EN BANC 4. ID.; CASO FORTUITO, INVOCATION OF.

Where appellant adopted precautionary

[G.R. No. L-21749. September 29, 1967.]
REPUBLIC OF THE PHILIPPINES, Plaintiff-Appellee, v. LUZON STEVEDORING
CORPORATION,Defendant-Appellant.
The Solicitor General for the Plaintiff-Appellee.
H. San Luis and L.V. Simbulan, for Defendant-Appellant.
measures by assigning two of its most powerful tugboats to tow its barge down river and
by assigning its more competent and experienced patrons to take care of the towlines,
who were instructed to take precautions; and where the engines and equipment had been
double-checked and unspected so that it had done all it could do to prevent an accident,
said appellant cannot invoke caso fortuito or force majeure, as the possibility of danger
was not only foreseeable, but actually foreseen. Otherwise stated, appellant, knowing or
appreciating the perils posed by the swollen stream and its swift current, voluntarily
entered into a situation involving obvious danger; it therefore assumed the risk, and
cannot shed responsibility merely because the precautions it adopted turned out to be
insufficient.

5. REMEDIAL LAW; EVIDENCE; DISCRETION OF JUDGE. Whether or not further

evidence will be allowed after a party offering the evidence had rested his case, lies within
SYLLABUS the sound discretion of the trial judge, and this discretion will not be reviewed except in
clear case of abuse.

1. REMEDIAL LAW; APPEALS, EFFECT OF; WAIVER; ESTOPPEL. The established rule in
this jurisdiction is that when a party appeals directly to the Supreme Court and submits DECISION
his case there for decision, he is deemed to have waived the right to dispute any finding of
fact made by the trial court. The only questions that may be raised are those of law. A
converso, a party who resorts to the Court of Appeals and submits his case for decision
there, is barred from contending later that his claim was beyond the jurisdiction of that
Court. REYES, J.B.L., J.:

2. CIVIL LAW; CULPA AQUILIANA; PRESUMPTIONS; RES IPSA LOQUITUR. Where an

immovable and stationary object like the Nagtahan bridge, uncontrovertedly provided with
adequate openings for passage of watercraft, is rammed by a barge exclusively controlled
by appellant, causing damage to its supports, there arises a presumption of negligence on The present case comes by direct appeal from a decision of the Court of First Instance of
appellants part or its employees, manning the barge or the tugs that towed it. In the Manila (Case No. 44572) adjudging the defendant-appellant, Luzon Stevedoring
ordinary course of events, such a thing does not happen if proper care is used. In Anglo- Corporation, liable in damages to the plaintiff-appellee Republic of the Philippines.
American Jurisprudence, the inference arises by what is known as the "res ipsa loquitur"
rule. In the early afternoon of August 17, 1960, barge L-1892, owned by the Luzon Stevedoring
Corporation was being towed down the Pasig river by tugboats "Bangus" and "Barbero," 1
3. ID; CASO FORTUITO. Caso fortuito or force majeure (which in law are identical also belonging to the same corporation, when the barge rammed against one of the
insofar as they exempt an obligor from liability) by definition, means extraordinary events wooden piles of the Nagtahan bailey bridge, smashing the posts and causing the bridge to
not forseeable or avoidable, "events that could not be forseen, or which though foreseen, list. The river, at the time, was swollen and the current swift, on account of the heavy
were inevitable." It is therefore not enough that the event should not have been forseen downpour in Manila and the surrounding provinces on August 15 and 16, 1960.
or anticipated, but it must be one impossible to foresee or to avoid. The mere difficulty to
foresee the happening is not impossibility to foresee the same: "un hecho no constituye Sued by the Republic of the Philippines for actual and consequential damage caused by its
caso fortuito por la sola circunstancia de que su existencia haga mas dificil o mas onerosa employees, amounting to P200,000 (Civil Case No. 44562, CFI of Manila), defendant
la accin diligente del presnto ofensor."
cralaw virtua1aw library
Luzon Stevedoring Corporation disclaimed liability therefor, on the grounds that it had
exercised due diligence in the selection and supervision of its employees; that the
damages to the bridge were caused by force majeure; that plaintiff has no capacity to this appeal are reduced to two: chanrob1es virtual 1aw library

sue; and that the Nagtahan bailey bridge is an obstruction to navigation.

After due trial, the court rendered judgment on June 11, 1963, holding the defendant
liable for the damage caused by its employees and ordering it to pay plaintiff the actual
cost of the repair of the Nagtahan bailey bridge which amounted to P192,561.72, with
legal interest thereon from the date of the filing of the complaint.
1) Whether or not the collision of appellants barge with the supports or piers of the
Nagtahan bridge was in law caused by fortuitous event or force majeure, and
2) Whether or not it was error for the Court to have permitted the plaintiff-appellee to
introduce additional evidence of damages after said party had rested its case.

Defendant appealed directly to this Court assigning the following errors allegedly As to the first question considering that the Nagtahan bridge was an immovable and
committed by the court a quo, to wit: chanrob1es virtual 1aw library stationary object and uncontrovertedly provided with adequate openings for the passage
of water craft, including barges like of appellants, it is undeniable that the unusual event
I The lower court erred in not holding that the herein defendant-appellant had exercised that the barge, exclusively controlled by appellant, rammed the bridge supports raises a
the diligence required of it in the selection and supervision of its personnel to prevent presumption of negligence on the part of appellant or its employees manning the barge or
damage or injury to others. the tugs that towed it. For in the ordinary course of events, such a thing does not happen
if proper care is used. In Anglo American Jurisprudence, the inference arises by what is
II The lower court erred in not holding that the ramming of the Nagtahan bailey bridge known as the "res ipsa loquitur" rule (Scott v. London Docks, Co., 2 H & C 596; San Juan
by barge L-1892 was caused by force majeure. Light & Transit Co. v. Requena, 224 U.S. 89, 56 L. Ed., 680; Whitwell v. Wolf, 127 Minn.
529, 149 N.W. 299; Bryne v. Great Atlantic & Pacific Tea Co., 269 Mass. 130; 168 N.E.
III The lower court erred in not holding that the Nagtahan bailey bridge is an 540; Gribsby v. Smith, 146 S.W. 2d 719).
obstruction, if not a menace, to navigation in the Pasig river.
The appellant strongly stresses the precautions taken by it on the day in question: that it
IV The lower court erred in not blaming the damage sustained by the Nagtahan bailey assigned two of its most powerful tugboats to tow down river its barge L-1892; that it
bridge to the improper placement of the dolphins. assigned to the task the more competent and experienced among its patrons, had the
towlines, engines and equipment double-checked and inspected that it instructed its
V The lower court erred in granting the plaintiffs motion to adduce further evidence in patrons to take extra precautions; and concludes that it had done all it was called to do,
chief after it has rested its case. and that the accident, therefore, should be held due to force majeure or fortuitous event.

