
"In consideration of the scholarship granted to me by the University, I hereby waive my right to transfer to another school without having
refunded to the University (defendant) the equivalent of my scholarship cash.
(Sgd.) Emeterio Cui".
It is admitted that, on August 16, 1949, the Director of Private Schools issued Memorandum No. 38, series of 1949, on the subject of "Scholarship,"
addressed to "All heads of private schools, colleges and universities," reading:
1. School catalogs and prospectuses submitted to this, Bureau show that some schools offer full or partial scholarships to deserving students
for excellence in scholarship or for leadership in extra-curricular activities. Such inducements to poor but gifted students should be
encouraged. But to stipulate the condition that such scholarships are good only if the students concerned continue in the same school
nullifies the principle of merit in the award of these scholarships.
2. When students are given full or partial scholarships, it is understood that such scholarships are merited and earned. The amount in tuition
and other fees corresponding to these scholarships should not be subsequently charged to the recipient students when they decide to quit
school or to transfer to another institution. Scholarships should not be offered merely to attract and keep students in a school.

3. Several complaints have actually been received from students who have enjoyed scholarships, full or partial, to the effect that they could
not transfer to other schools since their credentials would not be released unless they would pay the fees corresponding to the period of the
scholarships. Where the Bureau believes that the right of the student to transfer is being denied on this ground, it reserves the right to
authorize such transfer.
that defendant herein received a copy of this memorandum; that plaintiff asked the Bureau of Private Schools to pass upon the issue on his right to
secure the transcript of his record in defendant University, without being required to refund the sum of P1,033.87; that the Bureau of Private Schools
upheld the position taken by the plaintiff and so advised the defendant; and that, this notwithstanding, the latter refused to issue said transcript of
records, unless said refund were made, and even recommended to said Bureau that it issue a written order directing the defendant to release said
transcript of record, "so that the case may be presented to the court for judicial action." As above stated, plaintiff was, accordingly, constrained to pay,
and did pay under protest, said sum of P1,033.87, in order that he could take the bar examination in 1953. Subsequently, he brought this action for the
recovery of said amount, aside from P2,000 as moral damages, P500 as exemplary damages, P2,000 as attorney's fees, and P500 as expenses of
litigation.
In its answer, defendant reiterated the stand it took, vis-a-vis the Bureau of Private Schools, namely, that the provisions of its contract with plaintiff
are valid and binding and that the memorandum above-referred to is null and void. It, likewise, set up a counterclaim for P10,000.00 as damages, and
P3,000 as attorney's fees.
The issue in this case is whether the above quoted provision of the contract between plaintiff and the defendant, whereby the former waived his right
to transfer to another school without refunding to the latter the equivalent of his scholarships in cash, is valid or not. The lower court resolved this
question in the affirmative, upon the ground that the aforementioned memorandum of the Director of Private Schools is not a law; that the provisions
thereof are advisory, not mandatory in nature; and that, although the contractual provision "may be unethical, yet it was more unethical for plaintiff to
quit studying with the defendant without good reasons and simply because he wanted to follow the example of his uncle." Moreover, defendant
maintains in its brief that the aforementioned memorandum of the Director of Private Schools is null and void because said officer had no authority to
issue it, and because it had been neither approved by the corresponding department head nor published in the official gazette.
We do not deem it necessary or advisable to consider as the lower court did, the question whether plaintiff had sufficient reasons or not to transfer
from defendant University to the Abad Santos University. The nature of the issue before us, and its far reaching effects, transcend personal equations
and demand a determination of the case from a high impersonal plane. Neither do we deem it essential to pass upon the validity of said Memorandum
No. 38, for, regardless of the same, we are of the opinion that the stipulation in question is contrary to public policy and, hence, null and void. The
aforesaid memorandum merely incorporates a sound principle of public policy. As the Director of Private Schools correctly pointed, out in his letter,
Exhibit B, to the defendant,
There is one more point that merits refutation and that is whether or not the contract entered into between Cui and Arellano University on
September 10, 1951 was void as against public policy. In the case of Zeigel vs. Illinois Trust and Savings Bank, 245 Ill. 180, 19 Ann. Case
127, the court said: 'In determining a public policy of the state, courts are limited to a consideration of the Constitution, the judicial
decisions, the statutes, andthe practice of government officers.' It might take more than a government bureau or office to lay down or
establish a public policy, as alleged in your communication, but courts consider the practices of government officials as one of the four
factors in determining a public policy of the state. It has been consistently held in America that under the principles relating to the doctrine
of public policy, as applied to the law of contracts, courts of justice will not recognize or uphold a transaction which its object, operation, or
tendency is calculated to be prejudicial to the public welfare, to sound morality or to civic honesty (Ritter vs. Mutual Life Ins. Co., 169 U.S.
139; Heding vs. Gallaghere 64 L.R.A. 811; Veazy vs. Allen, 173 N.Y. 359). If Arellano University understood clearly the real essence of
scholarships and the motives which prompted this office to issue Memorandum No. 38, s. 1949, it should have not entered into a contract of
waiver with Cui on September 10, 1951, which is a direct violation of our Memorandum and an open challenge to the authority of the
Director of Private Schools because the contract was repugnant to sound morality and civic honesty. And finally, in Gabriel vs. Monte de
Piedad, Off. Gazette Supp. Dec. 6, 1941, p. 67 we read: 'In order to declare a contract void as against public policy, a court must find that
the contract as to consideration or the thing to be done, contravenes some established interest of society, or is inconsistent with sound
policy and good moralsor tends clearly to undermine the security of individual rights. The policy enunciated in Memorandum No. 38, s.
1949 is sound policy. Scholarship are awarded in recognition of merit not to keep outstanding students in school to bolster its prestige. In
the understanding of that university scholarships award is a business schemedesigned to increase the business potential of an education
institution. Thus conceived it is not only inconsistent with sound policy but also good morals. But what is morals? Manresa has this
definition. It is good customs; those generally accepted principles of morality which have received some kind of social and practical
confirmation. The practice of awarding scholarships to attract students and keep them in school is not good customs nor has it received
some kind of social and practical confirmation except in some private institutions as in Arellano University. The University of the
Philippines which implements Section 5 of Article XIV of the Constitution with reference to the giving of free scholarships to gifted
children, does not require scholars to reimburse the corresponding value of the scholarships if they transfer to other schools. So also with
the leading colleges and universities of the United States after which our educational practices or policies are patterned. In these institutions
scholarships are granted not to attract and to keep brilliant students in school for their propaganda mine but to reward merit or help gifted
students in whom society has an established interest or a first lien. (Emphasis supplied.)
WHEREFORE, the decision appealed from is hereby reversed and another one shall be entered sentencing the defendant to pay to the plaintiff the
sum of P1,033.87, with interest thereon at the legal rate from September 1, 1954, date of the institution of this case, as well as the costs, and
dismissing defendant's counterclaim. It is so ordered.
Bengzon, C.J., Padilla, Labrador, Reyes, J.B.L., Barrera, Parades, Dizon, De Leon and Natividad, JJ., concur.
Bautista Angelo, J., reserves his vote.

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. L-13403

March 23, 1960

RAMON E. SAURA, plaintiff-appellant,


vs.
ESTELA P. SINDICO, defendant-appellee.
Anacleto Magno for appellant.
Espeque and Jalandoni for appellee.
REYES, J. B. L., J.:
Appeal on issues of law from an order of the Court of First Instance of Pangasinan dismissing plaintiff's complaint for damages.
From the records it appears that Ramon E. Saura and Estela P. Sindico were contesting for nomination as the official candidate of the Nacionalista
Party in the fourth district of Pangasinan in the congressional elections of November 12, 1957. On August 23, 1957, the parties entered into a written
agreement bearing the same date, containing among other matters stated therein, a pledge that
Each aspirant shall respect the result of the aforesaid convention, i.e., no one of us shall either run as a rebel or independent candidate after
losing in said convention.
In the provincial convention held by the Nacionalista Party on August 31, 1957, Saura was elected and proclaimed the Party's official congressional
candidate for the aforesaid district of Pangasinan. Nonetheless, Sindico, in disregard of the covenant, filed, on September 6, 1957, her certificate of
candidacy for the same office with the Commission on Elections, and she openly and actively campaigned for her election. Wherefore, on October 5,
1957, plaintiff Saura commenced this suit for the recovery of damages. Upon motion of the defendant, the lower court, in its order of November 19,
1957, dismissed the complaint on the basis that the agreement sued upon is null and void, in tat (1) the subject matter of the contract, being a public
office, is not within the commerce of man; and (2) the "pledge" was in curtailment of the free exercise of elective franchise and therefore against
public policy. Hence, this appeal.
We agree with the lower court in adjudging the contract or agreement in question a nullity. Among those that may not be the subject matter (object) of
contracts are certain rights of individuals, which the law and public policy have deemed wise to exclude from the commerce of man. Among them are
the political rights conferred upon citizens, including, but not limited to, once's right to vote, the right to present one's candidacy to the people and to
be voted to public office, provided, however, that all the qualifications prescribed by law obtain. Such rights may not, therefore, be bargained away
curtailed with impunity, for they are conferred not for individual or private benefit or advantage but for the public good and interest.
Constitutional and statutory provision fix the qualifications of persons who may be eligible for certain elective public offices. Said requirements may
neither be enlarged nor reduced by mere agreements between private parties. A voter possessing all the qualifications required to fill an office may,
by himself or through a political party or group, present his candidacy without further limitations than those provided by law.
Every voter has a right to be a candidate for public office if he possesses the qualifications required to fill the office. It does not necessarily
follow that he can be the candidate of a particular political party. The statute provides when and how one may be a candidate of a political
party. If he cannot fill the requirement so as to be the candidates of the political party of his choice, he may still be a candidate at the
general election by petition. The right of the voter to vote at the general election for whom he pleases cannot be limited.
(Robertsvs. Cleveland, Secretary of State of State of New Mexico, 48 NM 226, 149 P (2d) 120, 153 A.L.R. 635, 637-638) (Emphasis
supplied)
In common law, certain agreements in consideration of the withdrawal of candidates for office have invariably been condemned by the courts as
being against public policy, be it a withdrawal from the race for nomination or, after nomination, from the race for election. (See notes in 37 L. R. A.
(N.S.) 289 and cases cited therein; 18 Am. Jur. Sec. 352, pp. 399-400)
In the case at hand, plaintiff complains on account of defendant's alleged violation of the "pledge" in question by filing her own certificate o
candidacy for a seat in the Congress of the Philippines and in openly and actively campaigning for her election. In the face of the preceding
considerations, we certainly cannot entertain plaintiff's action, which would result in limiting the choice of the electors to only those persons selected
by a small group or by party boses.
The case of Pendleton vs. Pace, 9 S.W. (2nd) 437, cited by the appellant, is clearly inapplicable. The court there only sanctioned the validity of an
agreement by the opposing candidates for nomination setting aside and re-submitting the nomination for another primary election on account of the

protest or contest filed by the losing candidate in the first primary election. To abandon the contest proceedings, the candidates for nomination agreed
to submit again their nomination to the electors in the subsequent primary.
Appellant likewise cites and quotes a portion of our ruling in Monsale vs. Nico, 83 Phil., 758; 46 Off. Gaz., 210, to the effect that it is not
incompetent or a candidate to withdraw or annul his certificate of candidacy. This is not in point, for while we stated there that he may do so, there
being no legal prohibition against such a voluntary withdrawal, it does not follow, nor did we imply anywhere in the decision, that in case there is any
agreement or consideration for such a withdrawal, said agreement or consideration should be held valid or given effect.
We find it unnecessary to discuss the other points raised by the parties.
Wherefore, the order of dismissal appealed from is hereby affirmed. No pronouncement as to costs.
Paras, C. J., Bengzon, Montemayor, Bautista Angelo, Labrador, Concepcion, Endencia, Barrera and Gutierrez David, JJ., concur.

Republic of the Philippines


SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-65425 November 5, 1987
IRENEO LEAL, JOSE LEAL, CATALINA LEAL, BERNABELA LEAL, VICENTE LEAL EUIOGIA LEAL PATERNO RAMOS,
MACARIO DEL ROSARIO, MARGARITA ALBERTO, VICTORIA TORRES, JUSTINA MANUEL, JULIAN MANUEL, MELANIA
SANTOS, CLEMENTE SAMARIO, MARIKINA VALLEY, INC., MIGUELA MENDOZA, and REGISTER OF DEEDS OF
RIZAL, petitioners,
vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT (4th Civil Cases Division), and VICENTE SANTIAGO (Substituted by
SALUD M. SANTIAGO), respondents.

SARMIENTO, J.:
In its resolution dated September 27, 1983, the respondent Intermediate Appellate Court, 1 speaking through Justice Porfirio V, Sison, ordered, in
part, the petitioners to accept the sum of P5,600.00 from the private respondent as repurchase price of the lots described in the "Compraventa" and,
thereafter, to execute a Deed of Repurchase to effect transfer over ownership over the same properties to the private respondent.
This ruling was a complete reversal of the earlier decision, 2 dated June 28, 1.978, penned by Justice Paras, of the Court of Appeals, in the same case,
affirming the trial court's dismissal of the private respondent's complaint.
The petitioners, feeling aggrieved and astonished by the complete turnaround of the respondent court, come to Us with this petition for review by
certiorari.
The antecedent facts are undisputed.
This case brings us back almost half a century ago, on March 21, 1941, when a document entitled "Compraventa," written entirely in the Spanish
language, involving three parcels of land, was executed by the private respondent's predecessors-in-interest, Vicente Santiago and his brother, Luis
Santiago, in favor of Cirilio Leal the deceased father of some of the petitioners, Pursuant to this "Compraventa," the title over the three parcels of
land in the name of the vendors was cancelled and a new one was issued in the name of Cirilo Leal who immediately took possession and exercised
ownership over the said lands. When Cirilo died on December 10, 1959, the subject lands were inherited by his six children, who are among the
petitioners, and who caused the consolidation and subdivision of the properties among themselves.
Between the years 1960 and 1965, the properties were either mortgaged or leased by the petitioners-children of Cirilo Leal to their co-petitioners.
Sometime before the agricultural year 1966-1967, Vicente Santiago approached the petitioners and offered re- repurchase the subject properties.
Petitioners, however, refused the offer. Consequently, Vicente Santiago instituted a complaint for specific performance before the then Court of First
Instance of Quezon City on August 2, 1967.
All the trial, the court a quo rendered its decision,-dismissing the complaint on the ground that the same was still premature considering that there
was, as yet, no sale nor any alienation equivalent to a sale. Not satisfied with this decision, the private respondent appealed to the Court of Appeals
and the latter, acting through the Fourth Division and with Justice Edgardo Paras as ponente affirmed the decision of the court a quo.
The petitioners seasonably filed a motion to amend the dispositive portion of the decision so as to include an order for the cancellation of the
annotations at the back of the Transfer certificates of Title issued in their favor. The private respondent,-on the other hand, filed a-timely motion for
reconsideration of the above decision and an opposition to petitioners' motion to amend. These incidents were not resolved until then Court of
Appeals was abolished and in lieu of which the Intermideate Appellate Court was established In view of the said reorganization, case was reassigned
to the Fourth Civil in this cases Division.
Resolving the abovestated motion for reconsideration, the respondent court, in a resolution penned by Justice Sison and promulgated on September
27, 1983, ruled, as follows:
WHEREFORE, Our decision of June 28, 1978 is hereby reversed and set aside and another one is rendered ordering: (1)
defendants-appellees surnamed Leal to accept the sum of P5,600.00 from plaintiff-appellant (substituted by Salud M. Santiago)
as repurchase price of the lots described in the "Compraventa" of March 21, 1941, and thereafter to execute a deed of repurchase
sufficient in law to transfer ownership of the properties to appellant Salud M. Santiago, the same to be done within five (5) days

from payment; (2) ordering the same defendants Leals and defendant Clemente Samario to indemnify appellant in the sum of
P3,087.50 as rental for the year 1967-1968 and the same amount every year thereafter; (3) ordering an the defendants jointly and
severally to pay the sum of Pl,500.00 as attorney's fees and other expenses of litigation; and (4) ordering defendant Register of
Deeds of Rizal to cancel Transfer Certificate of Title No. 42535 in the names of Vicente Santiago and Luis Santiago upon
presentation of the deed of sale herein ordered to be executed by the appellees in favor of Salud M. Santiago and to issue thereof
another Transfer Certificate of Title in the name alone of Salud M. Santiago. No costs here and in the courts (sic) below.
SO ORDERED.
Verily, the well-spring whence the present controversy arose is the abovementioned "Compraventa," more particularly paragraph (b) thereof, to wit:
xxx xxx xxx
(b) En caso de venta, no podran vender a otros dichos tres lotes de terreno sino al aqui vendedor Vicente Santiago, o los herederos
o sucesores de este por el niismo precio de CINCO MIL SEISCIENTOS PESOS (P5,600.00) siempre y cuando estos ultimos
pueden hacer la compra. 3
xxx xxx xxx
which is now the subject of varying and conflicting interpretations.
xxx xxx xxx
It is admitted by both parties that the phrase "they shall not sell to others these three lots but only to the seller Vicente Santiago or to his heirs or
successors" is an express prohibition against the sale of the lots described in the "Compraventa" to third persons or strangers to the contract.
However, while private respondent naturally lauds the resolution of Justice Sison, which sustains the validity of this prohibition, the petitioners, on
the other hand, endorse the decision penned by Justice Paras, which states, in part:
xxx xxx xxx
Finally, there is grave doubt re the validity of the ostensible resolutory condition here, namely, the prohibition to sell the lots to
persons other than the vendor (appellant); uncertainly, a prohibition to alienate should not exceed at most a period of twenty
years, otherwise there would be subversion of public policy, which naturally frowns on unwarranted restrictions on the right of
ownership. 4
xxx xxx xxx
We agree with the Paras ponencia.
Contracts are generally binding between the parties, their assigns and heirs; however, under Art. 1255 of the Civil Code of Spain, which is applicable
in this instance, pacts, clauses, and conditions which are contrary to public order are null and void, thus, without any binding effect.
Parenthetically, the equivalent provision in the Civil Code of the Philippines is that of Art. 1306, which states: "That contracting parties may establish
such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public
order, or public policy. Public order signifies the public weal public policy. 5 Essentially, therefore, public order and public policy mean one and
the same thing. Public policy is simply the English equivalent of "order publico" in Art. 1255 of the Civil Code of Spain. 6
One such condition which is contrary to public policy is the present prohibition to self to third parties, because the same virtually amounts to a
perpetual restriction to the right of ownership, specifically the owner's right to freely dispose of his properties. This, we hold that any such
prohibition, indefinite and stated as to time, so much so that it shall continue to be applicable even beyond the lifetime of the original parties to the
contract, is, without doubt, a nullity. In the light of this pronouncement, we grant the petitioners' prayer for the cancellation of the annotations of this
prohibition at the back of their Transfer Certificates 'Title.
It will be noted, moreover, that the petitioners have never sold, or even attempted to sell, the properties subject of the "Compraventa. "
We now come to what we believe is the very issue in this case which is, whether or not under the aforequoted paragraph (b) of the "Compraventa" a
right of repurchase in favor of the private respondent exist.
The ruling of the Fourth Division (Justice Paras) is that the said stipulation does not grant a right to repurchase. Contrarily, the resolution of the
Fourth Civil Cases Division (Justice P. V. Sison) interpreted the same provision as granting the right to repurchase subject to a condition precedent.
Thus, the assailed Resolution, reversing the earlier decision of the same respondent court, ruled

xxx xxx xxx


The all-importartant phrase "en caso de venta," must of necessity refer to the sale of the properties either by Cirilo or his heirs to
the Santiago brothers themselves or to their heirs, including appellants Vicente Santiago including appellants Vicente Santiago
and Salud M Santiago, for the same sum of P5,600.00, "siempre y cuando estos ultimos pueden hacer la compra" (when the latter
shall be able to buy it).
xxx xxx xxx
... We repeat, The words envision the situation contemplated by the contracting parties themselves, the resale of the lots to their
owners, and NOT to a sale of the lots to third parties or strangers to the contracts. ... 7
xxx xxx xxx
The law provides that for conventional redemption to take place, the vendor should reserve, in no uncertain terms, the right to repurchase the thing
sold. 8 Thus, the right to redeem must be expressly stipulated in the contract of sale in order that it may have legal existence.
In the case before us, we cannot and any express or implied grant of a right to repurchase, nor can we infer, from any word or words in the questioned
paragraph, the existence of any such right. The interpretation in the resolution (Justice Sison) is rather strained. The phrase "in case case" of should
be construed to mean "should the buyers wish to sell which is the plain and simple import of the words, and not "the buyers should sell," which is
clearly a contorted construction of the same phrase. The resort to Article 1373 of the Civil Code of the Philippines is erroneous. The subject phrase is
patent and unambiguous, hence, it must not be given another interpretation
But even assuming that such a right of repurchase is granted under the "Compraventa," the petitioner correctly asserts that the same has already
prescribed. Under Art. 1508 of the Civil Code of Spain (Art,. 1606 of the Civil Code of the Philippines), the right to redeem or repurchase, in the
absence of an express agreement as to time, shall last four years from the date of the contract. In this case then, the right to repurchase, if it was at
four guaranteed under in the "Compraventa," should have been exercise within four years from March 21, 1941 (indubitably the date of execution of
the contract), or at the latest in 1945.
In the respondent court's resolution, it is further ruled that the right to repurchase was given birth by the condition precedent provided for in the
phrase "siempre y cuando estos ultimos pueden hacer la compra" (when the buyer has money to buy). In other words, it is the respondent court's
contention that the right may be exercised only when the buyer has money to buy. If this were so, the second paragraph of Article 1508 would apply
there is agreement as to the time, although it is indefinite, therefore, the right should be exercised within ten years, because the law does not favor
suspended ownership. Since the alleged right to repurchase was attempted to be exercised by Vicente Santiago only in 1966, or 25 years from the
date of the contract, the said right has undoubtedly expired.
WHEREFORE, in view of the foregoing, the Resolution dated September 27, 1983, of the respondent court is SET ASIDE and the Decision
promulgated on June 28, 1978 is hereby REINSTATED. The annotations of the prohibition to sell at the back of TCT Nos. 138837, 138838, 138839,
138840, 138841, and 138842 are hereby ordered CANCELLED. Costs against the private respondent.
SO ORDERED.
Yap (Chairman), Melencio-Herrera and Padilla, JJ., concur.
Paras, J., took no part.

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. L-46591

July 28, 1987

BANCO FILIPINO SAVINGS and MORTGAGE BANK, petitioner,


vs.
HON. MIGUEL NAVARRO, Presiding Judge, Court of First Instance of Manila, Branch XXXI and FLORANTE DEL VALLE, respondents.
MELENCIO-HERRERA, J.:
This is a Petition to review on certiorari the Decision of respondent Court, the dispositive portion of which decrees:
WHEREFORE, the Court finds that the enforcement of the escalation clause retroactively before the lapse of the 15-year period stated in
the promissory note is contrary to Sec. 3 of Presidential Decree No. 116 and Sec. 109 of Republic Act No. 265, and hereby declares null
and void the said escalation clause. The respondent Banco Filipino Savings and Mortgage Bank is hereby ordered to desist from enforcing
the increased rate of interest on petitioner's loan.
SO ORDERED.
The facts are not in dispute:
On May 20, 1975, respondent Florante del Valle (the BORROWER) obtained a loan secured by a real estate mortgage (the LOAN, for short) from
petitioner BANCO FILIPINO 1 in the sum of Forty-one Thousand Three Hundred (P41,300.00) Pesos, payable and to be amortized within fifteen (15)
years at twelve (12%) per cent interest annually. Hence, the LOAN still had more than 730 days to run by January 2, 1976, the date when
CIRCULAR No. 494 was issued by the Central Bank.
Stamped on the promissory note evidencing the loan is an Escalation Clause, reading as follows:
I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to
me/us in the event law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan.
The Escalation Clause is based upon Central Bank CIRCULAR No. 494 issued on January 2, 1976, the pertinent portion of which reads:
3. The maximum rate of interest, including commissions, premiums, fees and other charges on loans with maturity of more than seven
hundred thirty (730) days, by banking institutions, including thrift banks and rural banks, or by financial intermediaries authorized to
engage in quasi-banking functions shall be nineteen percent (19%) per annum.
xxx

xxx

xxx

7. Except as provided in this Circular and Circular No. 493, loans or renewals thereof shall continue to be governed by the Usury Law, as
amended."
CIRCULAR No. 494 was issued pursuant to the authority granted to the Monetary Board by Presidential Decree No. 116 (Amending Further Certain
Sections of the Usury Law) promulgated on January 29, 1973, the applicable section of which provides:
Sec. 2. The same Act is hereby amended by adding the following section immediately after section one thereof, which reads as follows:
Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the
forbearance of any money, goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social
conditions: Provided, that such changes shall not be made oftener than once every twelve months.
The same grant of authority appears in P.D. No. 858, promulgated on December 31, 1975, except that the limitation on the frequency of changes was
eliminated.
On the strength of CIRCULAR No. 494 BANCO FILIPINO gave notice to the BORROWER on June 30, 1976 of the increase of interest rate on the
LOAN from 12% to 17% per annum effective on March 1, 1976.

On September 24, 1976, Ms. Mercedes C. Paderes of the Central Bank wrote a letter to the BORROWER as follows:
September 24, 1976
Mr. Florante del Valle
14 Palanca Street
B.F. Homes, Paranaque
Rizal
Dear Mr. del Valle:
This refers to your letter dated August 28, 1976 addressed to the Governor, Central Bank of the Philippines, seeking clarification and our official
stand on Banco Filipino's recent decision to raise interest rates on lots bought on installment from 12% to 17% per annum.
A verification made by our Examiner of the copy of your Promissory Note on file with Banco Filipino showed that the following escalation clause
with your signature is stamped on the Promissory Note:
I /We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to
me/us in the event a law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan.
In this connection, please be advised that the Monetary Board, in its Resolution No. 1155 dated June 11, 1976, adopted the following guidelines to
govern interest rate adjustments by banks and non-banks performing quasi-banking functions on loans already existing as of January 3, 1976, in the
light of Central Bank Circulars Nos. 492-498:
l. Only banks and non-bank financial intermediaries performing quasi-banking functions may increase interest rates on loans already
existings of January 2, 1976, provided that:
a. The pertinent loan contracts/documents contain escalation clauses expressly authorizing lending bank or non-bank performing
quasi-banking functions to increase the rate of interest stipulated in the contract, in the event that any law or Central Bank
regulation is promulgated increasing the maximum interest rate for loans; and
b. Said loans were directly granted by them and the remaining maturities thereof were more than 730 days as of January 2, 1976;
and
2. The increase in the rate of interest can be effective only as of January 2, 1976 or on a later date.
The foregoing guidelines, however, shall not be understood as precluding affected parties from questioning before a competent court of justice the
legality or validity of such escalation clauses.
We trust the above guidelines would help you resolve your problems regarding additional interest charges of Banco Filipino.
Very truly yours,
(Sgd.) MERCEDES C. PAREDES
Director
Contending that CIRCULAR No. 494 is not the law contemplated in the Escalation Clause of the promissory note, the BORROWER filed suit
against BANCO FILIPINO for "Declaratory Relief" with respondent Court, praying that the Escalation Clause be declared null and void and that
BANCO FILIPINO be ordered to desist from enforcing the increased rate of interest on the BORROWER's real estate loan.
For its part, BANCO FILIPINO maintained that the Escalation Clause signed by the BORROWER authorized it to increase the interest rate once a
law was passed increasing the rate of interest and that its authority to increase was provided for by CIRCULAR No. 494.
In its judgment, respondent Court nullified the Escalation Clause and ordered BANCO FILIPINO to desist from enforcing the increased rate of
interest on the BORROWER's loan. It reasoned out that P.D. No. 116 does not expressly grant the Central Bank authority to maximize interest rates
with retroactive effect and that BANCO FILIPINO cannot legally impose a higher rate of interest before the expiration of the 15-year period in which
the loan is to be paid other than the 12% per annum in force at the time of the execution of the loan.
It is from that Decision in favor of the BORROWER that BANCO FILIPINO has come to this instance on review by Certiorari. We gave due course
to the Petition, the question being one of law.

On February 24, 1983, the parties represented by their respective counsel, not only moved to withdraw the appeal on the ground that it had become
moot and academic "because of recent developments in the rules and regulations of the Central Bank," but also prayed that "the decision rendered in
the Court of First Instance be therefore vacated and declared of no force and effect as if the case was never filed," since the parties would like to end
this matter once and for all."
However, "considering the subject matter of the controversy in which many persons similarly situated are interested and because of the need for a
definite ruling on the question," the Court, in its Resolution of February 24, 1983, impleaded the Central Bank and required it to submit its Comment,
and encouraged homeowners similarly situated as the BORROWER to intervene in the proceedings.
At the hearing on February 24, 1983, one Leopoldo Z. So, a mortgage homeowner at B.F. Resort Subdivision, was present and manifested that he was
in a similar situation as the BORROWER. Since then, he has written several letters to the Court, pleading for early resolution of the case. The Court
allowed the intervention of Lolita Perono2and issued a temporary restraining order enjoining the Regional Trial Court (Pasay City Branch) in the case
entitled "Banco Filipino Savings and Mortgage Bank vs. Lolita Perono" from issuing a writ of possession over her mortgaged property. Also snowed
to intervene were Enrique Tabalon, Jose Llopis, et als., who had obtained loans with Identical escalation clauses from Apex Mortgage and Loans
Corporation, apparently an affiliate of BANCO FILIPINO, Upon motion of Jose Llopis, a Temporary Restraining Order was likewise issued
enjoining the foreclosure of his real estate mortgage by BANCO FILIPINO.
The Court made it explicit, however, that intervention was allowed only for the purpose of "joining in the discussion of the legal issue involved in
this proceedings, to wit, the validity of the so-called "escalation clause," or its applicability to existing contracts of loan."
The Central Bank has submitted its Comment and Supplemental Comment and like BANCO FILIPINO, has taken the position that the issuance of its
Circulars is a valid exercise of its authority to scribe maximum rates of interest and that, based on general principles of contract, the Escalation
Clause is a valid provision in the loan agreement provided that "(1) the increased rate imposed or charged by petitioner does not exceed the ceiling
fixed by law or the Monetary Board; (2) the increase is made effective not earlier than the effectivity of the law or regulation authorizing such an
increase; and (3) the remaining maturities of the loans are more than 730 days as of the effectivity of the law or regulation authorizing such an
increase. However, with respect to loan agreements entered into,on or after March 17, 1980, such agreement, in order to be valid, must also include a
de-escalation clause as required by Presidential Decree No. 1684." 3
The substantial question in this case is not really whether the Escalation Clause is a valid or void stipulation. There should be no question that the
clause is valid.
Some contracts contain what is known as an "escalator clause," which is defined as one in which the contract fixes a base price but contains
a provision that in the event of specified cost increases, the seller or contractor may raise the price up to a fixed percentage of the base.
Attacks on such a clause have usually been based on the claim that, because of the open price-provision, the contract was too indefinite to
be enforceable and did not evidence an actual meeting of the minds of the parties, or that the arrangement left the price to be determined
arbitrarily by one party so that the contract lacked mutuality. In most instances, however, these attacks have been unsuccessful. 4
The Court further finds as a matter of law that the cost of living index adjustment, or escalator clause, is not substantively unconscionable.
Cost of living index adjustment clauses are widely used in commercial contracts in an effort to maintain fiscal stability and to retain "real
dollar" value to the price terms of long term contracts. The provision is a common one, and has been universally upheld and enforced.
Indeed, the Federal government has recognized the efficacy of escalator clauses in tying Social Security benefits to the cost of living index,
42 U.S.C.s 415(i). Pension benefits and labor contracts negotiated by most of the major labor unions are other examples. That inflation,
expected or otherwise, will cause a particular bargain to be more costly in terms of total dollars than originally contemplated can be of little
solace to the plaintiffs. 5
What should be resolved is whether BANCO FILIPINO can increase the interest rate on the LOAN from 12% to 17% per annum under the
Escalation Clause. It is our considered opinion that it may not.
The Escalation Clause reads as follows:
I/We hereby authorize Banco Filipino to correspondingly increase
the interest rate stipulated in this contract without advance notice to me/us in the event
a law
increasing
the lawful rates of interest that may be charged
on this particular

kind of loan. (Paragraphing and emphasis supplied)


It is clear from the stipulation between the parties that the interest rate may be increased "in the event a law should be enacted increasing the lawful
rate of interest that may be charged on this particular kind of loan." " The Escalation Clause was dependent on an increase of rate made by "law"
alone.
CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly issued is not strictly a statute or a law, it has, however,
the force and effect of law."6 (Italics supplied). "An administrative regulation adopted pursuant to law has the force and effect of law." 7 "That
administrative rules and regulations have the force of law can no longer be questioned. " 8
The distinction between a law and an administrative regulation is recognized in the Monetary Board guidelines quoted in the letter to the
BORROWER of Ms. Paderes of September 24, 1976 (supra). According to the guidelines, for a loan's interest to be subject to the increases provided
in CIRCULAR No. 494, there must be an Escalation Clause allowing the increase "in the event that any law or Central Bank regulation is
promulgated increasing the maximum interest rate for loans." The guidelines thus presuppose that a Central Bank regulation is not within the term
"any law."
The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding section 7-a to the Usury Law, providing that parties to
an agreement pertaining to a loan could stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate
of interest is increased "by law or by the Monetary Board." To quote:
Sec. 7-a Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed
upon may be increased in the event that the applicable maximum rate of interest
is increased by law or by the Monetary Board:
Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be
reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board;
Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or
decrease in the maximum rate of interest. (Paragraphing and emphasis supplied).
It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1) that there can be an increase in interest if
increased by law or by the Monetary Board; and (2) in order for such stipulation to be valid, it must include a provision for reduction of the stipulated
interest "in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board."
While P.D. No. 1684 is not to be given retroactive effect, the absence of a de-escalation clause in the Escalation Clause in question provides another
reason why it should not be given effect because of its one-sidedness in favor of the lender.
2. The Escalation Clause specifically stipulated that the increase in interest rate was to be "on this particular kind of loan, " meaning one secured by
registered real estate mortgage.
Paragraph 7 of CIRCULAR No. 494 specifically directs that "loans or renewals continue to be governed by the Usury Law, as amended." So do
Circular No. 586 of the Central Bank, which superseded Circular No. 494, and Circular No. 705, which superseded Circular No. 586. The Usury
Law, as amended by Acts Nos. 3291, 3998 and 4070, became effective on May 1, 1916. It provided for the maximum yearly interest of 12% for loans
secured by a mortgage upon registered real estate (Section 2), and a maximum annual interest of 14% for loans covered by security other than
mortgage upon registered real estate (Section 3). Significant is the separate treatment of registered real estate loans and other loans not secured by
mortgage upon registered real estate. It appears clear in the Usury Law that the policy is to make interest rates for loans guaranteed by registered real
estate lower than those for loans guaranteed by properties other than registered realty.
On June 15, 1948, Congress approved Republic Act No. 265, creating the Central Bank, and establishing the Monetary Board. That law provides that
"the Monetary Board may, within the limits prescribed in the Usury law,9 fix the maximum rates of interest which banks may charge for different
types of loans and for any other credit operations, ... " and that "any modification in the maximum interest rates permitted for the borrowing or
lending operations of the banks shall apply only to future operations and not to those made prior to the date on which the modification becomes
effective" (Section 109).1avvphi1
On January 29, 1973, P.D. No. 116 was promulgated amending the Usury Law. The Decree gave authority to the Monetary Board "to prescribe
maximum rates of interest for the loan or renewal thereof or the forbearance of any money goods or credits, and to change such rate or rates
whenever warranted by prevailing economic and social conditions. In one section, 10 the Monetary Board could prescribe the maximum rate of interest
for loans secured by mortgage upon registered real estate or by any document conveying such real estate or an interest therein and, in another
separate section,11 the Monetary Board was also granted authority to fix the maximum interest rate for loans secured by types of security other than
registered real property. The two sections read:
SEC. 3. Section two of the same Act is hereby amended to read as follows:

SEC. 2. No person or corporation shall directly or indirectly take or receive in money or other property, real or personal, or
choses in action, a higher rate of interest or greater sum or value, including commissions, premiums, fines and penalties, for the
loan or renewal thereof or forbearance of money, goods, or credits, where such loan or renewal or forbearance is secured in whole
or in part by a mortgage upon real estate the title to which is duly registered or by any document conveying such real estate or an
interest therein, than twelve per centum per annum or the maximum rate prescribed by the Monetary Board and in force at the
time the loan or renewal thereof or forbearance is granted: Provided, That the rate of interest under this section or the maximum
rate of interest that may be prescribed by the Monetary Board under this section may likewise apply to loans secured by other
types of security as may be specified by the Monetary Board.
SEC. 4. Section three of the same Act is hereby amended to read as follows:
SEC. 3. No person or corporation shall directly or indirectly demand, take, receive, or agree to charge in money or other property,
real or personal, a higher rate or greater sum or value for the loan or forbearance of money, goods, or credits, where such loan or
forbearance is not secured as provided in Section two hereof, than fourteen per centum per annum or the maximum rate or rates
prescribed by the Monetary Board and in force at the time the loan or forbearance is granted.
Apparent then is that the separate treatment for the two classes of loans was maintained. Yet, CIRCULAR No. 494 makes no distinction as to the
types of loans that it is applicable to unlike Circular No. 586 dated January 1, 1978 and Circular No. 705 dated December 1, 1979, which fix the
effective rate of interest on loan transactions with maturities of more than 730 days to not exceeding 19% per annum (Circular No. 586) and not
exceeding 21% per annum (Circular No. 705) "on both secured and unsecured loans as defined by the Usury Law, as amended."
In the absence of any indication in CIRCULAR No. 494 as to which particular type of loan was meant by the Monetary Board, the more equitable
construction is to limit CIRCULAR No. 494 to loans guaranteed by securities other than mortgage upon registered realty.
WHEREFORE, the Court rules that while an escalation clause like the one in question can ordinarily be held valid, nevertheless, petitioner Banco
Filipino cannot rely thereon to raise the interest on the borrower's loan from 12% to 17% per annum because Circular No. 494 of the Monetary Board
was not the "law" contemplated by the parties, nor should said Circular be held as applicable to loans secured by registered real estate in the absence
of any such specific indication and in contravention of the policy behind the Usury Law. The judgment appealed from is, therefore, hereby affirmed
in so far as it orders petitioner Banco Filipino to desist from enforcing the increased rate of interest on petitioner's loan.
The Temporary Restraining Orders heretofore issued are hereby made permanent if the escalation clauses are Identical to the one herein and the loans
involved have applied the increased rate of interest authorized by Central Bank Circular No. 494.
SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 101771 December 17, 1996
SPOUSES MARIANO and GILDA FLORENDO, petitioners,
vs.
COURT OF APPEALS and LAND BANK OF THE PHILIPPINES, respondents.