VI The lower court erred in finding the plaintiff entitled to the amount of P192,561.72 These very precautions, however, completely destroy the appellants defense. For caso
for damages which is clearly exorbitant and without any factual basis. fortuito or force majeure (which in law are identical in so far as they exempt an obligor
from liability) 2 by definition, are extraordinary events not foreseeable or avoidable,
However, it must be recalled that the established rule in this jurisdiction is that when a "events that could not be foreseen, or which, though foreseen, were inevitable" (Art.
party appeals directly to the Supreme Court, and submits his case there for decision, he is 1174, Civ. Code of the Philippines). It is therefore, not enough that the event should not
deemed to have waived the right to dispute any finding of fact made by the trial Court. have been foreseen or anticipated, as is commonly believed but it must be one impossible
The only questions that may be raised are those of law (Savellano v. Diaz, L-17941, July to foresee or to avoid. The mere difficulty to foresee the happening is not impossibility to
31, 1963; Aballe v. Santiago, L- 16307, April 30, 1963, G.S.I.S. v. Cloribel, L-22236, June foresee the same: "un hecho no constituye caso fortuito por la sola circunstancia de que
22, 1965). A converso, a party who resorts to the Court of Appeals, and submits his case su existencia haga mas dificil o mas onerosa la accion diligente del presento ofensor"
for decision there, is barred from contending later that his claim was beyond the (Peirano Facio, Responsabilidad Extra-contractual, p. 465; Mazeaud, Trait de la
jurisdiction of the aforesaid Court. The reason is that a contrary rule would encourage the Responsabilite Civil, Vol. 2, sec. 1569). The very measures adopted by appellant prove
undesirable practice of appellants submitting their cases for decision to either court in that the possibility of danger was not only foreseeable, but actually foreseen, and was not
expectation of favorable judgment, but with intent of attacking its jurisdiction should the caso fortuito.
decision be unfavorable (Tyson Tan Et. Al. v. Filipinas Compaia de Seguros Et. Al., L-
10096, Res. on Motion to Reconsider, March 23, 1966). Consequently, we are limited in Otherwise state, the appellant, Luzon Stevedoring Corporation, knowing and appreciating
this appeal to the issues of law raised in the appellants brief. the perils posed by the swollen stream and its swift current, voluntarily entered into a
situation involving obvious danger; it therefore assumed the risk, and can not shed
Taking the aforesaid rules into account, it can be seen that the only reviewable issues in responsibility merely because the precautions it adopted turned out to be insufficient.
Hence, the lower Court committed no error in holding it negligent in not suspending
operations and in holding it liable for the damages caused.

It avails the appellant naught to argue that the dolphins, like the bridge, were improperly
located. Even if true, these circumstances would merely emphasize the need of even
higher degree of care on appellants part in the situation involved in the present case. The
appellant, whose barges and tugs travel up and down the river everyday, could not safely
ignore the danger posed by these allegedly improper constructions that had been erected
and, in place, for years.

On the second point: appellant charges the lower court with having abused its discretion
in the admission of plaintiffs additional evidence after the latter had rested its case. There
is an insinuation that the delay was deliberate to enable the manipulation of evidence to
prejudice defendant-appellant.

We find no merit in the contention. Whether or not further evidence will be allowed after a
party offering the evidence has rested his case, lies within the sound discretion of the trial
Judge, and this discretion will not be reviewed except in clear case of abuse. 3

In the present case, no abuse of that discretion is shown. What was allowed to be
introduced, after plaintiff had rested its evidence in chief, were vouchers and papers to
support an item of P1,558,00 allegedly spent for the reinforcement of the panel of the
bailey bridge, and which item already appeared in Exhibit GG. Appellant, in fact, has no
reason to charge the trial court of being unfair, because it was also able to secure, upon
written motion, a similar order dated November 24, 1962, allowing reception of additional
evidence for the said defendant-appellant. 4

WHEREFORE, finding no error in the decision of the lower Court appealed from, the same
is hereby affirmed. Costs against the defendant-appellant.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ.,
concur.
 EN BANC
[G.R. No. L-29640. June 10, 1971.]
GUILLERMO AUSTRIA, Petitioner, v. THE COURT OF APPEALS (Second Division), Philippines, providing that: . . It is clear that under the circumstances prevailing at present
PACIFICO ABAD and MARIA G. ABAD, Respondents.
Antonio Enrile Inton for Petitioner.
Jose A. Buendia for Respondents.
RECEIVED ON CONSIGNMENT; IT IS OTHER WISE IN 1971; CASE AT BAR. It is
undeniable that in order to completely exonerate the debtor for reason of a fortuitous
event, such debtor must, in addition to the casus itself, be free of any concurrent or
contributory fault or negligence. This is apparent from Article 1170 of the Civil Code of the
in the City of Manila and its suburbs, with their high incidence of crimes against persons
and property, that renders travel after nightfall a matter to be sedulously avoided without
suitable precaution and protection, the conduct of respondent Maria G. Abad, in returning
alone to her house in the evening, carrying jewelry of considerable value, would be
negligent per se, and would not exempt her from responsibility in the case of a robbery.
We are not persuaded, however, that the same rule should obtain ten years previously, in
1961, when the robbery in question did take place, for at that time criminality had not by
far reached the levels attained in the present day.

SYLLABUS 4. REMEDIAL LAW; EVIDENCE; THE RECOGNITION IN THE CIVIL CASE FOR RECOVERY
AGAINST THE COMMISSION AGENT OF THE FACT OF ROBBERY BEFORE CONVICTION IN
THE CRIMINAL CASE FOR ROBBERY WILL NOT PREJUDICE THE LATTER CASE, NEITHER
WILL IT RESULT IN INCONSISTENCY SHOULD THE ACCUSED OBTAIN AN ACQUITTAL OR
SHOULD THE CRIMINAL CASE BE DISMISSED; REASON. There is likewise no merit in
1. CIVIL LAW; OBLIGATIONS; REQUISITES OF FORTUITOUS EVENT. It is recognized in petitioners argument that to allow the fact of robbery to be recognized in the civil case
this jurisdiction that to constitute a caso fortuito that would exempt a person from before conviction is secured in the criminal action, would prejudice the latter case, or
responsibility, it is necessary that (1) the event must be independent of the human will (or would result in inconsistency should the accused obtain an acquittal or should the criminal
rather, of the debtors or obligors); (2) the occurrence must render it impossible for the case be dismissed. It must be realized that a court finding that a robbery has happened
debtor to fulfill the obligation in a normal manner; and that (3) the obligor must be free of would not necessarily mean that those accused in the criminal action should be found
participation in, or aggravation of, the injury to the creditor. A fortuitous event, therefore, guilty of the crime; nor would a ruling that those actually accused did not commit the
can be produced by nature, e.g., earthquakes, storms, floods, etc., or by the act of man, robbery be inconsistent with a finding that a robbery did take place. The evidence to
such as war, attack by bandits, robbery, etc., provided that the event has all the establish these facts would not necessarily be the same.
characteristics enumerated above.