PANGANIBAN, J.:p
May a bank unilaterally raise the interest rate on a housing loan granted an employee, by reason of the voluntary resignation of the borrower?
Such is the query raised in the petition for review on certiorari now before us, which assails the Decision promulgated on June 19, 1991 by
respondent Court of Appeals 1 in CA-G.R. CV No. 24956, upholding the validity and enforceability of the escalation by private respondent Land
Bank of the Philippines of the applicable interest rate on the housing loan taken out by petitioner-spouses.
The Antecedent Facts
Petitioners filed an action for Injunction with Damages docketed as Civil Case No. 86-38146 before the Regional Trial Court of Manila, Branch XXII
against respondent bank. Both parties, after entering into a joint stipulation of facts, submitted the case for decision on the basis of said stipulation
and memoranda. The stipulation reads in part:2
1. That (Petitioner) Gilda Florendo (was) an employee of (Respondent Bank) from May 17, 1976 until August 16, 1984 when she
voluntarily resigned. However, before her resignation, she applied for a housing loan of P148,000.00, payable within 25 years
from (respondent bank's) Provident Fund on July 20, 1983;
2. That (petitioners) and (respondent bank), through the latter's duly authorized representative, executed the Housing Loan
Agreement, . . .;
3. That, together with the Housing Loan Agreement, (petitioners) and (respondent bank), through the latter's authorized
representative, also executed a Real Estate Mortgage and Promissory
Note, . . .;
4. That the loan . . . was actually given to (petitioner) Gilda Florendo, . . ., in her capacity as employee of (respondent bank);
5. That on March 19, 1985, (respondent bank) increased the interest rate on (petitioner's) loan from 9%per annum to 17%, the
said increase to take effect on March 19, 1985;
6. That the details of the increase are embodied in (Landbank's) ManCom Resolution No. 85-08 dated March 19, 1985, . . . , and
in a PF (Provident Fund) Memorandum Circular (No. 85-08, Series of 1985), . . .;
7. That (respondent bank) first informed (petitioners) of the said increase in a letter dated June 7, 1985, . . . . Enclosed with the
letter are a copy of the PF Memo Circular . . . and a Statement of Account as of May 31, 1985, . . .;
8. That (petitioners) protested the increase in a letter dated June 11, 1985 to which (respondent bank) replied through a letter
dated July 1, 1985, . . . Enclosed with the letter is a Memorandum dated June 26, 1985 of (respondent bank's) legal counsel, A.B.
F. Gaviola, Jr., . . .;
9. That thereafter, (respondent bank) kept on demanding that (petitioner) pay the increased interest or the new monthly
installments based on the increased interest rate, but Plaintiff just as vehemently maintained that the said increase is unlawful and
unjustifiable. Because of (respondent bank's) repeated demands, (petitioners) were forced to file the instant suit for Injunction and
Damages;
10. That, just the same, despite (respondent bank's) demands that (petitioners) pay the increased interest or increased monthly
installments, they (petitioners) have faithfully paid and discharged their loan obligations, more particularly the monthly payment

of the original stipulated installment of P1,248.72. Disregarding (respondent bank's) repeated demand for increased interest and
monthly installment, (petitioners) are presently up-to-date in the payments of their obligations under the original contracts
(Housing Loan Agreement, Promissory Note and Real Estate Mortgage) with (respondent bank);
xxx xxx xxx
The clauses or provisions in the Housing Loan Agreement and the Real Estate Mortgage referred to above as the basis for the escalation are:
a. Section I-F of Article VI of the Housing Loan Agreement, 3 which provides that, for as long as the loan or any portion thereof
or any sum that may be due and payable under the said loan agreement remains outstanding, the borrower shall
f) Comply with all the rules and regulations of the program imposed by the LENDER and to comply with all
the rules and regulations that the Central Bank of the Philippines has imposed or will impose in connection
with the financing programs for bank officers and employees in the form of fringe benefits.
b. Paragraph (f) of the Real Estate Mortgage 4 which states:
The rate of interest charged on the obligation secured by this mortgage. . ., shall be subject, during the life of
this contract, to such an increase/decrease in accordance with prevailing rules, regulations and circulars of the
Central Bank of the Philippines as the Provident Fund Board of Trustees of the Mortgagee may prescribe for
its debtors and subject to the condition that the increase/decrease shall only take effect on the date of
effectivity of said increase/decrease and shall only apply to the remaining balance of the loan.
c. and ManCom (Management Committee) Resolution No. 85-08, together with PF (Provident Fund) Memorandum Circular No.
85-08, which escalated the interest rates on outstanding housing loans of bank employees who voluntarily "secede" (resign) from
the Bank; the range of rates varied depending upon the number of years service rendered by the employees concerned. The rates
were made applicable to those who had previously resigned from the bank as well as those who would be resigning in the future.
The trial court ruled in favor of respondent bank, and held that the bank was vested with authority to increase the interest rate (and the corresponding
monthly amortizations) pursuant to said escalation provisions in the housing loan agreement and the mortgage contract. The dispositive portion of the
said decision reads: 5
WHEREFORE, judgment is hereby rendered denying the instant suit for injunction and declaring that the rate of interest on the
loan agreement in question shall be 17% per annum and the monthly amortization on said loan properly raised to P2,064.75 a
month, upon the finality of this judgment.
xxx xxx xxx
Petitioners promptly appealed, arguing that, inter alia, the increased rate of interest is onerous and was imposed unilaterally, without the consent of
the borrower-spouses. Respondent bank likewise appealed and contested the propriety of having the increased interest rate apply only upon the
finality of the judgment and not from March 19, 1985.
The respondent Court subsequently affirmed with modification the decision of the trial court, holding that:

. . . Among the salient provisions of the mortgage is paragraph (f) which provides that the interest rate shall be subject, during the
term of the loan, to such increases/decreases as may be allowed under the prevailing rules and/or circulars of the Central Bank
and as the Provident Fund of the Bank may prescribe for its borrowers. In other words, the spouses agreed to the escalation of the
interest rate on their original loan. Such an agreement is a contractual one and the spouses are bound by it. Escalation clauses
have been ruled to be valid stipulations in contracts in order to maintain fiscal stability and to retain the value of money in long
term contracts (Insular Bank of Asia and America vs. Spouses Epifania Salazar and Ricardo Salazar, 159 SCRA 133). One of the
conditions for the validity of an escalation clause such as the one which refers to an increase rate is that the contract should also
contain a proviso for a decrease when circumstances so warrant it. Paragraph (f) referred to above contains such provision.
A contract is binding on the parties no matter that a provision thereof later proves onerous and which on hindsight, a party feels
he should not have agreed to in the first place.
and disposed as follows: 7
WHEREFORE, the dispositive part of the decision is MODIFIED in the sense that the interest of 17% on the balance of the loan
of the spouses shall be computed starting July 1, 1985.
Dissatisfied, the petitioners had recourse to this Court.

The Issues
Petitioners ascribe to respondent Court "a grave and patent error" in not nullifying the respondent bank's unilateral increase of the interest rate and
monthly amortizations of the loan
1. . . . (simply because of) a bare and unqualified stipulation that the interest rate may be increased;
2. . . . on the ground that the increase has no basis in the contracts between the parties;
3. . . . on the ground that the increase violates Section 7-A of the Usury Law;
4. . . . on the ground that the increase and the contractual provision that (respondent bank) relies upon for the increase are
contrary to morals, good customs, public order and public policy. 8
The key issue may be simply presented as follows: Did the respondent bank have a valid and legal basis to impose an increased interest rate on the
petitioners' housing loan?
The Court's Ruling
Basis for Increased Interest Rate
Petitioners argue that the HLA provision covers only administrative and other matters, and does not include interest rates per se, since Article VI of
the agreement deals with insurance on and upkeep of the mortgaged property. As for the stipulation in the mortgage deed, they claim that it is vague
because it does not state if the "prevailing" CB rules and regulations referred to therein are those prevailing at the time of the execution of these
contracts or at the time of the increase or decrease of the interest rate. They insist that the bank's authority to escalate interest rates has not been
shown to be "crystal-clear as a matter of fact" and established beyond doubt. The contracts being "contracts of adhesion," any vagueness in their
provisions should be interpreted in favor of petitioners.
We note that Section 1-F of Article VI of the HLA cannot be read as an escalation clause as it does not make any reference to increases or decreases
in the interest rate on loans. However, paragraph (f) of the mortgage contract is clearly and indubitably an escalation provision, and therefore, the
parties were and are bound by the said stipulation that "(t)he rate of interest charged on the obligation secured by this mortgage . . ., shall be subject,
during the life of this contract, to such an increase/decrease in accordance with prevailing rules, regulations and circulars of the Central Bank of the
Philippines as the Provident Fund Board of Trustees of the Mortgagee (respondent bank) may prescribe for its debtors . . . ." 9 Contrary to petitioners'
allegation, there is no vagueness in the aforequoted proviso; even their own arguments (below) indicate that this provision is quite clear to them.
In Banco Filipino Savings & Mortgage Bank vs. Navarro, 10 this Court in essence ruled that in general there is nothing inherently wrong with
escalation clauses. In IBAA vs. Spouses Salazar, 11 the Court reiterated the rule that escalation clauses are valid stipulations in commercial contracts to
maintain fiscal stability and to retain the value of money in long term contracts.
Application of the Escalation to Petitioners
Petitioners however insist that while ManCom Resolution No. 85-08 authorized a rate increase for resigned employees, it could not apply as to
petitioner-employee because nowhere in the loan agreement or mortgage contract is it provided that petitioner-wife's resignation will be a ground for
the adjustment of interest rates, which is the very bedrock of and the raison d'etre specified in said ManCom Resolution.
They additionally contend that the escalation is violative of Section 7-A of the Usury Law (Act No. 2655, as amended) which requires a law or MB
act fixing an increased maximum rate of interest, and that escalation upon the will of the respondent bank is contrary to the principle of mutuality of
contracts, per Philippine National Bank vs.Court of Appeals. 12
What is actually central to the disposition of this case is not really the validity of the escalation clause but theretroactive enforcement of the ManCom
Resolution as against petitioner-employee. In the case at bar, petitioners have put forth a telling argument that there is in fact no Central Bank rule,
regulation or other issuance which would have triggered an application of the escalation clause as to her factual situation.
In Banco Filipino, 13 this Court, speaking through Mme. Justice Ameurfina M. Herrera, disallowed the bank from increasing the interest rate on the
subject loan from 12% to 17% despite an escalation clause in the loan agreement authorizing the bank to "correspondingly increase the interest rate
stipulated in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest that may be
charged on this particular kind of loan". In said case, the bank had relied upon a Central Bank circular as authority to up its rates. The Court ruled
that CB Circular No. 494, although it has the effect of law, is not a law, but an administrative regulation.
In PNB vs. Court of Appeals, 14 this Court disallowed the increases in interest rate imposed by the petitioner-bank therein, on the ground, among
others, that said bank relied merely on its own Board Resolution (No. 681), PNB Circular No. 40-79-84, and PNB Circular No. 40-129-84, which
were neither laws nor resolutions of the Monetary Board.

In the case at bar, the loan was perfected on July 20, 1983. PD No. 116 became effective on January 29, 1973. CB Circular No. 416 was issued on
July 29, 1974. CB Circ. 504 was issued February 6, 1976. CB Circ. 706 was issued December 1, 1979. CB Circ. 905, lifting any interest rate ceiling
prescribed under or pursuant to the Usury Law, as amended, was promulgated in 1982. These and other relevant CB issuances had already come into
existence prior to the perfection of the housing loan agreement and mortgage contract, and thus it may be said that these regulations had been taken
into consideration by the contracting parties when they first entered into their loan contract. In light of the CB issuances in force at that time,
respondent bank was fully aware that it could have imposed an interest rate higher than 9% per annum rate for the housing loans of its employees,
but it did not. In the subject loan, the respondent bank knowingly agreed that the interest rate on petitioners' loan shall remain at 9% p.a.unless a CB
issuance is passed authorizing an increase (or decrease) in the rate on such employee loans and the Provident Fund Board of Trustees acts
accordingly. Thus, as far as the parties were concerned, all other onerous factors, such as employee resignations, which could have been used to
trigger an application of the escalation clause were considered barred or waived. If the intention were otherwise, they especially respondent bank
should have included such factors in their loan agreement.
ManCom Resolution No. 85-08, which is neither a rule nor a resolution of the Monetary Board, cannot be used as basis for the escalation in lieu of
CB issuances, since paragraph (f) of the mortgage contract very categorically specifies that any interest rate increase be in accordance with
"prevailing rules, regulations and circulars of the Central Bank . . . as the Provident Fund Board . . . may prescribe." The Banco
Filipino and PNB doctrines are applicable four-square in this case. As a matter of fact, the said escalation clause further provides that the increased
interest rate "shall only take effect on the date of effectivity of (the) increase/decrease" authorized by the CB rule, regulation or circular. Without such
CB issuance, any proposed increased rate will never become effective.
We have already mentioned (and now reiterate our holding in several
cases 15) that by virtue of CB Circular 905, the Usury Law has been rendered ineffective. Thus, petitioners' contention that the escalation clause is
violative of the said law is bereft of any merit.
On the other hand, it will not be amiss to point out that the unilateral determination and imposition of increased interest rates by the herein respondent
bank is obviously violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil Code. As this Court held in PNB: 16
In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between
the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively
upon the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even
assuming that the . . . loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there
was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being
violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a
contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the debtor) participation being
reduced to the alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil 85). Such a contract is a
veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition.
The respondent bank tried to sidestep this difficulty by averring that petitioner Gilda Florendo as a former bank employee was very knowledgeable
concerning respondent bank's lending rates and procedures, and therefore, petitioners were "on an equal footing" with respondent bank as far as the
subject loan contract was concerned. Thatmay have been true insofar as entering into the original loan agreement and mortgage contract was
concerned. However, that does not hold true when it comes to the determination and imposition of escalated rates of interest as unilaterally provided
in the ManCom Resolution, where she had no voice at all in its preparation and application.
To allay fears that respondent bank will inordinately be prejudiced by being stuck with this "sweetheart loan" at patently concessionary interest rates,
which according to respondent bank is the "sweetest deal" anyone could obtain and is an act of generosity considering that in 1985 lending rates in
the banking industry were peaking well over 30% p.a., 17 we need only point out that the bank had the option to impose in its loan contracts the
condition that resignation of an employee-borrower would be a ground for escalation. The fact is it did not. Hence, it must live with such omission.
And it would be totally unfair to now impose said condition, not to mention that it would violate the principle of mutuality of consent in contracts. It
goes without saying that such escalation ground can be included in future contracts not to agreements already validly entered into.
Let it be clear that this Court understands respondent bank's position that the concessional interest rate was really intended as a means to remunerate
its employees and thus an escalation due to resignation would have been a valid stipulation. But no such stipulation was in fact made, and thus the
escalation provision could not be legally applied and enforced as against herein petitioners.
WHEREFORE, the petition is hereby GRANTED. The Court hereby REVERSES and SETS ASIDE the challenged Decision of the Court of Appeals.
The interest rate on the subject housing loan remains at nine (9) percent per annum and the monthly amortization at P1,248.72.
SO ORDERED.
Narvasa, C.J., Davide, Jr., Melo and Francisco, JJ., concur.

Republic of the Philippines


SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 187930

February 23, 2015

NEW WORLD DEVELOPERS AND MANAGEMENT, INC., Petitioner,


vs.
AMA COMPUTER LEARNING CENTER, INC., Respondent.
x-----------------------x
G.R. No. 188250
AMA COMPUTER LEARNING CENTER, INC., Petitioner.
vs.
NEW WORLD DEVELOPERS AND MANAGEMENT, INC., Respondent,
DECISION
SERENO, CJ:
Before us are consolidated Petitions for Review on Certiorari under Rule 45 of the Rules of Court assailing the Court of Appeals (CA)
Decision1 dated 22 January 2009 and Resolution2 dated 18 May 2009 in CA-G.R. CV No. 89483.
The CA Decision ordered AMA Computer Learning Center, Inc. (AMA) to pay New World Developers and Management, Inc. (New World) unpaid
rentals for 2 months, as well asliquidated damages equivalent to 4 months rent. The CA Resolution denied the separate motions for reconsideration
filed by the parties.
FACTS
New World is the owner of a commercial building located at No. 1104-1118 Espaa corner Paredes Streets, Sampaloc, Manila. 3 In 1998, AMA agreed
to lease the entire second floor of the building for its computer learning center, and the parties entered into a Contract of Lease 4 covering the eightyear period from 15 June 1998 to 14 March 2006.
The monthly rental for the first year was set at P181,500, with an annual escalation rate equivalent to 15% for the succeeding years. 5 It was also
provided that AMA may preterminate the contract by sending notice in writing to New World at least six months before the intended date. 6 In case of
pretermination, AMA shall be liable for liquidated damages in an amount equivalent to six months of the prevailing rent.
In compliance with the contract, AMA paid New World the amount of P450,000 as advance rental and anotherP450,000 as security deposit.7
For the first three years, AMA paid the monthly rent as stipulated in the contract, with the required adjustment in accordance with the escalation rate
for the second and the third years. 8
In a letter dated 18 March 2002, AMA requested the deferment of the annual increase in the monthly rent by citing financial constraints brought
about by a decrease in its enrollment. New World agreed to reduce the escalation rate by 50% for the next six months. The following year, AMA
again requested the adjustment of the monthly rent and New World obliged by granting a 45% reduction of the monthly rent and a 5% reduction of
the escalation rate for the remaining term of the lease. For this purpose, the parties entered into an Addendum to the Contract of Lease. 9
On the evening of 6 July 2004, AMA removed all its office equipment and furniture from the leased premises. The following day, New World
received a letter from AMA dated 6 July 200410 stating that the former had decided to preterminate the contract effective immediately on the ground
of business losses due to a drastic decline in enrollment. AMA also demanded the refund of its advance rental and security deposit.
New World replied in a letter dated 12 July 2004,11 to which was attached a Statement of Account12 indicating the following amounts to be paid by
AMA: 1) unpaid two months rent in the amount of P466,620; 2) 3% monthly interest for the unpaid rent in the amount of P67,426.59; 3) liquidated
damages equivalent to six months of the prevailing rent in the amount of P1,399,860; and 4) damage to the leased premises amounting to P15,580.
The deduction of the advance rental and security deposit paid by AMA still left an unpaid balance in the amount of P1,049,486.59.
Despite the meetings between the parties, they failed to arrive at a settlement regarding the payment of the foregoing amounts. 13

On 27 October 2004, New World filed a complaint for a sum of money and damages against AMA before the Regional Trial Court of Marikina City,
Branch 156 (RTC).14
RULING OF THE RTC
In a Decision15 dated 31 January 2007, the RTC ordered AMA to pay New World P466,620 as unpaid rentals plus 3% monthly penalty interest until
payment; P1,399,860 as liquidated damages equivalent to six months rent, with the advance rental and security deposit paid by AMA to be deducted
therefrom; P15,580 for the damage to the leased premises; P100,000 as attorneys fees; and costs of the suit.
According to the RTC, AMA never denied that it had arrearages equivalent to two months rent. Other than its allegation that it did not participate in
the preparation of the Statement of Account, AMA did not proffer any evidence disputing the unpaid rent. For its part, New World clearly explained
the existence of the arrears.
While sympathizing with AMA in view of its business losses, the RTC ruled that AMA could not shirk from its contractual obligations, which
provided that it had to pay liquidated damages equivalent to six months rent in case of a pretermination of the lease.
The RTC provided no bases for awarding P15,580 for the damage to the leased premises and P100,000 for attorneys fees, while denying the prayer
for exemplary and moral damages.
Upon the denial of its motion for reconsideration, AMA filed an appeal before the CA. 16
RULING OF THE CA
In the assailed Decision dated 22 January 2009, the CA ordered AMA to pay New World P466,620 for unpaid rentals and P933,240 for liquidated
damages equivalent to four months rent, with the advance rental and security deposit paid by AMA to be deducted therefrom. 17
The appellate court ruled that the RTC erred in imposing a 3% monthly penalty interest on the unpaid rent, because there was no stipulation either in
the Contract of Lease or in the Addendum to the Contract of Lease concerning the imposition of interest in the event of a delay in the payment of the
rent.18 Thus, the CA ruled that the rent in arrears should earn interest at the rate of 6% per annum only, reckoned from the date of the extrajudicial
demand on 12 July 2004 until the finality of the Decision. Thereafter, interest at the rate of12% per annum shall be imposed until full payment.
The CA also ruled that the RTCs imposition of liquidated damages equivalent to six months rent was iniquitous. 19While conceding that AMA was
liable for liquidated damages for preterminating the lease, the CA also recognized that stipulated penalties may be equitably reduced by the courts
based on its sound discretion. Considering that the unexpired portion of the term of lease was already less than two years, and that AMA had suffered
business losses rendering it incapable of paying for its expenses, the CA deemed that liquidated damages equivalent to four months rent was
reasonable.20
The appellate court deleted the award for the damage to the leased premises, because no proof other than the Statement of Account was presented by
New World.21 Furthermore, noting that the latter was already entitled to liquidated damages, and that the trial court did not give any justification for
attorneys fees, the CA disallowed the award thereof. 22
Both parties filed their respective motions for reconsideration, which were denied in the assailed Resolution dated 10 May 2009.
Hence, the present petitions for review on certiorari. On 3 August 2009, the Court resolved to consolidate the petitions, considering that they involve
the same parties and assail the same CA Decision and Resolution. 23
PARTIES POSITIONS
According to New World, when parties freely stipulate on the manner by which one may preterminate the lease, that stipulation has the force of law
between them and should be complied with in good faith. 24 Since AMA preterminated the lease, it became liable to liquidated damages equivalent to
six months rent. Furthermore, its failure to give notice to New World six months prior to the intended pretermination of the contract and its leaving
the leased premises in the middle of the night, with all its office equipment and furniture, smacked of gross bad faith that renders it undeserving of
sympathy from the courts.25 Thus, the CA erred in reducing the liquidated damages from an amount equivalent to six months rent to only four
months.
New World also challenges the CA Decision and Resolution for disallowing the imposition of the 3% monthly interest on the unpaid rentals. It is
argued that AMA never disputed the imposition of the 3% monthly interest; rather, it only requested that the interest rate be reduced. 26
On the other hand, AMA assails the CA ruling for not recognizing the fact that compensation took place between the unpaid rentals and the advance
rental paid by AMA.27 Considering that the obligation of AMA as to the arrears has been extinguished by operation of law, there would be no
occasion for the imposition of interest.28

AMA also prays for the further reduction of the liquidated damages to an amount equivalent to one months rent up to one and a half months, arguing
that four months worth of rent is still iniquitous on account of the severe financial losses it suffered. 29
ISSUES
1. Whether AMA is liable to pay six months worth of rent as liquidated damages.
2. Whether AMA remained liable for the rental arrears.
OUR RULING
I.
AMA is liable for six months worth of rent as liquidated damages.
Item No. 14 of the Contract of Lease states:
That [AMA] may pre-terminate this Contract of Lease by notice in writing to [New World] at least six (6) months before the intended date of
pretermination, provided, however, that in such case, [AMA] shall be liable to [New World] for an amount equivalent to six (6) months current rental
as liquidated damages; 30
Quite notable is the fact that AMA never denied its liability for the payment of liquidated damages in view of its pretermination of the lease contract
with New World. What it claims, however, is that it is entitled to the reduction of the amount due to the serious business losses it suffered as a result
of a drastic decrease in its enrollment.
This Court is, first and foremost, one of law. While we are also a court of equity, we do not employ equitable principles when well-established
doctrines and positive provisions of the law clearly apply.31
The law does not relieve a party from the consequences of a contract it entered into with all the required formalities. 32 Courts have no power to ease
the burden of obligations voluntarily assumed by parties, just because things did not turn out as expected at the inception of the contract. 33 It must
also be emphasized that AMA is an entity that has had significant business experience, and is not a mere babe in the woods.
Articles 1159 and 1306 of the Civil Code state:
Art. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.
xxxx
Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public policy.
The fundamental rule is that a contract is the law between the parties. Unless it has been shown that its provisions are wholly or in part contrary to
law, morals, good customs, public order, or public policy, the contract will be strictly enforced by the courts. 34
In rebuttal, AMA invokes Article 2227 of the Civil Code, to wit:
Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable.
In Ligutan v. CA, we held that the resolution of the question of whether a penalty is reasonable, or iniquitous or unconscionable would depend on
factors including but not limited to the type, extent and purpose of the penalty; the nature of the obligation; the mode of the breach and its
consequences; the supervening realities; and the standing and relationship of the parties. 35 The appreciation of these factors is essentially addressed to
the sound discretion of the court.36
It is quite easy to understand the reason why a lessor would impose liquidated damages in the event of the pretermination of a lease contract.
Pretermination is effectively the breach of a contract, that was originally intended to cover an agreed upon period of time. A definite period assures
the lessor a steady income for the duration. A pretermination would suddenly cut short what would otherwise have been a longer profitable
relationship. Along the way, the lessor is bound to incur losses until it is able to find a new lessee, and it is this loss of income that is sought to be
compensated by the payment of liquidated damages.
There might have been other ways to work around its difficult financial situation and lessen the impact of the pretermination to both parties.
However, AMA opted to do the following:

1. It preterminated the lease without notifying New World at least six months before the intended date.
2. It removed all its office equipment and left the premises in the middle of the night.
3. Only after it had cleared the premises did it send New World a notice of pretermination effective immediately.
4. It had the gall to demand a full refund of the advance rental and security deposit, albeit without prejudice to their removal of the
improvements introduced in the premises.
We cannot understand the inability of AMA to be forthright with New World, considering that the former had been transparent about its business
losses in its previous requests for the reduction of the monthly rental. The drastic decrease in AMAs enrollment had been unfolding since 2002. Thus,
it cannot be said that the business losses had taken it by surprise. It is also highly unlikely that the decision to preterminate the lease contract was
made at the last minute. The cancellation of classes, the transfer of students, and administrative preparations for the closure of the computer learning
center and the removal of office equipment therefrom should take at least weeks, if not months, of logistic planning. Had AMA come clean about the
impending pretermination, measures beneficial to both parties could have been arrived at, and the instant cases would not have reached this Court.
Instead, AMA forced New World to share in the formers losses, causing the latter to scramble for new lessees while the premises remained
untenanted and unproductive.
In the sphere of personal and contractual relations governed by laws, rules and regulations created to promote justice and fairness, equity is deserved,
not demanded. The application of equity necessitates a balancing of the equities involved in a case, 37 for "[h]e who seeks equity must do equity, and
he who comes into equity must come with clean hands." 38 Persons in dire straits are never justified in trampling on other persons rights. Litigants
shall be denied relief if their conduct has been inequitable, unfair and dishonest as to the controversy in issue. 39 The actions of AMA smack of bad
faith.
We cannot abide by the prayer for the further reduction of the liquidated damages. We find that, in view of the surrounding circumstances, the CA
even erred in reducing the liquidated damages to four months worth of rent. Under the terms of the contract, and in light of the failure of AMA to
show that it is deserving of this Courts indulgence, the payment of liquidated damages in an amount equivalent to six months rent is proper.
Also proper is an award of exemplary damages. Article 2234 of the Civil Code provides:
Art. 2234. While the amount of the exemplary damages need not be proved, the plaintiff must show that he is entitled to moral, temperate or
compensatory damages before the court may consider the question of whether or not exemplary damages should be awarded. In case liquidated
damages have been agreed upon, although no proof of loss is necessary in order that such liquidated damages may be recovered, nevertheless, before
the court may consider the question of granting exemplary in addition to the liquidated damages, the plaintiff must show that he would be entitled to
moral, temperate or compensatory damages were it not for the stipulation for liquidated damages. (Emphasis supplied)
In this case, it is quite clear that New World sustained losses as a result of the unwarranted acts of AMA. Further, were it not for the stipulation in the
contract regarding the payment of liquidated damages, we would be awarding compensatory damages to New World.
"Exemplary damages are designed by our civil law to permit the courts to reshape behaviour that is socially deleterious in its consequence by creating
negative incentives or deterrents against such behaviour." 40 As such, they may be awarded even when not pleaded or prayed for.41 In order to prevent
the commission of a similar act in the future, AMA shall pay New World exemplary damages in the amount of P100,000.
II.
AMAs liability for the rental arrears has already been extinguished.
AMA assails the CA ruling mainly for the imposition of legal interest on the rent in arrears. AMA argues that the advance rental has extinguished its
obligation as to the arrears. Thus, it says, there is no more basis for the imposition of interest at the rate of 6% per annum from the date of
extrajudicial demand on 12 July 2004 until the finality of the Decision, plus interest at the rate of 12% per annum from finality until full payment.
At this juncture, it is necessary to look into the contract to determine the purpose of the advance rental and security deposit.
Item Nos. 2, 3 and 4 of the Contract of Lease provide:
xxxx
2. That [AMA] shall pay to [New World] in advance within the first 5 days of each calendar month a monthly rental in accordance with the
following schedule for the entire term of this Contract of Lease;
PERIOD

MONTHLY RENTAL RATES

Year 1 June 15, 1998 Mar 14, 1999

181,500.00

Year 2 Mar 15, 1999 Mar 14, 2000

P208,725.00

Year 3 Mar 15, 2000 Mar 14, 2001

P240,033.75

Year 4 Mar 15, 2001 Mar 14, 2002

P276,038.81

Year 5 Mar 15, 2002 Mar 14, 2003

P317,444.63

Year 6 Mar 15, 2003 Mar 14, 2004

P365,061.33

Year 7 Mar 15, 2004 Mar 14, 2005

P419,820.53

Year 8 Mar 15, 2005 Mar 14, 2006

P482,793.61
(P482,793.61 37,500 =
P445,293.61)

The monthly rentals referred to above were computed at an escalation rate of Fifteen Percent (15%) every year for the entire duration of
this lease contract.
3. Upon signing of this Contract, [AMA] shall pay advance rental in the amount of FOUR HUNDRED FIFTY THOUSAND PESOS
(P450,000.00); Said advance rental shall be applied as part of the rental for the last year of the Contract with a remaining balance of Four
Hundred Forty Five Thousand Two Hundred Ninety Three and 61/100 Pesos (P445,293.61) as monthly rental for the tenth [sic] and last
year of the lease term;
4. Upon signing of the Contract, [AMA] shall pay [New World] a Security Deposit in the amount of FOUR HUNDRED FIFTY
THOUSAND PESOS (P450,000.00) which shall be applied for any unpaid rental balance and damages on the leased premises, and the
balance of which shall be refunded by [New World] to [AMA] within sixty (60) days after the termination of the Contract, it being
understood that such balance is being held by [New World] in trust for [AMA]. 42
Based on Item No. 4, the security deposit was paid precisely to answer for unpaid rentals that may be incurred by AMA while the contract was in
force. The security deposit was held in trust by New World, and whatever may have been left of it after the termination of the lease shall be refunded
to AMA.
Based on Item No. 3 in relation to Item No. 2, the parties divided the advance rental of P450,000 by 12 months. They came up with P37,500, which
they intended to deduct from the monthly rental to be paid by AMA for the last year of the lease term. Thus, unlike the security deposit, no part of the
advance rental was ever meant to be refunded to AMA. Instead, the parties intended to apply the advance rental, on a staggered basis, to a portion of
the monthly rental in the last year of the lease term.
Considering the pretermination of the lease contract in the present case, this intent of the parties as regards the advance rental failed to take effect.
The advance rental, however, retains its purpose of answering for the outstanding amounts that AMA may owe New World.
We now delve into the actual application of the security deposit and the advance rental.
At the time of the pretermination of the contract of lease, the monthly rent stood at P233,310, inclusive of taxes;43hence, the two-month rental arrears
in the amount of P466,620.
Applying the security deposit of P450,000 to the arrears will leave a balance of P16,620 in New Worlds favor.1wphi1Given that we have found
AMA liable for liquidated damages equivalent to six months rent in the amount ofP1,399,860 (monthly rent of P233,310 multiplied by 6 months), its
total liability to New World is P1,416,480.
We then apply the advance rental of P450,000 to this amount to arrive at a total extinguishment of the liability for the unpaid rentals and a partial
extinguishment of the liability for liquidated damages. This shall leave AMA still liable to New World in the amount of P966,480 (P1,416,480 total
liability less P450,000 advance rental).
Not constituting a forbearance of money,44 this amount shall earn interest pursuant to Item II(2) 45 of our pronouncement in Eastern Shipping Lines v.
CA.46 This item remained unchanged by the modification made in Nacar v. Gallery Frames. 47 Interest at the rate of 6% per annum is hereby imposed
on the amount of 966,480 from the time of extrajudicial demand on 12 July 2004 until the finality of this Decision.
Thereafter this time pursuant to the modification in Nacar the amount due shall earn interest at the rate of 6% per annum until satisfaction, this
interim period being deemed to be by then equivalent to a forbearance of credit. 48
Considering the foregoing, there was no occasion for the unpaid two months rental to earn interest. Besides, we cannot sanction the imposition of
3% monthly penalty interest thereon. We quote with approval the ruling of the CA on this issue:

If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to
the contrary, shall be the payment of the interest agreed upon and in the absence of stipulation, the legal interest, which is six per cent per annum.
In the instant case, the Contract of Lease and the Addendum to the Contract of Lease do not specify any interest in the event of delay of payment of
rentals. Accordingly, there being no stipulation concerning interest, the trial court erred in imposing 3% interest per month on the two-month unpaid
rentals.
[New World] argues that the said3% interest per month on the unpaid rentals was agreed upon by the parties as allegedly shown in Exhibits "A-4",
"A-5", "A-6", "B-4", and "B-5".
We are not persuaded.
[New Worlds] letter dated 12 July 2004 to [AMA], Statement of Account dated 07 July 2004; and another Statement of Account dated 27 October
2004 were all prepared by [New World], with no participation or any indication of agreement on [AMAs] part. The alleged proposal of [AMA] as
contained in the Schedule of Receivable/Payable is just a computer print-out and does not contain any signature showing [AMAs] conformity to the
same.49
Having relied on the Contract of Lease for its demand for payment of liquidated damages, New World should have also referred to the contract to
determine the proper application of the advance rental and security deposit. Had it done so in the first instance, it would have known that there is no
occasion for the imposition of interest, 3% or otherwise, on the unpaid rentals. WHEREFORE, the Court of Appeals Decision dated 22 January 2009
and Resolution dated 10 May 2009 in CA-G.R. CV No. 89483 is AFFIRMED with MODIFICATION.
AMA Computer Learning Center, Inc. is ordered to pay New World Developers and Management, Inc. the amount ofP966,480, with interest at the
rate of 6% per annum from 12 July 2004 until full payment.
In addition, AMA shall pay New World exemplary damages in the amount of P100,000, which shall earn interest at the rate of 6% per annum from
the finality of this Decision until full payment.
SO ORDERED.
MARIA LOURDES P.A. SERENO
Chief Justice, Chairperson

Republic of the Philippines


SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 184041

October 13, 2010

ANICETO G. SALUDO, JR., Petitioner,


vs.
SECURITY BANK CORPORATION, Respondent.
DECISION
PEREZ, J.:
Before this Court is a petition for review on certiorari seeking the reversal of the Decision 1 of the Court of Appeals in CA-G.R. CV No. 88079 dated
24 January 2008 which affirmed the Decision2 of Branch 149 of the Regional Trial Court (RTC) of Makati City, finding petitioner Aniceto G. Saludo,
Jr. and Booklight, Inc. (Booklight) jointly and severally liable to Security Bank Corporation (SBC).
The basic facts follow
On 30 May 1996, Booklight was extended an omnibus line credit facility 3 by SBC in the amount of P10,000,000.00. Said loan was covered by a
Credit Agreement 4 and a Continuing Suretyship 5 with petitioner as surety, both documents dated 1 August 1996, to secure full payment and
performance of the obligations arising from the credit accommodation.
Booklight drew several availments of the approved credit facility from 1996 to 1997 and faithfully complied with the terms of the loan. On 30
October 1997, SBC approved the renewal of credit facility of Booklight in the amount ofP10,000,000.00 under the prevailing security lending
rate.6 From August 3 to 14, 1998, Booklight executed nine (9) promissory notes7 in favor of SBC in the aggregate amount of P9,652,725.00. For
failure to settle the loans upon maturity, demands 8 were made on Booklight and petitioner for the payment of the obligation but the duo failed to pay.
As of 15 May 2000, the obligation of Booklight stood at P10,487,875.41, inclusive of interest past due and penalty.9
On 16 June 2000, SBC filed against Booklight and herein petitioner an action for collection of sum of money with the RTC. Booklight initially filed a
motion to dismiss, which was later on denied for lack of merit. In his Answer, Booklight asserted that the amount demanded by SBC was not based
on the omnibus credit line facility of 30 May 1996, but rather on the amendment of the credit facilities on 15 October 1996 increasing the loan line
from P8,000,000.00 toP10,000,000.00. Booklight denied executing the promissory notes. It also claimed that it was not in default as in fact, it paid
the sum of P1,599,126.11 on 30 September 1999 as a prelude to restructuring its loan for which it earnestly negotiated for a mutually acceptable
agreement until 5 July 2000, without knowing that SBC had already filed the collection case. 10
In his Answer to the complaint, herein petitioner alleged that under the Continuing Suretyship, it was the parties understanding that his undertaking
and liability was merely as an accommodation guarantor of Booklight. He countered that he came to know that Booklight offered to pay SBC the
partial payment of the loan and proposed the restructuring of the obligation. Petitioner argued that said offer to pay constitutes a valid tender of
payment which discharged Booklights obligation to the extent of the offer. Petitioner also averred that the imposition of the penalty on the supposed
due and unpaid principal obligation based on the penalty rate of 2% per month is clearly unconscionable. 11
On 7 March 2005, Booklight was declared in default. Consequently, SBC presented its evidence ex-parte. The case against petitioner, however,
proceeded and the latter was able to present evidence on his behalf.
After trial, the RTC ruled that petitioner is jointly and solidarily liable with Booklight under the Continuing Suretyship Agreement. The dispositive
portion reads:
WHEREFORE, in view of the foregoing considerations, the Court hereby finds in favor of the plaintiff against the defendants by ordering the
defendants Booklight, Inc. and Aniceto G. Saludo, Jr., jointly and severally liable (solidarily liable) to plaintiff [sic], the following sums of Philippine
Pesos:
PN No.
74/787/98

Amount Interest Rate (per annum)


P1,927,000.00

BeginningUntil fully paid

20.189%

November 2, 1998

74/788/98

913,545.00 20.189%

November 2, 1998

74/789/98

1,927,090.00 20.189%

November 2, 1998

74/791/98

500,000.00 20.178%

November 4, 1998

74/792/98

800,000.00 20.178%

November 4, 1998

74/793/98

665,000.00 20.178%

November 3, 1998

74/808/98

970,000.00 20.178%

November 9, 1998

74/822/98

975,000.00 20.178%

November 12, 1998

74/823/98

975,000.00 20.178%

November 12, 1998

with attorneys fee of P100,000.00 plus cost of suit.12


The Court of Appeals affirmed in toto the ruling of the RTC. 13 Petitioner filed a motion for reconsideration but it was denied by the Court of Appeals
on 7 August 2008.14
Hence, the instant petition on the following arguments:
1. The first credit facility has a one-year term from 30 June 1996 to 30 June 1997 while the second credit facility runs from 30 October
1997 to 30 October 1998.
2. When the first credit facility expired, its accessory contract, the Continuing Surety agreement likewise expired.
3. The second credit facility is not covered by the Continuing Suretyship, thus, availments made in 1998 by Booklight are not covered by
the Continuing Suretyship.
4. The approval of the second credit facility necessitates the consent of petitioner for the latters Continuing Suretyship to be
effective.1avvphi1
5. The nine (9) promissory notes executed and drawn by Booklight in 1998 did not specify that they were drawn against and subject to the
Continuing Suretyship. Neither was it mentioned in the Continuing Suretyship that it was executed to serve as collateral to the nine (9)
promissory notes.
6. The Continuing Suretyship is a contract of adhesion and petitioners participation to it is his signing of his contract.
7. The approval of the second credit facility is considered a novation of the first sufficient to extinguish the Continuing Suretyship and
discharge petitioner.
8. The 20.178% interest rate imposed by the RTC is unconscionable. 15
The main derivative of these averments is the issue of whether or not petitioner should be held solidarily liable for the second credit facility extended
to Booklight.
We rule in the affirmative.
There is no doubt that Booklight was extended two (2) credit facilities, each with a one-year term, by SBC. Booklight availed of these two (2) credit
lines. While Booklight was able to comply with its obligation under the first credit line, it defaulted in the payment of the loan obligation amounting
to P9,652,725.00 under the second credit line. There is likewise no dispute that the first credit line facility, with a term from 30 June 1996 to 30 June
1997, was covered by a Continuing Suretyship with petitioner acting as the surety. The dispute is on the coverage by the Continuing Suretyship of the
loan contracted under the second credit facility.
Under the Continuing Suretyship, petitioner undertook to guarantee the following obligations:
a) "Guaranteed Obligations" the obligations of the Debtor arising from all credit accommodations extended by the Bank to the Debtor, including
increases, renewals, roll-overs, extensions, restructurings, amendments or novations thereof, as well as (i) all obligations of the Debtor presently or
hereafter owing to the Bank, as appears in the accounts, books and records of the Bank, whether direct or indirect, and (ii) any and all expenses which
the Bank may incur in enforcing any of its rights, powers and remedies under the Credit Instruments as defined hereinbelow; 16 (Emphasis supplied.)
Whether the second credit facility is considered a renewal of the first or a brand new credit facility altogether was indirectly answered by the trial
court when it invoked paragraph 10 of the Continuing Suretyship which provides:

10. Continuity of Suretyship. This Suretyship shall remain in full force and effect until full and due payment and performance of the Guaranteed
Obligations. This Suretyship shall not be terminated by the partial payment to the Bank of Guaranteed Obligations by any other surety or sureties of
the Guaranteed Obligations, even if the particular surety or sureties are relieved of further liabilities. 17
and concluded that the liability of petitioner did not expire upon the termination of the first credit facility.
It cannot be gainsaid that the second credit facility was renewed for another one-year term by SBC. The terms of renewal read:
30 October 1997
BOOKLIGHT, INC.
xxxx
Gentlemen:
We are pleased to advise you that the Bank has approved the renewal of your credit facility subject to the terms and conditions set forth below:
Facility : Loan Line
Amount : P10,000,000.00
Collateral : Existing JSS of Atty. Aniceto Saludo (marital consent waived)
Term : 180 day Promissory Notes
Interest Rate : Prevailing SBC lending rate; subject to monthly setting and payment
Expiry : October 31, 1998
x x x x.18
This very renewal is explicitly covered by the guaranteed obligations of the Continuing Suretyship.
The essence of a continuing surety has been highlighted in the case of Totanes v. China Banking Corporation 19 in this wise:
Comprehensive or continuing surety agreements are, in fact, quite commonplace in present day financial and commercial practice. A bank or
financing company which anticipates entering into a series of credit transactions with a particular company, normally requires the projected principal
debtor to execute a continuing surety agreement along with its sureties. By executing such an agreement, the principal places itself in a position to
enter into the projected series of transactions with its creditor; with such suretyship agreement, there would be no need to execute a separate surety
contract or bond for each financing or credit accommodation extended to the principal debtor. 201awphil
In Gateway Electronics Corporation v. Asianbank Corporation, 21 the Court emphasized that "[b]y its nature, a continuing suretyship covers current
and future loans, provided that, with respect to future loan transactions, they are x x x within the description or contemplation of the contract of
guaranty."
Petitioner argues that the approval of the second credit facility necessitates his consent considering the onerous and solidary liability of a surety. This
is contrary to the express waiver of his consent to such renewal, contained in paragraph 12 of the Continuing Suretyship, which provides in part:
12. Waivers by the Surety. The Surety hereby waives: x x x (v) notice or consent to any modification, amendment, renewal, extension or grace
period granted by the Bank to the Debtor with respect to the Credit Instruments. 22
Respondent, as last resort, harps on the novation of the first credit facility to exculpate itself from liability from the second credit facility.
At the outset, it must be pointed out that the Credit Agreement is actually the principal contract and it covers "all credit facilities now or hereafter
extended by [SBC] to [Booklight];"23 and that the suretyship agreement was executed precisely to guarantee these obligations, i.e., the credit facilities
arising from the credit agreement. The principal contract is the credit agreement covered by the Continuing Suretyship.
The two loan facilities availed by Booklight under the credit agreement are the Omnibus Line amounting toP10,000,000.00 granted to Booklight in
1996 and the other one is the Loan Line of the same amount in 1997. Petitioner however seeks to muddle the issue by insisting that these two
availments were two separate principal contracts, conveniently ignoring the fact that it is the credit agreement which constitutes the principal contract

signed by Booklight in order to avail of SBCs credit facilities. The two credit facilities are but loans made available to Booklight pursuant to the
credit agreement.
On these facts the novation argument advanced by petitioner must fail.
There is no novation to speak of. It is the first credit facility that expired and not the Credit Agreement. There was a second loan pursuant to the same
credit agreement. The terms and conditions under the Credit Agreement continue to apply and the Continuing Suretyship continues to guarantee the
Credit Agreement.
The lameness of petitioners stand is pointed up by his attempt to escape from liability by labelling the Continuing Suretyship as a contract of
adhesion.
A contract of adhesion is defined as one in which one of the parties imposes a ready-made form of contract, which the other party may accept or
reject, but which the latter cannot modify. One party prepares the stipulation in the contract, while the other party merely affixes his signature or his
adhesion thereto, giving no room for negotiation and depriving the latter of the opportunity to bargain on equal footing. 24
A contract of adhesion presupposes that the party adhering to the contract is a weaker party. That cannot be said of petitioner. He is a lawyer. He is
deemed knowledgeable of the legal implications of the contract that he is signing.
It must be borne in mind, however, that contracts of adhesion are not invalid per se. Contracts of adhesion, where one party imposes a ready-made
form of contract on the other, are not entirely prohibited. The one who adheres to the contract is, in reality, free to reject it entirely; if he adheres, he
gives his consent.25
Finally, petitioner challenges the imposition of 20.189% interest rate as unconscionable. We rule otherwise. In Development Bank of the Philippines
v. Family Foods Manufacturing Co. Ltd.,26 this Court upheld the validity of the imposition of 18% and 22% stipulated rates of interest in the two (2)
promissory notes. Likewise in Spouses Bacolor v. Banco Filipino Savings and Mortgage Bank, 27 the 24% interest rate agreed upon by parties was
held as not violative of the Usury Law, as amended by Presidential Decree No. 116.
WHEREFORE, the petition is DENIED. The Decision dated 24 January 2008 of the Court of Appeals in CA-G.R. CV No. 88079 is AFFIRMED in
toto.
SO ORDERED.
JOSE PORTUGAL PEREZ
Associate Justice

Republic of the Philippines


SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 164538

August 9, 2010

METROPOLITAN BANK and TRUST COMPANY, Petitioner,


vs.
ROGELIO REYNADO and JOSE C. ADRANDEA,** Respondents.
DECISION
DEL CASTILLO, J.:
"It is a hornbook doctrine in our criminal law that the criminal liability for estafa is not affected by a compromise, for it is a public offense which
must be prosecuted and punished by the government on its own motion, even though complete reparation [has] been made of the damage suffered by
the private offended party. Since a criminal offense like estafa is committed against the State, the private offended party may not waive or extinguish
the criminal liability that the law imposes for the commission of the crime." 1
This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks the reversal of the Court of Appeals (CAs) Decision 2 dated
October 21, 2002 in CA-G.R. SP No. 58548 and its further Resolution3 dated July 12, 2004 denying petitioners Motion for Reconsideration. 4
Factual Antecedents
On January 31, 1997, petitioner Metropolitan Bank and Trust Company charged respondents before the Office of the City Prosecutor of Manila with
the crime of estafa under Article 315, paragraph 1(b) of the Revised Penal Code. In the affidavit 5 of petitioners audit officer, Antonio Ivan S. Aguirre,
it was alleged that the special audit conducted on the cash and lending operations of its Port Area branch uncovered anomalous/fraudulent
transactions perpetrated by respondents in connivance with client Universal Converter Philippines, Inc. (Universal); that respondents were the only
voting members of the branchs credit committee authorized to extend credit accommodation to clients up to P200,000.00; that through the so-called
Bills Purchase Transaction, Universal, which has a paid-up capital of only P125,000.00 and actual maintaining balance of P5,000.00, was able to
make withdrawals totaling P81,652,000.006 against uncleared regional checks deposited in its account at petitioners Port Area branch; that,
consequently, Universal was able to utilize petitioners funds even before the seven-day clearing period for regional checks expired; that Universals
withdrawals against uncleared regional check deposits were without prior approval of petitioners head office; that the uncleared checks were later
dishonored by the drawee bank for the reason "Account Closed"; and, that respondents acted with fraud, deceit, and abuse of confidence.
In their defense, respondents denied responsibility in the anomalous transactions with Universal and claimed that they only intended to help the Port
Area branch solicit and increase its deposit accounts and daily transactions.
Meanwhile, on February 26, 1997, petitioner and Universal entered into a Debt Settlement Agreement 7 whereby the latter acknowledged its
indebtedness to the former in the total amount of P50,990,976.278 as of February 4, 1997 and undertook to pay the same in bi-monthly amortizations
in the sum of P300,000.00 starting January 15, 1997, covered by postdated checks, "plus balloon payment of the remaining principal balance and
interest and other charges, if any, on December 31, 2001."9
Findings of the Prosecutor
Following the requisite preliminary investigation, Assistant City Prosecutor Winnie M. Edad (Prosecutor Edad) in her Resolution 10 dated July 10,
1997 found petitioners evidence insufficient to hold respondents liable for estafa. According to Prosecutor Edad:
The execution of the Debt Settlement Agreement puts complainant bank in estoppel to argue that the liability is criminal. Since the agreement was
made even before the filing of this case, the relations between the parties [have] change[d], novation has set in and prevented the incipience of any
criminal liability on the part of respondents.11
Thus, Prosecutor Edad recommended the dismissal of the case:
WHEREFORE, for insufficiency of evidence, it is respectfully recommended that the case be dismissed. 12
On December 9, 1997, petitioner appealed the Resolution of Prosecutor Edad to the Department of Justice (DOJ) by means of a Petition for Review. 13
Ruling of the Department of Justice

On June 22, 1998, the DOJ dismissed the petition ratiocinating that:
It is evident that your client based on the same transaction chose to file estafa only against its employees and treat with kid gloves its big time client
Universal who was the one who benefited from this transaction and instead, agreed that it should be paid on installment basis.
To allow your client to make the choice is to make an unwarranted classification under the law which will result in grave injustice against herein
respondents. Thus, if your client agreed that no estafa was committed in this transaction with Universal who was the principal player and beneficiary
of this transaction[,] more so with herein respondents whose liabilities are based only on conspiracy with Universal.
Equivocally, there is no estafa in the instant case as it was not clearly shown how respondents misappropriated theP53,873,500.00 which Universal
owed your client after its checks deposited with Metrobank were dishonored. Moreover, fraud is not present considering that the Executive
Committee and the Credit Committee of Metrobank were duly notified of these transactions which they approved. Further, no damage was caused to
your client as it agreed [to] the settlement [with] Universal. 14
A Motion for Reconsideration15 was filed by petitioner, but the same was denied on March 1, 2000 by then Acting Secretary of Justice Artemio G.
Tuquero.16
Aggrieved, petitioner went to the CA by filing a Petition for Certiorari & Mandamus.17
Ruling of the Court of Appeals
By Decision18 of October 21, 2002, the CA affirmed the twin resolutions of the Secretary of Justice. Citing jurisprudence 19 wherein we ruled that
while novation does not extinguish criminal liability, it may prevent the rise of such liability as long as it occurs prior to the filing of the criminal
information in court.20 Hence, according to the CA, "[j]ust as Universal cannot be held responsible under the bills purchase transactions on account of
novation, private respondents, who acted in complicity with the former, cannot be made liable [for] the same transactions." 21 The CA added that
"[s]ince the dismissal of the complaint is founded on legal ground, public respondents may not be compelled by mandamus to file an information in
court."22
Incidentally, the CA totally ignored the Comment 23 of the Office of the Solicitor General (OSG) where the latter, despite being the statutory counsel
of public respondent DOJ, agreed with petitioner that the DOJ erred in dismissing the complaint. It alleged that where novation does not extinguish
criminal liability for estafa neither does restitution negate the offense already committed. 24
Additionally, the OSG, in sharing the views of petitioner contended that failure to implead other responsible individuals in the complaint does not
warrant its dismissal, suggesting that the proper remedy is to cause their inclusion in the information. 25 This notwithstanding, however, the CA
disposed of the petition as follows:
WHEREFORE, the petition is DENIED due course and, accordingly, DISMISSED. Consequently, the resolutions dated June 22, 1998 and March 1,
2000 of the Secretary of Justice are AFFIRMED.
SO ORDERED.26
Hence, this instant petition before the Court.
On November 8, 2004, we required27 respondents to file Comment, not a motion to dismiss, on the petition within 10 days from notice. The OSG
filed a Manifestation and Motion in Lieu of Comment 28 while respondent Jose C. Adraneda (Adraneda) submitted his Comment 29 on the petition. The
Secretary of Justice failed to file the required comment on the OSGs Manifestation and Motion in Lieu of Comment and respondent Rogelio
Reynado (Reynado) did not submit any. For which reason, we issued a show cause order 30 on July 19, 2006. Their persistent non-compliance with our
directives constrained us to resolve that they had waived the filing of comment and to impose a fine of P1,000.00 on Reynado. Upon submission of
the required memorandum by petitioner and Adraneda, the instant petition was submitted for resolution.
Issues
Petitioner presented the following main arguments for our consideration:
1. Novation and undertaking to pay the amount embezzled do not extinguish criminal liability.
2. It is the duty of the public prosecutor to implead all persons who appear criminally liable for the offense charged.
Petitioner persistently insists that the execution of the Debt Settlement Agreement with Universal did not absolve private respondents from criminal
liability for estafa. Petitioner submits that the settlement affects only the civil obligation of Universal but did not extinguish the criminal liability of
the respondents. Petitioner thus faults the CA in sustaining the DOJ which in turn affirmed the finding of Prosecutor Edad for committing apparent
error in the appreciation and the application of the law on novation. By petitioners claim, citing Metropolitan Bank and Trust Co. v. Tonda,31 the
"negotiations pertain [to] and affect only the civil aspect of the case but [do] not preclude prosecution for the offense already committed." 32

In his Comment, Adraneda denies being a privy to the anomalous transactions and passes on the sole responsibility to his co-respondent Reynado as
the latter was able to conceal the pertinent documents being the head of petitioners Port Area branch. Nonetheless, he contends that because of the
Debt Settlement Agreement, they cannot be held liable for estafa.
The OSG, for its part, instead of contesting the arguments of petitioner, even prayed before the CA to give due course to the petition contending that
DOJ indeed erred in dismissing the complaint for estafa.
Given the facts of the case, the basic issue presented before this Court is whether the execution of the Debt Settlement Agreement precluded
petitioner from holding respondents liable to stand trial for estafa under Art. 315 (1)(b) of the Revised Penal Code. 33
Our Ruling
We find the petition highly meritorious.
Novation not a mode of extinguishing
criminal liability for estafa; Criminal liability for estafa not affected by compromise or novation of contract.
Initially, it is best to emphasize that "novation is not one of the grounds prescribed by the Revised Penal Code for the extinguishment of criminal
liability."34
In a catena of cases, it was ruled that criminal liability for estafa is not affected by a compromise or novation of contract. In Firaza v. People 35 and
Recuerdo v. People,36 this Court ruled that in a crime of estafa, reimbursement or belated payment to the offended party of the money swindled by the
accused does not extinguish the criminal liability of the latter. We also held in People v. Moreno 37 and in People v. Ladera38 that "criminal liability for
estafa is not affected by compromise or novation of contract, for it is a public offense which must be prosecuted and punished by the Government on
its own motion even though complete reparation should have been made of the damage suffered by the offended party." Similarly in the case of
Metropolitan Bank and Trust Company v. Tonda39 cited by petitioner, we held that in a crime of estafa, reimbursement of or compromise as to the
amount misappropriated, after the commission of the crime, affects only the civil liability of the offender, and not his criminal liability.
Thus, the doctrine that evolved from the aforecited cases is that a compromise or settlement entered into after the commission of the crime does not
extinguish accuseds liability for estafa. Neither will the same bar the prosecution of said crime. Accordingly, in such a situation, as in this case, the
complaint for estafa against respondents should not be dismissed just because petitioner entered into a Debt Settlement Agreement with Universal.
Even the OSG arrived at the same conclusion:
Contrary to the conclusion of public respondent, the Debt Settlement Agreement entered into between petitioner and Universal Converter Philippines
extinguishes merely the civil aspect of the latters liability as a corporate entity but not the criminal liability of the persons who actually committed
the crime of estafa against petitioner Metrobank. x x x40
Unfortunately for petitioner, the above observation of the OSG was wittingly glossed over in the body of the assailed Decision of the CA.
Execution of the Debt Settlement Agreement did not prevent the incipience of criminal liability.
Even if the instant case is viewed from the standpoint of the law on contracts, the disposition absolving the respondents from criminal liability
because of novation is still erroneous.
Under Article 1311 of the Civil Code, "contracts take effect only between the parties, their assigns and heirs, except in case where the rights and
obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law." The civil law principle of
relativity of contracts provides that "contracts can only bind the parties who entered into it, and it cannot favor or prejudice a third person, even if he
is aware of such contract and has acted with knowledge thereof."41
In the case at bar, it is beyond cavil that respondents are not parties to the agreement. The intention of the parties thereto not to include them is
evident either in the onerous or in the beneficent provisions of said agreement. They are not assigns or heirs of either of the parties. Not being parties
to the agreement, respondents cannot take refuge therefrom to bar their anticipated trial for the crime they committed. It may do well for respondents
to remember that the criminal action commenced by petitioner had its genesis from the alleged fraud, unfaithfulness, and abuse of confidence
perpetrated by them in relation to their positions as responsible bank officers. It did not arise from a contractual dispute or matters strictly between
petitioner and Universal. This being so, respondents cannot rely on subject settlement agreement to preclude prosecution of the offense already
committed to the end of extinguishing their criminal liability or prevent the incipience of any liability that may arise from the criminal offense. This
only demonstrates that the execution of the agreement between petitioner and Universal has no bearing on the innocence or guilt of the respondents.
Determination of the probable cause, a function belonging to the public prosecutor; judicial review allowed where it has been clearly established
that the prosecutor committed grave abuse of discretion.

In a preliminary investigation, a public prosecutor determines whether a crime has been committed and whether there is probable cause that the
accused is guilty thereof. 42 The Secretary of Justice, however, may review or modify the resolution of the prosecutor.
"Probable cause is defined as such facts and circumstances that will engender a well-founded belief that a crime has been committed and that the
respondent is probably guilty thereof and should be held for trial."43 Generally, a public prosecutor is afforded a wide latitude of discretion in the
conduct of a preliminary investigation. By way of exception, however, judicial review is allowed where respondent has clearly established that the
prosecutor committed grave abuse of discretion that is, when he has exercised his discretion "in an arbitrary, capricious, whimsical or despotic
manner by reason of passion or personal hostility, patent and gross enough as to amount to an evasion of a positive duty or virtual refusal to perform
a duty enjoined by law."44 Tested against these guidelines, we find that this case falls under the exception rather than the general rule.
A close scrutiny of the substance of Prosecutor Edads Resolution dated July 10, 1997 readily reveals that were it not for the Debt Settlement
Agreement, there was indeed probable cause to indict respondents for the crime charged. From her own assessment of the Complaint-Affidavit of
petitioners auditor, her preliminary finding is that "Ordinarily, the offense of estafa has been sufficiently established." 45 Interestingly, she suddenly
changed tack and declared that the agreement altered the relation of the parties and that novation had set in preventing the incipience of any criminal
liability on respondents. In light of the jurisprudence herein earlier discussed, the prosecutor should not have gone that far and executed an apparent
somersault. Compounding further the error, the DOJ in dismissing petitioners petition, ruled out estafa contrary to the findings of the prosecutor.
Pertinent portion of the ruling reads:
Equivocally, there is no estafa in the instant case as it was not clearly shown how respondents misappropriated theP53,873,500.00 which Universal
owed your client after its checks deposited with Metrobank were dishonored. Moreover, fraud is not present considering that the Executive
Committee and the Credit Committee of Metrobank were duly notified of these transactions which they approved. Further, no damage was caused to
your client as it agreed [to] the settlement [with] Universal. 46
The findings of the Secretary of Justice in sustaining the dismissal of the Complaint are matters of defense best left to the trial courts deliberation
and contemplation after conducting the trial of the criminal case. To emphasize, a preliminary investigation for the purpose of determining the
existence of probable cause is "not a part of the trial. A full and exhaustive presentation of the parties evidence is not required, but only such as may
engender a well-grounded belief that an offense has been committed and that the accused is probably guilty thereof." 47 A "finding of probable cause
does not require an inquiry into whether there is sufficient evidence to procure a conviction. It is enough that it is believed that the act or omission
complained of constitutes the offense charged."48 So we held inBalangauan v. Court of Appeals:49
Applying the foregoing disquisition to the present petition, the reasons of DOJ for affirming the dismissal of the criminal complaints for estafa and/or
qualified estafa are determinative of whether or not it committed grave abuse of discretion amounting to lack or excess of jurisdiction. In requiring
"hard facts and solid evidence" as the basis for a finding of probable cause to hold petitioners Bernyl and Katherene liable to stand trial for the crime
complained of, the DOJ disregards the definition of probable cause that it is a reasonable ground of presumption that a matter is, or may be, wellfounded, such a state of facts in the mind of the prosecutor as would lead a person of ordinary caution and prudence to believe, or entertain an honest
or strong suspicion, that a thing is so. The term does not mean "actual and positive cause" nor does it import absolute certainty. It is merely based on
opinion and reasonable belief; that is, the belief that the act or omission complained of constitutes the offense charged. While probable cause
demands more than "bare suspicion," it requires "less than evidence which would justify conviction." Herein, the DOJ reasoned as if no evidence was
actually presented by respondent HSBC when in fact the records of the case were teeming; or it discounted the value of such substantiation when in
fact the evidence presented was adequate to excite in a reasonable mind the probability that petitioners Bernyl and Katherene committed the crime/s
complained of. In so doing, the DOJ whimsically and capriciously exercised its discretion, amounting to grave abuse of discretion, which rendered its
resolutions amenable to correction and annulment by the extraordinary remedy ofcertiorari.
In the case at bar, as analyzed by the prosecutor, a prima facie case of estafa exists against respondents. As perused by her, the facts as presented in
the Complaint-Affidavit of the auditor are reasonable enough to excite her belief that respondents are guilty of the crime complained of. In Andres v.
Justice Secretary Cuevas50 we had occasion to rule that the "presence or absence of the elements of the crime is evidentiary in nature and is a matter
of defense that may be passed upon after a full-blown trial on the merits." 51
Thus confronted with the issue on whether the public prosecutor and the Secretary of Justice committed grave abuse of discretion in disposing of the
case of petitioner, given the sufficiency of evidence on hand, we do not hesitate to rule in the affirmative. We have previously ruled that grave abuse
of discretion may arise when a lower court or tribunal violates and contravenes the Constitution, the law or existing jurisprudence.
Non-inclusion of officers of Universal not a ground for the dismissal of the complaint.
The DOJ in resolving to deny petitioners appeal from the resolution of the prosecutor gave another ground failure to implead the officers of
Universal. It explained:
To allow your client to make the choice is to make an unwarranted classification under the law which will result in grave injustice against herein
respondents. Thus, if your client agreed that no estafa was committed in this transaction with Universal who was the principal player and beneficiary
of this transaction[,] more so with herein respondents whose liabilities are based only on conspiracy with Universal. 521avvphi1
The ratiocination of the Secretary of Justice conveys the idea that if the charge against respondents rests upon the same evidence used to charge coaccused (officers of Universal) based on the latters conspiratorial participation, the non-inclusion of said co-accused in the charge should benefit the
respondents.

The reasoning of the DOJ is flawed.


Suffice it to say that it is indubitably within the discretion of the prosecutor to determine who must be charged with what crime or for what offense.
Public prosecutors, not the private complainant, are the ones obliged to bring forth before the law those who have transgressed it.
Section 2, Rule 110 of the Rules of Court53 mandates that all criminal actions must be commenced either by complaint or information in the name of
the People of the Philippines against all persons who appear to be responsible therefor. Thus the law makes it a legal duty for prosecuting officers to
file the charges against whomsoever the evidence may show to be responsible for the offense. The proper remedy under the circumstances where
persons who ought to be charged were not included in the complaint of the private complainant is definitely not to dismiss the complaint but to
include them in the information. As the OSG correctly suggested, the proper remedy should have been the inclusion of certain employees of
Universal who were found to have been in cahoots with respondents in defrauding petitioner. The DOJ, therefore, cannot seriously argue that because
the officers of Universal were not indicted, respondents themselves should not likewise be charged. Their non-inclusion cannot be perversely used to
justify desistance by the public prosecutor from prosecution of the criminal case just because not all of those who are probably guilty thereof were
charged.
Mandamus a proper remedy when resolution of public respondent is tainted with grave abuse of discretion.
Mandamus is a remedial measure for parties aggrieved. It shall issue when "any tribunal, corporation, board, officer or person unlawfully neglects the
performance of an act which the law specifically enjoins as a duty resulting from an office, trust or station." 54 The writ of mandamus is not available
to control discretion neither may it be issued to compel the exercise of discretion. Truly, it is a matter of discretion on the part of the prosecutor to
determine which persons appear responsible for the commission of a crime. However, the moment he finds one to be so liable it becomes his
inescapable duty to charge him therewith and to prosecute him for the same. In such a situation, the rule loses its discretionary character and becomes
mandatory. Thus, where, as in this case, despite the sufficiency of the evidence before the prosecutor, he refuses to file the corresponding information
against the person responsible, he abuses his discretion. His act is tantamount to a deliberate refusal to perform a duty enjoined by law. The Secretary
of Justice, on the other hand, gravely abused his discretion when, despite the existence of sufficient evidence for the crime of estafa as acknowledged
by the investigating prosecutor, he completely ignored the latters finding and proceeded with the questioned resolution anchored on purely
evidentiary matters in utter disregard of the concept of probable cause as pointed out in Balangauan. To be sure, findings of the Secretary of Justice
are not subject to review unless shown to have been made with grave abuse. 55 The present case calls for the application of the exception. Given the
facts of this case, petitioner has clearly established that the public prosecutor and the Secretary of Justice committed grave abuse of discretion.
WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of Appeals in CA-G.R. SP No. 58548 promulgated on October 21,
2002 affirming the Resolutions dated June 22, 1998 and March 1, 2000 of the Secretary of Justice, and its Resolution dated July 12, 2004 denying
reconsideration thereon are herebyREVERSED and SET ASIDE. The public prosecutor is ordered to file the necessary information for estafa
against the respondents.
SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila
G.R. No. 186738

September 27, 2010

PRUDENTIAL BANK AND TRUST COMPANY (now BANK OF THE PHILIPPINE ISLANDS,1) Petitioner,
vs.
LIWAYWAY ABASOLO, Respondent.
DECISION
CARPIO MORALES, J.:
Leonor Valenzuela-Rosales inherited two parcels of land situated in Palanan, Sta. Cruz, Laguna (the properties), registered as Original Certificates of
Title Nos. RO-527 and RO-528. After she passed away, her heirs executed on June 14, 1993 a Special Power of Attorney (SPA) in favor of Liwayway
Abasolo (respondent) empowering her to sell the properties. 2
Sometime in 1995, Corazon Marasigan (Corazon) wanted to buy the properties which were being sold forP2,448,960, but as she had no available
cash, she broached the idea of first mortgaging the properties to petitioner Prudential Bank and Trust Company (PBTC), the proceeds of which would
be paid directly to respondent. Respondent agreed to the proposal.
On Corazon and respondents consultation with PBTCs Head Office, its employee, Norberto Mendiola (Mendiola), allegedly advised respondent to
issue an authorization for Corazon to mortgage the properties, and for her (respondent) to act as one of the co-makers so that the proceeds could be
released to both of them.
To guarantee the payment of the property, Corazon executed on August 25, 1995 a Promissory Note for P2,448,960 in favor of respondent.
By respondents claim, in October 1995, Mendiola advised her to transfer the properties first to Corazon for the immediate processing of Corazons
loan application with assurance that the proceeds thereof would be paid directly to her (respondent), and the obligation would be reflected in a bank
guarantee.
Heeding Mendiolas advice, respondent executed a Deed of Absolute Sale over the properties in favor of Corazon following which or on December 4,
1995, Transfer Certificates of Title Nos. 164159 and 164160 were issued in the name of Corazon.
Corazons application for a loan with PBTCs Tondo Branch was approved on December 1995. She thereupon executed a real estate mortgage
covering the properties to secure the payment of the loan. In the absence of a written request for a bank guarantee, the PBTC released the proceeds of
the loan to Corazon.
Respondent later got wind of the approval of Corazons loan application and the release of its proceeds to Corazon who, despite repeated demands,
failed to pay the purchase price of the properties.
Respondent eventually accepted from Corazon partial payment in kind consisting of one owner type jeepney and four passenger jeepneys, 3 plus
installment payments, which, by the trial courts computation, totaled P665,000.
In view of Corazons failure to fully pay the purchase price, respondent filed a complaint for collection of sum of money and annulment of sale and
mortgage with damages, against Corazon and PBTC (hereafter petitioner), before the Regional Trial Court (RTC) of Sta. Cruz, Laguna. 4
In her Answer,5 Corazon denied that there was an agreement that the proceeds of the loan would be paid directly to respondent. And she claimed that
the vehicles represented full payment of the properties, and had in fact overpaidP76,040.
Petitioner also denied that there was any arrangement between it and respondent that the proceeds of the loan would be released to her. 6 It claimed
that it "may process a loan application of the registered owner of the real property who requests that proceeds of the loan or part thereof be payable
directly to a third party [but] the applicant must submit a letter request to the Bank." 7
On pre-trial, the parties stipulated that petitioner was not a party to the contract of sale between respondent and Corazon; that there was no written
request that the proceeds of the loan should be paid to respondent; and that respondent received five vehicles as partial payment of the properties. 8
Despite notice, Corazon failed to appear during the trial to substantiate her claims.

By Decision of March 12, 2004,9 Branch 91 of the Sta. Cruz, Laguna RTC rendered judgment in favor of respondent and against Corazon who was
made directly liable to respondent, and against petitioner who was made subsidiarily liable in the event that Corazon fails to pay. Thus the trial court
disposed:
WHEREFORE, premises considered, finding the plaintiff has established her claim against the defendants, Corazon Marasigan and Prudential Bank
and Trust Company, judgment is hereby rendered in favor of the plaintiff ordering:
Defendant Corazon Marasigan to pay the plaintiff the amount of P1,783,960.00 plus three percent (3%) monthly interest per month from August 25,
1995 until fully paid. Further, to pay the plaintiff the sum equivalent to twenty percent five [sic] (25%) of P1,783,960.00 as attorneys fees.
Defendant Prudential Bank and Trust Company to pay the plaintiff the amount of P1,783,960.00 or a portion thereof plus the legal rate of interest per
annum until fully paid in the event that Defendant Corazon Marasigan fails to pay the said amount or a portion thereof.
Other damages claimed not duly proved are hereby dismissed.
So Ordered.10 (emphasis in the original; underscoring partly in the original, partly supplied)
In finding petitioner subsidiarily liable, the trial court held that petitioner breached its understanding to release the proceeds of the loan to respondent:
Liwayway claims that the bank should also be held responsible for breach of its obligation to directly release to her the proceeds of the loan or part
thereof as payment for the subject lots. The evidence shows that her claim is valid.The Bank had such an obligation as proven by evidence. It failed
to rebut the credible testimony of Liwayway which was given in a frank, spontaneous, and straightforward manner and withstood the test of rigorous
cross-examination conducted by the counsel of the Bank. Her credibility is further strengthened by the corroborative testimony of Miguela delos
Reyes who testified that she went with Liwayway to the bank for several times. In her presence, Norberto Mendiola, the head of the loan department,
instructed Liwayway to transfer the title over the subject lots to Corazon to facilitate the release of the loan with the guarantee that Liwayway will be
paid upon the release of the proceeds.
Further, Liwayway would not have executed the deed of sale in favor of Corazon had Norberto Mendiola did not promise and guarantee that the
proceeds of the loan would be directly paid to her. Based on ordinary human experience, she would not have readily transferred the title over the
subject lots had there been no strong and reliable guarantee. In this case, what caused her to transfer title is the promise and guarantee made by
Norberto Mendiola that the proceeds of the loan would be directly paid to her. 11 (emphasis underscoring supplied)
On appeal, the Court of Appeals by Decision of January 14, 200812, affirmed the trial courts decision with modification on the amount of the
balance of the purchase price which was reduced from P1,783,960 to P1,753,960. It disposed:
WHEREFORE, premises considered, the assailed Decision dated March 12, 2004 of the Regional Trial Court of Sta. Cruz, Laguna, Branch 91,
is AFFIRMED WITH MODIFICATION as to the amount to be paid which isP1,753,960.00.
SO ORDERED.13 (emphasis in the original; underscoring supplied)
Petitioners motion for reconsideration having been denied by the appellate court by Resolution of February 23, 2009, the present petition for review
was filed.
The only issue petitioner raises is whether it is subsidiarily liable.
The petition is meritorious.
In the absence of a lender-borrower relationship between petitioner and Liwayway, there is no inherent obligation of petitioner to release the proceeds
of the loan to her.
To a banking institution, well-defined lending policies and sound lending practices are essential to perform its lending function effectively and
minimize the risk inherent in any extension of credit.
Thus, Section X302 of the Manual of Regulations for Banks provides:
X-302. To ensure that timely and adequate management action is taken to maintain the quality of the loan portfolio and other risk assets and that
adequate loss reserves are set up and maintained at a level sufficient to absorb the loss inherent in the loan portfolio and other risk assets, each bank
shall establish a system of identifying and monitoring existing or potential problem loans and other risk assets and of evaluating credit policies vis-vis prevailing circumstances and emerging portfolio trends. Management must also recognize that loss reserve is a stabilizing factor and that failure
to account appropriately for losses or make adequate provisions for estimated future losses may result in misrepresentation of the banks financial
condition.

In order to identify and monitor loans that a bank has extended, a system of documentation is necessary. Under this fold falls the issuance by a bank
of a guarantee which is essentially a promise to repay the liabilities of a debtor, in this case Corazon. It would be contrary to established banking
practice if Mendiola issued a bank guarantee, even if no request to that effect was made.
The principle of relativity of contracts in Article 1311 of the Civil Code supports petitioners cause:
Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the
contract are not transmissible by their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the property he
received from the decedent.
If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to
the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person. (underscoring supplied)
For Liwayway to prove her claim against petitioner, a clear and deliberate act of conferring a favor upon her must be present. A written request would
have sufficed to prove this, given the nature of a banking business, not to mention the amount involved.
Since it has not been established that petitioner had an obligation to Liwayway, there is no breach to speak of. Liwayways claim should only be
directed against Corazon. Petitioner cannot thus be held subisidiarily liable.
To the Court, Liwayway did not rely on Mendiolas representations, even if he indeed made them. The contract for Liwayway to sell to Corazon was
perfected from the moment there was a meeting of minds upon the properties-object of the contract and upon the price. Only the source of the funds
to pay the purchase price was yet to be resolved at the time the two inquired from Mendiola. Consider Liwayways testimony:
Q: We are referring to the promissory note which you aforementioned a while ago, why did this promissory note come about?
A: Because the negotiation was already completed, sir, and the deed of sale will have to be executed, I asked the defendant (Corazon) to execute the
promissory note first before I could execute a deed of absolute sale, for assurance that she really pay me, sir. 14 (emphasis and underscoring supplied)
That it was on Corazons execution of a promissory note that prompted Liwayway to finally execute the Deed of Sale is thus clear.
The trial Courts reliance on the doctrine of apparent authority that the principal, in this case petitioner, is liable for the obligations contracted by its
agent, in this case Mendiola, does not lie. Prudential Bank v. Court of Appeals15instructs:
[A] banking corporation is liable to innocent third persons where the representation is made in the course of its business by an agent acting within the
general scope of his authority even though, in the particular case, the agent is secretly abusing his authority and attempting to perpetuate fraud upon
his principal or some person, for his own ultimate benefit.16 (underscoring supplied)
The onus probandi that attempt to commit fraud attended petitioners employee Mendiolas acts and that he abused his authority lies on Liwayway.
She, however, failed to discharge the onus. It bears noting that Mendiola was not privy to the approval or disallowance of Corazons application for a
loan nor that he would benefit by the approval thereof.
Aside from Liwayways bare allegations, evidence is wanting to show that there was collusion between Corazon and Mendiola to defraud her. Even
in Liwayways Complaint, the allegation of fraud is specifically directed against Corazon. 17
IN FINE, Liwayways cause of action lies against only Corazon.
WHEREFORE, the Decision of January 14, 2008 of the Court of Appeals, in so far as it holds petitioner, Prudential Bank and Trust Company (now
Bank of the Philippine Islands), subsidiary liable in case its co-defendant Corazon Marasigan, who did not appeal the trial courts decision, fails to
pay the judgment debt, is REVERSED and SET ASIDE. The complaint against petitioner is accordingly DISMISSED.
SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 186550

July 5, 2010

ASIAN CATHAY FINANCE AND LEASING CORPORATION, Petitioner,


vs.
SPOUSES CESARIO GRAVADOR and NORMA DE VERA and SPOUSES EMMA CONCEPCION G. DUMIGPI and FEDERICO L.
DUMIGPI, Respondents.
DECISION
NACHURA, J.:
On appeal is the June 10, 2008 Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 83197, setting aside the April 5, 2004 decision 2 of the
Regional Trial Court (RTC), Branch 9, Bulacan, as well as its subsequent Resolution 3dated February 11, 2009, denying petitioners motion for
reconsideration.
On October 22, 1999, petitioner Asian Cathay Finance and Leasing Corporation (ACFLC) extended a loan of Eight Hundred Thousand Pesos
(P800,000.00)4 to respondent Cesario Gravador, with respondents Norma de Vera and Emma Concepcion Dumigpi as co-makers. The loan was
payable in sixty (60) monthly installments of P24,400.00 each. To secure the loan, respondent Cesario executed a real estate mortgage 5 over his
property in Sta. Maria, Bulacan, covered by Transfer Certificate of Title No. T-29234. 6
Respondents paid the initial installment due in November 1999. However, they were unable to pay the subsequent ones. Consequently, on February 1,
2000, respondents received a letter demanding payment of P1,871,480.00 within five (5) days from receipt thereof. Respondents requested for an
additional period to settle their account, but ACFLC denied the request. Petitioner filed a petition for extrajudicial foreclosure of mortgage with the
Office of the Deputy Sheriff of Malolos, Bulacan.
On April 7, 2000, respondents filed a suit for annulment of real estate mortgage and promissory note with damages and prayer for issuance of a
temporary restraining order (TRO) and writ of preliminary injunction. Respondents claimed that the real estate mortgage is null and void. They
pointed out that the mortgage does not make reference to the promissory note dated October 22, 1999. The promissory note does not specify the
maturity date of the loan, the interest rate, and the mode of payment; and it illegally imposed liquidated damages. The real estate mortgage, on the
other hand, contains a provision on the waiver of the mortgagors right of redemption, a provision that is contrary to law and public policy.
Respondents added that ACFLC violated Republic Act No. 3765, or the Truth in Lending Act, in the disclosure statement that should be issued to the
borrower. Respondents, thus, claimed that ACFLCs petition for foreclosure lacked factual and legal basis, and prayed that the promissory note, real
estate mortgage, and any certificate of sale that might be issued in connection with ACFLCs petition for extrajudicial foreclosure be declared null
and void. In the alternative, respondents prayed that the court fix their obligation atP800,000.00 if the mortgage could not be annulled, and declare as
null and void the provisions on the waiver of mortgagors right of redemption and imposition of the liquidated damages. Respondents further prayed
for moral and exemplary damages, as well as attorneys fees, and for the issuance of a TRO to enjoin ACFLC from foreclosing their property.
On April 12, 2000, the RTC issued an Order,7 denying respondents application for TRO, as the acts sought to be enjoined were already fait accompli.
On May 12, 2000, ACFLC filed its Answer, denying the material allegations in the complaint and averring failure to state a cause of action and lack
of cause of action, as defenses. ACFLC claimed that it was merely exercising its right as mortgagor; hence, it prayed for the dismissal of the
complaint.
After trial, the RTC rendered a decision, dismissing the complaint for lack of cause of action. Sustaining the validity of the promissory note and the
real estate mortgage, the RTC held that respondents are well-educated individuals who could not feign naivet in the execution of the loan
documents. It, therefore, rejected respondents claim that ACFLC deceived them into signing the promissory note, disclosure statement, and deed of
real estate mortgage. The RTC further held that the alleged defects in the promissory note and in the deed of real estate mortgage are too insubstantial
to warrant the nullification of the mortgage. It added that a promissory note is not one of the essential elements of a mortgage; thus, reference to a
promissory note is neither indispensable nor imperative for the validity of the mortgage. The RTC also upheld the interest rate and the penalty charge
imposed by ACFLC, and the waiver of respondents right of redemption provided in the deed of real estate mortgage.
The RTC disposed thus:
WHEREFORE, on the basis of the evidence on record and the laws/jurisprudence applicable thereto, judgment is hereby rendered DISMISSING the
complaint in the above-entitled case for want of cause of action as well as the counterclaim of [petitioner] Asian Cathay Finance & Leasing
Corporation for moral and exemplary damages and attorneys fees for abject lack of proof to justify the same.