2. ID.; ID.; ID.; FOR ROBBERY TO CONSTITUTE A FORTUITOUS EVENT, IT IS NOT

REQUIRED THAT THE ACCUSED IN THE ROBBERY CASE BE FIRST CONVICTED; REASON.
The point at issue in this proceeding is how the fact of robbery is to be established in DECISION
order that a person may avail of the exempting provision of Article 1174 of the new Civil
Code, which reads as follows: . . It may be noted therefrom that the emphasis of the
provision is on the events, not on the agents or factors responsible for them. To avail of
the exemption granted in the law, it is not necessary that the persons responsible for the
occurrence should be found or punished; it would only be sufficient to establish that the REYES, J.B.L., J.:
unforeseeable event, the robbery in this case, did take place without any concurrent fault
on the debtors part, and this can be done by preponderant evidence. To require in the
present action for recovery the prior conviction of the culprits in the criminal case, in order
to establish the robbery as a fact, would be to demand proof beyond reasonable doubt to
prove a fact in a civil case. Guillermo Austria petitions for the review of the decision rendered by the Court of Appeals
(in CA-G.R. No. 33572-R), on the sole issue of whether in a contract of agency
3. ID.; ID.; ID.; ID.; THE COMMISSION AGENT WHO TRAVELED ALONE AT NIGHT 1961 IS (consignment of goods for sale) it is necessary that there be prior conviction for robbery
NOT NEGLIGENT AND NOT RESPONSIBLE FOR THE LOSS DUE TO ROBBERY OF JEWELRY before the loss of the article shall exempt the consignee from liability for such loss.
 the entrusted articles.
In a receipt dated 30 January 1961, Maria G. Abad acknowledged having received from
Guillermo Austria one (1) pendant with diamonds valued at P4,500.00, to be sold on We find no merit in the contention of petitioner.
commission basis or to be returned on demand. On 1 February 1961, however while
walking home to her residence in Mandaluyong, Rizal, Abad was said to have been It is recognized in this jurisdiction that to constitute a caso fortuito that would exempt a
accosted by two men, one of whom hit her on the face, while the other snatched her purse person from responsibility, it is necessary that (1) the event must be independent of the
containing jewelry and cash, and ran away. Among the pieces of jewelry allegedly taken human will (or rather, of the debtors or obligors); (2) the occurrence must render it
by the robbers was the consigned pendant. The incident became the subject of a criminal impossible for the debtor to fulfill the obligation, in a normal manner; and that (3) the
case filed in the Court of First Instance of Rizal against certain persons (Criminal Case No. obligor must be free of participation in, or aggravation of, the injury to the creditor. 1 A
10649, People v. Rene Garcia, Et. Al.). fortuitous event, therefore, can be produced by nature, e.g., earthquakes, storms, floods,
etc., or by the act of man, such as war, attack by bandits, robbery, 2 etc., provided that
As Abad failed to return the jewelry or pay for its value notwithstanding demands, Austria the event has all the characteristics enumerated above.
brought in the Court of First Instance of Manila an action against her and her husband for
recovery of the pendant or of its value, and damages. Answering the allegations of the It is not here disputed that if respondent Maria Abad were indeed the victim of robbery,
complaint, defendants spouses set up the defense that the alleged robbery had and if it were really true that the pendant, which she was obliged either to sell on
extinguished their obligation. commission or to return to petitioner, were taken during the robbery, then the occurrence
of that fortuitous event would have extinguished her liability. The point at issue in this
After due hearing, the trial court rendered judgment for the plaintiff, and ordered proceeding is how the fact of robbery is to be established in order that a person may avail
defendants spouses, jointly and severally, to pay to the former the sum of P4,500.00, with of the exempting provision of Article 1174 of the new Civil Code, which reads as follows: jgc:chanrobles.com .ph

legal interest thereon, plus the amount of P450.00 as reasonable attorneys fees, and the
costs. It was held that defendants failed to prove the fact of robbery, or, if indeed it was "ART. 1174. Except in cases expressly specified by law, or when it is otherwise declared by
committed, that defendant Maria Abad was guilty of negligence when she went home stipulation, or when the nature of the obligation requires the assumption of risk, no
without any companion, although it was already getting dark and she was carrying a large person shall be responsible for those events which could not be foreseen, or which, though
amount of cash and valuables on the day in question, and such negligence did not free her foreseen, were inevitable." cralaw virtua1aw library

from liability for damages for the loss of the jewelry.

It may be noted the reform that the emphasis of the provision is on the events, not on the
Not satisfied with his decision, the defendants went to the Court of Appeals, and there agents or factors responsible for them. To avail of the exemption granted in the law, it is
secured a reversal of the judgment. The appellate court, overruling the finding of the trial not necessary that the persons responsible for the occurrence should be found or
court on the lack of credibility of the two defense witnesses who testified on the punished; it would only be sufficient to establish that the enforceable event, the robbery in
occurrence of the robbery, and holding that the facts of robbery and defendant Maria this case, did take place without any concurrent fault on the debtors part, and this can be
Abads possession of the pendant on that unfortunate day have been duly established, done by preponderant evidence. To require in the present action for recovery the prior
declared respondents not responsible for the loss of the jewelry on account of a fortuitous conviction of the culprits in the criminal case, in order to establish the robbery as a fact,
event, and relieved them from liability for damages to the owner. Plaintiff thereupon would be to demand proof beyond reasonable doubt to prove a fact in a civil case.
instituted the present proceeding.
It is undeniable that in order to completely exonerate the debtor for reason of a fortuitous
It is now contended by herein petitioner that the Court of Appeals erred in finding that event, such debtor must, in addition to the casus itself, be free of any concurrent or
there was robbery in the case, although nobody has been found guilty of the supposed contributory fault or negligence, 3 This is apparent from Article 1170 of the Civil Code of
crime. It is petitioners theory that for robbery to fall under the category of a fortuitous the Philippines, providing that: jgc:chanroble s.com.ph

event and relieve the obligor from is obligation under a contract, pursuant to Article 1174
of the new Civil Code, there ought to be prior finding on the guilt of the persons "ART. 1170. Those who in the performance of their obligations are guilty of fraud,
responsible there for. In short, that the occurrence of the robbery should be proved by a negligence, or delay, and those who in any manner contravene the tenor thereof, are liable
final judgment of conviction in the criminal case. To adopt a different view, petitioner for damages."cralaw virtua1aw library

argues, would be to encourage persons accountable for goods or properties received in

trust or consignment to connive with others, who would be willing to be accused in court It is clear that under the circumstances prevailing at present in the City of Manila and its
for the robbery, in order to be absolved from civil liability for the lass or disappearance of suburbs, with their high incidence of crimes against persons and property, that renders
travel after nightfall a matter to be sedulously avoided without suitable precaution and
protection, the conduct of respondent Maria G. Abad, in returning alone to her house in
the evening, carrying jewelry of considerable value, would be negligent per se, and would
not exempt her from responsibility in the case of a robbery. We are not persuaded,
however, that the same rule should obtain ten years previously, in 1961, when the robbery
in question did take place, for at that time criminality had not by far reached the levels
attained in the present day.

There is likewise no merit in petitioners argument that to allow the fact of robbery to be
recognized in the civil case before conviction is secured in the criminal action, would
prejudice the latter case, or would result in inconsistency should the accused obtain an
acquittal or should the criminal case be dismissed. It must be realized that a court finding
that a robbery has happened would not necessarily mean that those accused in the
criminal action should be found guilty of the crime; nor would a ruling that those actually
accused did not commit the robbery be inconsistent with a finding that a robbery did take
place. The evidence to establish these facts would not necessarily be the same.

WHEREFORE, finding no error in the decision of the Court of Appeals under review, the
petition in this case is hereby dismissed, with costs against the petitioner.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee, Barredo, Villamor and
Makasiar, JJ., concur.

Castro, J., did not take part.

SECOND DIVISION

[G.R. No. L-47851. October 3, 1986.]

JUAN F. NAKPIL & SONS, and JUAN F. NAKPIL, Petitioners, v. THE COURT OF
APPEALS, UNITED CONSTRUCTION COMPANY, INC., JUAN J. CARLOS, and the
 PHILIPPINE BAR ASSOCIATION, Respondents. act of God, there concurs a corresponding fraud, negligence, delay or violation or
contravention in any manner of the tenor of the obligation as provided for in Article 1170
[G.R. No. L-47863. October 3, 1986.] of the Civil Code, which results in loss or damage, the obligor cannot escape liability. It
has also been held that when the negligence of a person concurs with an act of God in
THE UNITED CONSTRUCTION CO., INC., Petitioner, v. COURT OF APPEALS, ET producing a loss, such person is not exempt from liability by showing that the immediate
AL.,Respondents. cause of the damage was the act of God. To be exempt from liability for loss because of an
act of God, he must be free from any previous negligence or misconduct by which that
[G.R. No. L-47896. October 3, 1986.] loss or damage may have been occasioned. (Fish & Elective Co. v. Phil. Motors, 55 Phil.
129; Tucker v. Milan, 49 O.G. 4379; Limpangco & Sons v. Yangco Steamship Co., 34 Phil.
PHILIPPINE BAR ASSOCIATION, ET AL., Petitioners, v. COURT OF APPEALS, ET 594, 604; Lasam v. Smith, 45 Phil. 657)
AL.,Respondents.
4. ID.; QUASI-DELICTS; NEGLIGENCE EQUIVALENT TO BAD FAITH; The afore-
mentioned facts clearly indicate the wanton negligence of both the defendant and the
third-party defendants in effecting the plans, designs, specifications, and construction of
the PBA building and We hold such negligence as equivalent to bad faith in the
SYLLABUS performance of their respective tasks. Relative thereto, the ruling of the Supreme Court in
Tucker v. Milan (49 O.G. 4379 ,4380) which may be in point in this case, reads: "One who
negligently creates a dangerous condition cannot escape liability for the natural and
probable consequences thereof, although the act of a third person, or an act of God for
which he is not responsible, intervenes to precipitate the loss."cralaw virtua1aw library

1. CIVIL LAW; ACT OF GOD; DEFINED. An act of God has been defined as an accident,
due directly and exclusively to natural causes without human intervention, which by no 5. REMEDIAL LAW; COURT OF APPEALS; FINDINGS OF FACTS CONCLUSIVE ON THE
amount of foresight, pains or care, reasonably to have been expected, could have been PARTIES AND ON THE SUPREME COURT; EXCEPTIONS. It is well settled that the
prevented. (1 Corpus Juris 1174). findings of facts of the Court of Appeals are conclusive on the parties and on this Court
(cases cited in Tolentino v. de Jesus, 56 SCRA 67; Cesar v. Sandiganbayan, January 17,
2. ID.; ID.; GENERAL RULE; REQUISITES TO EXEMPT OBLIGOR FROM LIABILITY. The 1985, 134 SCRA 105, 121), unless (1) the conclusion is a finding grounded entirely on
general rule is that no person shall be responsible for events which could not be foreseen speculation, surmise and conjectures; (2) the inference made is manifestly mistaken; (3)
or which, though foreseen, were inevitable (Article 1174, New Civil Code). To exempt the there is grave abuse of discretion; (4) the judgment is based on misapprehension of facts;
obligor from liability under this Article, for a breach of an obligation due to an "act of (5) the findings of fact are conflicting; (6) the Court of Appeals went beyond the issues of
God", the following must concur: (a) the cause of the breach of the obligation must be the case and its findings are contrary to the admissions of both appellant and appellees
independent of the will of the debtor; (b) the event must be either unforeseeable or (Ramos v. Pepsi-Cola Bottling Co., February 8, 1967, 19 SCRA 289, 291-292; Roque v.
unavoidable; (c) the event must be such as to render it impossible for the debtor to fulfill Buan, Oct. 31, 1967, 21 SCRA 648, 651); (7) the findings of facts of the Court of Appeals
his obligation in a normal manner; and (d) the debtor must be free from any participation are contrary to those of the trial court; (8) said findings of facts are conclusions without
in, or aggravation of the injury to the creditor. (Vasquez v. Court of Appeals, 138 SCRA citation of specific evidence on which they are based; (9) the facts set forth in the petition
553; Estrada v. Consolacion, 71 SCRA 423; Austria v. Court of Appeals, 39 SCRA 527; as well as in the petitioners main and reply briefs are not disputed by the respondents
Republic of the Phil. v. Luzon Stevedoring Corp., 21 SCRA 279; Lasam v. Smith, 45 Phil. (Garcia v. CA, June 30, 1970, 33 SCRA 622; Alsua-Bett v. Court of Appeals, July 30, 1979,
657). The principle embodied in the act of God doctrine strictly requires that the act must 92 SCRA 322, 366); (10) the finding of fact of the Court of Appeals is premised on the
be one occasioned exclusively by the violence of nature and all human agencies are to be supposed absence of evidence and is contradicted by evidence on record (Salazar v.
excluded from creating or entering into the cause of the mischief. Gutierrez, May 29, 1970, 33 SCRA 243, 247; Cited in G.R. No. 66497-98, Sacay v.
Sandiganbayan, July 10, 1986).
3. ID.; ID.; INSTANCES WHEN THE RULE DOES NOT APPLY. When the effect, the cause
of which is to be considered, is found to be in part the result of the participation of man,
whether it be from active intervention or neglect, or failure to act, the whole occurrence is
thereby humanized, as it were, and removed from the rules applicable to the acts of God.
(1 Corpus Juris, pp. 1174-1175) Thus, if upon the happening of a fortuitous event or an DECISION
 December 8, 1971 Order of the lower court is hereby affirmed with COSTS to be paid by
the defendant and third party defendant (except Roman Ozaeta) in equal shares.