SO ORDERED.8
Aggrieved, respondents appealed to the CA. On June 10, 2008, the CA rendered the assailed Decision, reversing the RTC. It held that the amount
of P1,871,480.00 demanded by ACFLC from respondents is unconscionable and excessive. Thus, it declared respondents principal loan to
be P800,000.00, and fixed the interest rate at 12% per annum and reduced the penalty charge to 1% per month. It explained that ACFLC could not
insist on the interest rate provided on the note because it failed to provide respondents with the disclosure statement prior to the consummation of the
loan transaction. Finally, the CA invalidated the waiver of respondents right of redemption for reasons of public policy. Thus, the CA ordered:
WHEREFORE, premises considered, the appealed decision is REVERSED AND SET ASIDE. Judgment is hereby rendered as follows:
1) Affirming the amount of the principal loan under the REM and Disclosure Statement both dated October 22, 1999 to be P800,000.00,
subject to:
a. 1% interest per month (12% per annum) on the principal from November 23, 1999 until the date of the foreclosure sale,
less P24,000.00 paid by [respondents] as first month amortization[;]
b. 1% penalty charge per month on the principal from December 23, 1999 until the date of the foreclosure sale.
2) Declaring par. 14 of the REM as null and void by reason of public policy, and granting mortgagors a period of one year from the finality
of this Decision within which to redeem the subject property by paying the redemption price as computed under paragraph 1 hereof, plus
one percent (1%) interest thereon from the time of foreclosure up to the time of the actual redemption pursuant to Section 28, Rule 39 of
the 1997 Rules on Civil Procedure.
The claim of the [respondents] for moral and exemplary damages and attorneys fees is dismissed for lack of merit.
SO ORDERED.9
ACFLC filed a motion for reconsideration, but the CA denied it on February 11, 2009.
ACFLC is now before us, faulting the CA for reversing the dismissal of respondents complaint. It points out that respondents are well-educated
persons who are familiar with the execution of loan documents. Thus, they cannot be deceived into signing a document containing provisions that
they are not amenable to. ACFLC ascribes error on the part of the CA for invalidating the interest rates imposed on respondents loan, and the waiver
of the right of redemption.
The appeal lacks merit.
It is true that parties to a loan agreement have a wide latitude to stipulate on any interest rate in view of Central Bank Circular No. 905, series of
1982, which suspended the Usury Law ceiling on interest rate effective January 1, 1983. However, interest rates, whenever unconscionable, may be
equitably reduced or even invalidated. In several cases, 10 this Court had declared as null and void stipulations on interest and charges that were found
excessive, iniquitous and unconscionable.
Records show that the amount of loan obtained by respondents on October 22, 1999 was P800,000.00. Respondents paid the installment for
November 1999, but failed to pay the subsequent ones. On February 1, 2000, ACFLC demanded payment of P1,871,480.00. In a span of three
months, respondents obligation ballooned by more than P1,000,000.00. ACFLC failed to show any computation on how much interest was imposed
and on the penalties charged. Thus, we fully agree with the CA that the amount claimed by ACFLC is unconscionable.
In Spouses Isagani and Diosdada Castro v. Angelina de Leon Tan, Sps. Concepcion T. Clemente and Alexander C. Clemente, Sps. Elizabeth T. Carpio
and Alvin Carpio, Sps. Marie Rose T. Soliman and Arvin Soliman and Julius Amiel Tan, 11 this Court held:
The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is immoral and unjust. It is
tantamount to a repugnant spoliation and an iniquitous deprivation of property, repulsive to the common sense of man. It has no support in law, in
principles of justice, or in the human conscience nor is there any reason whatsoever which may justify such imposition as righteous and as one that
may be sustained within the sphere of public or private morals.
Stipulations authorizing the imposition of iniquitous or unconscionable interest are contrary to morals, if not against the law. Under Article 1409 of
the Civil Code, these contracts are inexistent and void from the beginning. They cannot be ratified nor the right to set up their illegality as a defense
be waived. The nullity of the stipulation on the usurious interest does not, however, affect the lenders right to recover the principal of the loan. Nor
would it affect the terms of the real estate mortgage. The right to foreclose the mortgage remains with the creditors, and said right can be exercised
upon the failure of the debtors to pay the debt due. The debt due is to be considered without the stipulation of the excessive interest. A legal interest
of 12% per annum will be added in place of the excessive interest formerly imposed. 12 The nullification by the CA of the interest rate and the penalty
charge and the consequent imposition of an interest rate of 12% and penalty charge of 1% per month cannot, therefore, be considered a reversible
error.

ACFLC next faults the CA for invalidating paragraph 14 of the real estate mortgage which provides for the waiver of the mortgagors right of
redemption. It argues that the right of redemption is a privilege; hence, respondents are at liberty to waive their right of redemption, as they did in this
case.
Settled is the rule that for a waiver to be valid and effective, it must, in the first place, be couched in clear and unequivocal terms which will leave no
doubt as to the intention of a party to give up a right or benefit which legally pertains to him. Additionally, the intention to waive a right or an
advantage must be shown clearly and convincingly.13 Unfortunately, ACFLC failed to convince us that respondents waived their right of redemption
voluntarily.
As the CA had taken pains to demonstrate:
The supposed waiver by the mortgagors was contained in a statement made in fine print in the REM. It was made in the form and language prepared
by [petitioner]ACFLC while the [respondents] merely affixed their signatures or adhesion thereto. It thus partakes of the nature of a contract of
adhesion. It is settled that doubts in the interpretation of stipulations in contracts of adhesion should be resolved against the party that prepared them.
This principle especially holds true with regard to waivers, which are not presumed, but which must be clearly and convincingly shown. [Petitioner]
ACFLC presented no evidence hence it failed to show the efficacy of this waiver.
Moreover, to say that the mortgagors right of redemption may be waived through a fine print in a mortgage contract is, in the last analysis,
tantamount to placing at the mortgagees absolute disposal the property foreclosed. It would render practically nugatory this right that is provided by
law for the mortgagor for reasons of public policy. A contract of adhesion may be struck down as void and unenforceable for being subversive to
public policy, when the weaker party is completely deprived of the opportunity to bargain on equal footing. 14
In fine, when the redemptioner chooses to exercise his right of redemption, it is the policy of the law to aid rather than to defeat his right. 15 Thus, we
affirm the CA in nullifying the waiver of the right of redemption provided in the real estate mortgage.
Finally, ACFLC claims that respondents complaint for annulment of mortgage is a collateral attack on its certificate of title. The argument is
specious.
The instant complaint for annulment of mortgage was filed on April 7, 2000, long before the consolidation of ACFLCs title over the property. In fact,
when respondents filed this suit at the first instance, the title to the property was still in the name of respondent Cesario. The instant case was pending
with the RTC when ACFLC filed a petition for foreclosure of mortgage and even when a writ of possession was issued. Clearly, ACFLCs title is
subject to the final outcome of the present case.1avvphi1
WHEREFORE, the petition is DENIED. The assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 83197 are AFFIRMED.
Costs against petitioner.
SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-47544 January 28, 1980
PEPITO VELASCO, AMABLE LUMANLAN, RAMON GALANG, FELIPE LUMBANG and APOLONIO DE LOS SANTOS, petitioners,
vs.
COURT OF APPEALS and GOVERNMENT SERVICE INSURANCE SYSTEM, respondents.
Ocampo, Velasco, Sicat & Associate for petitioners.
Manuel M. Lazaro for respondent GSIS.

BARREDO, J.:
Petition for certiorari, erroneously citing Section I of Rule 65, for the review of the decision of the Special Division of Five of the Court of Appeals
dated December 6, 1977 in CA .G.R. No. 06152 declaring, by a vote of four to one, null and void the order of the Court of First Instance of
Pampanga in Civil Case No. 4260 dated December 2, 1976, which had declared the judgment of said court in said case final and executory, directing
in consequence, said trial court to approve the record on appeal of herein respondent Government Service Insurance System (GSIS for short) and to
give due course to its appeal, setting aside correspondingly the restraining order it had previously issued in the same case, the Court of Appeals
holding that, contrary to the ruling of the trial court, the motion for new trial of the GSIS admittedly filed on time is not pro-forma and, therefore, the
period to appeal the trial court's decision in question had been suspended by said motion, hence, said decision was still appealable.
From the foregoing brief statement of the nature of the instant case, it would appear that Our sole function in this proceeding should be to resolve the
single issue of whether or not the Court of Appeals erred in ruling that the motion for new trial of the GSIS in question should indeed be deemed proforma. But going over the extended pleadings of both parties, the Court is immediately impressed that substantial justice may not be timely achieved,
if We should decide this case upon such a technical ground alone. We have carefully read all the allegations and arguments of the parties, very ably
and comprehensively expounded by evidently knowledgeable and unusually competent counsel, and We feel We can better serve the interests of
justice by broadening the scope of Our inquiry, for as the record before Us stands, We see that there is enough basis for Us to end the basic
controversy between the parties here and now, dispensing, however, with procedural steps which would not anyway affect substantially the merits of
their respective claims.
As a matter of fact, after our first study of this case, We already announced Our intention in this direction at the hearing held on February 21, 1979,
where Attys. Celestino T. Ocampo, Vicente Sicat and Victoriano David appeared and argued for the petitioners and Justice Manuel Lazaro and Atty.
Antonio F. Navarrete, for the GSIS. We reiterated said intention in Our resolution of said date by requiring the parties "to INFORM the Court ...
whether or not there are any issues of fact that the purported appeal of private respondent would involve and whether or not petitioners controvert the
same, with the end in view of enabling this Court to take the necessary steps to convert this proceeding into an appeal ... (under) Republic Act 5440".
To be sure, in its compliance dated April 10, 1979 with said resolution, GSIS does enumerate certain allegedly "pivotal factual issues" its appeal
"would involve." However, as will be explained anon even the "pivotal factual issues" referred to may be justly resolved here without the need of
returning this case to the trial court. The exact position of the parties in respect to said issues and the allegations of fact in their pleadings here and in
the court below as well as the undisputed evidence related thereto are so clearly stated and comprehensively discussed by the parties in their said
pleadings that to conduct further proceedings or to await any other briefs from them would be superfluous and a waste of time and effort.
Accordingly, We now deem this case as submitted for Our decision as a duly made appeal under Republic Act 5440.
According to GSIS:
A Detailed Statement of Facts and of the Case
It is not without reason to state that the ambience of a particular case has much to contribute to the resolution thereof. So it is with
the instant case. And for a better appreciation of the antecedents which led to the decision of the Court of First Instance of
Pampanga and subsequently the questioned decision of the respondent Court of Appeals, the environmental facts which spawned
them should thus be laid bare before this Honorable Court, the better to appreciate their factual significance and legal
consequences.
1. Sometime on November 10, 1965, Alta Farms secured from the GSIS a Three Million Two Hundred Fifty Five Thousand
Pesos (P3,255,000.00) loan and an additional loan of Five Million Sixty-Two Thousand Pesos (P5,062,000.00) on October 5,
1967, to finance a piggery project. These loans were secured by two mortgage (Exh. "B").

2. Alta Farms defaulted in the payment of its amortizations. it is presumably because of this that Alta Farms executed a Deed of
Sale With Assumption of Mortgage with Asian Engineering Corporation on July 10, 1969 (Exh. "C"), but without the previous
consent or approval of the GSIS and in direct violation of the provisions of the mortgage contracts.
3. Even without the approval of the Deed of Sale With Assumption of Mortgage by the GSIS, Asian Engineering Corporation
executed an Exclusive Sales Agency, Management and Administration Contract in favor of Laigo Realty Corporation, with the
intention of converting the piggery farm into a subdivision (Exh. "D"). And on October 20, 1969, Asian Engineering executed
another contract with Laigo, whereby Laigo was to undertake the development of the property into a subdivision (Exh. "E").
Conformably with the two contracts (Exh "D" and "E"), Laigo started the development of the lot into a subdivision.
Contract of Petitioner
Lumanlan and his admission
4. After developing the area, on December 4, 1969, Laigo entered into a contract (Exh. "GG") with Amable Lumanlan, one of the
petitioners, to construct for the home buyers, 20 houses on the subdivision. The contract provided that Laigo shall secure the
agreement and signature of the home buyers (Paragraph 6 of Agreement, Exh. "GG") and that Laigo "shall pay for the houses on
a "turn-key" bases" (Paragraph 5 of Agreement, Exh. "GG"). The parties to the agreement are, stated by the agreement itself, as
follows:
This Agreement, executed this 29th day of November, 1969, in the City of Manila, by and between
LAIGO REALTY CORPORATION, ...
represented by its President,
RHODY E. LAIGO, ... hereinafter referred to as the FIRST PARTY
- and ... AMABLE G. LUMANLAN ... hereinafter referred to as the SECOND PARTY.
And the signatories are IN WITNESS WHEREOF, the parties hereunto affixed their signatures this 4th day of Dec. 1969 at Manila,
Philippines.
(Sgd) Illegible
LAIGO REALTY CORPORATION

ALEJANDRO Y. DE JESUS

BY:

By:

(Sgd) RHODY E. LAIGO

(Sgd) Illegible

(t) RHODY E. LAIGO

AMABLE G. LUMANLAN

- President (Sgd) Illegible


ANASTACIO F. DANAN
(See Exh. "GG")
5. Petitioner Lumanlan allegedly constructed 20 houses for the home buyers and for which he claims a balance of P309,187.76
from the home buyers and Laigo. This is reflected in Exhibit "X" of petitioners. However, in the letter of Lumanlan to the GSIS
on January 7, 1972, he was collecting only P216,500.00 (Exh. "W" evidence of Lumanlan). Thus, even the evidence of Lumanlan
on what is due him is conflicting.
6. Out of his claim, petitioner Lumanlan admits that Mrs. Rhody Laigo paid him in several checks totalling P124,855.00 but
which checks were all dishonored when presented for payment. This is Exhibit "X" of petitioners.

7. Thus, on November 7, 1970, petitioner Lumanlan wrote a letter to Laigo Realty Corporation (Exh. "Y", evidence of Lumanlan)
which reads
I wish to inform you that I have received from Mrs. Rhody E. Laigo several bank checks which were either
dishonored by the bank or were cancelled at the request of Mrs. Rhody E. Laigo for reasons of insufficient
funds.
The following are the checks:
DATE

SER.
NO.

May
20,1970

646371

P36,000.00

June
10,1970

659907

9,000.00

"

June
30,
1970

646397

20,000.00

"

July 6,
1970

646398

19,800.00

"

July 3,
1970

464399

11,250.00

"

Aug.
7,1970

659913

16,200.00

"

Aug.
14,1970

659914

12,605.00

"

Total

AMOUNT

BANK
Prudential Bank

P124,855.00

8. In the same letter, Exh, "Y", Lumanlan admits that the checks of Laigo that were dishonored were intended to pay 8 houses
occupied by home buyers, who caused the construction in accordance with the Agreement of Laigo and Lumanlan (Exh. "GG").
The letter of Lumanlan also admits This amount was intended to pay for eight (8) houses occupied by the following home buyers:
1

. Liborio
Yalung

P18,000.00

2. Caridad
Pascua

13,500.00

3. Antonio
Candelaria

15,300.00

4. Alberto
Rarela

11,800.00

5.
Felomena
Gonzales

16,200.00

6. Estelita
Manalang

16,200.00

7. Rogelio
Zabala

16,200.00

8.
Wilhelmina
Paras

16,200.00

P123,400.00
Refund for
expenses
in the
execution
of
housing
plans for
the

1 ,455.00

above
houses.

P
124,855.00

It is significant to note that Exhibits "GG", "W" "X" and "Y" are part of the evidence of petitioners.
9. On December 17, 1970, Laigo acknowledged its dishonored checks and promised to make good the same. This is reflected in
Exhibit "Y-l" of petitioners. The dishonored checks were all presented by petitioners and marked Exhibits "II-l" to "II-6".
Contract of Petitioner
Velasco and his admissions
10. On December 29, 1969, Laigo entered into a contract with petitioner Pepito Velasco to construct houses for the home buyers
who agreed with Velasco on the prices and the downpayment. Exhibits "HH" and "HH-l" for petitioners. The parties to the
contract are LAIGO REALTY CORPORATION, ... as the FIRST PARTY
- and ... PEPITO VELASCO, ... jointly known as the SECOND PARTY;
11. Petitioner Velasco constructed houses for various home buyers, who individually agreed with Velasco, as to the prices and the
downpayment to be paid by the individual home buyers.
When neither Laigo nor the individual home buyers paid for the home constructed, Velasco wrote the GSIS to intercede for the
unpaid accounts of the home buyers (Exh. "AA" for petitioners). Exhibit "AA" admits that Pepito Velasco is one of the building
contractors contracted by Laigo to construct houses for home buyers. it states the names of the home buyers, the cost of houses
agreed upon, the downpayment made by the buyers and their respective balance to Velasco. Since the letter of Velasco, Exh.
"AA", is a written admission that is highly revealing and illuminating we feel it important and material to quote therefrom as
follows.
May I inform your good offices that the undersigned is one of the building contractors contracted by the
Laigo Realty Corporation to construct residential houses of lot buyers therein For your further information
the following are the names of the lot owners for whom the undersigned have constructed houses for,
including the respective balances payable to me as of this date.
Name of Buyer

Cost of
House

Down

Balances

1. Benjamin Cristobal

P19,500.00

P1,950.00

17,550.00

2. Nehemiah Quipot

23,000.00

2,300.00

20,700.00

3. Alberto Villalon

18,000.00

1,800.00

16,200.00

4. Luis Jacob

20,000.00

2,000.00

18,000.00

5. Jose Salonga

20,000.00

2,000.00

18,000.00

6. Antonio Jontillano

12,500.00

1,200.00

11,300.00
P101,750.00

xxx xxx xxx


Very respectfully yours,
(Sgd) Pepito Velasco
(t) PEPITO VELASCO
Contractor'
This is the evidence of Velasco.
12. Velasco admits that Laigo paid him in five (5) checks with the total amount of P35,000.00 but which all bounched or were
dishonored (Exh. "BB" of petitioners). It is interesting to note that in the same letter of Velasco to his lawyer, Velasco also named
the buyers of the houses for whom he constructed the houses and the balance due from the home buyers (See Exh. "BB" of
petitioners).
Con tract of Petitioner
de los Santos and his
admissions
13. On March 4, 1970, Laigo entered into a contract with petitioner Apolonio de los Santos whereby the latter agreed to construct
houses for the home buyers and Laigo agreed to pay the full purchase price of every house constructed ... based on a "turn- key
arrangement". (Vide Exh. "A") The parties to the contract are shown as follows:
If these conditions above are acceptable to your good self, kindly signify your conformity below.
Truly yours,
(Sgd) Rhody E. Laigo
(t) RHODY E. LAIGO
CONFORME
(Sgd) APOLONIO DE LOS SANTOS
(Date) March 4, 1970
(Vide Exhibit "A" of petitioners)
Contract of Petitioner
Galang and his admissions
14. Petitioner Ramon Galang also constructed a house for Victor Coquilla for an agreed price of P14,000.00. Coquilla paid a
downpayment of P1,400.00, thereby leaving a balance of P12,600.00, which he wanted the GSIS to pay. Thus, in his letter to the
GSIS (Exh "CC" for Petitioners) he admits -

In connection with your Palos Verdes Estate Subdivision located in Talipapa, Caloocan City and which was
era d Realty Corporation I wish to inform you that I have the Laigo Realty Corporation constructed in the
subdivision the following house, its owner and cost of construction
Name Of
Owner

Cost of
House

Amount Paid

Balance

1. Victor
Coquilla

P14,000.00

P1,400.00

P12,600.00

May I inform your good Offices further that the amount of P12,600.00 referred to above as the 'balance 'is payable to the
undersigned, Payment of which has been delayed for almost one and a half years now.
Trusting that you give this letter your usual Prompt attention, I beg to remain
Very respectfully yours,
(Sgd.) Ramon R. Galang
(t) RAMON R. GALANG
Contracto
r,
(Vide Exh. "KK" for petitioners; emphasis supplied)
Contract of Petitioner
Lumbang
15. Petitioner Felipe Lumbang also claims to have constructed for the home buyers upon the instance of Laigo, four (4) houses
with the balance of P82,705.00. Lumanlan admits that he constructed the four houses for the home buyers who paid him a
downpayment but who still have outstanding balances Vide Exh. "LL" for the petitioners).
16. The Deed of Sale With Assumption of Mortgage between Alta Farms and Asian Engineering, for one reason or another, was
not approved by the GSIS. And when Alta Farms failed to liquidate its accounts, GSIS foreclosed the properties including all
improvements (the house in 1970. In November and December 1971, the Certificate of Sale in favor of the GSIS were issued.
17. While the properties were under foreclosure and even pending the consolidation of titles, certain lots were sold on installment
basis, for which Laigo received P985,000.00, and 63 houses in various stages were constructed, among which are the houses
allegedly constructed by the petitioners.
xxx xxx xxx
21. An along, from the time the contracts were entered into by Laigo Realty Corporation, the petitioners had always directed their
claims against Laigo Realty Corporation as may be shown by Exhibits "Z", "X", "Y" and "I-1"; Laigo would pay by checks to the
contractors; and when the checks were dishonored they would always file a protest with Laigo Realty Corporation. Originally, an
claims were addressed to Laigo Realty Corporation, being the party who executed the contracts
22. When the petitioners could not collect from Laigo and the home buyers and after the GSIS foreclosed the subdivision
including the improvements (the houses constructed), the petitioners sent a letter of demand on August 3, 1974 (Exhibit "EE") for
GSIS to pay for the indebtedness of Laigo Realty Corporation. It is enlightening and interesting to note that the annexes to the
letter specifies who are the home buyers who caused the construction the agreed price of the construction between the home
buyers and the contractors, the downpayment made by the home buyers to the contractors, and the balance of the home buyers
due the contractors by reason of the contracts (Exhibits "EE-l" and "EE-2"). It is crystal clear from the letter of the lawyer of the
petitioners that the ones who caused the construction are home buyers through Laigo Realty Corporation, that the home buyers
made downpayments to the contractors, and that the latter agreed to the price and the balance that were not paid by the home
buyers This is certainly indubitable proof that the GSIS had nothing to do whatsoever in the construction of the houses by the
petitioners.

23. On August 12. 1974, the Assistant General Manager on A legal affairs - he GSIS categorically and specifically denied the an
the firm and clear legal ground, among others, that the has no privity of contract with the petitioners (Exhibit "FF"). This denial
of the claim of the negates, rebukes and belies any and all or on the other inter-office the GSIS.
24. On April 14, 1975, the petitioners filed a case against the GSIS for the on of mm of money representing labor and materials
used in the construction of houses caused by home buyers the intercession of Laigo Realty Corporation in the principal sum of
P607,328.27. The complaint, docketed as Civil Case No. 4260 of the Court of First Instance of Pampanga, prayed for (1) The sum of SIX HUNDRED SEVEN THOUSAND THREE HUNDRED TWENTY EIGHT & 271100
PESOS (P607,328.27) in its current value due to inflation with legal interest from the date of extrajudicial
demand;
(2) the sum of FIFTY THOUSAND (P50,000.00) PESOS as attorney's fees;
(3) such sum for exemplary damages as may be assess by this Honorable Court against the defendant; and
(4) the costs of this suit (Vide pp. 91-95 of the instant Amended Petition)
25. On July 30, 1975, and within the extensions of time granted, the GSIS filed its Answer traversing the claims and alleging,
among others, that the petitioners have no privity of contract with the GSIS; that the petitioners have no cause of action; and that
Laigo Realty Corporation which entered into the contracts with the petitioners is a necessary and indispensable party who should
be included as a party to properly ventilate the issues and to avoid multiplicity of suits (pp. 96-101 of the instant Amended
Petition).
26. After pre-trial was terminated the petitioners presented their evidence, and thereafter, under date of December 16, 1975, they
filed their Plaintiffs' Formal Offer of Evidence (pp. 103-113 of the instant Amended Petition).
27. On February 20, 1976, the petitioners and the GSIS filed their "Joint Manifestation" which in substance is a stipulation of
facts (pp. 114-116 of the instant Amended Petition). The petitioners agreed that the witnesses of the GSIS to be presented would
testify on the followinga. The execution of the Deed of Quitclaim dated May 7, 1970, executed in favor of defendant GSIS by Laigo
Realty notwithstanding the followed ownership." GSIS if they were presented evidence." (Pp. 379-391,
Record. Corporation freeing said defendant from any and all claims arising out of the suppliers, contractors
and house such as plaintiffs in the Palos Verdes Estate which now constitutes the GSIS Hills Subdivision
b. At the time of the Extra-Judicial Foreclosure of the Estate Mortgage on November, 1971, conducted by
defendant or Laigo properties, plaintiff's claims are not registered;
c. Plaintiffs' services were contracted by Laigo Corporation and not by the defendant GSIS;
d That defendant up to the present has not collected the house owner of the 63 houses built by the plaintiffs
proceedings and consolidation of ownership
The petitioners thus did not choose to cross-examine or dispute what they had agreed upon as the testimonies of the witnesses of
the to testify; hence, they stand as uncontroverted evidence. 1
Significantly, the trial court's conclusions of fact are substantially as alleged by the GSIS above, except as to certain details which We deem
immaterial in the light of the legal provisions and principles upon which We believe the resolution of this controversy should be based. It may be
stated in this connection, however, that the trial court made the following findings and conclusions as regards the amount petitioners are entitled to
recover:
The next issue that would then necessarily follow is: - How much are the plaintiffs entitled to be paid?
Again, an examination of the plaintiffs' uncontroverted evidence disclose that as of the time they were ordered to 'cease and
desist' from introducing any further improvement on the property, they had already constructed several houses valued (in
common to them) in the total of P609,328.27 and for which amount representing the actual cost of construction of the houses
(materials and labor already considered) as of those years of construction (1969-1970), they had not yet been fully paid; that upon
consolidation of ownership of the entire Palos Verdes Estate Subdivision where said plaintiffs had introduced the improvements
aforesaid in the GSIS, they made written request for payment of what was already then due them on the defendant GSIS - new
owner of the premises but that their said request had fallen on deaf ears. Consequently, for having been compelled to litigate and
to incur unnecessary expenses instead of given the opportunity of making use of the proceeds of their investment and labor in
further investments and work, said plaintiffs are here now further invoking justice and equity on their side and praying that they

be paid their afore-stated entitlement in the amount of P607,328.27 in the equivalent or present value of our Pesos as devaluated.
Thus, through testimonial evidence now also standing on record unrebutted, said plaintiffs proceeded to show to the Court the
effect of such devaluation of the currency on the prices of materials, as well as on their rights and claims, as follow:
1969-1970

1975

MATERIAL

Cost

Cost

1. White Sand Porac

P9.00 per cu. m.

P30.00 per cu. m.

2. Crashed GravelBaliwag

15.00 per cu. m.

30.00 per cu. m.

3. Cement

3.90 per bag

14.00 per bag

4. Lumber

.36 to .42 per

1. 70 to 1.80 per

board foot

board ft.

5. Nails .

75 per kilo

4.20 per kilo

6. GI Sheets

1.00 per linear

4.20 to 4.50 per

foot

linear foot

10.50 to 1 1.00 per

38.00 to 40.00

gallon

per gallon

8. Iron bars

2.7 5 to 3. 00

15.00

9. Toilet materials

110.00 to 120.00

410. 00 to 420. 00

7. Paint

Water closet, Phil.


Standard with seat
cover
And indeed, this Court can take judicial notice of the fact that a house costing, say P10,000.00 in 1969-1970, would now cost no
less than P40,000.00. So that, considering that the generally accepted standard or ratio in the determination of the costs of
materials and labor supplied and put in the construction by the builder-contractors that the latter (labor) is 30% of that of the
former (cost of materials), a computation of plaintiffs dues as is, or P607,328,27, would give this:
a. Cost of materials

P
4
6
7
,
1
7
5
.
5
0

b. Cost of labor

1
4
0
,
1
5
2
.
5
0

Total

6
0
7
,
3
2
8
.
0
0

In effect, by considering the aforesaid four times increase in said materials costing P467,175.50, the same materials would now
cost P1,868,702.00. By adding 30% of said amount of P1,868.702.00, or P560,610.60 for the cost of labor, to the said cost of
materials, the total amount to which plaintiffs would therefore, be justly and equitably entitled is the sum of P2,429,312.60. And
the facts and circumstances as proven, in the honest opinion of this Court as a court of law and equity, truly warrant that this said
amount be awarded to the plaintiffs. (pp. 193-195, Record.)
Parenthetically, the following reprobation by the Court of Appeals of the foregoing posture of the trial court reveals how much the same had
evidently influenced said appellate court to rule in favor of allowing respondent's appeal:
This Court finds no compelling reason to bar appellate review of the unprecedented judgment, mentioned at the outset,
whichrevalued upwards four-fold to repeat, four times the amount of plaintiffs' claim (as alleged in their complaint)
representingactual costs of houses built by them for the former owner-mortgagor of the subdivision that, eventually, was acquired
by the GSIS as highest bidder at the foreclosure sale.
It bears emphasis that "unjust enrichment", which was invoked by plaintiffs in suing the GSIS instead of the former ownerand/or
the developer (which contracted with plaintiff in regard to the houses in question), is manifest in the judgment sought to be
elevated to this appellate court. For, under that judgment, plaintiffs stand to receive, from and at the expense of the GSIS, as new
owner, and to keep for themselves as additional increment more than P 1.8 million OVER and ABOVE actual costs of materials
and labor that went into the building of said houses, according to their own allegations and evidence. Whether or not the trial
court can, by the simple expedient of taking "judicial notice" of inflation, quadruple the plaintiffs' claim, in the light of the Civil
Code provision (Art. 1250) authorizing revaluation only upon proof of "extraordinary inflation or deflation of the currency" and
of Republic Act No. 524 providing that obligation shall be discharged in the currency that is legal tender at the time of payment,
is an important and far-reaching legal question that deserves further examination or review not only by this court but also, if need
be, by the Supreme Court." (Pp. 31-32, Record.)
Truth to tell however, contrary to the contention of GSIS, the trial court's four-fold award may not be said to be entirely baseless and arbitrary, much
less based on no more than the judicial notice taken by His Honor that "a house costing, say P10,000 in 1969-1970, would now cost no less than
P40,000." That the trial court did not award more than what petitioners had demanded in their complaint is clearly evidenced by their allegation in
Paragraph 5 of their complaint regarding the effects of inflation as wen as by their prayer that they be paid "the sum of Six Hundred Seven Thousand
Three Hundred Twenty-Eight and 27/100 Pesos (P607,328.27) in its current value due to inflation", as well as by the testimonial evidence referred to
in detail in the decision in question, as can be seen in the portions thereof We have quoted above.
Thus, We find and hold that the material facts in this case are beyond dispute and the only issues We have to resolve are legal ones. It is clear to Us
that petitioners did construct, furnishing the materials and labor needed for the purpose the 63 houses that now belong to or are owned by respondent
GSIS. It is alleged in Paragraphs 5 and 8 of petitioners' complaint that:
5. That during the period of the joint venture agreement being negotiated by the Government Service Insurance System and the
Laigo Realty Corporation, the plaintiffs herein constructed residential house and other improvements at the said GSIS His
Subdivision, furnishing materials, supplies, labor and miscellaneous services at their own expense, which costs of mass labor and
miscellaneous services total the amount of P607,328.27, and which is broken down or itemized as follows:
Amable C.
Lumanlan
------------

P309,187.76

Pepito Velasco
-------------------

142,510.00

Apolonio de los
Santos --------

60,325.51

Felipe Lumbang

82,705.00

-----------------Ramon Galang
-------------------

12,600.00

That the foregoing expenditures and- claims are computed on the basis of actual costs of ma and labor as of the time of the
construction;
That owing to the inflation which is a matter of judicial notice, such costs of materials and labor is now reasonably assessed at
very much more than the above-mentioned amount
xxx xxx xxx
8. That the construction of houses and improvements has greatly increased the value of the aforesaid defendant's property. (Pp.
71-72, Record.)
The answer of GSIS to the foregoing allegations is as follows:
5. It specifically denies the allegations in paragraph 5, the truth being defendant is not liable for any of the materials, supplies and
labor allegedly furnished and supplied by plaintiffs to Palos Verdes Estate Subdivision as the same pertain exclusively to Laigo
Realty Corporation, since on 7 May 1970, Laigo Realty Corporation executed a Deed of Quitclaim and Undertaking, xerox copy
of which is hereto attached as Annex "1" and made an integral part hereof, holding free and harmless defendant from claims of
materialmen, contractor or any other person arising out of or having connection with the development of the said subdivision.
Thus the "NOW, THEREFORE" clause of said Deed of Quitclaim and Undertaking provides:
NO THEREFORE, for and in consideration of the above premises; and in the event of disapproval by the
GSIS of its proposal to develop- the aforesaid property of ALTA FARMS, INC. into a subdivision, REALTY
CORPORATION hereby forever quitclaims, releases and waives in favor of the GSIS its rights and interests
in the aforesaid property of ALTA FARMS, INC. arising out of the development of the aforesaid property into
a subdivision, and further shall answer and pay for any claim of or liability to any contractor, material
furnisher, lot buyer, or any other person arising out of or having connection with said subdivision
development. If the GSIS, for any reason, shall be held liable on any such claims or liabilities or otherwise its
mortgage hen be diminished, LAIGO REALTY CORPORATION further binds itself to indemnify the GSIS
such sums corresponding to such claims or diminution.
xxx xxx xxx
8. It admits the allegations in paragraph 8.(Pp. 76-77, Record.)
In other words, apart from- admitting expressly that "the constructions of houses and improvements has greatly increased the value" of the
subdivision it now owns, nowhere in its statement of the material facts in Paragraph 5 of its answer relative to the allegations of the petitioners
regarding the construction by them of the houses in dispute and the cost thereof to each of them does respondent deny said facts as not true. What
GSIS limitedly alleged in its answer is the legal proposition that it is not liable therefor because of lack of contractual privity between it and
petitioners. It may be safely said then that it does not now lie in the lips of GSIS to maintain that petitioners did not build the houses in question and
that the cost thereof is different from what petitioners have stated in their complaint.
What is more, the reliance of GSIS on the Deed of Quitclaim of May 7, 1970 is to Our mind misplaced. We have analyzed this document carefully,
and We are of the considered view that it is actually evidence against GSIS. Even if what is unnatural in ordinary business or industrial experience
were assumed, that is, that GSIS was unaware all along during the period of their construction of the work then being done by petitioners - albeit it is
possible there was no express consent given to - by and thru the aforementioned deed of quitclaim, GSIS agreed to receive and did actually receive
the benefits of what petitioners had accomplished or would accomplish under their contracts with Laigo., So much so, that the dispositive portion of
the quitclaim dead does not really relieve GSIS from liability to petitioners. Properly viewed, GSIS virtually assumed under said deed, liability in
regard to claims like those of petitioners who might not be paid by Laigo albeit said liability has been made subject to the reservation that it could
seek indemnity from Laigo.
GSIS received Alta Farms' proposal about the conversion of their piggery project into a subdivision (in which Laigo Realty's participation was
mentioned) as early as February 5, 1970. It was only in November, 1970 that it issued its "cease and desist" order. From all indications, the jobs of
petitioners were already practically finished then. Thus, in Paragraph 17 of its Comment on the petition herein, GSIS states:
17. While the properties were under foreclosure and even pending the consolidation of titles, certain lots were sold to installment
basis, for which Laigo received P985,000.00, and 63 houses in various stages were constructed, among which are the houses
allegedly constructed by the petitioners. (P. 387, Record.)

And in the Joint Manifestation filed by the parties with the trial court as late as February 20, 1976, GSIS made it clear that "defendant (GSIS) up to
the present has not collected from the house owners of the 63 houses built by the plaintiffs notwithstanding the foreclosure proceedings and
consolidation 6f ownership." Again, it is thus obvious that GSIS assumed ownership of the houses built by petitioners and was benefited by the same,
and the fact that it has not collected any payment from the "house owners" or the construction of the houses respectively occupied by them is of no
moment insofar as its liability to petitioners is concerned. Surely, it is not pretended that those "house owners" would be allowed to enrich themselves
at the expense of petitioners. Indeed, the term "house owners" is inappropriate, if only because in Paragraph 16 of its Comment on the petition herein,
GSIS unequivocally state that "GSIS foreclosed the properties including all improvements (the houses in 1970" and, thereby, became the owner of
said houses.
Upon the foregoing factual premises, the legal issue that arises is whether or not GSIS is liable to the petitioners for the cost of the materials and
labor furnished by them in construction of the 63 houses now owned by the GSIS and for the construction of which no payment has been made on the
balance due petitioners. Our considered view is and We so hold that even in equity alone, GSIS should pay the petitioners. After all, it admits it has
not collected from the ones who appear to be the buyers thereof, albeit it must be collecting the installments on the lots. All it has to do then is to pass
on to them what it has to pay petitioners. In law, GSIS is, under the peculiar circumstances of this case, the owner of said houses. Pursuant to Article
1729 of the Civil Code:
Those who put their labor upon or furnish materials for a piece of work undertaken by the contractor have an action against the
owner up to the amount owing from the latter to the contractor at the time the claim is made. However, the following shall not
prejudice the laborers, employees and furnishers of materials:
1) Payments made by the owner to the contractor before they are due;
2) Renunciation by the contractor of any amount due him from the owner.
This article is subject to the provisions of special laws. (1597a)
Laigo admittedly has not paid petitioners. The "bouncing" checks issued by it in their favor is mentioned by GSIS itself in its statement of the facts.
We hold that upon this premise it is a fair construction of the Deed of Quitclaim aforementioned, that GSIS can be held liable to petitioners, without
prejudice to its securing corresponding indemnity from Laigo. It is obvious from the terms of said deed that GSIS contemplated the possibility of its
being liable for Laigo's account, otherwise, there was no need for the reservation. This is one such liability. In this connection while, indeed, Article
1729 refers to the laborers and materialmen themselves, under the peculiar circumstances of this case, it is but fair and just that petitioners be deemed
as suing for the reimbursement of what they have already paid the laborers and materialmen, as otherwise they (petitioners) would be unduly
prejudiced while either Laigo, GSIS or the occupants of the houses would enrich themselves at their expense. It is a bad law that would allow such a
result.
At this juncture, We need to add only that Article 1311 of the Civil Code which GSIS invokes is not applicable where the situation contemplated in
Article 1729 obtains. The intention of the latter provision is to protect the laborers and the materialmen from being taken advantage of by
unscrupulous contractors and from possible connivance between owners and contractors. Thus, a constructive vinculum or contractual privity is
created by this provision, by way of exception to the principle underlying Article 1311 between the owner, on the one hand, and those who furnish
labor and/or materials, on the other. As a matter of fact, insofar as the laborers are concerned, by a special law, Act No. 3959, they are given added
protection by requiring contractors to file bonds guaranteeing payment to them. And under Article 2242 of the Civil Code, paragraphs (3) and (4),
claims of laborers and materialmen, respectively, enjoy preference among the creditors of the owner in regard to specific immovable property.
As regards Article 525 of the Civil Code also invoked by GSIS, suffice it to say that this provision refers particularly to instances where the bad faith
or the good faith of the builder is the decisive factor in determining liability. In the case at bar, there is no necessity to pass on the question of whether
petitioners acted in good faith or bad faith, for the simple reason that under the Deed of Quitclaim, GSIS freely accepted the benefits of what they
have accomplished.
GSIS contends that Laigo should have been joined as defendant in this case. While petitioners could have done so, they were not under such
obligation mandatorily. Under the circumstances of this case, Laigo is only a necessary party, not an indispensable one. And to allay GSIS, its right to
secure reimbursement from Laigo is hereby reserved.
Coming now to the amount for which GSIS is liable, We reiterate that, to be sure, there is evidence in the record, uncontradicted at that, regarding the
lower value of money at the time the demand upon GSIS was made compared to that when petitioners furnished the labor and materials in question.
We are not, however, inclined to go along with the trial court that the amount demanded should be multiplied four times. We believe that it being a
matter of judicial notice that the prices of labor and material have substantially risen since 1970, it would be fair enough to make respondent liable
for interest on the amount of the demand, which is supported by evidence and not effectively disputed by GSIS in its answer, at the rate of 12% per
annum from the time petitioners filed their complaint below on April 14,1975.
In addition, We hold that our award to petitioners of attorney's fees in the amount of Fifty Thousand (P50,00.00) Pesos would only be just and proper.
As We view the position taken by GSIS in this case, petitioners were compelled to litigate over a matter that could have been justly and equitably
settled without having to go to court, particularly, when it is considered that under the Deed of Quitclaim several times mentioned earlier, GSIS freely
accepted from Laigo the benefits of the expenses for labor and material incurred by petitioners in the houses in question, hence, as We have said
above, GSIS had no legal basis for insisting that Article 1729 of the Civil Code does not apply to this case, it being indisputably the owner of said
houses already. Besides, it must be borne in mind that the claims of petitioners are in the nature of claims of the laborers and materialmen themselves.

Accordingly, Article 2208, paragraphs 2, 7 and 11, are applicable hereto. Indeed, the "house owners " or occupants who have not paid either
petitioners or Laigo, or even the GSIS should not be allowed to enrich themselves at the expense of petitioners, and the most feasible way of avoiding
such a result is for GSIS to Pay Petitioners and then pass on to said "house owners" what it would have to pay under this judgment.
IN VIEW OF ALL THE FOREGOING, judgment is hereby rendered affirming the decision appealed from, with the modification that respondent
GSIS shall pay petitioners the total amount of SIX HUNDRED SEVEN THOUSAND THREE HUNDRED TWENTY EIGHT AND 27/100 PESOS
(P607,328.27), plus interest at 8% per annum from April 14, 1975 (which is less than that allowed by Circular No. 416 of the Central Bank dated July
29, 1974) until fully paid, the said sum to correspond separately to petitioners as follows:
Amable C.
Lumanlan

P309,187.76 plus
interest

Pepito Velasco

142,510.00

Apolonio de log
Santos

60,325.51

Felipe Lumbang

82,705.00 and

Ramon Galang

12,600.00

plus Fifty Thousand (P50,000) Pesos as attorney's fees for an of them and the costs.
Barredo (Chairman), Antonio, Concepcion, Jr., Santos and Abad Santos, JJ., concur.