PARAS, J.:"SO ORDERED." cralaw virtua1aw library

Petitioners Juan F. Nakpil & Sons in L-47851 and United Construction Co., Inc. and Juan J.
Carlos in L-47863 seek the reversal of the decision of the Court of Appeals, among other
things, for exoneration from liability while petitioner Philippine Bar Association in L-47896
These are petitions for review on certiorari of the November 28, 1977 decision of the seeks the modification of aforesaid decision to obtain an award of P1,830,000.00 for the
Court of Appeals in CA G.R. No. 51771-R modifying the decision of the Court of First loss of the PBA building plus four (4) times such amount as damages resulting in
Instance of Manila, Branch V, in Civil Case No. 74958 dated September 21, 1971 as increased cost of the building; P100,000.00 as exemplary damages; and P100,000.00 as
modified by the Order of the lower court dated December 8, 1971. The Court of Appeals in attorneys fees. chanrobles virtual lawlibrary

modifying the decision of the lower court included an award of an additional amount of
P200,000.00 to the Philippine Bar Association to be paid jointly and severally by the These petitions arising from the same case filed in the Court of First Instance of Manila
defendant United Construction Co. and by the third-party defendants Juan F. Nakpil and were consolidated by this Court in the resolution of May 10, 1978 requiring the respective
Sons and Juan F. Nakpil. respondents to comment. (Rollo, L-47851, p. 172).

The dispositive portion of the modified decision of the lower court reads: chanroble svirtualawlibrary The facts as found by the lower court (Decision, C.C. No. 74958; Record on Appeal, pp.
269-348; pp. 520-521; Rollo, L-47851, p. 169) and affirmed by the Court of Appeals are
"WHEREFORE, judgment is hereby rendered: jgc:chanroble s.com.ph as follows:
chanrob1es virtual 1aw library

"(a) Ordering defendant United Construction Co., Inc. and third-party defendants (except The plaintiff, Philippine Bar Association, a civic-non-profit association, incorporated under
Roman Ozaeta) to pay the plaintiff, jointly and severally, the sum of P989,335.68 with the Corporation Law, decided to construct an office building on its 840 square meters lot
interest at the legal rate from November 29, 1968, the date of the filing of the complaint located at the corner of Aduana and Arzobispo Streets, Intramuros, Manila. The
until full payment; construction was undertaken by the United Construction, Inc. on an "administration"
basis, on the suggestion of Juan J. Carlos, the president and general manager of said
"(b) Dismissing the complaint with respect to defendant Juan J. Carlos; corporation. The proposal was approved by plaintiffs board of directors and signed by its
president Roman Ozaeta, a third-party defendant in this case. The plans and specifications
"(c) Dismissing the third-party complaint; for the building were prepared by the other third-party defendants Juan F. Nakpil & Sons.
The building was completed in June, 1966.
"(d) Dismissing the defendants and third-party defendants counterclaims for lack of
merit; In the early morning of August 2, 1968 an unusually strong earthquake hit Manila and its
environs and the building in question sustained major damage. The front columns of the
"(e) Ordering defendant United Construction Co., Inc. and third-party defendants (except building buckled, causing the building to tilt forward dangerously. The tenants vacated the
Roman Ozaeta) to pay the costs in equal shares. building in view of its precarious condition. As a temporary remedial measure, the building
was shored up by United Construction, Inc. at the cost of P13,661.28.
"SO ORDERED." (Record on Appeal, p. 521; Rollo, L-47851, p. 169).
On November 29, 1968, the plaintiff commenced this action for the recovery of damages
The dispositive portion of the decision of the Court of Appeals reads:jgc:chanroble s.com.ph arising from the partial collapse of the building against United Construction, Inc. and its
President and General Manager Juan J. Carlos as defendants. Plaintiff alleges that the
"WHEREFORE, the judgment appealed from is modified to include an award of collapse of the building was accused by defects in the construction, the failure of the
P200,000.00 in favor of plaintiff-appellant Philippine Bar Association, with interest at the contractors to follow plans and specifications and violations by the defendants of the terms
legal rate from November 29, 1968 until full payment to be paid jointly and severally by of the contract.
defendant United Construction Co., Inc. and third party defendants (except Roman
Ozaeta). In all other respects, the judgment dated September 21, 1971 as modified in the Defendants in turn filed a third-party complaint against the architects who prepared the
plans and specifications, alleging in essence that the collapse of the building was due to workmanship in the construction of the building;
the defects in the said plans and specifications. Roman Ozaeta, the then president of the
plaintiff Bar Association was included as a third-party defendant for damages for having (d) The alleged failure to exercise the requisite degree of supervision expected of the
included Juan J. Carlos, President of the United Construction Co., Inc. as party defendant. architect, the contractor and/or the owner of the building;
virtualawlibrary chanrobles.com:chanrobles.com.ph
chanroble s

On March 3, 1969, the plaintiff and third-party defendants Juan F. Nakpil & Sons and Juan (e) An act of God or a fortuitous event; and
F. Nakpil presented a written stipulation which reads:jgc:chanroble s.com.ph

(f) Any other cause not herein above specified.

"1. That in relation to defendants answer with counterclaims and third-party complaints
and the third-party defendants Nakpil & Sons answer thereto, the plaintiff need not 2. If the cause of the damage suffered by the building arose from a combination of the
amend its complaint by including the said Juan F. Nakpil & Sons and Juan F. Nakpil above-enumerated factors, the degree or proportion in which each individual factor
personally as parties defendant. contributed to the damage sustained;

2. That in the event (unexpected by the undersigned) that the Court should find after the 3. Whether the building is now a total loss and should be completely demolished or
trial that the above-named defendants Juan J. Carlos and United Construction Co., Inc. are whether it may still be repaired and restored to a tenantable condition. In the latter case,
free from any blame and liability for the collapse of the PBA Building, and should further the determination of the cost of such restoration or repair, and the value of any remaining
find that the collapse of said building was due to defects and/or inadequacy of the plans, construction, such as the foundation, which may still be utilized or availed of." (Record on
designs, and specifications prepared by the third-party defendants, or in the event that Appeal pp. 275-276; Rollo, L-47851, p. 169).
the Court may find Juan F. Nakpil and Sons and/or Juan F. Nakpil contributorily negligent
or in any way jointly and solidarily liable with the defendants, judgment may be rendered Thus, the issues of this case were divided into technical issues and non-technical issues.
in whole or in part, as the case may be, against Juan F. Nakpil & Sons and/or Juan F. As aforestated the technical issues were referred to the Commissioner. The non-technical
Nakpil in favor of the plaintiff to all intents and purposes as if plaintiffs complaint has issues were tried by the Court. chanrobles.com : virtual law library

been duly amended by including the said Juan F. Nakpil & Sons and Juan F. Nakpil as
parties defendant and by alleging causes of action against them including, among others, Meanwhile, plaintiff moved twice for the demolition of the building on the ground that it
the defects or inadequacy of the plans, designs, and specifications prepared by them
and/or failure in the performance of their contract with plaintiff.
3. Both parties hereby jointly petition this Honorable Court to approve this stipulation."
(Record on Appeal, pp. 274-275; Rollo, L-47851, p. 169).
Upon the issues being joined, a pre-trial was conducted on March 7, 1969, during which
among others, the parties agreed to refer the technical issues involved in the case to a
Commissioner. Mr. Andres O. Hizon, who was ultimately appointed by the trial court,
assumed his office as Commissioner, charged with the duty to try the following issues:
may topple down in case of a strong earthquake. The motions were opposed by the
defendants and the matter was referred to the Commissioner. Finally, on April 30, 1979
the building was authorized to be demolished at the expense of the plaintiff, but not
another earthquake of high intensity on April 7, 1970 followed by other strong
earthquakes on April 9, and 12, 1970, caused further damage to the property. The actual
demolition was undertaken by the buyer of the damaged building. (Record on Appeal, pp.
278-280; Ibid.).
After the protracted hearings, the Commissioner eventually submitted his report on
September 25, 1970 with the findings that while the damage sustained by the PBA
jgc:chanrobles.com .ph

building was caused directly by the August 2, 1968 earthquake whose magnitude was
"1. Whether the damage sustained by the PBA building during the August 2, 1968 estimated at 7.3 they were also caused by the defects in the plans and specifications
earthquake had been caused, directly or indirectly, by: prepared by the third-party defendants architects, deviations from said plans and
chanrob1es virtual 1aw library