Separate Opinions

AQUINO, J., concurring:


In the affirmance of the decision of the Court of Appeals but dissents as to the resolution of the merits of the case which has not been appealed to this
Court.

Separate Opinions

AQUINO, J., concurring:


In the affirmance of the decision of the Court of Appeals but dissents as to the resolution of the merits of the case which has not been appealed to this
Court.

Separate Opinions
AQUINO, J., concurring:

In the affirmance of the decision of the Court of Appeals but dissents as to the resolution of the merits of the case which has not been appealed to this
Court.
:

/s/ RHODY
(t)

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. 16454

September 29, 1921

GEORGE A. KAUFFMAN, plaintiff-appellee,


vs.
THE PHILIPPINE NATIONAL BANK, defendant-appellant.
Roman J. Lacson for appellant.
Ross and Lawrence for appellee.
STREET, J.:
At the time of the transaction which gave rise to this litigation the plaintiff, George A. Kauffman, was the president of a domestic corporation
engaged chiefly in the exportation of hemp from the Philippine Islands and known as the Philippine Fiber and Produce Company, of which company
the plaintiff apparently held in his own right nearly the entire issue of capital stock. On February 5, 1918, the board of directors of said company,
declared a dividend of P100,000 from its surplus earnings for the year 1917, of which the plaintiff was entitled to the sum of P98,000. This amount
was accordingly placed to his credit on the books of the company, and so remained until in October of the same year when an unsuccessful effort was
made to transmit the whole, or a greater part thereof, to the plaintiff in New York City.
In this connection it appears that on October 9, 1918, George B. Wicks, treasurer of the Philippine Fiber and Produce Company, presented himself in
the exchange department of the Philippine National Bank in Manila and requested that a telegraphic transfer of $45,000 should be made to the
plaintiff in New York City, upon account of the Philippine Fiber and Produce Company. He was informed that the total cost of said transfer, including
exchange and cost of message, would be P90,355.50. Accordingly, Wicks, as treasurer of the Philippine Fiber and Produce Company, thereupon drew
and delivered a check for that amount on the Philippine National Bank; and the same was accepted by the officer selling the exchange in payment of
the transfer in question. As evidence of this transaction a document was made out and delivered to Wicks, which is referred to by the bank's assistant
cashier as its official receipt. This memorandum receipt is in the following language:
October 9th, 1918.
CABLE TRANSFER BOUGHT FROM
PHILIPPINE NATIONAL BANK,
Manila, P.I.
Stamp P18
Foreign
$45,000.

Amount
3/8 %

Rate
P90,337.50

Payable through Philippine National Bank, New York. To G. A. Kauffman, New York. Total P90,355.50. Account of Philippine Fiber and
Produce Company. Sold to Messrs. Philippine Fiber and Produce Company, Manila.
(Sgd.) Y LERMA,
Manager, Foreign Department.
On the same day the Philippine National Bank dispatched to its New York agency a cablegram to the following effect:
Pay George A. Kauffman, New York, account Philippine Fiber Produce Co., $45,000. (Sgd.) PHILIPPINE NATIONAL BANK, Manila.
Upon receiving this telegraphic message, the bank's representative in New York sent a cable message in reply suggesting the advisability of
withholding this money from Kauffman, in view of his reluctance to accept certain bills of the Philippine Fiber and Produce Company. The
Philippine National Bank acquiesced in this and on October 11 dispatched to its New York agency another message to withhold the Kauffman
payment as suggested.

Meanwhile Wicks, the treasurer of the Philippine Fiber and Produce Company, cabled to Kauffman in New York, advising him that $45,000 had been
placed to his credit in the New York agency of the Philippine National Bank; and in response to this advice Kauffman presented himself at the office
of the Philippine National Bank in New York City on October 15, 1918, and demanded the money. By this time, however, the message from the
Philippine National Bank of October 11, directing the withholding of payment had been received in New York, and payment was therefore refused.
In view of these facts, the plaintiff Kauffman instituted the present action in the Court of First Instance of the city of Manila to recover said sum, with
interest and costs; and judgment having been there entered favorably to the plaintiff, the defendant appealed.
Among additional facts pertinent to the case we note the circumstance that at the time of the transaction above-mentioned, the Philippines Fiber and
Produce Company did not have on deposit in the Philippine National Bank money adequate to pay the check for P90,355.50, which was delivered in
payment of the telegraphic order; but the company did have credit to that extent, or more, for overdraft in current account, and the check in question
was charged as an overdraft against the Philippine Fiber and Produce Company and has remained on the books of the bank as an interest-bearing item
in the account of said company.
It is furthermore noteworthy that no evidence has been introduced tending to show failure of consideration with respect to the amount paid for said
telegraphic order. It is true that in the defendant's answer it is suggested that the failure of the bank to pay over the amount of this remittance to the
plaintiff in New York City, pursuant to its agreement, was due to a desire to protect the bank in its relations with the Philippine Fiber and Produce
Company, whose credit was secured at the bank by warehouse receipts on Philippine products; and it is alleged that after the exchange in question
was sold the bank found that it did not have sufficient to warrant payment of the remittance. In view, however, of the failure of the bank to
substantiate these allegations, or to offer any other proof showing failure of consideration, it must be assumed that the obligation of the bank was
supported by adequate consideration.
In this court the defense is mainly, if not exclusively, based upon the proposition that, inasmuch as the plaintiff Kauffman was not a party to the
contract with the bank for the transmission of this credit, no right of action can be vested in him for the breach thereof. "In this situation," we here
quote the words of the appellant's brief, "if there exists a cause of action against the defendant, it would not be in favor of the plaintiff who had
taken no part at all in the transaction nor had entered into any contract with the plaintiff, but in favor of the Philippine Fiber and Produce Company,
the party which contracted in its own name with the defendant."
The question thus placed before us is one purely of law; and at the very threshold of the discussion it can be stated that the provisions of the
Negotiable Instruments Law can come into operation there must be a document in existence of the character described in section 1 of the Law; and
no rights properly speaking arise in respect to said instrument until it is delivered. In the case before us there was an order, it is true, transmitted by
the defendant bank to its New York branch, for the payment of a specified sum of money to George A. Kauffman. But this order was not made
payable "to order or "to bearer," as required in subsection (d) of that Act; and inasmuch as it never left the possession of the bank, or its representative
in New York City, there was no delivery in the sense intended in section 16 of the same Law. In this connection it is unnecessary to point out that the
official receipt delivered by the bank to the purchaser of the telegraphic order, and already set out above, cannot itself be viewed in the light of a
negotiable instrument, although it affords complete proof of the obligation actually assumed by the bank.
Stated in bare simplicity the admitted facts show that the defendant bank for a valuable consideration paid by the Philippine Fiber and Produce
Company agreed on October 9, 1918, to cause a sum of money to be paid to the plaintiff in New York City; and the question is whether the plaintiff
can maintain an action against the bank for the nonperformance of said undertaking. In other words, is the lack of privity with the contract on the part
of the plaintiff fatal to the maintenance of an action by him?
The only express provision of law that has been cited as bearing directly on this question is the second paragraph of article 1257 of the Civil Code;
and unless the present action can be maintained under the provision, the plaintiff admittedly has no case. This provision states an exception to the
more general rule expressed in the first paragraph of the same article to the effect that contracts are productive of effects only between the parties
who execute them; and in harmony with this general rule are numerous decisions of this court (Wolfson vs. Estate of Martinez, 20 Phil., 340; Ibaez
de Aldecoa vs. Hongkong and Shanghai Banking Corporation, 22 Phil., 572, 584; Manila Railroad Co.vs. Compaia Trasatlantica and Atlantic, Gulf
and Pacific Co., 38 Phil., 873, 894.)
The paragraph introducing the exception which we are now to consider is in these words:
Should the contract contain any stipulation in favor of a third person, he may demand its fulfillment, provided he has given notice of his
acceptance to the person bound before the stipulation has been revoked. (Art. 1257, par. 2, Civ. Code.)
In the case of Uy Tam and Uy Yet vs. Leonard (30 Phil., 471), is found an elaborate dissertation upon the history and interpretation of the paragraph
above quoted and so complete is the discussion contained in that opinion that it would be idle for us here to go over the same matter. Suffice it to say
that Justice Trent, speaking for the court in that case, sums up its conclusions upon the conditions governing the right of the person for whose benefit
a contract is made to maintain an action for the breach thereof in the following words:
So, we believe the fairest test, in this jurisdiction at least, whereby to determine whether the interest of a third person in a contract is a
stipulation pour autrui, or merely an incidental interest, is to rely upon the intention of the parties as disclosed by their contract.
If a third person claims an enforcible interest in the contract, the question must be settled by determining whether the contracting parties
desired to tender him such an interest. Did they deliberately insert terms in their agreement with the avowed purpose of conferring a favor

upon such third person? In resolving this question, of course, the ordinary rules of construction and interpretation of writings must be
observed. (Uy Tam and Uy Yet vs. Leonard, supra.)
Further on in the same opinion he adds: "In applying this test to a stipulation pour autrui, it matters not whether the stipulation is in the nature of a
gift or whether there is an obligation owing from the promise to the third person. That no such obligation exists may in some degree assist in
determining whether the parties intended to benefit a third person, whether they stipulated for him." (Uy Tam and Uy Yet vs. Leonard, supra.)
In the light of the conclusion thus stated, the right of the plaintiff to maintain the present action is clear enough; for it is undeniable that the bank's
promise to cause a definite sum of money to be paid to the plaintiff in New York City is a stipulation in his favor within the meaning of the paragraph
above quoted; and the circumstances under which that promise was given disclose an evident intention on the part of the contracting parties that the
plaintiff should have the money upon demand in New York City. The recognition of this unqualified right in the plaintiff to receive the money implies
in our opinion the right in him to maintain an action to recover it; and indeed if the provision in question were not applicable to the facts now before
us, it would be difficult to conceive of a case arising under it.
It will be noted that under the paragraph cited a third person seeking to enforce compliance with a stipulation in his favor must signify his acceptance
before it has been revoked. In this case the plaintiff clearly signified his acceptance to the bank by demanding payment; and although the Philippine
National Bank had already directed its New York agency to withhold payment when this demand was made, the rights of the plaintiff cannot be
considered to as there used, must be understood to imply revocation by the mutual consent of the contracting parties, or at least by direction of the
party purchasing he exchange.
In the course of the argument attention was directed to the case of Legniti vs. Mechanics, etc. Bank (130 N.E. Rep., 597), decided by the Court of
Appeals of the State of New York on March 1, 1921, wherein it is held that, by selling a cable transfer of funds on a foreign country in ordinary
course, a bank incurs a simple contractual obligation, and cannot be considered as holding the money which was paid for the transfer in the character
of a specific trust. Thus, it was said, "Cable transfers, therefore, mean a method of transmitting money by cable wherein the seller engages that he has
the balance at the point on which the payment is ordered and that on receipt of the cable directing the transfer his correspondent at such point will
make payment to the beneficiary described in the cable. All these transaction are matters of purchase and sale create no trust relationship."
As we view it there is nothing in the decision referred to decisive of the question now before us, wish is merely that of the right of the beneficiary to
maintain an action against the bank selling the transfer.
Upon the considerations already stated, we are of the opinion that the right of action exists, and the judgment must be affirmed. It is so ordered, with
costs against the appellant. Interest will be computed as prescribed in section 510 of the Code of Civil Procedure.
Johnson, Araullo, Avancea and Villamor, JJ., concur.

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. L-20853

May 29, 1967

BONIFACIO BROS., INC., ET AL., plaintiffs-appellants,


vs.
ENRIQUE MORA, ET AL., defendants-appellees.
G. Magsaysay for plaintiffs-appellants.
Abad Santos and Pablo for defendant-appellee H. E. Reyes, Inc.
J. P. Santilla and A. D. Hidalgo, Jr. for other defendant-appellee.
CASTRO, J.:
This is an appeal from the decision of the Court of First Instance of Manila, Branch XV, in civil case 48823, affirming the decision of the Municipal
Court of Manila, declaring the H.S. Reyes, Inc. as having a better right than the Bonifacio Bros., Inc. and the Ayala Auto Parts Company, appellants
herein, to the proceeds of motor insurance policy A-0615, in the sum of P2,002.73, issued by the State Bonding & Insurance Co. Inc., and directing
payment of the said amount to the H. Reyes, Inc.
Enrique Mora, owner of Oldsmobile sedan model 1956, bearing plate No. QC- mortgaged the same to the H.S. Reyes, Inc., with the condition that
the former would insure the automobile with the latter as beneficiary. The automobile was thereafter insured on June 23, 1959 with the State Bonding
& Insurance Co., Inc., and motor car insurance policy A-0615 was issued to Enrique Mora, the pertinent provisions of which read:
1. The Company (referring to the State Bonding & Insurance Co., Inc.) will, subject to the Limits of Liability, indemnify the Insured
against loss of or damages to the Motor Vehicle and its accessories and spare parts whilst thereon; (a) by accidental collision or overturning
or collision or overturning consequent upon mechanical breakdown or consequent upon wear and tear,
xxx

xxx

xxx

2. At its own option the Company may pay in cash the amount of the loss or damage or may repair, reinstate, or replace the Motor Vehicle
or any part thereof or its accessories or spare parts. The liability of the Company shall not exceed the value of the parts whichever is the
less. The Insured's estimate of value stated in the schedule will be the maximum amount payable by the Company in respect of any claim
for loss or damage.1wph1.t
xxx

xxx

xxx

4. The Insured may authorize the repair of the Motor Vehicle necessitated by damage for which the Company may be liable under this
Policy provided that: (a) The estimated cost of such repair does not exceed the Authorized Repair Limit, (b) A detailed estimate of the
cost is forwarded to the Company without delay, subject to the condition that "Loss, if any is payable to H.S. Reyes, Inc.," by virtue of the
fact that said Oldsmobile sedan was mortgaged in favor of the said H.S. Reyes, Inc. and that under a clause in said insurance policy, any
loss was made payable to the H.S. Reyes, Inc. as Mortgagee;
xxx

xxx

xxx

During the effectivity of the insurance contract, the car met with an accident. The insurance company then assigned the accident to the Bayne
Adjustment Co. for investigation and appraisal of the damage. Enrique Mora, without the knowledge and consent of the H.S. Reyes, Inc., authorized
the Bonifacio Bros. Inc. to furnish the labor and materials, some of which were supplied by the Ayala Auto Parts Co. For the cost of labor and
materials, Enrique Mora was billed at P2,102.73 through the H.H. Bayne Adjustment Co. The insurance company after claiming a franchise in the
amount of P100, drew a check in the amount of P2,002.73, as proceeds of the insurance policy, payable to the order of Enrique Mora or H.S. Reyes,.
Inc., and entrusted the check to the H.H. Bayne Adjustment Co. for disposition and delivery to the proper party. In the meantime, the car was
delivered to Enrique Mora without the consent of the H.S. Reyes, Inc., and without payment to the Bonifacio Bros. Inc. and the Ayala Auto Parts Co.
of the cost of repairs and materials.
Upon the theory that the insurance proceeds should be paid directly to them, the Bonifacio Bros. Inc. and the Ayala Auto Parts Co. filed on May 8,
1961 a complaint with the Municipal Court of Manila against Enrique Mora and the State Bonding & Insurance Co., Inc. for the collection of the sum
of P2,002.73 The insurance company filed its answer with a counterclaim for interpleader, requiring the Bonifacio Bros. Inc. and the H.S. Reyes, Inc.
to interplead in order to determine who has better right to the insurance proceeds in question. Enrique Mora was declared in default for failure to
appear at the hearing, and evidence against him was received ex parte. However, the counsel for the Bonifacio Bros. Inc., Ayala Auto Parts Co. and

State Bonding & Insurance Co. Inc. submitted a stipulation of facts, on the basis of which are Municipal Court rendered a decision declaring the H.S.
Reyes, Inc. as having a better right to the disputed amount and ordering State Bonding & Insurance Co. Inc. to pay to the H. S. Reyes, Inc. the said
sum of P2,002.73. From this decision, the appellants elevated the case to the Court of First Instance of Manila which the stipulation of facts was
reproduced. On October 19, 1962 the latter court rendered a decision, affirming the decision of the Municipal Court. The Bonifacio Bros. Inc. and the
Ayala Auto Parts Co. moved for reconsideration of the decision, but the trial court denied the motion. Hence, this appeal.
The main issue raised is whether there is privity of contract between the Bonifacio Bros. Inc. and the Ayala Auto Parts Co. on the one hand and the
insurance company on the other. The appellants argue that the insurance company and Enrique Mora are parties to the repair of the car as well as the
towage thereof performed. The authority for this assertion is to be found, it is alleged, in paragraph 4 of the insurance contract which provides that
"the insured may authorize the repair of the Motor Vehicle necessitated by damage for which the company may be liable under the policy provided
that (a) the estimated cost of such repair does not exceed the Authorized Repair Limit, and (b) a detailed estimate of the cost is forwarded to the
company without delay." It is stressed that the H.H. Bayne Adjustment Company's recommendation of payment of the appellants' bill for materials
and repairs for which the latter drew a check for P2,002.73 indicates that Mora and the H.H. Bayne Adjustment Co. acted for and in representation of
the insurance company.
This argument is, in our view, beside the point, because from the undisputed facts and from the pleadings it will be seen that the appellants' alleged
cause of action rests exclusively upon the terms of the insurance contract. The appellants seek to recover the insurance proceeds, and for this purpose,
they rely upon paragraph 4 of the insurance contract document executed by and between the State Bonding & Insurance Company, Inc. and Enrique
Mora. The appellants are not mentioned in the contract as parties thereto nor is there any clause or provision thereof from which we can infer that
there is an obligation on the part of the insurance company to pay the cost of repairs directly to them. It is fundamental that contracts take effect only
between the parties thereto, except in some specific instances provided by law where the contract contains some stipulation in favor of a third
person.1 Such stipulation is known as stipulation pour autrui or a provision in favor of a third person not a pay to the contract. Under this doctrine, a
third person is allowed to avail himself of a benefit granted to him by the terms of the contract, provided that the contracting parties have clearly and
deliberately conferred a favor upon such person.2Consequently, a third person not a party to the contract has no action against the parties thereto, and
cannot generally demand the enforcement of the same. 3 The question of whether a third person has an enforcible interest in a contract, must be settled
by determining whether the contracting parties intended to tender him such an interest by deliberately inserting terms in their agreement with the
avowed purpose of conferring a favor upon such third person. In this connection, this Court has laid down the rule that the fairest test to determine
whether the interest of a third person in a contract is a stipulation pour autrui or merely an incidental interest, is to rely upon the intention of the
parties as disclosed by their contract.4 In the instant case the insurance contract does not contain any words or clauses to disclose an intent to give any
benefit to any repairmen or materialmen in case of repair of the car in question. The parties to the insurance contract omitted such stipulation, which
is a circumstance that supports the said conclusion. On the other hand, the "loss payable" clause of the insurance policy stipulates that "Loss, if any, is
payable to H.S. Reyes, Inc." indicating that it was only the H.S. Reyes, Inc. which they intended to benefit.
We likewise observe from the brief of the State Bonding & Insurance Company that it has vehemently opposed the assertion or pretension of the
appellants that they are privy to the contract. If it were the intention of the insurance company to make itself liable to the repair shop or materialmen,
it could have easily inserted in the contract a stipulation to that effect. To hold now that the original parties to the insurance contract intended to
confer upon the appellants the benefit claimed by them would require us to ignore the indespensable requisite that a stipulation pour autrui must be
clearly expressed by the parties, which we cannot do.
As regards paragraph 4 of the insurance contract, a perusal thereof would show that instead of establishing privity between the appellants and the
insurance company, such stipulation merely establishes the procedure that the insured has to follow in order to be entitled to indemnity for repair.
This paragraph therefore should not be construed as bringing into existence in favor of the appellants a right of action against the insurance company
as such intention can never be inferred therefrom.
Another cogent reason for not recognizing a right of action by the appellants against the insurance company is that "a policy of insurance is a distinct
and independent contract between the insured and insurer, and third persons have no right either in a court of equity, or in a court of law, to the
proceeds of it, unless there be some contract of trust, expressed or implied between the insured and third person." 5 In this case, no contract of trust,
expressed or implied exists. We, therefore, agree with the trial court that no cause of action exists in favor of the appellants in so far as the proceeds
of insurance are concerned. The appellants' claim, if at all, is merely equitable in nature and must be made effective through Enrique Mora who
entered into a contract with the Bonifacio Bros. Inc. This conclusion is deducible not only from the principle governing the operation and effect of
insurance contracts in general, but is clearly covered by the express provisions of section 50 of the Insurance Act which read:
The insurance shall be applied exclusively to the proper interests of the person in whose name it is made unless otherwise specified in the
policy.
The policy in question has been so framed that "Loss, if any, is payable to H.S. Reyes, Inc.," which unmistakably shows the intention of the parties.
The final contention of the appellants is that the right of the H.S. Reyes, Inc. to the insurance proceeds arises only if there was loss and not where
there is mere damage as in the instant case. Suffice it to say that any attempt to draw a distinction between "loss" and "damage" is uncalled for,
because the word "loss" in insurance law embraces injury or damage.
Loss in insurance, defined. The injury or damage sustained by the insured in consequence of the happening of one or more of the
accidents or misfortune against which the insurer, in consideration of the premium, has undertaken to indemnify the insured. (1 Bouv. Ins.
No. 1215; Black's Law Dictionary; Cyclopedic Law Dictionary, cited in Martin's Phil. Commercial Laws, Vol. 1, 1961 ed. p. 608).

Indeed, according to sec. 120 of the Insurance Act, a loss may be either total or partial.
Accordingly, the judgment appealed from is hereby affirmed, at appellants' cost.
Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur.

Republic of the Philippines


SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-27696 September 30, 1977
MIGUEL FLORENTINO, ROSARIO ENCARNACION de FLORENTINO, MANUEL ARCE, JOSE FLORENTINO, VICTORINO
FLORENTINO, ANTONIO FLORENTINO, REMEDION ENCARNACION and SEVERINA ENCARNACION, petitioners-appellants,
vs.
SALVADOR ENCARNACION, SR., SALVADOR ENCARNACION, JR., and ANGEL ENCARNACION, oppositors to encumbrancepetitioners-appelles.
Jose F. Singson and Miguel Florentino for appellants.
Pedro Singson for appellees.

GUERRERO, J.:
Appeal from the decision of the Court of First Instance of Ilocos Sur, acting as a land registration court, in Land Registration case No. N-310.
On May 22, 1964, the petitioners-appellants Miguel Florentino, Remedios Encarnacion de Florentino, Manuel Arce, Jose Florentino, Victorino
Florentino, Antonio Florentino, Remedior, Encarnacion and Severina Encamacion, and the Petitiners-appellees Salvador Encamacion, Sr., Salvador
Encamacion, Jr. and Angel Encarnacion filed with the Court of First Instance of ilocos Sur an application for the registration under Act 496 of a
parcel of agricultural land located at Barrio Lubong Dacquel Cabugao Ilocos Sur.
The application alleged among other things that the applicants are the common and pro-indiviso owners in fee simple of the said land with the
improvements existing thereon; that to the best of their knowledge and belief, there is no mortgage, lien or encumbrance of any kind whatever
affecting said land, nor any other person having any estate or interest thereon, legal or equitable, remainder, reservation or in expectancy; that said
applicants had acquired the aforesaid land thru and by inheritance from their predecessors in interest, lately from their aunt, Doa Encarnacion
Florentino who died in Vigan, Ilocos Sur in 1941, and for which the said land was adjudicated to them by virtue of the deed of extrajudicial partition
dated August 24, 1947; that applicants Salvador Encarnacion, Jr. and Angel Encarnacion acquired their respective shares of the land thru purchase
from the original heirs, Jesus, Caridad, Lourdes and Dolores surnamed Singson one hand and from Asuncion Florentino on the other.
After due notice and publication, the Court set the application for hearing. No Opposition whatsoever was filed except that of the Director of Lands
which was later withdrawn, thereby leaving the option unopposed. Thereupon, an order of general default was withdrawn against the whole world.
Upon application of the asets the Clerk Of court was commission will and to have the evidence of the agents and or to submit the for the Court's for
resolution.
The crucial point in controversy in this registration case is centered in the stipulation marked Exhibit O-1 embodied in the deed of extrajudicial
partition (Exhibit O) dated August 24, 1947 which states:
Los productos de esta parcela de terreno situada en el Barrio Lubong Dacquel Cabugao Ilocos Sur, se destination para costear los
tos de procesio de la Tercera Caida celebration y sermon de Siete Palbras Seis Estaciones de Cuaresma, procesion del Nino Jesus,
tilaracion y conservacion de los mismos, construction le union camarin en conde se depositan los carros mesas y otras cosas que
seven para lot leiracion de Siete Palabras y otras cosas mas Lo que sobra de lihos productos despues de descontados todos los
gastos se repartira nosotros los herederos.
In his testimony during the trial, applicant Miguel Florentino asked the court to include the said stipulation (Exhibit O-1) as an encumbrance on the
land sought to be registered, and cause the entry of the same on the face of the title that will finally be issued. Opposing its entry on the title as an
encumbrance, petitionersappellee Salvador Encamacion, Sr., Salvador Encarnaciori, Jr. and Angel Encarriacion filed on October 3, 1966 a
manifestation seeking to withdraw their application on their respective shares of the land sought to be registered. The withdrawal was opposed by the
petitioners-appellants.
The Court after hearing the motion for withdrawal and the opposition thereto issued on November 17, 1966 an order and for the purpose of
ascertaining and implifying the issues therein stated that all the applicants admit the truth of the following;

(1) That just after the death of Encarnacion FIorentino in 1941 up to last year and as had always been the case since time
immomorial the products of the land made subiect matter of this land has been used in answering for the payment for the
religious functions specified in the Deed Extrajudicial Partition belated August 24, 1947:
(2) That this arrangement about the products answering for the comment of experisence for religions functions as mentioned
above was not registered in the office of the Register of Deeds under Act No 3344, Act 496 or and, other system of registration;
(3) That all the herein applicants know of the existence of his arrangement as specified in the Deed of Extra judicial Partition of A
adjust 24, 1947;
(4) That the Deed of Extrajudicial Partition of August 24, 194-, not signed by Angel Encarnacion or Salvador Encarnacion, Jr,.
The court denied the petitioners-appellee motion to withdraw for lack of merit, and rendered a decision under date of November
29, 1966 confirming the title of the property in favor of the f appoints with their respective shares as follows:
Spouses Miguel Florentino and Rosario Encarnacion de Florentino, both of legal age, Filipinos, and residents of Vigan, Ilocos
Sur, consisting of an undivided 31/297 and 8.25/297 portions, respectively;
Manuel Arce, of legal age, Filipino, married to Remedios Pichay and resident of Vigan, Ilocos Sur, consisting of an undivided
66/297 portion;
Salvador Encarnacion, Jr., of legal age, Filipino, married to Angelita Nagar and resident of Vigan, Ilocos Sur, consisting of an
undivided 66/297; Jose Florentino, of legal age, Filipino, married to Salvacion Florendo and resident of 16 South Ninth Diliman,
Quezon City, consisting of an undivided 33/297 portion;
Angel Encarnacion, of legal age, Filipino, single and resident of 1514 Milagros St., Sta. Cruz, Manila, consisting of an undivided
33/297 portion;
Victorino Florentino, of legal age, Filipino, married to Mercedes L. Encarnacion and resident of Vigan, Ilocos Sur, consisting of
an undivided 17.5/297 portion;
Antonio Florentino, of legal age, Filipino, single and resident of Vigan, Ilocos Sur, consisting of an undivided 17.5/297;
Salvador Encarnacion, Sr., of legal age, Filipino, married to Dolores Singson, consisting of an undivided 8.25/297;
Remedios Encarnacion, of legal age, Filipino, single and resident of Vigan, Ilocos Sur, consisting of an undivided 8.25/297
portion; and
Severina Encarnacion, of legal age, Filipino, single and resident of Vigan, Ilocos Sur, consisting of 8.25/297 undivided portion.
The court, after ruling "that the contention of the proponents of encumbrance is without merit bemuse, taking the self-imposed arrangement in favor
of the Church as a pure and simple donation, the same is void for the that the donee here has riot accepted the donation (Art. 745, Civil Code) and for
the further that, in the case of Salvador Encarnacion, Jr. and Angel Encarnacion, they had made no oral or written grant at all (Art. 748) as in fact they
are even opposed to it," 1 held in the Positive portion, as follows:
In view of all these, therefore, and insofar as the question of encumbrance is concerned, let the religious expenses as herein
specified be made and entered on the undivided shares, interests and participations of all the applicants in this case, except that of
Salvador Encarnacion, Sr., Salvador Encarnacion, Jr. and Angel Encarnacion.
On January 3, 1967, petitioners-appellants filed their Reply to the Opposition reiterating their previous arguments, and also attacking the junction of
the registration court to pass upon the validity or invalidity of the agreement Exhibit O-1, alleging that such is specified only in an ordinary action
and not proper in a land registration proceeding.
The Motion for Reconsideration and of New Trial was denied on January 14, 1967 for lack of merit, but the court modified its earlier decision of
November 29, 1966, to wit:
This Court believes, and so holds, that the contention of the movants (proponents of the encumbrance) is without merit because
the arrangement, stipulation or grant as embodied in Exhibit O (Escritura de Particion Extrajudicial), by whatever name it may be
(called, whether donation, usufruct or ellemosynary gift, can be revoked as in fact the oppositors Salvador Encarnacion, Sr., who
is the only one of the three oppositors who is a party to said Exhibit O (the two others, Salvador Encarnacion, Jr. and Angel
Encarnacion no parties to it) did revoke it as shown by acts accompanying his refusal to have the same appear as an encumbrance
on the title to be issued. In fact, legally, the same can also be ignored or discararded by will the three oppositors. The reasons are:
First, if the said stipulation is pour bodies in Exhibit O-1 is to be viewed as a stipulation pour autrui the same cannot now be

enforced because the Church in whose favor it was made has not communicated its acceptance to the oppositors before the latter
revoked it. Says the 2nd par. of Art. 1311 of the New Civil Code:
"If a contract should contain some stipulation in favor of a third person he may demand its fulfillment provided he communicated
his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The
contracting parties must have clearly and deliberately conferred a favor upon a third person." No evide nee has ever been
submitted by the Church to show its clear acceptance of the grant before its revocation by the oppositor Salvador Encarnacion, Sr.
(or of the two other oppositors, Salvador Encarnacion, Jr. and Angel Encarnacion, who didn't even make any giant, in the first
place), and so not even the movants who have officiously taken into themselves the right to enforce the grant cannot now
maintain any action to compel compliance with it. (Bank of the P.I. v. Concepcion y Hijos, Inc., 53 Phil. 806). Second, the Church
in whose favor the stipulation or grant had apparently been made ought to be the proper party to compel the herein three
oppositors to abide with the stipulation. But it has not made any appearance nor registered its opposition to the application even
before Oct. 18, 1965 when an order of general default was issued. Third, the movants are not, in the contemplation of Section 2,
Rule 3 of the Rules of Court, the real party in interest to raise the present issue; and Fourth, the movants having once alleged in
their application for registration that the land is without encumbrance (par. 3 thereof), cannot now be alloted by the rules of
pleading to contradict said allegation of theirs. (McDaniel v. Apacible, 44 Phil. 248)
SO ORDERED. 2
After Motions for Reconsideration were denied by the court, the petitioners- appellants appealed directly to this Court pursuant to Rule 4 1, Rules of
Court, raising the following assign of error:
I. The lower court erred in concluding that the stipulation embodied in Exhibit O on religious expenses is just an arrangement
stipulation, or grant revocable at the unilateral option of the coowners.
II. The lower court erred in finding and concluding that the encumbrance or religious expenses embodied in Exhibit O, the
extrajudicial partition between the co-heirs, is binding only on the appoints Miguel Florentino, Rosario Encarnacion de
Florentino, Manuel Arce, Jose Florentino, Antonio Florentino, Victorino Florentino, Remedios Encarnacion and Severina
Encarnacion.
III. The lower court as a registration court erred in passing upon the merits of the encumbrance (Exhibit O-1) as the sanie was
never put to issue and as the question involved is an adjudication of rights of the parties.
We find the first and second assignments of error impressed with merit and, therefore, tenable. The stipulation embodied in Exhibit O-1 on religious
expenses is not revocable at the unilateral option of the co-owners and neither is it binding only on the petitioners-appellants Miguel Florentino,
Rosario Encarnacion de Florentino Manuel Arce, Jose Florentino, Victorino Florentino Antonio Florentino, Remedios Encarnacion and Severina E It
is also binding on the oppositors-appellees Angel Encarnacion,
The stipulation (Exhibit 411) in pan of an extrajudicial partition (Exh. O) duly agreed and signed by the parties, hence the sanie must bind the
contracting parties thereto and its validity or compliance cannot be left to the with of one of them (Art. 1308, N.C.C.). Under Art 1311 of the New
Civil Code, this stipulation takes effect between the parties, their assign and heirs. The article provides:
Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in cases where the rights and
obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The heir is not
liable beyond the value of the property he received from the decedent.
If a contract should contain a stipulation in favor of a third person, he may demand its fulfillment provided he communicated his
acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting
parties must have clearly and deliberately conferred a favor upon a third person.
The second paragraph of Article 1311 above-quoted states the law on stipulations pour autrui. Consent the nature and purpose of the motion (Exh. O1), We hold that said stipulation is a station pour autrui. A stipulation pour autruiis a stipulation in favor of a third person conferring a clear and
deliberate favor upon him, and which stipulation is merely a part of a contract entered into by the parties, neither of whom acted as agent of the third
person, and such third person and demand its fulfillment provoked that he communicates his to the obligor before it is revoked. 3 The requisites are:
(1) that the stipulation in favor of a third person should be a part, not the whole, of the contract; (2) that the favorable stipulation should not be
conditioned or compensated by any kind of obligation whatever; and (3) neither of the contracting bears the legal represented or authorization of third
person.
To constitute a valid stipulation pour autrui it must be the purpose and intent of the stipulating parties to benefit the third and it is not sufficient that
the third person may be incidentally benefited by the stipulation. The fairest test to determine whether the interest of third person in a contract is a
stipulation pour autrui or merely an incidental interest, is to rely upon the intention of the parties as disclosed by their contract. In applying this test,
it meters not whether the stipulation is in the nature of a gift or whether there is an obligation owing from the promisee to the third person. That no
such obsorption exists may in some degree assist in determining whether the parties intended to benefit a third person. 4

In the case at bar, the determining point is whether the co-owners intended to benefit the Church when in their extrajudicial partition of several
parcels of land inherited by them from Doa Encarnacion Florendo they agreed that with respect to the land situated in Barrio Lubong Dacquel
Cabugao Ilocos Sur, the fruits thereof shall serve to defray the religious expenses specified in Exhibit O-1. The evidence on record shows that the true
intent of the parties is to confer a direct and material benefit upon the Church. The fruits of the aforesaid land were used thenceforth to defray the
expenses of the Church in the preparation and celebration of the Holy Week, an annual Church function. Suffice it to say that were it not for Exhibit
O-1, the Church would have necessarily expended for this religious occasion, the annual relisgious procession during the Holy Wock and also for the
repair and preservation of all the statutes, for the celebration of the Seven Last Word.
We find that the trial court erred in holding that the stipulation, arrangement or grant (Exhibit O-1) is revocable at the option of the co-owners. While
a stipulation in favor of a third person has no binding effect in itself before its acceptance by the party favored, the law does not provide when the
third person must make his acceptance. As a rule, there is no time at such third person has after the time until the stipulation is revoked. Here, We find
that the Church accepted the stipulation in its favor before it is sought to be revoked by some of the co-owners, namely the petitioners-appellants
herein. It is not disputed that from the time of the with of Doa Encarnacion Florentino in 1941, as had always been the case since time immemorial
up to a year before the firing of their application in May 1964, the Church had been enjoying the benefits of the stipulation. The enjoyment of
benefits flowing therefrom for almost seventeen years without question from any quarters can only be construed as an implied acceptance by the
Church of the stipulation pour autrui before its revocation.
The acceptance does not have to be in any particular form, even when the stipulation is for the third person an act of liberality or
generosity on the part of the promisor or promise. 5
It need not be made expressly and formally. Notification of acceptance, other than such as is involved in the making of demand,
is unnecessary. 6
A trust constituted between two contracting parties for the benefit of a third person is not subject to the rules governing donation
of real property. The beneficiary of a trust may demand performance of the obligation without having formally accepted the
benefit of the this in a public document, upon mere acquiescence in the formation of the trust and acceptance under the second
paragraph of Art. 1257 of the Civil Code. 7
Hence, the stipulation (Exhibit O-1) cannot now be revoked by any of the stipulators at their own option. This must be so because of Article 1257,
Civil Code and the cardinal rule of contracts that it has the force of law between the parties. 8 Thus, this Court ruled in Garcia v. Rita Legarda,
Inc., 9 "Article 1309 is a virtual reproduction of Article 1256 of the Civil Code, so phrased to emphasize that the contract must bind both parties,
based on the principles (1) that obligation arising from contracts have the force of law between the contracting parties; and (2) that there must be
mutuality between the parties based on their principle equality, to which is repugnant to have one party bound by the contract leaving the other free
therefrom."
Consequently, Salvador Encarnacion, Sr. must bear with Exhibit O-1, being a signatory to the Deed of Extrajudicial Partition embodying such
beneficial stipualtion. Likewise, with regards to Salvador, Jr. and Angel Encarnacion, they too are bound to the agreement. Being subsequent
purchasers, they are privies or successors in interest; it is axiomatic that contracts are enforceable against the parties and their privies. 10 Furthermore,
they are shown to have given their conformity to such agreement when they kept their peace in 1962 and 1963, having already bought their
respective shares of the subject land but did not question the enforcement of the agreement as against them. They are also shown to have knowledge
of Exhibit O-1 as they had admitted in a Deed of Real Mortgage executed by them on March 8, 1962 involving their shares of the subject land that,
"This parcel of land is encumbered as evidenced by the document No. 420, page 94, Book 1, series 1947, executed by the heirs of the late
Encarnacion Florentino, on August 26, 1947, before M. Francisco Ante, Notwy Public of Vigan, Ilocos Sur, in its page 10 of the said document of
partition, and also by other documents."
The annotation of Exhibit O-1 on the face of the title to be issued in this case is merely a guarantee of the continued enforcement and fulfillment of
the beneficial stipulation. It is error for the lower court to rule that the petitioners-appellants are not the real parties in interest, but the Church. That
one of the parties to a contract pour autrui is entitled to bring an action for its enforcement or to prevent its breach is too clear to need any extensive
discussion. Upon the other hand, that the contract involved contained a stipulation pour autrui amplifies this settled rule only in the sense that the
third person for whose benefit the contract was entered into may also demand its fulfillment provoked he had communicated his acceptance thereof to
the obligor before the stipulation in his favor is revoked. 11
Petitioners-appellants' third assignment of error is not well-taken. Firstly, the otherwise rigid rule that the jurisdiction of the Land Registration Court,
being special and limited in character and proceedings thereon summary in nature, does not extend to cases involving issues properly litigable in
other independent suits or ordinary civil actions, has time and again been relaxed in special and exceptional circumstances. (See Government of the
Phil. Islands v. Serafica, 61 Phil. 93 (1934); Caoibes v. Sison, 102 Phil. 19 (1957); Luna v. Santos, 102 Phil. 588 (1957); Cruz v. Tan, 93 Phil. 348
(1953); Gurbax Singh Pabla & Co. v. Reyes, 92 Phil. 177 (1952). From these cases, it may be gleaned and gathered that the peculiarity of the
exceptions is based not only on the fact that Land Registration Courts are likewise the same Courts of First Instance, but also the following premises
(1) Mutual consent of the parties or their acquired in submitting the at aforesaid determination by the court in the registration; (2) Full opportunity
given to the parties in the presentation of their respective skies of the issues and of the evidence in support thereto; (3) Consideration by the court that
the evidence already of record is sufficient and adequate for rendering a decision upon these issues. 12 In the case at bar, the records clearly show that
the second and third premism enumerated abow are fully mt. With regards to first premise, the petioners-appellants cannot claim that the issues anent
Exhibit O-1 were not put in issue because this is contrary to their stand before the lower court where they took the initial step in praying for the
court's determination of the merits of Exhibit O-1 as an encumbrance to be annotated on the title to be issued by such court. On the other hand, the
petitioners-appellees who had the right to invoke the limited jurisdiction of the registration court failed to do so but met the issues head-on.