(a) The inadequacies or defects in the plans and specifications prepared by third-party
defendants;
(b) The deviations, if any, made by the defendants from said plans and specifications and
how said deviations contributed to the damage sustained;
(c) The alleged failure of defendants to observe the requisite quality of materials and
specifications by the defendant contractors and failure of the latter to observe the
requisite workmanship in the construction of the building and of the contractors, architects
and even the owners to exercise the requisite degree of supervision in the construction of
subject building.
All the parties registered their objections to aforesaid findings which in turn were
answered by the Commissioner.
The trial court agreed with the findings of the Commissioner except as to the holding that of P200,000.00 imposed by the Court of Appeals. UCCI also claimed that it should be
the owner is charged with full time supervision of the construction. The Court sees no reimbursed the expenses of shoring the building in the amount of P13,661.28 while the
legal or contractual basis for such conclusion. (Record on Appeal, pp. 309-328; Ibid.). Nakpils opposed the payment of damages jointly and solidarily with UCCI. chanroble svirtualawlibrary

Thus, on September 21, 1971, the lower court rendered the assailed decision which was
modified by the Intermediate Appellate Court on November 28, 1977.
All the parties herein appealed from the decision of the Intermediate Appellate Court.
Hence, these petitions.
The pivotal issue in this case is whether or not an act of God, an unusually strong
earthquake which caused the failure of the building, exempts from liability, parties who
are otherwise liable because of their negligence.
The applicable law governing the rights and liabilities of the parties herein is Article 1723
of the New Civil Code, which provides: jgc:chanrobles.com .ph

On May 11, 1978, the United Architects of the Philippines, the Association of Civil
Engineers, and the Philippine Institute of Architects filed with the Court a motion to
intervene as amicus curiae. They proposed to present a position paper on the liability of
architects when a building collapses and to submit likewise a critical analysis with
computations on the divergent views on the design and plans as submitted by the experts
procured by the parties. The motion having been granted, the amicus curiae were granted
a period of 60 days within which to submit their position.
After the parties had all filed their comments, We gave due course to the petitions in Our
Resolution of July 21, 1978.
The position papers of the amicus curiae (submitted on November 24, 1978) were duly
noted.
"Art. 1723. The engineer or architect who drew up the plans and specifications for a
building is liable for damages if within fifteen years from the completion of the structure
the same should collapse by reason of a defect in those plans and specifications, or due to
the defects in the ground. The contractor is likewise responsible for the damage if the
edifice falls within the same period on account of defects in the construction or the use of
materials of inferior quality furnished by him, or due to any violation of the terms of the
contract. If the engineer or architect supervises the construction, he shall be solidarily
liable with the contractor.
Acceptance of the building, after completion, does not imply waiver of any of the causes of
action by reason of any defect mentioned in the preceding paragraph.
The action must be brought within ten years following the collapse of the building." cralaw virtua1aw library

The amicus curiae gave the opinion that the plans and specifications of the Nakpils were
not defective. But the Commissioner, when asked by Us to comment, reiterated his
conclusion that the defects in the plans and specifications indeed existed.chanroble s law library : red
Using the same authorities availed of by the amicus curiae such as the Manila Code (Ord.
No. 4131) and the 1966 Asep Code, the Commissioner added that even if it can be proved
that the defects in the construction alone (and not in the plans and design) caused the
damage to the building, still the deficiency in the original design and lack of specific
provisions against torsion in the original plans and the overload on the ground floor
columns (found by all the experts including the original designer) certainly contributed to
the damage which occurred. (Ibid, p. 174).
On the other hand, the general rule is that no person shall be responsible for events which
could not be foreseen or which, though foreseen, were inevitable (Article 1174, New Civil
Code).
An act of God has been defined as an accident, due directly and exclusively to natural
causes without human intervention, which by no amount of foresight, pains or care,
reasonably to have been expected, could have been prevented. (1 Corpus Juris 1174).
There is no dispute that the earthquake of August 2, 1968 is a fortuitous event or an act
of God.

In their respective briefs petitioners, among others, raised the following assignments of To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of an
errors: Philippine Bar Association claimed that the measure of damages should not be obligation due to an "act of God," the following must concur: (a) the cause of the breach
limited to P1,100,000.00 as estimated cost of repairs or to the period of six (6) months for of the obligation must be independent of the will of the debtor; (b) the event must be
loss of rentals while United Construction Co., Inc. and the Nakpils claimed that it was an either unforseeable or unavoidable; (c) the event must be such as to render it impossible
act of God that caused the failure of the building which should exempt them from for the debtor to fulfill his obligation in a normal manner; and (d) the debtor must be free
responsibility and not the defective construction, poor workmanship, deviations from plans from any participation in, or aggravation of the injury to the creditor. (Vasquez v. Court of
and specifications and other imperfections in the case of United Construction Co., Inc. or Appeals, 138 SCRA 553; Estrada v. Consolacion, 71 SCRA 423; Austria v. Court of
the deficiencies in the design, plans and specifications prepared by petitioners in the case Appeals, 39 SCRA 527; Republic of the Phil. v. Luzon Stevedoring Corp., 21 SCRA 279;
of the Nakpils. Both UCCI and the Nakpils object to the payment of the additional amount Lasam v. Smith, 45 Phil. 657).
 facts set forth in the petition as well as in the petitioners main and reply briefs are not
Thus, if upon the happening of a fortuitous event or an act of God, there concurs a disputed by the respondents (Garcia v. CA, June 30, 1970, 33 SCRA 622; Alsua-Bett v.
corresponding fraud, negligence, delay or violation or contravention in any manner of the Court of Appeals, July 30, 1979, 92 SCRA 322, 366); (10) the finding of fact of the Court
tenor of the obligation as provided for in Article 1170 of the Civil Code, which results in of Appeals is premised on the supposed absence of evidence and is contradicted by
loss or damage, the obligor cannot escape liability. evidence on record (Salazar v. Gutierrez, May 29, 1970, 33 SCRA 243, 247; Cited in G.R.
No. 66497-98, Sacay v. Sandiganbayan, July 10, 1986).
The principle embodied in the act of God doctrine strictly requires that the act must be
one occasioned exclusively by the violence of nature and all human agencies are to be It is evident that the case at bar does not fall under any of the exceptions above-
excluded from creating or entering into the cause of the mischief. When the effect, the mentioned. On the contrary, the records show that the lower court spared no effort in
cause of which is to be considered, is found to be in part the result of the participation of arriving at the correct appreciation of facts by the referral of technical issues to a
man, whether it be from active intervention or neglect, or failure to act, the whole Commissioner chosen by the parties whose findings and conclusions remained
occurrence is thereby humanized, as it were, and removed from the rules applicable to the convincingly unrebutted by the intervenors/amicus curiae who were allowed to intervene
acts of God. (1 Corpus Juris, pp. 1174-1175). in the Supreme Court.