Secondly, for this very special reason, We win uphold the actuation of the lower court in determining the conflicting interests of the parties in the
registration proceedings before it. This case has been languishing in our courts for thirteen tong years. To require that it be remanded to the lower
court for another proceeding under its general jurisdiction is not in consonance with our avowed policy of speedy justice. It would not be amiss to
note that if this case be remanded to the lower court, and should appeal again be made, the name issues will once more be raised before us hence, Our
decision to resolve at once the issues in the instant petition.
IN VIEW OF THE FOREGOING, the decision of the Court of First Instance of Ilocos Sur in Land Registration Case No. N-310 is affirmed but
modified to allow the annotation of Exhibit O-1 as an encumbrance on the face of the title to be finally issued in favor of all the applications (herein
appellants and herein appellees) in the registration proceedings below.
No pronouncement as to cost.
SO ORDERED.
Teehankee (Chairman), Muoz Palma, Fernandez, JJ., concur.

Republic of the Philippines


SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 74521 November 11, 1986
BANK OF AMERICA NT & SA, petitioner,
vs.
THE HON. FIRST CIVIL CASES DIVISION, INTERMEDIATE APPELLATE COURT and AIR CARGO AND TRAVEL
CORPORATION, respondents.
Agcaoili & Associates for petitioner.
Marcelo P. Villanuea for respondents.

MELENCIO-HERRERA, J.:
As the Petition and the Comment submitted by private respondent Air Cargo and Travel Corporation (ACTC) have sufficiently argued the legal
question involved in this case, the Court has resolved to give due course to the Petition, with private respondent's Comment being its Answer, and to
consider this case submitted for decision.
The basic relevant facts have been stated by respondent Appellate Court as follows:
Shorn of non-essentials, the facts are: Plaintiff Air Cargo and Travel Corporation is the owner of Account Number 19842-01-2
with defendant Bank of America. Defendant Toshiyuki Minami, President of plaintiff corporation in Japan, is the owner of
Account Number 24506-01-7 with defendant Bank.
On March 10, 1981, the Bank received a tested telex advise from Kyowa Bank of Japan stating,
ADVISE PAY USDLS 23,595. TO YOUR A/C NBR 24506-01-7 OF A. C. TRAVEL CORPORATION MR. TOSHIYUKO
MINAMI.
and the Bank Credited the amount of US$23,595.00 to Account Number 24506-07-1 (should be 24506-01-7) owned, as aforesaid,
by Minami.
On March 12, 1981, Minami withdrew the sum of P180,000.00 the equivalent in Philippine Pesos of the sum of US$23,595.00
from the Bank on his Account Number 24506-07-1 (should be 24506-01-7)
It may be explained that the "tested" telex advice is a message signed in "code". Evidently, there was a previous contractual agreement between
Kyowa Bank of Japan (KYOWA) and Petitioner (BANKAMERICA) that, from time to time, KYOWA can ask BANKAMERICA to pay amounts to
a third party (beneficiary) with BANKAMERICA afterwards billing KYOWA the indicated amount given to the beneficiary. To assure itself that an
Order received from KYOWA really comes from KYOWA, it is usually agreed that KYOWA's signature will be in accordance with a confidential
code.
According to ACTC in its Comment, in the early part of 1981, it was Tokyo Tourist Corporation in Japan which applied with Kyowa Bank, Ltd. also
based in Tokyo, Japan, for telegraphic transfer of the sum of US$23,595.00 payable to ACTC's account with BANKAMERICA, Manila.
When the tested telex was received on May 10, 1981, employees of BANKAMERICA noted its patent ambiguity. Notwithstanding, on the following
day, BANKAMERICA credited the amount of US$23,595.00 to the account of Minami. ACTC claimed that the amount should have been credited to
its account and demanded restitution, but BANKAMERICA refused.
On February 18, 1982, ACTC filed suit for damages against BANKAMERICA and Minami before the Trial Court in Pasig for the failure of
BANKAMERICA to restitute. Minami was declared in default. Thereafter, judgment was rendered with the following dispositive part:
IN VIEW OF THE FOREGOING CONSIDERATIONS, the Court upon a judicious and fair assessment of the testimonial and
documentary evidences submitted by the parties is of the opinion and so holds that defendant Bank and defendant Minami must
pay plaintiff, jointly and severally the following.

1. The sum of US$23,595.00 or in Philippine Currency at the current guiding rate of exchange which is P14.00 to the dollar, as
and by way of actual damages with interest at the rate of twelve (12%) per cent per annum from the filing of the complaint until
fully paid;
2. The sum of P50,000.00 as temperate and exemplary damages;
3. The sum of P10,000.00 as attorney's fees;;
4. The costs of this suit.
SO ORDERED.
Upon appeal taken by BANKAMERICA, Respondent Court "affirmed in toto, " except that the dollar-peso rate of ex-change would be that "at the
time of payment." Said respondent Court:
We must say that the Bank personnel were in fact confused or in doubts as to the real payee.
The Senior Clerk who initially received the tested telex had called up Mr. Colegado, Mr. Ichiban, Miss Mayagama and Atty.
Villanueva, all of plaintiff-appellee, but he received "no answer."(Exh. 3; pp. 9-10, t.s.n., Dec. 2, 1982).
Thereupon, the processor checked the alphabetical listings and he saw that the payee, Account Number 24506-01-7, matched the
name appearing in the tested telex advise (p. 10, t.s.n., Dec. 2, 1981).
The gross negligence then of appellant Bank may be sum (sic) up as follows; The words "A.C. TRAVEL CORPORATION MR.
TOSHIYUKO MINAMI" engendered or cast doubt
on the part of the Senior Clerk as to the real payee despite the "A.C. NBR 24506-01-7" and
should have consulted higher officials of plaintiff before giving the advise to the processor who sent the same to the computer
center for ultimate processing (p. 11, Appellant's Brief).
The processor verified that Account Number 24506-01-7 belonged to TOSHIYUKO MINAMI' only and not to "A.C. TRAVEL
CORPORATION MR. TOSHIYUKO MINAMI" and this circumstance should have moved the processor to be more prudent and
to consult higher officials instead of sending the advise to the computer center for processing or crediting the remittance to the
account of Toshiyuko Minami, (Emphasis supplied)
We are constrained to reverse.
It is our considered opinion that, in the tested telex, considered either as a patent ambiguity or as a latent ambiguity, the beneficiary is Minami. The
mention of Account No. 24506-01-7, as well as the name of Minami, has to be given more weight than the mention of the name of ACTC.
BANKAMERICA could not have very well disregarded that account number. It could also be that the mention of ACTC's name was a further
identification of Minami, to prevent payment to a possible another "Toshiyuko Minami" who may not be connected with ACTC. On the other hand, it
should be difficult to concede that, in the tested telex, Account No. 24506-01-7 was erroneously written and should be substituted by Account No.
19842-01-2 in the name of ACTC.
In Vargas Plow Factory, Inc. vs. Central Bank, it was held that "the opening of a letter of credit in favor of the exporter becomes ultimately but the
result of a stipulation pour autrui" (27 SCRA 84 [1969]). Similarly, when KYOWA asked BANK-AMERICA to pay an amount to a beneficiary
(either ACTC or Minami), the contract was between KYOWA and BANK-AMERICA and it had a stipulation pour autrui.
It should be recalled that the tested telex originated from KYOWA at the behest of Tokyo Tourist Corporation with whom ACTC had business
dealings. Minami, on the other hand, was the liaison officer of ACTC in Japan. As the entity responsible for the tested telex was Tokyo Tourist
Corporation, it can reasonably be concluded that if it had intended that the US$23,595.00 should be credited to ACTC, upon learning that the amount
was credited to Minami, it should have gone, together with the representatives of ACTC, in protest to KYOWA and lodged a protest. Since that was
not done, it could well be that Tokyo Tourist Corporation had really intended its remittance to be credited to Minami. The identity of the beneficiary
should be in accordance with the identification made by KYOWA, and ACTC cannot question that identification as it is not a party to the
arrangement between KYOWA and BANKAMERICA (see Manila Railroad Co. vs. Compaia Trasatlantica, 38 Phil. 875 [1918]).
WHEREFORE, the Decision of Respondent Court, in its case AC-G.R. CV No. 03985, is hereby reversed in so far as Bank of America, NT & SA is
concerned.Without pronouncement as to costs.
SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-40234 December 14, 1987
MARIMPERIO COMPAIA NAVIERA, S.A., petitioner,
vs.
COURT OF APPEALS and UNION IMPORT & EXPORT CORPORATION and PHILIPPINES TRADERS CORPORATION, respondents.

PARAS, J.:
This is a petition for certiorari under Section 1, Rule 65 of the Rules of Court seeking the annulment and setting aside of the decision of the Court of
Appeals * and promulgated on September 2, 1974 in CA-G.R. No. 48521-R entitled "Union Import and Export Corporation, et al., PlaintiffsAppellees v. Marimperio Compaia Naviera, S.A., Defendant-Appellant", ordering petitioner to pay respondent the total sum of US $265,482.72 plus
attorney's fees of US$100,000.00 and (b) the resolution of the said Court of Appeals in the same case, dated February 17, 1975 fixing the amount of
attorney, s fees to Pl00,000.00 instead of $100,000.00 as erroneously stated in the decision but denying petitioner's motion for reconsideration and/or
new trial.
The dispositive portion of the decision sought to be annulled (Rollo, p. 215) reads as follows:
For all the foregoing, and in accordance therewith, let judgment be entered (a) affirming the decision appealed from insofar as it
directs the defendant-appellant: (1) to pay plaintiffs the sum of US $22,500.00 representing the remittance of plaintiffs to said
defendant for the first 15-day hire of the vessel "SS PAXOI" including overtime and an overpayment of US $254.00; (2) to pay
plaintiffs the sum of US $16,000.00, corresponding to the remittance of plaintiffs to defendant for the second 15-day hire of the
aforesaid vessel; (3) to pay plaintiffs the sum of US $6,982.72, representing the cost of bunker oil, survey and watering of the
said vessel; (4) to pay plaintiffs the sum of US $100,000.00 as and for attorney's fees; and, (b) reversing the portion granting
commission to the intervenor-appellee and hereby dismissing the complaint-in-intervention. The order of the court a quo denying
the plaintiffs' Motion for Partial Reconsideration, is likewise, affirmed, without any special pronouncement as to costs.
The facts of the case as gathered from the amended decision of the lower court (Amended Record on Appeal, p. 352), are as follows:
In 1964 Philippine Traders Corporation and Union Import and Export Corporation entered into a joint business venture for the purchase of copra
from Indonesia for sale in Europe. James Liu President and General Manager of the Union took charge of the European market and the chartering of
a vessel to take the copra to Europe. Peter Yap of Philippine on the other hand, found one P.T. Karkam in Dumai Sumatra who had around 4,000 tons
of copra for sale. Exequiel Toeg of Interocean was commissioned to look for a vessel and he found the vessel "SS Paxoi" of Marimperio available.
Philippine and Union authorized Toeg to negotiate for its charter but with instructions to keep confidential the fact that they are the real charterers.
Consequently on March 21, 1965, in London England, a "Uniform Time Charter" for the hire of vessel "Paxoi" was entered into by the owner,
Marimperio Compania Naviera, S.A. through its agents N. & J. Vlassopulos Ltd. and Matthews Wrightson, Burbridge, Ltd. to be referred to simply
as Matthews, representing Interocean Shipping Corporation, which was made to appear as charterer, although it merely acted in behalf of the real
charterers, private respondents herein.
The pertinent provisions or clauses of the Charter Party read:
1. The owners let, and the Charterers hire the Vessel for a period of 1 (one) trip via safe port or ports Hong Kong, Philippine
Islands and/or INDONESIA from the time the Vessel is delivered and placed at the disposal of the Charterers on sailing
HSINKANG ... .
4. The Charterers are to provide and pay for oil-fuel, water for boilers, port charges, pilotages ... .
6. The Charterers to pay as hire s.21 (Twenty-one Shillings per deadweights ton per 30 days or pro rata commencing in
accordance with Clause 1 until her redelivery to the owners.
Payment of hire to be made in cash as per Clause 40 without discount, every 15 days in advance.

In default of payment of the Owners to have the right of withdrawing the vessel from the services of the Charterers, without
noting any protest and without interference by any court or any formality whatsoever and without prejudice the Owners may
otherwise have on the Charterers under the Charter.
7. The Vessel to be redelivered on the expiration of the Charter in the same good order as when delivered to the Charterers (fair
wear and tear expected) in the Charterer's option in ANTWERP HAMBURG RANGE.
20. The Charterers to have the option of subletting the Vessel, giving due notice to the Owners, but the original Charterers always
to remain responsible to the Owners for due performance of the Charter.
29. Export and/or import permits for Charterers'cargo to the Charterers'risk and expense. Charterers to obtain and be responsible
for all the necessary permits to enter and/or trade in and out of all ports during the currency of the Charter at their risk and
expense. ...
33. Charterers to pay as overtime, bonus and premiums to Master, Officers and crew, the sum of 200 (Two Hundred Pounds) per
month to be paid together with hire.
37. Bunkers on delivery as on board. Bunkers on redelivery maximum 110 tons. Prices of bunkers at 107' per long ton at both
ends.
38. Upon sailing from each loading port, Master to cable SEASHIPS MANILA advising the quantity loaded and the time of
completion.
40. The hire shall be payable in external sterling or at Charterers' option in U.S. dollars in London; - Williams Deacon's
Vlassopulos Ltd., Account No. 861769.
In view of the aforesaid Charter, on March 30, 1965 plaintiff Charterer cabled a firm offer to P.T. Karkam to buy the 4,000 tons of copra for U.S.
$180.00 per ton, the same to be loaded either in April or May, 1965. The offer was accepted and plaintiffs opened two irrevocable letters of Credit in
favor of P.T. Karkam
On March 29, 1965, the Charterer was notified by letter by Vlassopulos through Matthews that the vessel "PAXOI" had sailed from Hsinkang at
noontime on March 27, 196-5 and that it had left on hire at that time and date under the Uniform Time-Charter.
The Charterer was however twice in default in its payments which were supposed to have been done in advance. The first 15-day hire comprising the
period from March 27 to April 1-1, 1965 was paid despite follow-ups only on April 6, 1965 and the second 15-day hire for the period from April 12
to April 27, 1965 was paid also despite follow-ups only on April 26, 1965. On April 14, 1965 upon representation of Toeg, the Esso Standard Oil
(Hongkong) Company supplied the vessel with 400 tons of bunker oil at a cost of US $6,982.73.
Although the late payments for the charter of the vessel were received and acknowledged by Vlassopulos without comment or protest, said agent
notified Matthews, by telex on April 23, 1965 that the shipowners in accordance with Clause 6 of the Charter Party were withdrawing the vessel from
Charterer's service and holding said Charterer responsible for unpaid hirings and all legal claims.
On April 29, 1965, the shipowners entered into another charter agreement with another Charterer, the Nederlansche Stoomvart of Amsterdam, the
delivery date of which was around May 3, 1965 for a trip via Indonesia to Antwep/Hamburg at an increase charter cost.
Meanwhile, the original Charterer again remitted on April 30, 1965, the amount corresponding to the 3rd 15-day hire of the vessel "PAXOI" but this
time the remittance was refused.
On May 3,1965, respondents Union Import and Export Corporation and Philippine Traders Corporation filed a complaint with the Court of First
Instance of Manila, Branch VIII, against the Unknown Owners of the Vessel "SS Paxoi" for specific performance with prayer for preliminary
attachment, alleging, among other things, that the defendants (unknown owners) through their duly authorized agent in London, the N & J
Vlassopulos Ltd., ship brokers, entered into a contract of Uniform Time-Charter with the Interocean Shipping Company of Manila through the latter's
duly authorized broker, the Overseas Steamship Co., Inc., for the Charter of the vessel SS PAXOI' under the terms and conditions appearing
therein ...; that, immediately thereafter, the Interocean Shipping Company sublet,the said vessel to the plaintiff Union Import & Export, Corporation
which in turn sublet the same to the other plaintiff, the Philippine Traders Corporation (Amended Record on Appeal, p. 17). Respondents as plaintiffs
in the complaint obtained a writ of preliminary attachment of vessel PAXOI' " which was anchored at Davao on May 5, 1969, upon the filing of the
corresponding bond of P1,663,030.00 (Amended Record on Appeal, p. 27). However, the attachment was lifted on May 15, 1969 upon defendant's
motion and filing of a counterbond for P1,663,030 (Amended Record on Appeal, p. 62).
On May 11, 1965, the complaint was amended to Identify the defendant as Marimperio Compania Naviera S.A., petitioner herein (Amended Record
on Appeal, p. 38). In answer to the amended complaint, by way of special defenses defendant (petitioner herein) alleged among others that the
Charter Party covering its vessel "SS PAXOI" was entered into by defendant with Interocean Shipping Co. which is not a party in the complaint; that
defendant has no agreement or relationship whatsoever with the plaintiffs; that plaintiffs are unknown to defendant; that the charter party entered into
by defendant with the Interocean Shipping Co. over the vessel "SS PAXOI" does not authorize a sub-charter of said vessel to other parties; and that at

any rate, any such sub-charter was without the knowledge or consent of defendant or defendant's agent, and therefore, has no effect and/or is not
binding upon defendant. By way of counterclaim, defendant prayed that plaintiffs be ordered to pay defendant (1) the sum of 5,085.133d or its
equivalent, in Philippine currency of P54,929.60, which the defendant failed to realize under the substitute charter, from May 3, 1965 to May 16,
1965, while the vessel was under attachment; (2) the sum of E68.7.10 or its equivalent of P7,132.83, Philippine currency, as premium for defendant's
counterbond for the first year, and such other additional premiums that will have to be paid by defendant for additional premiums while the case is
pending; and (3) a sum of not less than P200,000.00 for and as attomey's fees and expenses of litigations (Amended Record on Appeal, p. 64).
On March 16, 1966, respondent Interocean Shipping Corporation filed a complaint-in-intervention to collect what it claims to be its loss of income by
way of commission and expenses in the amount of P15,000.00 and the sum of P2,000.00 for attorney's fees (Amended Record on Appeal, p. 87). In
its amended answer to the complaint-in-intervention petitioner, by way of special defenses alleged that (1) the plaintiff-in-intervention, being the
charterer, did not notify the defendant shipowner, petitioner, herein, about any alleged sub-charter of the vessel "SS PAXOI" to the plaintiffs;
consequently, there is no privity of contract between defendant and plaintiffs and it follows that plaintiff-in-intervention, as charterer, is responsible
for defendant shipowner for the proper performance of the charter party; (2) that the charter party provides that any dispute arising from the charter
party should be referred to arbitration in London; that Charterer plaintiff-in-intervention has not complied with this provision of the charter party;
consequently its complaint-in intervention is premature; and (3) that the alleged commission of 2 1/2 and not become due for the reason, among
others, that the charterer violated the contract, and the full hiring fee due the shipowner was not paid in accordance with the terms and conditions of
the charter party. By way of counterclaim defendant shipowner charged the plaintiff-in-intervention attorney's fees and expenses of litigation in the
sum of P10,000.00 (Amended Record on Appeal, p. 123).
On November 22, 1969 the Court of First Instance of Manila, Branch VIII rendered its decision ** in favor of defendant Marimperio Compania
Naviera, S.A., petitioner herein, and against plaintiffs Union Import and Export Corporation and Philippine Traders Corporation, respondents herein,
dismissing the amended complaint, and ordering said plaintiff on the counterclaim to pay defendant, jointly and severally, the amount of f 8,011.38 or
its equivalent in Philippine currency of P75,303.40, at the exchange rate of P9.40 to 1 for the unearned charter hire due to the attachment of the vessel
"PAXOI" in Davao, plus premiums paid on the counterbond as of April 22, 1968 plus the telex and cable charges and the sum of P10,000.00 as
attorney's fees and costs. The trial court dismissed the complaint-in-intervention, ordering the intervenor, on the counterclaim, to pay defendant the
sum of P10,000.00 as attorney's fees, and the costs (Amended Record on Appeal, p. 315).
Plaintiffs filed a Motion for Reconsideration and/or new trial of the decision of the trial court on December 23, 1969 (Amended Record on Appeal, p.
286); the intervenor filed its motion for reconsideration and/or new trial on January 7, 1970 (Amended Record on Appeal, p. 315).
Acting on the two motions for reconsideration, the trial court reversed its stand in its amended decision dated January 24, 1978. The dispositive
portion of the amended decision states:
FOR ALL THE FOREGOING CONSIDERATIONS, the Court renders judgment for the plaintiffs Union Import & Export
Corporation and Philin Traders Corporation, and plaintiff-in-intervention, Interocean Shipping Corporation, and consequently
orders the defendant, Marimperio Compania Naveria S.A.:
(1) To pay plaintiffs the sum of US$22,500.00 representing the remittance of plaintiffs to said defendant for
the first 15-day hire of the vessel "SS PAXOI" including overtime and an overpayment of US$254.00;
(2) To pay plaintiffs the sum of US$16,000.00 corresponding to the remittance of plaintiffs to defendant for
the second 15-day hire of the aforesaid vessel;
(3) To pay plaintiffs the sum of US$6,982.72 representing the cost of bunker oil, survey and watering of the
said vessel;
(4) To pay plaintiffs the sum of US$220,0,00.00 representing the unrealized profits; and
(5) To pay plaintiffs the sum of P100,000.00, as and for attorney's fees (Moran, Comments on the Rules of
Court, Vol. III, 1957 5d 644, citing Haussermann vs. Rahmayer, 12 Phil. 350; and others)" (Francisco vs.
Matias, G.R. No. L-16349, January 31, 1964; Sison vs. Suntay, G.R. No. L-1000 . December 28, 1957).
The Court further orders defendant to pay plaintiff-in-intervention the amount of P15,450.44, representing the
latter's commission as broker, with interest thereon at 6% per annum from the date of the filing of the
complaint-in-intervention, until fully paid, plus the sum of P2,000.00 as attorney's fees.
The Court finally orders the defendant to pay the costs.
In view of the above conclusion, the Court orders the dismissal of the counterclaims filed by defendant against the plaintiffs and
plaintiff-in- intervention, as wen as its motion for the award of damages in connection with the issuance of the writ of preliminary
attachment.

Defendant (petitioner herein), filed a motion for reconsideration and/or new trial of the amended decision on February 19, 1970 (Amended Record on
Appeal, p. 382). Meanwhile a new Judge was assigned to the Trial Court (Amended Record on Appeal, p. 541). On September 10, 1970 the trial court
issued its order of September 10, 1970*** denying defendant's motion for reconsideration (Amended Record on Appeal, p. 583).
On Appeal, the Court of Appeals affirmed the amended decision of the lower court except the portion granting commission to the intervenorappellee, which it reversed thereby dismissing the complaint-in- intervention. Its two motions (1) for reconsideration and/or new trial and (2) for new
trial having been denied by the Court of Appeals in its Resolution of February 17, 1975 which, however, fixed the amount of attorney's fees at
P100,000.00 instead of $100,000.00 (Rollo, p. 81), petitioner filed with this Court its petition for review on certiorari on March 19, 197 5 (Rollo, p.
86).
After deliberating on the petition, the Court resolved to require the respondents to comment thereon, in its resolution dated April 2, 1975 (rollo, p.
225).
The comment on petition for review by certiorari was filed by respondents on April 21, 1975, praying that the petition for review by certiorari dated
March 18, 1975 be dismissed for lack of merit Rollo p. 226). The reply to comment was filed on May 8, 1975 (Rollo, p. 259). The rejoinder to reply
to comment was filed on May 13, 197 5 (Rollo, p. 264).
On October 20, 1975, the Court resolved (a) to give due course to the petition; (b) to treat the petition for review as a special civil action; and (c) to
require both parties to submit their respective memoranda within thirty (30) days from notice hereof (Rollo, p. 27).
Respondents filed their memoranda on January 27, 1976 (Rollo, p. 290); petitioner, on February 26, 1976 (Rollo, p. 338). Respondents' reply
memorandum was filed on April 14, 1976 (Rollo, p. 413) and Rejoinder to respondents' reply memorandum was filed on May 28, 1976 (Rollo, p.
460).
On June 11, 1976, the Court resolved to admit petitioner's rejoinder to respondents' reply memorandum and to declare this case submitted for
decision (Rollo, p. 489).
The main issues raised by petitioner are:
1. Whether or not respondents have the legal capacity to bring the suit for specific performance against petitioner based on the
charter party, and
2. Whether or not the default of Charterer in the payment of the charter hire within the time agreed upon gives petitioner a right to
rescind the charter party extra judicially.
I.
According to Article 1311 of the Civil Code, a contract takes effect between the parties who made it, and also their assigns and heirs, except in cases
where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. Since a
contract may be violated only by the parties, thereto as against each other, in an action upon that contract, the real parties in interest, either as plaintiff
or as defendant, must be parties to said contract. Therefore, a party who has not taken part in it cannot sue or be sued for performance or for
cancellation thereof, unless he shows that he has a real interest affected thereby (Macias & Co. v. Warner Barners & Co., 43 Phil. 155 [1922] and
Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125 [1951]; Coquia v. Fieldmen's Insurance Co., Inc., 26 SCRA 178 [1968]).
It is undisputed that the charter party, basis of the complaint, was entered into between petitioner Marimperio Compaia Naviera, S.A., through its
duly authorized agent in London, the N & J Vlassopulos Ltd., and the Interocean Shipping Company of Manila through the latter's duly authorized
broker, the Overseas Steamship Co., Inc., represented by Matthews, Wrightson Burbridge Ltd., for the Charter of the 'SS PAXOI' (Amended
Complaint, Amended Record on Appeal, p. 33; Complaint-in-Intervention, Amended Record on Appeal, p. 87). It is also alleged in both the
Complaint (Amended Record on Appeal 18) and the Amended Complaint (Amended Record on Appeal, p. 39) that the Interocean Shipping Company
sublet the said vessel to respondent Union Import and Export Corporation which in turn sublet the same to respondent Philippine Traders
Corporation. It is admitted by respondents that the charterer is the Interocean Shipping Company. Even paragraph 3 of the complaint-in-intervention
alleges that respondents were given the use of the vessel "pursuant to paragraph 20 of the Uniform Time Charter ..." which precisely provides for the
subletting of the vessel by the charterer (Rollo, p. 24). Furthermore, Article 652 of the Code of Commerce provides that the charter party shall
contain, among others, the name, surname, and domicile of the charterer, and if he states that he is acting by commission, that of the person for whose
account he makes the contract. It is obvious from the disclosure made in the charter party by the authorized broker, the Overseas Steamship Co., Inc.,
that the real charterer is the Interocean Shipping Company (which sublet the vessel to Union Import and Export Corporation which in turn sublet it to
Philippine Traders Corporation).
In a sub-lease, there are two leases and two distinct judicial relations although intimately connected and related to each other, unlike in a case of
assignment of lease, where the lessee transmits absolutely his right, and his personality disappears; there only remains in the juridical relation two
persons, the lessor and the assignee who is converted into a lessee (Moreno, Philippine Law Dictionary, 2nd ed., p. 594). In other words, in a contract
of sub-lease, the personality of the lessee does not disappear; he does not transmit absolutely his rights and obligations to the sub-lessee; and the sublessee generally does not have any direct action against the owner of the premises as lessor, to require the compliance of the obligations contracted
with the plaintiff as lessee, or vice versa (10 Manresa, Spanish Civil Code, 438).

However, there are at least two instances in the Civil Code which allow the lessor to bring an action directly (accion directa) against the sub-lessee
(use and preservation of the premises under Art. 1651, and rentals under Article 1652).
Art. 1651 reads:
Without prejudice to his obligation toward the sub-lessor, the sub-lessee is bound to the lessor for all acts which refer to the use
and preservation of the thing leased in the manner stipulated between the lessor and the lessee.
Article 1652 reads:
The sub-lessee is subsidiarily liable to the lessor for any rent due from the lessee. However, the sub-lessee shall not be
responsible beyond the amount of rent due from him, in accordance with the terms of the sub-lease, at the time of the extrajudicial demand by the lessor.
Payments of rent in advance by the sub-lessee shall be deemed not to have been made, so far as the lessor's claim is concerned,
unless said payments were effected in virtue of the custom of the place.
It will be noted however that in said two Articles it is not the sub-lessee, but the lessor, who can bring the action. In the instant case, it is clear that the
sub-lessee as such cannot maintain the suit they filed with the trial court (See A. Maluenda and Co. v. Enriquez, 46 Phil. 916).
In the law of agency "with an undisclosed principal, the Civil Code in Article 1883 reads:
If an agent acts in his own name, the principal has no right of action against the persons with whom the agent has contracted;
neither have such persons against the principal.
In such case the agent is the one directly bound in favor of the person with whom he has contracted, as if the transaction were his
own, except when the contract involves things belonging to the principal.
The provisions of this article shag be understood to be without prejudice to the actions between the principal and agent.
While in the instant case, the true charterers of the vessel were the private respondents herein and they chartered the vessel through an intermediary
which upon instructions from them did not disclose their names. Article 1883 cannot help the private respondents, because although they were the
actual principals in the charter of the vessel, the law does not allow them to bring any action against the adverse party and vice, versa.
II.
The answer to the question of whether or not the default of charterer in the payment of the charter hire within the time agreed upon gives petitioner a
right to rescind the charter party extrajudicially, is undoubtedly in the affirmative.
Clause 6 of the Charter party specifically provides that the petitioner has the right to withdraw the vessel fromthe service of the charterers, without
noting any protest and without interference of any court or any formality in the event that the charterer defaults in the payment of hire. The payment
of hire was to be made every fifteen (1 5) days in advance.
It is undisputed that the vessel "SS PAXOI" came on hire on March 27, 1965. On March 29, Vlassopulos notified by letter the charterer through
Matthews of that fact, enclosing therein owner's debit note for a 15-day hire payable in advance. On March 30, 1965 the shipowner again notified
Matthews that the payment for the first 15-day hire was overdue. Again on April 2 the shipowner telexed Matthews insisting on the payment, but it
was only on April 7 that the amount of US $22,500.00 was remitted to Williams Deacons Bank, Ltd. through the Rizal Commercial Banking
Corporation for the account of Vlassopulos, agent of petitioner, corresponding to the first 15-day hire from March 27 to April 11, 1965.
On April 8, 1965, Vlassopulos acknowledged receipt of the payment, again with a debit note for the second 15-day hire and overtime which was due
on April 11, 1965. On April 23, 1965, Vlassopulos notified Matthews by telex that charterers were in default and in accordance with Clause 6 of the
charter party, the vessel was being withdrawn from charterer's service, holding them responsible for unpaid hire and all other legal claims of the
owner. Respondents remitted the sum of US$6,000.00 and US$10,000.00 to the bank only on April 26, 1965 representing payment for the second 15day hire from April 12 to April 27, 1965, received and accepted by the payee, Vlassopulos without any comment or protest.
Unquestionably, as of April 23, 1965, when Vlassopulos notified Matthews of the withdrawal of the vessel from the Charterers' service, the latter was
already in default. Accordingly, under Clause 6 of the charter party the owners had the right to withdraw " SS PAXO I " from the service of
charterers, which withdrawal they did.
The question that now arises is whether or not petitioner can rescind the charter party extra-judicially. The answer is also in the affirmative. A
contract is the law between the contracting parties, and when there is nothing in it which is contrary to law, morals, good customs, public policy or
public order, the validity of the contract must be sustained (Consolidated Textile Mills, Inc. v. Reparations Commission, 22 SCRA 674 [19681; Lazo
v. Republic Surety & Insurance Co., Inc., 31 SCRA 329 [1970]; Castro v. Court of Appeals, 99 SCRA 722 [1980]; Escano v. Court of Appeals, 100

SCRA 197 [1980]). A judicial action for the rescission of a contract is not necessary where the contract provides that it may be revoked and cancelled
for violation of any of its terms and conditions (Enrile v. Court of Appeals, 29 SCRA 504 [1969]; University of the Philippines v. De los Angeles, 35
SCRA 102 [1970]; Palay, Inc. v. Clave, 124 SCRA 638 [1983]).
PREMISES CONSIDERED, (1) the decision of the Court of Appeals affirming the amended decision of the Court of First Instance of Manila,
Branch VIII, is hereby REVERSED and SET ASIDE except for that portion of the decision dismissing the complaint-in-intervention; and (2) the
original decision of the trial court is hereby REINSTATED.
SO ORDERED.
Teehankee, C.J., Narvasa, Cruz and Gancayco, JJ., concur.

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. L-13505

February 4, 1919

GEO. W. DAYWALT, plaintiff-appellant,


vs.
LA CORPORACION DE LOS PADRES AGUSTINOS RECOLETOS, ET AL., defendants-appellees.
C. C. Cohn and Thos. D. Aitken for appellant.
Crossfield & O'Brien for appellee.
STREET, J.:
In the year 1902, Teodorica Endencia, an unmarried woman, resident in the Province of Mindoro, executed a contract whereby she obligated herself
to convey to Geo. W. Daywalt, a tract of land situated in the barrio of Mangarin, municipality of Bulalacao, now San Jose, in said province. It was
agreed that a deed should be executed as soon as the title to the land should be perfected by proceedings in the Court of Land Registration and a
Torrens certificate should be produced therefore in the name of Teodorica Endencia. A decree recognizing the right of Teodorica as owner was
entered in said court in August 1906, but the Torrens certificate was not issued until later. The parties, however, met immediately upon the entering of
this decree and made a new contract with a view to carrying their original agreement into effect. This new contract was executed in the form of a
deed of conveyance and bears date of August 16, 1906. The stipulated price was fixed at P4,000, and the area of the land enclosed in the boundaries
defined in the contract was stated to be 452 hectares and a fraction.
The second contract was not immediately carried into effect for the reason that the Torrens certificate was not yet obtainable and in fact said
certificate was not issued until the period of performance contemplated in the contract had expired. Accordingly, upon October 3, 1908, the parties
entered into still another agreement, superseding the old, by which Teodorica Endencia agreed upon receiving the Torrens title to the land in question,
to deliver the same to the Hongkong and Shanghai Bank in Manila, to be forwarded to the Crocker National Bank in San Francisco, where it was to
be delivered to the plaintiff upon payment of a balance of P3,100.
The Torrens certificate was in time issued to Teodorica Endencia, but in the course of the proceedings relative to the registration of the land, it was
found by official survey that the area of the tract inclosed in the boundaries stated in the contract was about 1.248 hectares of 452 hectares as stated in
the contract. In view of this development Teodorica Endencia became reluctant to transfer the whole tract to the purchaser, asserting that she never
intended to sell so large an amount of land and that she had been misinformed as to its area.
This attitude of hers led to litigation in which Daywalt finally succeeded, upon appeal to the Supreme Court, in obtaining a decree for specific
performance; and Teodorica Endencia was ordered to convey the entire tract of land to Daywalt pursuant to the contract of October 3, 1908, which
contract was declared to be in full force and effect. This decree appears to have become finally effective in the early part of the year 1914. 1
The defendant, La Corporacion de los Padres Recoletos, is a religious corporation, with its domicile in the city of Manila. Said corporation was
formerly the owner of a large tract of land, known as the San Jose Estate, on the island of Mindoro, which was sold to the Government of the
Philippine Islands in the year 1909. The same corporation was at this time also the owner of another estate on the same island immediately adjacent
to the land which Teodorica Endencia had sold to Geo. W. Daywalt; and for many years the Recoletos Fathers had maintained large herds of cattle on
the farms referred to. Their representative, charged with management of these farms, was father Isidoro Sanz, himself a members of the order. Father
Sanz had long been well acquainted with Teodorica Endencia and exerted over her an influence and ascendency due to his religious character as well
as to the personal friendship which existed between them. Teodorica appears to be a woman of little personal force, easily subject to influence, and
upon all the important matters of business was accustomed to seek, and was given, the advice of father Sanz and other members of his order with
whom she came in contact.
Father Sanz was fully aware of the existence of the contract of 1902 by which Teodorica Endencia agreed to sell her land to the plaintiff as well as of
the later important developments connected with the history of that contract and the contract substituted successively for it; and in particular Father
Sanz, as well as other members of the defendant corporation, knew of the existence of the contract of October 3, 1908, which, as we have already
seen finally fixed the rights of the parties to the property in question. When the Torrens certificate was finally issued in 1909 in favor of Teodorica
Endencia, she delivered it for safekeeping to the defendant corporation, and it was then taken to Manila where it remained in the custody and under
the control of P. Juan Labarga the procurador and chief official of the defendant corporation, until the deliver thereof to the plaintiff was made
compulsory by reason of the decree of the Supreme Court in 1914.
When the defendant corporation sold the San Jose Estate, it was necessary to bring the cattle off of that property; and, in the first half of 1909, some
2,368 head were removed to the estate of the corporation immediately adjacent to the property which the plaintiff had purchased from Teodorica
Endencia. As Teodorica still retained possession of said property Father Sanz entered into an arrangement with her whereby large numbers of cattle
belonging to the defendant corporation were pastured upon said land during a period extending from June 1, 1909, to May 1, 1914.