Thus it has been held that when the negligence of a person concurs with an act of God in In any event, the relevant and logical observations of the trial court as affirmed by the
producing a loss, such person is not exempt from liability by showing that the immediate Court of Appeals that "while it is not possible to state with certainty that the building
cause of the damage was the act of God. To be exempt from liability for loss because of an would not have collapsed were those defects not present, the fact remains that several
act of God, he must be free from any previous negligence or misconduct by which that buildings in the same area withstood the earthquake to which the building of the plaintiff
loss or damage may have been occasioned. (Fish & Elective Co. v. Phil. Motors, 55 Phil. was similarly subjected," cannot be ignored.
129; Tucker v. Milan, 49 O.G. 4379; Limpangco & Sons v. Yangco Steamship Co., 34 Phil.
594, 604; Lasam v. Smith, 45 Phil. 657). The next issue to be resolved is the amount of damages to be awarded to the PBA for the
chanrobles virtualawlibrary chanroble s.com :chanrobles.com .ph

partial collapse (and eventual complete collapse) of its building.

The negligence of the defendant and the third-party defendants petitioners was
established beyond dispute both in the lower court and in the Intermediate Appellate The Court of Appeals affirmed the finding of the trial court based on the report of the
Court. Defendant United Construction Co., Inc. was found to have made substantial Commissioner that the total amount required to repair the PBA building and to restore it
deviations from the plans and specifications, and to have failed to observe the requisite to tenantable condition was P900,000.00 inasmuch as it was not initially a total loss.
workmanship in the construction as well as to exercise the requisite degree of supervision; However, while the trial court awarded the PBA said amount as damages, plus unrealized
while the third-party defendants were found to have inadequacies or defects in the plans rental income for one-half year, the Court of Appeals modified the amount by awarding in
and specifications prepared by them. As correctly assessed by both courts, the defects in favor of PBA an additional sum of P200,000.00 representing the damage suffered by the
the construction and in the plans and specifications were the proximate causes that PBA building as a result of another earthquake that occurred on April 7, 1970 (L-47896,
rendered the PBA building unable to withstand the earthquake of August 2, 1968. For this Vol. I, p. 92). chanroble s law library

reason the defendant and third-party defendants cannot claim exemption from liability.
(Decision, Court of Appeals, pp. 30-31). The PBA in its brief insists that the proper award should be P1,830,000.00 representing
the total value of the building (L-47896, PBAs No. 1 Assignment of Error, p. 19), while
It is well settled that the findings of facts of the Court of Appeals are conclusive on the both the NAKPILS and UNITED question the additional award of P200,000.00 in favor of
parties and on this court (cases cited in Tolentino v. de Jesus, 56 SCRA 67; Cesar v. the PBA (L-47851, NAKPILs Brief as Petitioner, p. 6, UNITEDs Brief as Petitioner, p, 25).
Sandiganbayan, January 17, 1985, 134 SCRA 105, 121), unless (1) the conclusion is a The PBA further urges that the unrealized rental income awarded to it should not be
finding grounded entirely on speculation surmise and conjectures; (2) the inference made limited to a period of one-half year but should be computed on a continuing basis at the
is manifestly mistaken; (3) there is grave abuse of discretion; (4) the judgment is based rate of P178,671.76 a year until the judgment for the principal amount shall have been
on misapprehension of facts; (5) the findings of fact are conflicting; (6) the Court of satisfied (L-47896, PBAs No. 11 Assignment of Errors, p. 19).
Appeals went beyond the issues of the case and its findings are contrary to the admissions
of both appellant and appellees (Ramos v. Pepsi-Cola Bottling Co., February 8, 1967, 19 The collapse of the PBA building as a result of the August 2, 1968 earthquake was only
SCRA 289, 291-292; Roque v. Buan, Oct. 31, 1967, 21 SCRA 648, 651); (7) the findings partial and it is undisputed that the building could then still be repaired and restored to its
of facts of the Court of Appeals are contrary to those of the trial court; (8) said findings of tenantable condition. The PBA, however, in view of its lack of needed funding, was unable,
facts are conclusions without citation of specific evidence on which they are based; (9) the thru no fault of its own, to have the building repaired. UNITED, on the other hand, spent
P13,661.28 to shore up the building after the August 2, 1968 earthquake (L-47896, CA traced to design deficiencies and defective construction, factors which are neither
Decision, p. 46). Because of the earthquake on April 7, 1970, the trial court after the mysterious nor esoteric. The theological allusion of appellant United that God acts in
needed consultations, authorized the total demolition of the building (L-47896, Vol. 1, pp. mysterious ways His wonders to perform impresses us to be inappropriate. The evidence
53-54). reveals defects and deficiencies in design and construction. There is no mystery about
these acts of negligence. The collapse of the PBA building was no wonder performed by
There should be no question that the NAKPILS and UNITED are liable for the damage God. It was a result of the imperfections in the work of the architects and the people in
resulting from the partial and eventual collapse of the PBA building as a result of the the construction company. More relevant to our mind is the lesson from the parable of the
earthquakes. wise man in the Sermon on the Mount, "which built his house upon a rock; and the rain
descended and the floods came and the winds blew and beat upon that house: and it fell
We quote with approval the following from the erudite decision penned by Justice Hugo E. not; for it was founded upon a rock" and of the "foolish man which built his house upon
Gutierrez (now an Associate Justice of the Supreme Court) while still an Associate Justice the sand. And the rain descended and the floods came, and the winds blew, and beat upon
of the Court of, Appeals:jgc:chanrobles.com .ph that house; and it fell and great was the fall of it. (St. Matthew 7: 24-27)." The
requirement that a building should withstand rains, floods, winds, earthquakes, and
"There is no question that an earthquake and other forces of nature such as cyclones, natural forces is precisely the reason why we have professional experts like architects, and
drought, floods, lightning, and perils of the sea are acts of God. It does not necessarily engineers. Designs and constructions vary under varying circumstances and conditions but
follow, however, that specific losses and suffering resulting from the occurrence of these the requirement to design and build well does not change.
natural force are also acts of God. We are not convinced on the basis of the evidence on
record that from the thousands of structures in Manila, God singled out the blameless PBA The findings of the lower Court on the cause of the collapse are more rational and
building in Intramuros and around six or seven other buildings in various parts of the city accurate. Instead of laying the blame solely on the motions and forces generated by the
for collapse or severe damage and that God alone was responsible for the damages and earthquake, it also examined the ability of the PBA building, as designed and constructed,
losses thus suffered. to withstand and successfully weather those forces.