Under the first cause stated in the complaint in the present action the plaintiff seeks to recover from the defendant corporation the sum of P24,000, as
damages for the use and occupation of the land in question by reason of the pasturing of cattle thereon during the period stated. The trial court came
to the conclusion that the defendant corporation was liable for damages by reason of the use and occupation of the premises in the manner stated; and
fixed the amount to be recovered at P2,497. The plaintiff appealed and has assigned error to this part of the judgment of the court below, insisting that
damages should have been awarded in a much larger sum and at least to the full extent of P24,000, the amount claimed in the complaint.
As the defendant did not appeal, the property of allowing damages for the use and occupation of the land to the extent o P2,497, the amount awarded,
is not now in question an the only thing here to be considered, in connection with this branch of the case, is whether the damages allowed under this
head should be increased. The trial court rightly ignored the fact that the defendant corporation had paid Teodorica Endencia of ruse and occupation
of the same land during the period in question at the rate of P425 per annum, inasmuch as the final decree of this court in the action for specific
performance is conclusive against her right, and as the defendant corporation had notice of the rights of the plaintiff under this contract of purchase, it
can not be permitted that the corporation should escape liability in this action by proving payment of rent to a person other than the true owner.
With reference to the rate of which compensation should be estimated the trial court came to the following conclusion:
As to the rate of the compensation, the plaintiff contends that the defendant corporation maintained at leas one thousand head of cattle on
the land and that the pasturage was of the value of forty centavos per head monthly, or P4,800 annually, for the whole tract. The court can
not accept this view. It is rather improbable that 1,248 hectares of wild Mindoro land would furnish sufficient pasturage for one thousand
head of cattle during the entire year, and, considering the locality, the rate of forty centavos per head monthly seems too high. The evidence
shows that after having recovered possession of the land the plaintiff rented it to the defendant corporation for fifty centavos per hectares
annually, the tenant to pay the taxes on the land, and this appears to be a reasonable rent. There is no reason to suppose that the land was
worth more for grazing purposes during the period from 1909 to 1913, than it was at the later period. Upon this basis the plaintiff is entitled
to damages in the sum of p2,497, and is under no obligation to reimburse the defendants for the land taxes paid by either of them during the
period the land was occupied by the defendant corporation. It may be mentioned in this connection that the Lontok tract adjoining the land
in question and containing over three thousand hectares appears to have been leased for only P1,000 a year, plus the taxes.
From this it will be seen that the trial court estimated the rental value of the land for grazing purposes at 50 centavos per hectare per annum, and
roughly adopted the period of four years as the time for which compensation at that rate should be made. As the court had already found that the
defendant was liable for these damages from June, 1, 1909, to May 1, 1914, or a period of four years and eleven months, there seems some ground
for the contention made in the appellant's first assignment of error that the court's computation was erroneous, even accepting the rule upon which the
damages were assessed, as it is manifest that at the rate of 50 centavos per hectare per annum, the damages for four years and eleven months would
be P3,090.
Notwithstanding this circumstance, we are of the opinion that the damages assessed are sufficient to compensate the plaintiff for the use and
occupation of the land during the whole time it was used. There is evidence in the record strongly tending to show that the wrongful use of the land
by the defendant was not continuous throughout the year but was confined mostly to the reason when the forage obtainable on the land of the
defendant corporation was not sufficient to maintain its cattle, for which reason it became necessary to allow them to go over to pasture on the land in
question; and it is not clear that the whole of the land was used for pasturage at any time. Considerations of this character probably led the trial court
to adopt four years as roughly being the period during which compensation should be allowed. But whether this was advertently done or not, we see
no sufficient reason, in the uncertainty of the record with reference to the number of the cattle grazed and the period when the land was used, for
substituting our guess for the estimate made by the trial court.
In the second cause of action stated in the complaint the plaintiff seeks to recover from the defendant corporation the sum of P500,000, as damages,
on the ground that said corporation, for its own selfish purposes, unlawfully induced Teodorica Endencia to refrain from the performance of her
contract for the sale of the land in question and to withhold delivery to the plaintiff of the Torrens title, and further, maliciously and without
reasonable cause, maintained her in her defense to the action of specific performance which was finally decided in favor of the plaintiff in this court.
The cause of action here stated is based on liability derived from the wrongful interference of the defendant in the performance of the contract
between the plaintiff and Teodorica Endencia; and the large damages laid in the complaint were, according to the proof submitted by the plaintiff,
incurred as a result of a combination of circumstances of the following nature: In 1911, it appears, the plaintiff, as the owner of the land which he had
bought from Teodorica Endencia entered into a contract (Exhibit C) with S. B. Wakefield, of San Francisco, for the sale and disposal of said lands to
a sugar growing and milling enterprise, the successful launching of which depended on the ability of Daywalt to get possession of the land and the
Torrens certificate of title. In order to accomplish this end, the plaintiff returned to the Philippine Islands, communicated his arrangement to the
defendant,, and made repeated efforts to secure the registered title for delivery in compliance with said agreement with Wakefield. Teodorica
Endencia seems to have yielded her consent to the consummation of her contract, but the Torrens title was then in the possession of Padre Juan
Labarga in Manila, who refused to deliver the document. Teodorica also was in the end contract with the plaintiff, with the result that the plaintiff was
kept out of possession until the Wakefield project for the establishment of a large sugar growing and milling enterprise fell through. In the light of
what has happened in recent years in the sugar industry, we feel justified in saying that the project above referred to, if carried into effect, must
inevitably have proved a great success.
The determination of the issue presented in this second cause of action requires a consideration of two points. The first is whether a person who is not
a party to a contract for the sale of land makes himself liable for damages to the vendee, beyond the value of the use and occupation, by colluding
with the vendor and maintaining him in the effort to resist an action for specific performance. The second is whether the damages which the plaintiff
seeks to recover under this head are too remote and speculative to be the subject of recovery.
As preliminary to a consideration of the first of these questions, we deem it well it dispose of the contention that the members of the defendants
corporation, in advising and prompting Teodorica Endencia not to comply with the contract of sale, were actuated by improper and malicious

motives. The trial court found that this contention was not sustained, observing that while it was true that the circumstances pointed to an entire
sympathy on the part of the defendant corporation with the efforts of Teodorica Endencia to defeat the plaintiff's claim to the land, the fact that its
officials may have advised her not to carry the contract into effect would not constitute actionable interference with such contract. It may be added
that when one considers the hardship that the ultimate performance of that contract entailed on the vendor, and the doubt in which the issue was
involved to the extent that the decision of the Court of the First Instance was unfavorable to the plaintiff and the Supreme Court itself was divided
the attitude of the defendant corporation, as exhibited in the conduct of its procurador, Juan Labarga, and other members of the order of the
Recollect Fathers, is not difficult to understand. To our mind a fair conclusion on this feature of the case is that father Juan Labarga and his associates
believed in good faith that the contract cold not be enforced and that Teodorica would be wronged if it should be carried into effect. Any advice or
assistance which they may have given was, therefore, prompted by no mean or improper motive. It is not, in our opinion, to be denied that Teodorica
would have surrendered the documents of title and given possession of the land but for the influence and promptings of members of the defendants
corporation. But we do not credit the idea that they were in any degree influenced to the giving of such advice by the desire to secure to themselves
the paltry privilege of grazing their cattle upon the land in question to the prejudice of the just rights of the plaintiff.
The attorney for the plaintiff maintains that, by interfering in the performance of the contract in question and obstructing the plaintiff in his efforts to
secure the certificate of tittle to the land, the defendant corporation made itself a co-participant with Teodorica Endencia in the breach of said
contract; and inasmuch as father Juan Labarga, at the time of said unlawful intervention between the contracting parties, was fully aware of the
existence of the contract (Exhibit C) which the plaintiff had made with S. B. Wakefield, of San Francisco, it is insisted that the defendant corporation
is liable for the loss consequent upon the failure of the project outlined in said contract.
In this connection reliance is placed by the plaintiff upon certain American and English decisions in which it is held that a person who is a stranger to
contract may, by an unjustifiable interference in the performance thereof, render himself liable for the damages consequent upon non-performance. It
is said that the doctrine of these cases was recognized by this court in Gilchrist vs. Cuddy (29 Phil. Rep., 542); and we have been earnestly pressed to
extend the rule there enunciated to the situation here presente.
Somewhat more than half a century ago the English Court of the Queen's Bench saw its way clear to permit an action for damages to be maintained
against a stranger to a contract wrongfully interfering in its performance. The leading case on this subject is Lumley vs. Gye ([1853], 2 El. & Bl.,
216). It there appeared that the plaintiff, as manager of a theatre, had entered into a contract with Miss Johanna Wagner, an opera singer,, whereby she
bound herself for a period to sing in the plaintiff's theatre and nowhere else. The defendant, knowing of the existence of this contract, and, as the
declaration alleged, "maliciously intending to injure the plaintiff," enticed and produced Miss Wagner to leave the plaintiff's employment. It was held
that the plaintiff was entitled to recover damages. The right which was here recognized had its origin in a rule, long familiar to the courts of the
common law, to the effect that any person who entices a servant from his employment is liable in damages to the master. The master's interest in the
service rendered by his employee is here considered as a distinct subject of juridical right. It being thus accepted that it is a legal wrong to break up a
relation of personal service, the question now arose whether it is illegal for one person to interfere with any contract relation subsisting between
others. Prior to the decision of Lumley vs. Gye [supra] it had been supposed that the liability here under consideration was limited to the cases of the
enticement of menial servants, apprentices, and others to whom the English Statutes of Laborers were applicable. But in the case cited the majority of
the judges concurred in the opinion that the principle extended to all cases of hiring. This doctrine was followed by the Court of Appeal in
Bowen vs. Hall ([1881], 6 Q. B., Div., 333); and in Temperton vs.Russell ([1893], Q. B., 715), it was held that the right of action for maliciously
procuring a breach of contract is not confined to contracts for personal services, but extends to contracts in general. In that case the contract which the
defendant had procured to be breached was a contract for the supply of building material.
Malice in some form is generally supposed to be an essential ingredient in cases of interference with contract relations. But upon the authorities it is
enough if the wrong-doer, having knowledge of the existence of the contract relations, in bad faith sets about to break it up. Whether his motive is to
benefit himself or gratify his spite by working mischief to the employer is immaterial. Malice in the sense of ill-will or spite is not essential.
Upon the question as to what constitutes legal justification, a good illustration was put in the leading case. If a party enters into contract to go for
another upon a journey to a remote and unhealthful climate, and a third person, with abona fide purpose of benefiting the one who is under contract to
go, dissuades him from the step, no action will lie. But if the advice is not disinterested and the persuasion is used for "the indirect purpose of
benefiting the defendant at the expense of the plaintiff," the intermedler is liable if his advice is taken and the contract broken.
The doctrine embodied in the cases just cited has sometimes been found useful, in the complicated relations of modern industry, as a means of
restraining the activities of labor unions and industrial societies when improperly engaged in the promotion of strikes. An illustration of the
application of the doctrine in question in a case of this kind is found in South Wales Miners Federation vs. Glamorgan Coal Co. ([1905]), A. C., 239).
It there appeared that certain miners employed in the plaintiff's collieries, acting under the order of the executive council of the defendant federation,
violated their contract with the plaintiff by abstaining from work on certain days. The federation and council acted without any actual malice or illwill towards the plaintiff, and the only object of the order in question was that the price of coal might thereby be kept up, a factor which affected the
miner's wage scale. It was held that no sufficient justification was shown and that the federation was liable.
In the United States, the rule established in England by Lumley vs. Gye [supra] and subsequent cases is commonly accepted, though in a few of the
States the broad idea that a stranger to a contract can be held liable upon its is rejected, and in these jurisdictions the doctrine, if accepted at all, is
limited to the situation where the contract is strictly for personal service. (Boyson vs. Thorn, 98 Cal., 578; Chambers & Marshall vs. Baldwin 91 Ky.,
121; Bourliervs. Macauley, 91 Ky., 135; Glencoe Land & Gravel Co. vs. Hudson Bros. Com. Co., 138 Mo., 439.)
It should be observed in this connection that, according to the English and American authorities, no question can be made as to the liability to one
who interferes with a contract existing between others by means which, under known legal cannons, can be denominated an unlawful means. Thus, if
performance is prevented by force, intimidation, coercion, or threats, or by false or defamatory statements, or by nuisance or riot, the person using
such unlawful means is, under all the authorities, liable for the damage which ensues. And in jurisdictions where the doctrine of Lumley vs. Gye

[supra] is rejected, no liability can arise from a meddlesome and malicious interference with a contract relation unless some such unlawful means as
those just indicated are used. (See cases last above cited.)
This brings us to the decision made by this court in Gilchrist vs. Cuddy (29 Phil. Rep., 542). It there appeared that one Cuddy, the owner of a
cinematographic film, let it under a rental contract to the plaintiff Gilchrist for a specified period of time. In violation of the terms of this agreement,
Cuddy proceeded to turn over the film also under a rental contract, to the defendants Espejo and Zaldarriaga. Gilchrist thereupon restored to the
Court of First Instance and produced an injunction restraining the defendants from exhibiting the film in question in their theater during the period
specified in the contract of Cuddy with Gilchrist. Upon appeal to this court it was in effect held that the injunction was not improperly granted,
although the defendants did not, at the time their contract was made, know the identity of the plaintiff as the person holding the prior contract but did
know of the existence of a contract in favor of someone. It was also said arguendo, that the defendants would have been liable in damages under
article 1902 of the Civil Code, if the action had been brought by the plaintiff to recover damages. The force of the opinion is, we think, somewhat
weakened by the criticism contain in the concurring opinion, where it is said that the question of breach of contract by inducement was not really
involved in the case. Taking the decision upon the point which was rally decided, it is authority for the proposition that one who buys something
which he knows has been sold to some other person can be restrained from using that thing to the prejudice of the person having the prior and better
right.
Translated into terms applicable to the case at bar, the decision in Gilchrist vs. Cuddy (29 Phil. Rep., 542), indicates that the defendant corporation,
having notice of the sale of the land in question to Daywalt, might have been enjoined by the latter from using the property for grazing its cattle
thereon. That the defendant corporation is also liable in this action for the damage resulting to the plaintiff from the wrongful use and occupation of
the property has also been already determined. But it will be observed that in order to sustain this liability it is not necessary to resort to any subtle
exegesis relative to the liability of a stranger to a contract for unlawful interference in the performance thereof. It is enough that defendant use the
property with notice that the plaintiff had a prior and better right.
Article 1902 of the Civil Code declares that any person who by an act or omission, characterized by fault or negligence, causes damage to another
shall be liable for the damage so done. Ignoring so much of this article as relates to liability for negligence, we take the rule to be that a person is
liable for damage done to another by any culpable act; and by "culpable act" we mean any act which is blameworthy when judged by accepted legal
standards. The idea thus expressed is undoubtedly broad enough to include any rational conception of liability for the tortious acts likely to be
developed in any society. Thus considered, it cannot be said that the doctrine of Lumleyvs. Gye [supra] and related cases is repugnant to the
principles of the civil law.
Nevertheless, it must be admitted that the codes and jurisprudence of the civil law furnish a somewhat uncongenial field in which to propagate the
idea that a stranger to a contract may sued for the breach thereof. Article 1257 of the Civil Code declares that contracts are binding only between the
parties and their privies. In conformity with this it has been held that a stranger to a contract has no right of action for the nonfulfillment of the
contract except in the case especially contemplated in the second paragraph of the same article. (Uy Tam and Uy Yet vs. Leonard, 30 Phil. Rep., 471.)
As observed by this court in Manila Railroad Co. vs. Compaia Transatlantica, R. G. No. 11318 (38 Phil. Rep., 875), a contract, when effectually
entered into between certain parties, determines not only the character and extent of the liability of the contracting parties but also the person or entity
by whom the obligation is exigible. The same idea should apparently be applicable with respect to the person against whom the obligation of the
contract may be enforced; for it is evident that there must be a certain mutuality in the obligation, and if the stranger to a contract is not permitted to
sue to enforce it, he cannot consistently be held liable upon it.
If the two antagonistic ideas which we have just brought into juxtaposition are capable of reconciliation, the process must be accomplished by
distinguishing clearly between the right of action arising from the improper interference with the contract by a stranger thereto, considered as an
independent act generate of civil liability, and the right of action ex contractu against a party to the contract resulting from the breach thereof.
However, we do not propose here to pursue the matter further, inasmuch as, for reasons presently to be stated, we are of the opinion that neither the
doctrine of Lumley vs. Gye [supra] nor the application made of it by this court in Gilchrist vs. Cuddy (29 Phil. Rep., 542), affords any basis for the
recovery of the damages which the plaintiff is supposed to have suffered by reason of his inability to comply with the terms of the Wakefield
contract.
Whatever may be the character of the liability which a stranger to a contract may incur by advising or assisting one of the parties to evade
performance, there is one proposition upon which all must agree. This is, that the stranger cannot become more extensively liable in damages for the
nonperformance of the contract than the party in whose behalf he intermeddles. To hold the stranger liable for damages in excess of those that could
be recovered against the immediate party to the contract would lead to results at once grotesque and unjust. In the case at bar, as Teodorica Endencia
was the party directly bound by the contract, it is obvious that the liability of the defendant corporation, even admitting that it has made itself
coparticipant in the breach of the contract, can in no even exceed hers. This leads us to consider at this point the extent of the liability of Teodorica
Endencia to the plaintiff by reason of her failure to surrender the certificate of title and to place the plaintiff in possession.
It should in the first place be noted that the liability of Teodorica Endencia for damages resulting from the breach of her contract with Daywalt was a
proper subject for adjudication in the action for specific performance which Daywalt instituted against her in 1909 and which was litigated by him to
a successful conclusion in this court, but without obtaining any special adjudication with reference to damages. Indemnification for damages
resulting from the breach of a contract is a right inseparably annexed to every action for the fulfillment of the obligation (art. 1124, Civil Code); and
its is clear that if damages are not sought or recovered in the action to enforce performance they cannot be recovered in an independent action. As to
Teodorica Endencia, therefore, it should be considered that the right of action to recover damages for the breach of the contract in question was
exhausted in the prior suit. However, her attorneys have not seen fit to interpose the defense of res judicata in her behalf; and as the defendant
corporation was not a party to that action, and such defense could not in any event be of any avail to it, we proceed to consider the question of the
liability of Teodorica Endencia for damages without refernce to this point.

The most that can be said with refernce to the conduct of Teodorica Endencia is that she refused to carry out a contract for the sale of certain land and
resisted to the last an action for specific performance in court. The result was that the plaintiff was prevented during a period of several years from
exerting that control over the property which he was entitled to exert and was meanwhile unable to dispose of the property advantageously. Now,
what is the measure of damages for the wrongful detention of real property by the vender after the time has come for him to place the purchaser in
possession?
The damages ordinarily and normally recoverable against a vendor for failure to deliver land which he has contracted to deliver is the value of the use
and occupation of the land for the time during which it is wrongfully withheld. And of course where the purchaser has not paid the purchaser money,
a deduction may be made in respect to the interest on the money which constitutes the purchase price. Substantially the same rule holds with respect
to the liability of a landlord who fails to put his tenant in possession pursuant to contract of lease. The measure of damages is the value of the
leasehold interest, or use and occupation, less the stipulated rent, where this has not been paid. The rule that the measure of damages for the wrongful
detention of land is normally to be found in the value of use and occupation is, we believe, one of the things that may be considered certain in the law
(39 cyc., 1630; 24 Cyc., 1052 Sedgewick on Damages, Ninth ed., sec. 185.) almost as wellsettled, indeed, as the rule that the measure of damages
for the wrongful detention of money is to be found in the interest.
We recognize the possibility that more extensive damages may be recovered where, at the time of the creation of the contractual obligation, the
vendor, or lessor, is aware of the use to which the purchaser or lessee desires to put the property which is the subject of the contract, and the contract
is made with the eyes of the vendor or lessor open to the possibility of the damage which may result to the other party from his own failure to give
possession. The case before us is not this character, inasmuch as at the time when the rights of the parties under the contract were determined, nothing
was known to any to them about the San Francisco capitalist who would be willing to back the project portrayed in Exhibit C.
The extent of the liability for the breach of a contract must be determined in the light of the situation in existence at the time the contract is made; and
the damages ordinarily recoverable are in all events limited to such as might be reasonable are in all events limited to such as might be reasonably
foreseen in the light of the facts then known to the contracting parties. Where the purchaser desires to protect himself, in the contingency of the
failure of the vendor promptly to give possession, from the possibility of incurring other damages than such as the incident to the normal value of the
use and occupation, he should cause to be inserted in the contract a clause providing for stipulated amount to the paid upon failure of the vendor to
give possession; and not case has been called to our attention where, in the absence of such a stipulation, damages have been held to be recoverable
by the purchaser in excess of the normal value of use and occupation. On the contrary, the most fundamental conceptions of the law relative to the
assessment of damages are inconsistent with such idea.
The principles governing this branch of the law were profoundly considered in the case Hadley vs. Baxendale (9 Exch., 341), decided in the English
Court of Exchequer in 1854; and a few words relative to the principles governing will here be found instructive. The decision in that case is
considered a leading authority in the jurisprudence of the common law. The plaintiffs in that case were proprietors of a mill in Gloucester, which was
propelled by steam, and which was engaged in grinding and supplying meal and flour to customers. The shaft of the engine got broken, and it became
necessarily that the broken shaft be sent to an engineer or foundry man at Greenwich, to serve as a model for casting or manufacturing another that
would fit into the machinery. The broken shaft could be delivered at Greenwich on the second day after its receipts by the carrier it. It was delivered
to the defendants, who were common carriers engaged in that business between these points, and who had told plaintiffs it would be delivered at
Greenwich on the second day after its delivery to them, if delivered at a given hour. The carriers were informed that the mill was stopped, but were
not informed of the special purpose for which the broken shaft was desired to forwarded, They were not told the mill would remain idle until the new
shaft would be returned, or that the new shaft could not be manufactured at Greenwich until the broken one arrived to serve as a model. There was
delay beyond the two days in delivering the broken shaft at Greenwich, and a corresponding delay in starting the mill. No explanation of the delay
was offered by the carriers. The suit was brought to recover damages for the lost profits of the mill, cause by the delay in delivering the broken shaft.
It was held that the plaintiff could not recover.
The discussion contained in the opinion of the court in that case leads to the conclusion that the damages recoverable in case of the breach of a
contract are two sorts, namely, (1) the ordinary, natural, and in a sense necessary damage; and (2) special damages.
Ordinary damages is found in all breaches of contract where the are no special circumstances to distinguish the case specially from other contracts.
The consideration paid for an unperformed promise is an instance of this sort of damage. In all such cases the damages recoverable are such as
naturally and generally would result from such a breach, "according to the usual course of things." In case involving only ordinary damage no
discussion is ever indulged as to whether that damage was contemplated or not. This is conclusively presumed from the immediateness and
inevitableness of the damage, and the recovery of such damage follows as a necessary legal consequence of the breach. Ordinary damage is assumed
as a matter of law to be within the contemplation of the parties.
Special damage, on the other hand, is such as follows less directly from the breach than ordinary damage. It is only found in case where some
external condition, apart from the actual terms to the contract exists or intervenes, as it were, to give a turn to affairs and to increase damage in a way
that the promisor, without actual notice of that external condition, could not reasonably be expected to foresee. Concerning this sort of damage,
Hadley vs.Baxendale (1854) [supra] lays down the definite and just rule that before such damage can be recovered the plaintiff must show that the
particular condition which made the damage a possible and likely consequence of the breach was known to the defendant at the time the contract was
made.
The statement that special damages may be recovered where the likelihood of such damages flowing from the breach of the contract is contemplated
and foreseen by the parties needs to be supplemented by a proposition which, though not enunciated in Hadley vs. Baxendale, is yet clearly to be
drawn from subsequent cases. This is that where the damage which a plaintiff seeks to recover as special damage is so far speculative as to be in
contemplation of law remote, notification of the special conditions which make that damage possible cannot render the defendant liable therefor. To
bring damages which would ordinarily be treated as remote within the category of recoverable special damages, it is necessary that the condition

should be made the subject of contract in such sense as to become an express or implied term of the engagement. Horne vs. Midland R. Co. (L. R., 8
C. P., 131) is a case where the damage which was sought to be recovered as special damage was really remote, and some of the judges rightly places
the disallowance of the damage on the ground that to make such damage recoverable, it must so far have been within the contemplation of the parties
as to form at least an implied term of the contract. But others proceeded on the idea that the notice given to the defendant was not sufficiently full and
definite. The result was the same in either view. The facts in that case were as follows: The plaintiffs, shoe manufacturers at K, were under contract to
supply by a certain day shoes to a firm in London for the French government. They delivered the shoes to a carrier in sufficient time for the goods to
reach London at the time stipulated in the contract and informed the railroad agent that the shoes would be thrown back upon their hands if they did
not reach the destination in time. The defendants negligently failed to forward the good in due season. The sale was therefore lost, and the market
having fallen, the plaintiffs had to sell at a loss.
In the preceding discussion we have considered the plaintiff's right chiefly against Teodorica Endencia; and what has been said suffices in our opinion
to demonstrate that the damages laid under the second cause of action in the complaint could not be recovered from her, first, because the damages
laid under the second cause of action in the complaint could not be recovered from her, first, because the damages in question are special damages
which were not within contemplation of the parties when the contract was made, and secondly, because said damages are too remote to be the subject
of recovery. This conclusion is also necessarily fatal to the right of the plaintiff to recover such damages from the defendant corporation, for, as
already suggested, by advising Teodorica not to perform the contract, said corporation could in no event render itself more extensively liable than the
principle in the contract.
Our conclusion is that the judgment of the trial court should be affirmed, and it is so ordered, with costs against the appellant.
Arellano, C.J., Torres, Carson, Araullo, Malcolm, Avancea and Moir, JJ., concur.

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. L-9356

February 18, 1915

C. S. GILCHRIST, plaintiff-appellee,
vs.
E. A. CUDDY, ET AL., defendants.
JOSE FERNANDEZ ESPEJO and MARIANO ZALDARRIAGA, appellants.
C. Lozano for appellants.
Bruce, Lawrence, Ross and Block for appellee.
TRENT, J.:
An appeal by the defendants, Jose Fernandez Espejo and Mariano Zaldarriaga, from a judgment of the Court of First Instance of Iloilo, dismissing
their cross-complaint upon the merits for damages against the plaintiff for the alleged wrongful issuance of a mandatory and a preliminary injunction.
Upon the application of the appellee an ex parte mandatory injunction was issued on the 22d of May, 1913, directing the defendant, E. A. Cuddy, to
send to the appellee a certain cinematograph film called "Zigomar" in compliance with an alleged contract which had been entered into between these
two parties, and at the time an ex partepreliminary injunction was issued restraining the appellants from receiving and exhibiting in their theater the
Zigomar until further orders of the court. On the 26th of that month the appellants appeared and moved the court to dissolve the preliminary
injunction. When the case was called for trial on August 6, the appellee moved for the dismissal of the complaint "for the reason that there is no
further necessity for the maintenance of the injunction." The motion was granted without objection as to Cuddy and denied as to the appellants in
order to give them an opportunity to prove that the injunction were wrongfully issued and the amount of damages suffered by reason thereof.
The pertinent part of the trial court's findings of fact in this case is as follows:
It appears in this case that Cuddy was the owner of the film Zigomar and that on the 24th of April he rented it to C. S. Gilchrist for a week
for P125, and it was to be delivered on the 26th of May, the week beginning that day. A few days prior to this Cuddy sent the money back
to Gilchrist, which he had forwarded to him in Manila, saying that he had made other arrangements with his film. The other arrangements
was the rental to these defendants Espejo and his partner for P350 for the week and the injunction was asked by Gilchrist against these
parties from showing it for the week beginning the 26th of May.
It appears from the testimony in this case, conclusively, that Cuddy willfully violated his contract, he being the owner of the picture, with
Gilchrist because the defendants had offered him more for the same period. Mr. Espejo at the trial on the permanent injunction on the 26th
of May admitted that he knew that Cuddy was the owner of the film. He was trying to get it through his agents Pathe Brothers in Manila.
He is the agent of the same concern in Iloilo. There is in evidence in this case on the trial today as well as on the 26th of May, letters
showing that the Pathe Brothers in Manila advised this man on two different occasions not to contend for this film Zigomar because the
rental price was prohibitive and assured him also that he could not get the film for about six weeks. The last of these letters was written on
the 26th of April, which showed conclusively that he knew they had to get this film from Cuddy and from this letter that the agent in
Manila could not get it, but he made Cuddy an offer himself and Cuddy accepted it because he was paying about three times as much as he
had contracted with Gilchrist for. Therefore, in the opinion of this court, the defendants failed signally to show the injunction against the
defendant was wrongfully procured.
The appellants duly excepted to the order of the court denying their motion for new trial on the ground that the evidence was insufficient to justify the
decision rendered. There is lacking from the record before us the deposition of the defendant Cuddy, which apparently throws light upon a contract
entered into between him and the plaintiff Gilchrist. The contents of this deposition are discussed at length in the brief of the appellants and an
endeavor is made to show that no such contract was entered into. The trial court, which had this deposition before it, found that there was a contract
between Cuddy and Gilchrist. Not having the deposition in question before us, it is impossible to say how strongly it militates against this findings of
fact. By a series of decisions we have construed section 143 and 497 (2) of the Code of Civil Procedure to require the production of all the evidence
in this court. This is the duty of the appellant and, upon his failure to perform it, we decline to proceed with a review of the evidence. In such cases
we rely entirely upon the pleadings and the findings of fact of the trial court and examine only such assigned errors as raise questions of law.
(Ferrer vs. Neri Abejuela, 9 Phil. Rep., 324; Valle vs. Galera, 10 Phil. Rep., 619; Salvacion vs. Salvacion, 13 Phil. Rep., 366; Breta vs. Smith, Bell &
Co., 15 Phil. Rep., 446; Arroyo vs. Yulo, 18 Phil. Rep., 236; Olsen & Co. vs. Matson, Lord & Belser Co., 19 Phil. Rep., 102; Blum vs. Barretto, 19
Phil. Rep., 161; Cuyugan vs. Aguas, 19 Phil. Rep., 379; Mapa vs. Chaves, 20 Phil. Rep., 147; Mans vs. Garry, 20 Phil. Rep., 134.) It is true that some
of the more recent of these cases make exceptions to the general rule. Thus, in Olsen & Co. vs.Matson, Lord & Belser Co., (19 Phil. Rep., 102), that
portion of the evidence before us tended to show that grave injustice might result from a strict reliance upon the findings of fact contained in the
judgment appealed from. We, therefore, gave the appellant an opportunity to explain the omission. But we required that such explanation must show
a satisfactory reason for the omission, and that the missing portion of the evidence must be submitted within sixty days or cause shown for failing to
do so. The other cases making exceptions to the rule are based upon peculiar circumstances which will seldom arise in practice and need not here be

set forth, for the reason that they are wholly inapplicable to the present case. The appellants would be entitled to indulgence only under the doctrine
of the Olsen case. But from that portion of the record before us, we are not inclined to believe that the missing deposition would be sufficient to
justify us in reversing the findings of fact of the trial court that the contract in question had been made. There is in the record not only the positive
and detailed testimony of Gilchrist to this effect, but there is also a letter of apology from Cuddy to Gilchrist in which the former enters into a lengthy
explanation of his reasons for leasing the film to another party. The latter could only have been called forth by a broken contract with Gilchrist to
lease the film to him. We, therefore, fail to find any reason for overlooking the omission of the defendants to bring up the missing portion of the
evidence and, adhering to the general rule above referred to, proceed to examine the questions of law raised by the appellants.
From the above-quoted findings of fact it is clear that Cuddy, a resident of Manila, was the owner of the "Zigomar;" that Gilchrist was the owner of a
cinematograph theater in Iloilo; that in accordance with the terms of the contract entered into between Cuddy and Gilchrist the former leased to the
latter the "Zigomar" for exhibition in his (Gilchrist's) theater for the week beginning May 26, 1913; and that Cuddy willfully violate his contract in
order that he might accept the appellant's offer of P350 for the film for the same period. Did the appellants know that they were inducing Cuddy to
violate his contract with a third party when they induced him to accept the P350? Espejo admitted that he knew that Cuddy was the owner of the film.
He received a letter from his agents in Manila dated April 26,assuring him that he could not get the film for about six weeks. The arrangement
between Cuddy and the appellants for the exhibition of the film by the latter on the 26th of May were perfected after April 26, so that the six weeks
would include and extend beyond May 26. The appellants must necessarily have known at the time they made their offer to Cuddy that the latter had
booked or contracted the film for six weeks from April 26. Therefore, the inevitable conclusion is that the appellants knowingly induced Cuddy to
violate his contract with another person. But there is no specific finding that the appellants knew the identity of the other party. So we must assume
that they did not know that Gilchrist was the person who had contracted for the film.
The appellants take the position that if the preliminary injunction had not been issued against them they could have exhibited the film in their theater
for a number of days beginning May 26, and could have also subleased it to other theater owners in the nearby towns and, by so doing, could have
cleared, during the life of their contract with Cuddy, the amount claimed as damages. Taking this view of the case, it will be unnecessary for us to
inquire whether the mandatory injunction against Cuddy was properly issued or not. No question is raised with reference to the issuance of that
injunction.
The right on the part of Gilchrist to enter into a contract with Cuddy for the lease of the film must be fully recognized and admitted by all. That
Cuddy was liable in an action for damages for the breach of that contract, there can be no doubt. Were the appellants likewise liable for interfering
with the contract between Gilchrist and Cuddy, they not knowing at the time the identity of one of the contracting parties? The appellants claim that
they had a right to do what they did. The ground upon which the appellants base this contention is, that there was no valid and binding contract
between Cuddy and Gilchrist and that, therefore, they had a right to compete with Gilchrist for the lease of the film, the right to compete being a
justification for their acts. If there had been no contract between Cuddy and Gilchrist this defense would be tenable, but the mere right to compete
could not justify the appellants in intentionally inducing Cuddy to take away the appellee's contractual rights.
Chief Justice Wells in Walker vs. Cronin (107 Mass., 555), said: "Everyone has a right to enjoy the fruits and advantages of his own enterprise,
industry, skill and credit. He has no right to be free from malicious and wanton interference, disturbance or annoyance. If disturbance or loss come as
a result of competition, or the exercise of like rights by others, it is damnum absque injuria, unless some superior right by contract or otherwise is
interfered with."
In Read vs. Friendly Society of Operative Stonemasons ([1902] 2 K. B., 88), Darling, J., said: "I think the plaintiff has a cause of action against the
defendants, unless the court is satisfied that, when they interfered with the contractual rights of plaintiff, the defendants had a sufficient justification
for their interference; . . . for it is not a justification that `they acted bona fide in the best interests of the society of masons,' i. e., in their own
interests. Nor is it enough that `they were not actuated by improper motives.' I think their sufficient justification for interference with plaintiff's right
must be an equal or superior right in themselves, and that no one can legally excuse himself to a man, of whose contract he has procured the breach,
on the ground that he acted on a wrong understanding of his own rights, or without malice, or bona fide, or in the best interests of himself, or even
that he acted as an altruist, seeking only good of another and careless of his own advantage." (Quoted with approval in Beekman vs. Marsters, 195
Mass., 205.)
It is said that the ground on which the liability of a third party for interfering with a contract between others rests, is that the interference was
malicious. The contrary view, however, is taken by the Supreme Court of the United States in the case of Angle vs. Railway Co. (151 U. S., 1). The
only motive for interference by the third party in that case was the desire to make a profit to the injury of one of the parties of the contract. There was
no malice in the case beyond the desire to make an unlawful gain to the detriment of one of the contracting parties.
In the case at bar the only motive for the interference with the Gilchrist Cuddy contract on the part of the appellants was a desire to make a profit
by exhibiting the film in their theater. There was no malice beyond this desire; but this fact does not relieve them of the legal liability for interfering
with that contract and causing its breach. It is, therefore, clear, under the above authorities, that they were liable to Gilchrist for the damages caused
by their acts, unless they are relieved from such liability by reason of the fact that they did not know at the time the identity of the original lessee
(Gilchrist) of the film.
The liability of the appellants arises from unlawful acts and not from contractual obligations, as they were under no such obligations to induce Cuddy
to violate his contract with Gilchrist. So that if the action of Gilchrist had been one for damages, it would be governed by chapter 2, title 16, book 4
of the Civil Code. Article 1902 of that code provides that a person who, by act or omission, causes damages to another when there is fault or
negligence, shall be obliged to repair the damage do done. There is nothing in this article which requires as a condition precedent to the liability of a
tort-feasor that he must know the identity of a person to whom he causes damages. In fact, the chapter wherein this article is found clearly shows that
no such knowledge is required in order that the injured party may recover for the damage suffered.

But the fact that the appellants' interference with the Gilchrist contract was actionable did not of itself entitle Gilchrist to sue out an injunction against
them. The allowance of this remedy must be justified under section 164 of the Code of Civil Procedure, which specifies the circumstance under
which an injunction may issue. Upon the general doctrine of injunction we said in Devesa vs. Arbes (13 Phil. Rep., 273):
An injunction is a "special remedy" adopted in that code (Act No. 190) from American practice, and originally borrowed from English legal
procedure, which was there issued by the authority and under the seal of a court of equity, and limited, as in order cases where equitable
relief is sought, to cases where there is no "plain, adequate, and complete remedy at law," which "will not be granted while the rights
between the parties are undetermined, except in extraordinary cases where material and irreparable injury will be done," which cannot be
compensated in damages, and where there will be no adequate remedy, and which will not, as a rule, be granted, to take property out of the
possession of one party and put it into that of another whose title has not been established by law.
We subsequently affirmed the doctrine of the Devesa case in Palafox vs. Madamba (19 Phil., Rep., 444), and we take this occasion of again affirming
it, believing, as we do, that the indiscriminate use of injunctions should be discouraged.
Does the fact that the appellants did not know at the time the identity of the original lessee of the film militate against Gilchrist's right to a
preliminary injunction, although the appellant's incurred civil liability for damages for such interference? In the examination of the adjudicated cases,
where in injunctions have been issued to restrain wrongful interference with contracts by strangers to such contracts, we have been unable to find any
case where this precise question was involved, as in all of those cases which we have examined, the identity of both of the contracting parties was
known to the tort-feasors. We might say, however, that this fact does not seem to have a controlling feature in those cases. There is nothing in section
164 of the Code of Civil Procedure which indicates, even remotely, that before an injunction may issue restraining the wrongful interference with
contrast by strangers, the strangers must know the identity of both parties. It would seem that this is not essential, as injunctions frequently issue
against municipal corporations, public service corporations, public officers, and others to restrain the commission of acts which would tend to
injuriously affect the rights of person whose identity the respondents could not possibly have known beforehand. This court has held that in a proper
case injunction will issue at the instance of a private citizen to restrain ultra vires acts of public officials. (Severino vs. Governor-General, 16 Phil.
Rep., 366.) So we proceed to the determination of the main question of whether or not the preliminary injunction ought to have been issued in this
case.
As a rule, injunctions are denied to those who have an adequate remedy at law. Where the choice is between the ordinary and the extraordinary
processes of law, and the former are sufficient, the rule will not permit the use of the latter. (In re Debs, 158 U. S., 564.) If the injury is irreparable,
the ordinary process is inadequate. In Wahle vs.Reinbach (76 Ill., 322), the supreme court of Illinois approved a definition of the term "irreparable
injury" in the following language: "By `irreparable injury' is not meant such injury as is beyond the possibility of repair, or beyond possible
compensation in damages, nor necessarily great injury or great damage, but that species of injury, whether great or small, that ought not to be
submitted to on the one hand or inflicted on the other; and, because it is so large on the one hand, or so small on the other, is of such constant and
frequent recurrence that no fair or reasonable redress can be had therefor in a court of law." (Quoted with approval in Nashville R. R.
Co. vs. McConnell, 82 Fed., 65.)
The case at bar is somewhat novel, as the only contract which was broken was that between Cuddy and Gilchrist, and the profits of the appellee
depended upon the patronage of the public, for which it is conceded the appellants were at liberty to complete by all fair does not deter the
application of remarked in the case of the "ticket scalpers" (82 Fed., 65), the novelty of the facts does not deter the application of equitable principles.
This court takes judicial notice of the general character of a cinematograph or motion-picture theater. It is a quite modern form of the play house,
wherein, by means of an apparatus known as a cinematograph or cinematograph, a series of views representing closely successive phases of a moving
object, are exhibited in rapid sequence, giving a picture which, owing to the persistence of vision, appears to the observer to be in continuous motion.
(The Encyclopedia Britanica, vol. 6, p. 374.) The subjects which have lent themselves to the art of the photographer in this manner have increased
enormously in recent years, as well as have the places where such exhibition are given. The attendance, and, consequently, the receipts, at one of
these cinematograph or motion-picture theaters depends in no small degree upon the excellence of the photographs, and it is quite common for the
proprietor of the theater to secure an especially attractive exhibit as his "feature film" and advertise it as such in order to attract the public. This
feature film is depended upon to secure a larger attendance that if its place on the program were filled by other films of mediocre quality. It is evident
that the failure to exhibit the feature film will reduce the receipts of the theater.
Hence, Gilchrist was facing the immediate prospect of diminished profits by reason of the fact that the appellants had induced Cuddy to rent to them
the film Gilchrist had counted upon as his feature film. It is quite apparent that to estimate with any decree of accuracy the damages which Gilchrist
would likely suffer from such an event would be quite difficult if not impossible. If he allowed the appellants to exhibit the film in Iloilo, it would be
useless for him to exhibit it again, as the desire of the public to witness the production would have been already satisfied. In this extremity, the
appellee applied for and was granted, as we have indicated, a mandatory injunction against Cuddy requiring him to deliver the Zigomar to Gilchrist,
and a preliminary injunction against the appellants restraining them from exhibiting that film in their theater during the weeks he (Gilchrist) had a
right to exhibit it. These injunction saved the plaintiff harmless from damages due to the unwarranted interference of the defendants, as well as the
difficult task which would have been set for the court of estimating them in case the appellants had been allowed to carry out their illegal plans. As to
whether or not the mandatory injunction should have been issued, we are not, as we have said, called upon to determine. So far as the preliminary
injunction issued against the appellants is concerned, which prohibited them from exhibiting the Zigomar during the week which Gilchrist desired to
exhibit it, we are of the opinion that the circumstances justified the issuance of that injunction in the discretion of the court.
We are not lacking in authority to support our conclusion that the court was justified in issuing the preliminary injunction against the appellants.
Upon the precise question as to whether injunction will issue to restrain wrongful interference with contracts by strangers to such contracts, it may be
said that courts in the United States have usually granted such relief where the profits of the injured person are derived from his contractual relations
with a large and indefinite number of individuals, thus reducing him to the necessity of proving in an action against the tort-feasor that the latter was
responsible in each case for the broken contract, or else obliging him to institute individual suits against each contracting party and so exposing him

to a multiplicity of suits. Sperry & Hutchinson Co. vs.Mechanics' Clothing Co. (128 Fed., 800); Sperry & Hutchinson Co. vs. Louis Weber & Co.
(161 Fed., 219); Sperry & Hutchinson Co. vs. Pommer (199 Fed., 309); were all cases wherein the respondents were inducing retail merchants to
break their contracts with the company for the sale of the latters' trading stamps. Injunction issued in each case restraining the respondents from
interfering with such contracts.
In the case of the Nashville R. R. Co. vs. McConnell (82 Fed., 65), the court, among other things, said: "One who wrongfully interferes in a contract
between others, and, for the purpose of gain to himself induces one of the parties to break it, is liable to the party injured thereby; and his continued
interference may be ground for an injunction where the injuries resulting will be irreparable."
In Hamby & Toomer vs. Georgia Iron & Coal Co. (127 Ga., 792), it appears that the respondents were interfering in a contract for prison labor, and
the result would be, if they were successful, the shutting down of the petitioner's plant for an indefinite time. The court held that although there was
no contention that the respondents were insolvent, the trial court did not abuse its discretion in granting a preliminary injunction against the
respondents.
In Beekman vs. Marsters (195 Mass., 205), the plaintiff had obtained from the Jamestown Hotel Corporation, conducting a hotel within the grounds
of the Jamestown Exposition, a contract whereby he was made their exclusive agent for the New England States to solicit patronage for the hotel. The
defendant induced the hotel corporation to break their contract with the plaintiff in order to allow him to act also as their agent in the New England
States. The court held that an action for damages would not have afforded the plaintiff adequate relief, and that an injunction was proper compelling
the defendant to desist from further interference with the plaintiff's exclusive contract with the hotel company.
In Citizens' Light, Heat & Power Co. vs. Montgomery Light & Water Power Co. (171 Fed., 553), the court, while admitting that there are some
authorities to the contrary, held that the current authority in the United States and England is that:
The violation of a legal right committed knowingly is a cause of action, and that it is a violation of a legal right to interfere with contractual
relations recognized by law, if there be no sufficient justification for the interference. (Quinn vs. Leatham, supra, 510; Angle vs. Chicago,
etc., Ry. Co., 151 U. S., 1; 14 Sup. Ct., 240; 38 L. Ed., 55; Martens vs. Reilly, 109 Wis., 464, 84 N. W., 840; Rice vs. Manley, 66 N. Y., 82;
23 Am. Rep., 30; Bitterman vs. L. & N. R. R. Co., 207 U. S., 205; 28 Sup. Ct., 91; 52 L. Ed., 171; Beekman vs. Marsters, 195 Mass., 205;
80 N. E., 817; 11 L. R. A. [N. S.] 201; 122 Am. St. Rep., 232; South Wales Miners' Fed. vs.Glamorgan Coal Co., Appeal Cases, 1905, p.
239.)
See also Nims on Unfair Business Competition, pp. 351- 371.
In 3 Elliot on Contracts, section 2511, it is said: "Injunction is the proper remedy to prevent a wrongful interference with contract by strangers to such
contracts where the legal remedy is insufficient and the resulting injury is irreparable. And where there is a malicious interference with lawful and
valid contracts a permanent injunction will ordinarily issue without proof of express malice. So, an injunction may be issued where the complainant
to break their contracts with him by agreeing to indemnify who breaks his contracts of employment may be adjoined from including other employees
to break their contracts and enter into new contracts with a new employer of the servant who first broke his contract. But the remedy by injunction
cannot be used to restrain a legitimate competition, though such competition would involve the violation of a contract. Nor will equity ordinarily
enjoin employees who have quit the service of their employer from attempting by proper argument to persuade others from taking their places so long
as they do not resort to force or intimidations on obstruct the public thoroughfares."
Beekman vs. Marster, supra, is practically on all fours with the case at bar in that there was only one contract in question and the profits of the injured
person depended upon the patronage of the public. Hamby & Toomer vs.Georgia Iron & Coal Co., supra, is also similar to the case at bar in that there
was only one contract, the interference of which was stopped by injunction.
For the foregoing reasons the judgment is affirmed, with costs, against the appellants.
Arellano, C.J., Torres, Carson and Araullo, JJ., concur.

Separate Opinions
MORELAND, J., concurring:
The court seems to be of the opinion that the action is one for a permanent injunction; whereas, under my view of the case, it is one for specific
performance. The facts are simple. C. S. Gilchrist, the plaintiff, proprietor of the Eagle Theater of Iloilo, contracted with E. A. Cuddy, one of the
defendants, of Manila, for a film entitled "Zigomar or Eelskin, 3d series," to be exhibited in his theater in Iloilo during the week beginning May 26,
1913. Later, the defendants Espejo and Zaldarriaga, who were also operating a theater in Iloilo, representing Pathe Freres, also obtained from Cuddy
a contract for the exhibition of the film aforesaid in their theater in Iloilo during the same week.
The plaintiff commenced this action against Cuddy and the defendants Espejo and Zaldarriaga for the specific performance of the contract with
Cuddy. The complaint prays "that the court, by a mandatory injunction, order Cuddy to deliver, on the 24th of May, 1913, in accordance with the

aforesaid contract, the said film 'Zigomar, 3d series, or Eelskin,' to the plaintiff Gilchrist, in accordance with the terms of the agreement, so that
plaintiff can exhibit the same during the last week beginning May 26, 1913, in the Eagle Theater, in Iloilo; that the court issue a preliminary
injunction against the defendants Espejo and Zaldarriaga prohibiting them from receiving, exhibiting, or using said film in Iloilo during the last week
of May, 1913, or at any other time prior to the delivery to the plaintiff ; that, on the trial, said injunction be made perpetual and that Cuddy be ordered
and commanded to specifically perform his contract with the plaintiff ."
On the filing of the complaint the plaintiff made an application for a mandatory injunction compelling the defendant Cuddy to deliver to plaintiff the
film in question by mailing it to him from Manila on the 24th of May so that it would reach Iloilo for exhibition on the 26th; and for a preliminary
restraining order against the order two defendants prohibiting them from receiving or exhibiting the said film prior to its exhibition by plaintiff.
The court, on this application, entered an order which provided that Cuddy should "not send said film 'Zigomar, 3d series, or Eelskin,' to the
defendants Espejo and Zaldarriaga and that he should send it to the plaintiff, Gilchrist, on the 24th day of May, 1913, in the mail for Iloilo," This
order was duly served on the defendants, including Cuddy, in whose possession the film still was, and, in compliance therewith Cuddy mailed the
film to the plaintiff at Iloilo on the 24th of May. The latter duly received it and exhibited it without molestation during the week beginning the 26th of
May in accordance with the contract which he claimed to have made with Cuddy.
The defendants Espejo and Zaldarriaga having received due notice of the issuance of the mandatory injunction and restraining order of the 22d of
May, appeared before the court on the 26th of May and moved that the court vacate so much of the order as prohibited them from receiving and
exhibiting the film. In other words, while the order of the 22d of May was composed of two parts, one a mandatory order for immediate specific
performance of the plaintiff's contract with the defendant Cuddy, and the other a preliminary restraining order directed to Espejo and Zaldarriaga
prohibiting them from receiving and exhibiting the film during the week beginning the 26th of May, their motion of the 26th of May referred
exclusively to the injunction against them and touched in no way that portion of the order which required the immediate performance by Cuddy of his
contract with Gilchrist. Indeed, the defendants Espejo and Zaldarriaga did not even except to the order requiring Cuddy to specifically perform his
agreement with the plaintiff nor did they in any way make an objection to or show their disapproval of it. It was not excepted to or appealed from and
is not before this court for review.
The motion of Espejo and Zaldarriaga to vacate the injunction restraining them from receiving the film was denied on the 26th of May. After the
termination of the week beginning May 26th, and after the exhibition of the film by the plaintiff in accordance with the alleged contract with Cuddy,
the plaintiff came into court and moved that, in view of the fact that he had already obtained all that he desired to obtain or could obtain by his action,
namely, the exhibition of the film in question during the week beginning May 26th, there was no reason for continuing it and moved for its dismissal.
To this motion Cuddy consented and the action was dismissed as to him. But the other defendants objected to the dismissal of the action on the
ground that they desired to present to the court evidence showing the damages which they had suffered by reason of the issuance of the preliminary
injunction prohibiting them from receiving and exhibiting the film in question during the week beginning May 26. The court sustained their objection
and declined to dismiss the action as to them, and, on the 8th of August, heard the evidence as to damages. He denied defendants the relief asked for
and dismissed their claim for damages. They thereupon took an appeal from that order, and that is the appeal which we have now before us and which
is the subject of the opinion of the court with which I am concurring.
We thus have this strange condition:
An action for specific performance of a contract to deliver a film for exhibition during a given time. A preliminary mandatory injunction ordering the
delivery of the film in accordance with the contract. The delivery of the film in accordance with the preliminary mandatory injunction. The actual
exhibition of the film during the time specified in the contract. No objection to the issuance of the mandatory injunction, to the delivery of the film,
or to the ground that the plaintiff had obtained full relief by means of the so-called preliminary remedy by virtue of which the contract was actually
specifically performed before the action was tried. No objection or exception to the order requiring the specific performance of the contract.
Under such conditions it is possible for the defendant Espejo and Zaldarriaga to secure damages for the wrongful issuance of the preliminary
injunction directed against them even though it be admitted that it was erroneously issued and that there was no ground therefor whatever? It seems
to me that it is not. At the time this action was begun the film, as we have seen, was in the possession of Cuddy and, while in his possession, he
complied with a command of the court to deliver it to plaintiff. In pursuance of that command he delivered it to plaintiff, who used it during the time
specified in his contract with Cuddy; or, in other words, he made such use of it as he desired and then returned it to Cuddy. This order and the
delivery of the film under it were made in an action in which the defendants Espejo and Zaldarriaga were parties, without objection on their part and
without objection or exception to the order. The film having been delivered to defendants' competitor, the plaintiff, under a decree of the court to
which they made no objection and took no exception and from which they have not appealed, what injury can they show by reason of the injunction
restraining them from making use of the film? If they themselves, by their conduct, permitted the plaintiff to make it impossible for them to gain
possession of the film and to use it, then the preliminary injunction produced no injury for the reason that no harm can result from restraining a party
from doing a thing which, without such restraint, it would be impossible for him to do. Moreover, the order for the delivery of the film to plaintiff
was a complete determination of the rights of the parties to the film which, while the court had no right to make, nevertheless, was valid and binding
on all the parties, none of them objecting or taking exception thereto. Being a complete determination of the rights of the parties to the action, it
should have been the first point attacked by the defendants, as it foreclosed them completely and, if left in force, eliminating every defense. This
order was made on May 22d and was not excepted to or appealed from. On the 8th of August following the defendants appealed from the order
dismissing their claim to damages but the order for the delivery of the film to plaintiff was final at that time and is now conclusive on this court.
Section 143 of the Code of Civil Procedure, providing for appeals by bill of exceptions, provides that "upon the rendition of final judgment disposing
of the action, either party shall have the right to perfect a bill of exceptions for a review by the Supreme Court of all rulings, orders, and judgment
made in the action, to which the party has duly excepted at the time of making such ruling, order, or judgment." While the order for the delivery of
the film to plaintiff was in one sense a preliminary order, it was in reality a final determination of the rights of the parties to the film, as it ordered the

delivery thereof to plaintiff for his use. If it had been duly excepted to, its validity could have been attacked in an appeal from the final judgment
thereafter entered in the action. Not having been excepted to as required by the section just referred to, it became final and conclusive on all the
parties to the action, and when, on the 8th day of August following, the defendants presented their claim for damages based on the alleged wrongful
issuance of a temporary restraining order, the whole foundation of their claim had disappeared by virtue of the fact that the execution of the order of
the 22d of May had left nothing for them to litigate. The trial court, on the 8th of August, would have been fully justified in refusing to hear the
defendants on their claim for damages. Their right thereto had been adjudicated on the 22d of May and that adjudication had been duly put into
execution without protest, objection or exception, and was, therefore, final and conclusive on them on the 8th of August.
I have presented this concurring opinion in an attempt to prevent confusion, if any, which might arise from the theory on which the court decides this
case. It seems to me impossible that the action can be one for a permanentinjunction. The very nature of the case demonstrates that a permanent
injunction is out of the question. The only thing that plaintiff desired was to be permitted to use the film for the week beginning the 26th of May.
With the termination of that week his rights expired. After that time Cuddy was perfectly free to turn the film over to the defendants Espejo and
Zaldarriaga for exhibition at any time. An injunction permanently prohibiting the defendants from exhibiting the film in Iloilo would have been
unjustifiable, as it was something that plaintiff did not ask and did not want; and would have been an invasion of the rights of Cuddy as, after the
termination of the week beginning May 26, he was at liberty, under his contract with plaintiff, to rent the film to the defendants Espejo and
Zaldarriaga and permit its exhibition in Iloilo at any time. The plaintiff never asked to have defendants permanently enjoined from exhibiting the film
in Iloilo and no party to the action has suggested such thing.
The action is one for specific performance purely; and while the court granted plaintiff rights which should have been granted only after a trial of the
action, nevertheless, such right having been granted before trial and none of the defendants having made objection or taken exception thereto, and the
order granting them having become final, such order became a final determination of the action, by reason of the nature of the action itself, the rights
of the parties became thereby finally determined and the defendants Espejo and Zaldarriaga, being parties to the action, were precluded from further
litigation relative to the subject matter of the controversy.
No damages are claimed by reason of the issuance of the mandatory injunction under which the film was delivered to plaintiff and used by him
during the week beginning the 26th of May. While the opinion says in the first paragraph that the action is "for damages against the plaintiff for the
alleged wrongful issuance of a mandatory and preliminary injunction," the opinion also says in a latter portion that "It will be unnecessary for us to
inquire whether the mandatory injunction against Cuddy was properly issued or not. No question is raised with reference to the issuance of that
injunction;" and still later it is also stated that "as to whether or not the mandatory injunction should have been issued, we are not, as we have said,
called upon to determine." I repeat that no objection was made by the defendants to the issuance of the mandatory injunction, no exception was taken
to the order on which it was issued and no appeal has been taken therefrom. That order is now final and conclusive and was at the time this appeal
was taken. That being so, the rights of the defendants were foreclosed thereby. The defendants Espejo and Zaldarriaga cannot now be heard to say
that they were damaged by the issuance of the preliminary restraining injunction issued on the same day as the mandatory injunction.
From what has been said it is clear, it seems to me, that the question of a breach of contract by inducement, which is substantially the only question
discussed and decided, is not in the case in reality and, in my judgment, should not be touched upon. Courts will not proceed with a litigation and
discuss and decided question which might possibly be involved in the case when it clearly appears that there remains nothing about which to litigate,
the whole subject matter of the original action having been settled and the parties having no real controversy to present. At the time the defendants
Espejo and Zaldarriaga offered their claim for damages arising out of the wrongful issuance of the restraining order, there was nothing between them
and the plaintiff to litigate, the rightfulness of plaintiff's demand having already been finally adjudicated and determined in the same action.

EN BANC
[G.R. No. L-8437. November 28, 1956.]
ESTATE OF K. H. HEMADY, deceased, vs. LUZON SURETY CO., INC., claimant-Appellant.

DECISION
REYES, J. B. L., J.:
Appeal by Luzon Surety Co., Inc., from an order of the Court of First Instance of Rizal, presided by Judge Hermogenes Caluag, dismissing its claim
against the Estate of K. H. Hemady (Special Proceeding No. Q-293) for failure to state a cause of action.
The Luzon Surety Co. had filed a claim against the Estate based on twenty different indemnity agreements, or counter bonds, each subscribed by a
distinct principal and by the deceased K. H. Hemady, a surety solidary guarantor) in all of them, in consideration of the Luzon Surety Co.s of having
guaranteed, the various principals in favor of different creditors. The twenty counterbonds, or indemnity agreements, all contained the following
stipulations:chanroblesvirtuallawlibrary
Premiums. As consideration for this suretyship, the undersigned jointly and severally, agree to pay the COMPANY the sum of
________________ (P______) pesos, Philippines Currency, in advance as premium there of for every __________ months or fractions thereof, this
________ or any renewal or substitution thereof is in effect.
Indemnity. The undersigned, jointly and severally, agree at all times to indemnify the COMPANY and keep it indemnified and hold and save it
harmless from and against any and all damages, losses, costs, stamps, taxes, penalties, charges, and expenses of whatsoever kind and nature which
the COMPANY shall or may, at any time sustain or incur in consequence of having become surety upon this bond or any extension, renewal,
substitution or alteration thereof made at the instance of the undersigned or any of them or any order executed on behalf of the undersigned or any of
them; chan roblesvirtualawlibraryand to pay, reimburse and make good to the COMPANY, its successors and assigns, all sums and amount of money
which it or its representatives shall pay or cause to be paid, or become liable to pay, on account of the undersigned or any of them, of whatsoever kind
and nature, including 15% of the amount involved in the litigation or other matters growing out of or connected therewith for counsel or attorneys
fees, but in no case less than P25. It is hereby further agreed that in case of extension or renewal of this ________ we equally bind ourselves for the
payment thereof under the same terms and conditions as above mentioned without the necessity of executing another indemnity agreement for the
purpose and that we hereby equally waive our right to be notified of any renewal or extension of this ________ which may be granted under this
indemnity agreement.
Interest on amount paid by the Company. Any and all sums of money so paid by the company shall bear interest at the rate of 12% per annum
which interest, if not paid, will be accummulated and added to the capital quarterly order to earn the same interests as the capital and the total sum
thereof, the capital and interest, shall be paid to the COMPANY as soon as the COMPANY shall have become liable therefore, whether it shall have
paid out such sums of money or any part thereof or not.
xxx

xxx

xxx

Waiver. It is hereby agreed upon by and between the undersigned that any question which may arise between them by reason of this document and
which has to be submitted for decision to Courts of Justice shall be brought before the Court of competent jurisdiction in the City of Manila, waiving
for this purpose any other venue. Our right to be notified of the acceptance and approval of this indemnity agreement is hereby likewise waived.
xxx

xxx

xxx

Our Liability Hereunder. It shall not be necessary for the COMPANY to bring suit against the principal upon his default, or to exhaust the property
of the principal, but the liability hereunder of the undersigned indemnitor shall be jointly and severally, a primary one, the same as that of the
principal, and shall be exigible immediately upon the occurrence of such default. (Rec. App. pp. 98- 102.)
The Luzon Surety Co., prayed for allowance, as a contingent claim, of the value of the twenty bonds it had executed in consideration of the
counterbonds, and further asked for judgment for the unpaid premiums and documentary stamps affixed to the bonds, with 12 per cent interest
thereon.
Before answer was filed, and upon motion of the administratrix of Hemadys estate, the lower court, by order of September 23, 1953, dismissed the
claims of Luzon Surety Co., on two grounds:chanroblesvirtuallawlibrary (1) that the premiums due and cost of documentary stamps were not
contemplated under the indemnity agreements to be a part of the undertaking of the guarantor (Hemady), since they were not liabilities incurred after
the execution of the counterbonds; chan roblesvirtualawlibraryand (2) that whatever losses may occur after Hemadys death, are not chargeable to
his estate, because upon his death he ceased to be guarantor.
Taking up the latter point first, since it is the one more far reaching in effects, the reasoning of the court below ran as
follows:chanroblesvirtuallawlibrary
The administratrix further contends that upon the death of Hemady, his liability as a guarantor terminated, and therefore, in the absence of a showing
that a loss or damage was suffered, the claim cannot be considered contingent. This Court believes that there is merit in this contention and finds
support in Article 2046 of the new Civil Code. It should be noted that a new requirement has been added for a person to qualify as a guarantor, that
is:chanroblesvirtuallawlibrary integrity. As correctly pointed out by the Administratrix, integrity is something purely personal and is not
transmissible. Upon the death of Hemady, his integrity was not transmitted to his estate or successors. Whatever loss therefore, may occur after
Hemadys death, are not chargeable to his estate because upon his death he ceased to be a guarantor.
Another clear and strong indication that the surety company has exclusively relied on the personality, character, honesty and integrity of the now
deceased K. H. Hemady, was the fact that in the printed form of the indemnity agreement there is a paragraph entitled Security by way of first
mortgage, which was expressly waived and renounced by the security company. The security company has not demanded from K. H. Hemady to

comply with this requirement of giving security by way of first mortgage. In the supporting papers of the claim presented by Luzon Surety Company,
no real property was mentioned in the list of properties mortgaged which appears at the back of the indemnity agreement. (Rec. App., pp. 407-408).
We find this reasoning untenable. Under the present Civil Code (Article 1311), as well as under the Civil Code of 1889 (Article 1257), the rule is that

Contracts take effect only as between the parties, their assigns and heirs, except in the case where the rights and obligations arising from the contract
are not transmissible by their nature, or by stipulation or by provision of law.
While in our successional system the responsibility of the heirs for the debts of their decedent cannot exceed the value of the inheritance they receive
from him, the principle remains intact that these heirs succeed not only to the rights of the deceased but also to his obligations. Articles 774 and 776
of the New Civil Code (and Articles 659 and 661 of the preceding one) expressly so provide, thereby confirming Article 1311 already quoted.
ART. 774. Succession is a mode of acquisition by virtue of which the property, rights and obligations to the extent of the value of the inheritance,
of a person are transmitted through his death to another or others either by his will or by operation of law.
ART. 776. The inheritance includes all the property, rights and obligations of a person which are not extinguished by his death.
In Mojica vs. Fernandez, 9 Phil. 403, this Supreme Court ruled:chanroblesvirtuallawlibrary
Under the Civil Code the heirs, by virtue of the rights of succession are subrogated to all the rights and obligations of the deceased (Article 661) and
cannot be regarded as third parties with respect to a contract to which the deceased was a party, touching the estate of the deceased (Barrios vs. Dolor,
2 Phil. 44).
xxx

xxx

xxx

The principle on which these decisions rest is not affected by the provisions of the new Code of Civil Procedure, and, in accordance with that
principle, the heirs of a deceased person cannot be held to be third persons in relation to any contracts touching the real estate of their decedent
which comes in to their hands by right of inheritance; chan roblesvirtualawlibrarythey take such property subject to all the obligations resting thereon
in the hands of him from whom they derive their rights.
(See also Galasinao vs. Austria, 51 Off. Gaz. (No. 6) p. 2874 and de Guzman vs. Salak, 91 Phil., 265).
The binding effect of contracts upon the heirs of the deceased party is not altered by the provision in our Rules of Court that money debts of a
deceased must be liquidated and paid from his estate before the residue is distributed among said heirs (Rule 89). The reason is that whatever
payment is thus made from the estate is ultimately a payment by the heirs and distributees, since the amount of the paid claim in fact diminishes or
reduces the shares that the heirs would have been entitled to receive.
Under our law, therefore, the general rule is that a partys contractual rights and obligations are transmissible to the successors. The rule is a
consequence of the progressive depersonalization of patrimonial rights and duties that, as observed by Victorio Polacco, has characterized the
history of these institutions. From the Roman concept of a relation from person to person, the obligation has evolved into a relation from patrimony
to patrimony, with the persons occupying only a representative position, barring those rare cases where the obligation is strictly personal, i.e., is
contracted intuitu personae, in consideration of its performance by a specific person and by no other. The transition is marked by the disappearance of
the imprisonment for debt.
Of the three exceptions fixed by Article 1311, the nature of the obligation of the surety or guarantor does not warrant the conclusion that his peculiar
individual qualities are contemplated as a principal inducement for the contract. What did the creditor Luzon Surety Co. expect of K. H. Hemady
when it accepted the latter as surety in the counterbonds? Nothing but the reimbursement of the moneys that the Luzon Surety Co. might have to
disburse on account of the obligations of the principal debtors. This reimbursement is a payment of a sum of money, resulting from an obligation to
give; chan roblesvirtualawlibraryand to the Luzon Surety Co., it was indifferent that the reimbursement should be made by Hemady himself or by
some one else in his behalf, so long as the money was paid to it.
The second exception of Article 1311, p. 1, is intransmissibility by stipulation of the parties. Being exceptional and contrary to the general rule, this
intransmissibility should not be easily implied, but must be expressly established, or at the very least, clearly inferable from the provisions of the
contract itself, and the text of the agreements sued upon nowhere indicate that they are non-transferable.
(b) Intransmisibilidad por pacto. Lo general es la transmisibilidad de darechos y obligaciones; chan roblesvirtualawlibraryle excepcion, la
intransmisibilidad. Mientras nada se diga en contrario impera el principio de la transmision, como elemento natural a toda relacion juridica, salvo las
personalisimas. Asi, para la no transmision, es menester el pacto expreso, porque si no, lo convenido entre partes trasciende a sus herederos.
Siendo estos los continuadores de la personalidad del causante, sobre ellos recaen los efectos de los vinculos juridicos creados por sus antecesores, y
para evitarlo, si asi se quiere, es indespensable convension terminante en tal sentido.
Por su esencia, el derecho y la obligacion tienden a ir ms all de las personas que les dieron vida, y a ejercer presion sobre los sucesores de esa
persona; chan roblesvirtualawlibrarycuando no se quiera esto, se impone una estipulacion limitativa expresamente de la transmisibilidad o de cuyos
tirminos claramente se deduzca la concresion del concreto a las mismas personas que lo otorgon. (Scaevola, Codigo Civil, Tomo XX, p. 541-542)
(Emphasis supplied.)
Because under the law (Article 1311), a person who enters into a contract is deemed to have contracted for himself and his heirs and assigns, it is
unnecessary for him to expressly stipulate to that effect; chan roblesvirtualawlibraryhence, his failure to do so is no sign that he intended his bargain
to terminate upon his death. Similarly, that the Luzon Surety Co., did not require bondsman Hemady to execute a mortgage indicates nothing more
than the companys faith and confidence in the financial stability of the surety, but not that his obligation was strictly personal.
The third exception to the transmissibility of obligations under Article 1311 exists when they are not transmissible by operation of law. The
provision makes reference to those cases where the law expresses that the rights or obligations are extinguished by death, as is the case in legal
support (Article 300), parental authority (Article 327), usufruct (Article 603), contracts for a piece of work (Article 1726), partnership (Article 1830

and agency (Article 1919). By contract, the articles of the Civil Code that regulate guaranty or suretyship (Articles 2047 to 2084) contain no
provision that the guaranty is extinguished upon the death of the guarantor or the surety.
The lower court sought to infer such a limitation from Art. 2056, to the effect that one who is obliged to furnish a guarantor must present a person
who possesses integrity, capacity to bind himself, and sufficient property to answer for the obligation which he guarantees. It will be noted, however,
that the law requires these qualities to be present only at the time of the perfection of the contract of guaranty. It is self-evident that once the contract
has become perfected and binding, the supervening incapacity of the guarantor would not operate to exonerate him of the eventual liability he has
contracted; chan roblesvirtualawlibraryand if that be true of his capacity to bind himself, it should also be true of his integrity, which is a quality
mentioned in the article alongside the capacity.
The foregoing concept is confirmed by the next Article 2057, that runs as follows:chanroblesvirtuallawlibrary
ART. 2057. If the guarantor should be convicted in first instance of a crime involving dishonesty or should become insolvent, the creditor may
demand another who has all the qualifications required in the preceding article. The case is excepted where the creditor has required and stipulated
that a specified person should be guarantor.
From this article it should be immediately apparent that the supervening dishonesty of the guarantor (that is to say, the disappearance of his integrity
after he has become bound) does not terminate the contract but merely entitles the creditor to demand a replacement of the guarantor. But the step
remains optional in the creditor:chanroblesvirtuallawlibrary it is his right, not his duty; chan roblesvirtualawlibraryhe may waive it if he chooses, and
hold the guarantor to his bargain. Hence Article 2057 of the present Civil Code is incompatible with the trial courts stand that the requirement of
integrity in the guarantor or surety makes the latters undertaking strictly personal, so linked to his individuality that the guaranty automatically
terminates upon his death.
The contracts of suretyship entered into by K. H. Hemady in favor of Luzon Surety Co. not being rendered intransmissible due to the nature of the
undertaking, nor by the stipulations of the contracts themselves, nor by provision of law, his eventual liability thereunder necessarily passed upon his
death to his heirs. The contracts, therefore, give rise to contingent claims provable against his estate under section 5, Rule 87 (2 Moran, 1952 ed., p.
437; chan roblesvirtualawlibraryGaskell & Co. vs. Tan Sit, 43 Phil. 810, 814).
The most common example of the contigent claim is that which arises when a person is bound as surety or guarantor for a principal who is insolvent
or dead. Under the ordinary contract of suretyship the surety has no claim whatever against his principal until he himself pays something by way of
satisfaction upon the obligation which is secured. When he does this, there instantly arises in favor of the surety the right to compel the principal to
exonerate the surety. But until the surety has contributed something to the payment of the debt, or has performed the secured obligation in whole or in
part, he has no right of action against anybody no claim that could be reduced to judgment. (May vs. Vann, 15 Pla., 553; chan
roblesvirtualawlibraryGibson vs. Mithell, 16 Pla., 519; chan roblesvirtualawlibraryMaxey vs. Carter, 10 Yarg. [Tenn.], 521 Reeves vs. Pulliam, 7
Baxt. [Tenn.], 119; chan roblesvirtualawlibraryErnst vs. Nou, 63 Wis., 134.)
For Defendant administratrix it is averred that the above doctrine refers to a case where the surety files claims against the estate of the principal
debtor; chan roblesvirtualawlibraryand it is urged that the rule does not apply to the case before us, where the late Hemady was a surety, not a
principal debtor. The argument evinces a superficial view of the relations between parties. If under the Gaskell ruling, the Luzon Surety Co., as
guarantor, could file a contingent claim against the estate of the principal debtors if the latter should die, there is absolutely no reason why it could
not file such a claim against the estate of Hemady, since Hemady is a solidary co-debtor of his principals. What the Luzon Surety Co. may claim from
the estate of a principal debtor it may equally claim from the estate of Hemady, since, in view of the existing solidarity, the latter does not even enjoy
the benefit of exhaustion of the assets of the principal debtor.
The foregoing ruling is of course without prejudice to the remedies of the administratrix against the principal debtors under Articles 2071 and 2067 of
the New Civil Code.
Our conclusion is that the solidary guarantors liability is not extinguished by his death, and that in such event, the Luzon Surety Co., had the right to
file against the estate a contingent claim for reimbursement. It becomes unnecessary now to discuss the estates liability for premiums and stamp
taxes, because irrespective of the solution to this question, the Luzon Suretys claim did state a cause of action, and its dismissal was erroneous.
Wherefore, the order appealed from is reversed, and the records are ordered remanded to the court of origin, with instructions to proceed in
accordance with law. Costs against the Administratrix- Appellee. SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 120554 September 21, 1999


SO PING BUN, petitioner,
vs.
COURT OF APPEALS, TEK HUA ENTERPRISES CORP. and MANUEL C. TIONG, respondents.

QUISUMBING, J.:
This petition for certiorari challenges the Decision 1 of the Court of Appeals dated October 10, 1994, and the Resolution 2dated June 5, 1995, in CAG.R. CV No. 38784. The appellate court affirmed the decision of the Regional Trial Court of Manila, Branch 35, except for the award of attorney's
fees, as follows:
WHEREFORE, foregoing considered, the appeal of respondent-appellant So Ping Bun for lack of merit is DISMISSED. The
appealed decision dated April 20, 1992 of the court a quo is modified by reducing the attorney's fees awarded to plaintiff Tek Hua
Enterprising Corporation from P500,000.00 to P200,000.00. 3
The facts are as follows:
In 1963, Tek Hua Trading Co, through its managing partner, So Pek Giok, entered into lease agreements with lessor Dee C. Chuan & Sons Inc.
(DCCSI). Subjects of four (4) lease contracts were premises located at Nos. 930, 930-Int., 924-B and 924-C, Soler Street, Binondo, Manila. Tek Hua
used the areas to store its textiles. The contracts each had a one-year term. They provided that should the lessee continue to occupy the premises after
the term, the lease shall be on a month-to-month basis.
When the contracts expired, the parties did not renew the contracts, but Tek Hua continued to occupy the premises. In 1976, Tek Hua Trading Co.
was dissolved. Later, the original members of Tek Hua Trading Co. including Manuel C. Tiong, formed Tek Hua Enterprising Corp., herein
respondent corporation.
So Pek Giok, managing partner of Tek Hua Trading, died in 1986. So Pek Giok's grandson, petitioner So Ping Bun, occupied the warehouse for his
own textile business, Trendsetter Marketing.
On August 1, 1989, lessor DCCSI sent letters addressed to Tek Hua Enterprises, informing the latter of the 25% increase in rent effective September
1, 1989. The rent increase was later on reduced to 20% effective January 1, 1990, upon other lessees' demand. Again on December 1, 1990, the lessor
implemented a 30% rent increase. Enclosed in these letters were new lease contracts for signing. DCCSI warned that failure of the lessee to
accomplish the contracts shall be deemed as lack of interest on the lessee's part, and agreement to the termination of the lease. Private respondents did
not answer any of these letters. Still, the lease contracts were not rescinded.
On March 1, 1991, private respondent Tiong sent a letter to petitioner which reads as follows:
March 1, 1991
Mr. So Ping Bun
930 Soler Street
Binondo, Manila
Dear Mr. So,

Due to my closed (sic) business associate (sic) for three decades with your late grandfather Mr. So Pek Giok and late father, Mr.
So Chong Bon, I allowed you temporarily to use the warehouse of Tek Hua Enterprising Corp. for several years to generate your
personal business.
Since I decided to go back into textile business, I need a warehouse immediately for my stocks. Therefore, please be advised to
vacate all your stocks in Tek Hua Enterprising Corp. Warehouse. You are hereby given 14 days to vacate the premises unless you
have good reasons that you have the right to stay. Otherwise, I will be constrained to take measure to protect my interest.
Please give this urgent matter your preferential attention to avoid inconvenience on your part.
Very truly yours,
(Sgd) Manuel C. Tiong
MANUEL C. TIONG
President 4
Petitioner refused to vacate. On March 4, 1992, petitioner requested formal contracts of lease with DCCSI in favor Trendsetter Marketing. So Ping
Bun claimed that after the death of his grandfather, So Pek Giok, he had been occupying the premises for his textile business and religiously paid
rent. DCCSI acceded to petitioner's request. The lease contracts in favor of Trendsetter were executed.
In the suit for injunction, private respondents pressed for the nullification of the lease contracts between DCCSI and petitioner. They also claimed
damages.
After trial, the trial court ruled:
WHEREFORE, judgment is rendered:
1. Annulling the four Contracts of Lease (Exhibits A, A-1 to A-3, inclusive) all dated
March 11, 1991, between defendant So Ping Bun, doing business under the name and
style of "Trendsetter Marketing", and defendant Dee C. Chuan & Sons, Inc. over the
premises located at Nos. 924-B, 924-C, 930 and 930, Int., respectively, Soler Street,
Binondo Manila;
2. Making permanent the writ of preliminary injunction issued by this Court on June 21,
1991;
3. Ordering defendant So Ping Bun to pay the aggrieved party, plaintiff Tek Hua
Enterprising Corporation, the sum of P500,000.00, for attorney's fees;
4. Dismissing the complaint, insofar as plaintiff Manuel C. Tiong is concerned, and the
respective counterclaims of the defendant;
5. Ordering defendant So Ping Bun to pay the costs of this lawsuit;
This judgment is without prejudice to the rights of plaintiff Tek Hua Enterprising Corporation and defendant Dee C. Chuan &
Sons, Inc. to negotiate for the renewal of their lease contracts over the premises located at Nos. 930, 930-Int., 924-B and 924-C
Soler Street, Binondo, Manila, under such terms and conditions as they agree upon, provided they are not contrary to law, public
policy, public order, and morals.
SO ORDERED. 5
Petitioner's motion for reconsideration of the above decision was denied.
On appeal by So Ping Bun, the Court of Appeals upheld the trial court. On motion for reconsideration, the appellate court modified the decision by
reducing the award of attorney's fees from five hundred thousand (P500,000.00) pesos to two hundred thousand (P200,000.00) pesos.
Petitioner is now before the Court raising the following issues:

I. WHETHER THE APPELLATE COURT ERRED IN AFFIRMING THE TRIAL COURT'S


DECISION FINDING SO PING BUN GUILTY OF TORTUOUS INTERFERENCE OF
CONTRACT?
II. WHETHER THE APPELLATE COURT ERRED IN AWARDING ATTORNEY'S FEES OF
P200,000.00 IN FAVOR OF PRIVATE RESPONDENTS.
The foregoing issues involve, essentially, the correct interpretation of the applicable law on tortuous conduct, particularly unlawful interference with
contract. We have to begin, obviously, with certain fundamental principles on torts and damages.
Damage is the loss, hurt, or harm which results from injury, and damages are the recompense or compensation awarded for the damage
suffered. 6 One becomes liable in an action for damages for a nontrespassory invasion of another's interest in the private use and enjoyment of asset if
(a) the other has property rights and privileges with respect to the use or enjoyment interfered with, (b) the invasion is substantial, (c) the defendant's
conduct is a legal cause of the invasion, and (d) the invasion is either intentional and unreasonable or unintentional and actionable under general
negligence rules. 7
The elements of tort interference are: (1) existence of a valid contract; (2) knowledge on the part of the third person of the existence of contract; and
(3) interference of the third person is without legal justification or excuse. 8
A duty which the law of torts is concerned with is respect for the property of others, and a cause of action ex delictomay be predicated upon an
unlawful interference by one person of the enjoyment by the other of his private
property. 9 This may pertain to a situation where a third person induces a party to renege on or violate his undertaking under a contract. In the case
before us, petitioner's Trendsetter Marketing asked DCCSI to execute lease contracts in its favor, and as a result petitioner deprived respondent
corporation of the latter's property right. Clearly, and as correctly viewed by the appellate court, the three elements of tort interference abovementioned are present in the instant case.
Authorities debate on whether interference may be justified where the defendant acts for the sole purpose of furthering his own financial or economic
interest. 10 One view is that, as a general rule, justification for interfering with the business relations of another exists where the actor's motive is to
benefit himself. Such justification does not exist where his sole motive is to cause harm to the other. Added to this, some authorities believe that it is
not necessary that the interferer's interest outweigh that of the party whose rights are invaded, and that an individual acts under an economic interest
that is substantial, not merely de minimis, such that wrongful and malicious motives are negatived, for he acts in self-protection. 11Moreover
justification for protecting one's financial position should not be made to depend on a comparison of his economic interest in the subject matter with
that of others. 12 It is sufficient if the impetus of his conduct lies in a proper business interest rather than in wrongful motives. 13
As early as Gilchrist vs. Cuddy, 14 we held that where there was no malice in the interference of a contract, and the impulse behind one's conduct lies
in a proper business interest rather than in wrongful motives, a party cannot be a malicious interferer. Where the alleged interferer is financially
interested, and such interest motivates his conduct, it cannot be said that he is an officious or malicious intermeddler. 15
In the instant case, it is clear that petitioner So Ping Bun prevailed upon DCCSI to lease the warehouse to his enterprise at the expense of respondent
corporation. Though petitioner took interest in the property of respondent corporation and benefited from it, nothing on record imputes deliberate
wrongful motives or malice on him.
Sec. 1314 of the Civil Code categorically provides also that, "Any third person who induces another to violate his contract shall be liable for damages
to the other contracting party." Petitioner argues that damage is an essential element of tort interference, and since the trial court and the appellate
court ruled that private respondents were not entitled to actual, moral or exemplary damages, it follows that he ought to be absolved of any liability,
including attorney's fees.
It is true that the lower courts did not award damages, but this was only because the extent of damages was not quantifiable. We had a similar
situation in Gilchrist, where it was difficult or impossible to determine the extent of damage and there was nothing on record to serve as basis thereof.
In that case we refrained from awarding damages. We believe the same conclusion applies in this case.
While we do not encourage tort interferers seeking their economic interest to intrude into existing contracts at the expense of others, however, we
find that the conduct herein complained of did not transcend the limits forbidding an obligatory award for damages in the absence of any malice. The
business desire is there to make some gain to the detriment of the contracting parties. Lack of malice, however, precludes damages. But it does not
relieve petitioner of the legal liability for entering into contracts and causing breach of existing ones. The respondent appellate court correctly
confirmed the permanent injunction and nullification of the lease contracts between DCCSI and Trendsetter Marketing, without awarding damages.
The injunction saved the respondents from further damage or injury caused by petitioner's interference.
Lastly, the recovery of attorney's fees in the concept of actual or compensatory damages, is allowed under the circumstances provided for in Article
2208 of the Civil Code. 16 One such occasion is when the defendant's act or omission has compelled the plaintiff to litigate with third persons or to
incur expenses to protect his interest. 17 But we have consistently held that the award of considerable damages should have clear factual and legal
bases. 18 In connection with attorney's fees, the award should be commensurate to the benefits that would have been derived from a favorable
judgment. Settled is the rule that fairness of the award of damages by the trial court calls for appellate review such that the award if far too excessive
can be reduced. 19 This ruling applies with equal force on the award of attorney's fees. In a long line of cases we said, "It is not sound policy to place

in penalty on the right to litigate. To compel the defeated party to pay the fees of counsel for his successful opponent would throw wide open the door
of temptation to the opposing party and his counsel to swell the fees to undue proportions." 20
Considering that the respondent corporation's lease contract, at the time when the cause of action accrued, ran only on a month-to-month basis
whence before it was on a yearly basis, we find even the reduced amount of attorney's fees ordered by the Court of Appeals still exorbitant in the light
of prevailing jurisprudence. 21 Consequently, the amount of two hundred thousand (P200,000.00) awarded by respondent appellate court should be
reduced to one hundred thousand (P100,000.00) pesos as the reasonable award or attorney's fees in favor of private respondent corporation.
WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 38784 are hereby
AFFIRMED, with MODIFICATION that the award of attorney's fees is reduced from two hundred thousand (P200,000.00) to one hundred thousand
(P100,000.00) pesos. No pronouncement as to costs.1wphi1.nt
SO ORDERED.
Bellosillo, Mendoza and Buena, JJ., concur.