The record is replete with evidence of defects and deficiencies in the designs and plans, The evidence sufficiently supports a conclusion that the negligence and fault of both
defective construction, poor workmanship, deviation from plans and specifications and United and Nakpil and Sons, not a mysterious act of an inscrutable God, were responsible
other imperfections. These deficiencies are attributable to negligent men and not to a for the damages. The Report of the Commissioner, Plaintiffs Objections to the Report,
perfect God. Third Party Defendants Objections to the Report, Defendants Objections to the Report,
Commissioners Answer to the various Objections, Plaintiffs Reply to the Commissioners
The act-of-God arguments of the defendants-appellants and third party defendants- Answer, Defendants Reply to the Commissioners Answer, Counter-Reply to Defendants
appellants presented in their briefs are premised on legal generalizations or speculations Reply, and Third-Party Defendants Reply to the Commissioners Report not to mention the
and on theological fatalism both of which ignore the plain facts. The lengthy discussion of exhibits and the testimonies show that the main arguments raised on appeal were already
United on ordinary earthquakes and unusually strong earthquakes and on ordinary raised during the trial and fully considered by the lower Court. A reiteration of these same
fortuitous events and extraordinary fortuitous events leads to its argument that the arguments on appeal fails to convince us that we should reverse or disturb the lower
August 2, 1968 earthquake was of such an overwhelming and destructive character that Courts factual findings and its conclusions drawn from the facts, among them: jgc:chanroble s.com.ph

by its own force and independent of the particular negligence alleged, the injury would
have been produced. If we follow this line of speculative reasoning, we will be forced to "The Commissioner also found merit in the allegations of the defendants as to the physical
conclude that under such a situation scores of buildings in the vicinity and in other parts of evidence before and after the earthquake showing the inadequacy of design, to wit: jgc:chanrobles.com .ph

Manila would have toppled down. Following the same line of reasoning, Nakpil and Sons
alleges that the designs were adequate in accordance with pre-August 2, 1968 knowledge "Physical evidence before the earthquake, providing (sic) inadequacy of design;
and appear inadequate only in the light of engineering information acquired after the
earthquake. If this were so, hundreds of ancient buildings which survived the earthquake 1. Inadequate design was the cause of the failure of the building.
better than the two-year old PBA building must have been designed and constructed by
architects and contractors whose knowledge and foresight were unexplainably auspicious 2. Sub-baffles on the two sides and in front of the building;
and prophetic. Fortunately, the facts on record allow a more down to earth explanation of
the collapse. The failure of the PBA building, as a unique and distinct construction with no a. Increase the inertia forces that move the building laterally toward the Manila Fire
reference or comparison to other buildings, to weather the severe earthquake forces was Department.

b. Create another stiffness-imbalance.
3. The embedded 4" diameter cast iron downspout on all exterior columns reduces the
cross-sectional area of each of the columns and the strength thereof.
4. Two front corners, A7 and D7 columns were very much less reinforced.
but in the light of recent and current standards.
The Commissioner answered the said objections alleging that third-party defendants
objections were based on estimates or exhibits not presented during the hearing; that the
resort to engineering references posterior to the date of the preparation of the plans was
induced by the third-party defendants themselves who submitted computations of the
third-party defendants are erroneous.

Physical Evidence After the Earthquake, Proving Inadequacy of design; The issue presently considered is admittedly a technical one of the highest degree. It
involves questions not within the ordinary competence of the bench and the bar to resolve
1. Column A7 suffered the severest fracture and maximum sagging Also D7. by themselves. Counsel for the third-party defendants has aptly remarked that
"engineering, although dealing in mathematics, is not an exact science and that the
2. There are more damages in the front part of the building than towards the rear, not present knowledge as to the nature of earthquakes and the behavior of forces generated
only in columns but also in slabs. by them still leaves much to be desired; so much so "that the experts of the different
parties, who are all engineers, cannot agree on what equation to use, as to what
3. Building leaned and sagged more on the front part of the building. earthquake co-efficients are, on the codes to be used and even as to the type of structure
that the PBA building (is) was" (p. 29, Memo, of third-party defendants before the
4. Floors showed maximum sagging on the sides and toward the front corner parts of the Commissioner).
building.
The difficulty expected by the Court if this technical matter were to be tried and inquired
5. There was a lateral displacement of the building of about 8", Maximum sagging occurs into by the Court itself, coupled with the intrinsic nature of the questions involved therein,
at the column A7 where the floor is lower by 80 cm. than the highest slab level. constituted the reason for the reference of the said issues to a Commissioner whose
qualifications and experience have eminently qualified him for the task, and whose
6. Slab at the corner column D7 sagged by 38 cm." cralaw virtua1aw library competence had not been questioned by the parties until he submitted his report. Within
the pardonable limit of the Courts ability to comprehend the meaning of the
The Commissioner concluded that there were deficiencies or defects in the design, plans Commissioners report on this issue, and the objections voiced to the same, the Court
and specifications of the PBA building which involved appreciable risks with respect to the sees no compelling reasons to disturb the findings of the Commissioner that there were
accidental forces which may result from earthquake shocks. He conceded, however, that defects and deficiencies in the design, plans and specifications prepared by third-party
the fact that those deficiencies or defects may have arisen from an obsolete or not too defendants, and that said defects and deficiencies involved appreciable risks with respect
conservative code or even a code that does not require a design for earthquake forces to the accidental forces which may result from earthquake shocks.
mitigates in a large measure the responsibility or liability of the architect and engineer
designer. (2) (a) The deviations, if any, made by the defendants from the plans and specifications,
and how said deviations contributed to the damage sustained by the building.
The Third-party defendants, who are the most concerned with this portion of the
Commissioners report, voiced opposition to the same on the grounds that (a) the finding (b) The alleged failure of defendants to observe the requisite quality of materials and
is based on a basic erroneous conception as to the design concept of the building, to wit, workmanship in the construction of the building.
that the design is essentially that of a heavy rectangular box on stilts with shear wall at
one end; (b) the finding that there were defects and a deficiency in the design of the These two issues, being interrelated with each other, will be discussed together.
building would at best be based on an approximation and, therefore, rightly belonged to
the realm of speculation, rather than of certainty and could very possibly be outright The findings of the Commissioner on these issues were as follows: jgc:chanrobles.com .ph

error; (c) the Commissioner has failed to back up or support his finding with extensive,
complex and highly specialized computations and analyzes which he himself emphasizes "We now turn to the construction of the PBA Building and the alleged deficiencies or
are necessary in the determination of such a highly technical question; and (d) the defects in the construction and violations or deviations from the plans and specifications.
Commissioner has analyzed the design of the PBA building not in the light of existing and All these may be summarized as follows: chanrob1es virtual 1aw library

available earthquake engineering knowledge at the time of the preparation of the design,
a. Summary of alleged defects as reported by Engineer Mario M. Bundalian. (7) Column B5 Lack of spirals at a distance of 26" below the beam,

(1) Wrongful and defective placing of reinforcing bars. (8) Column B7 Spirals not tied to vertical reinforcing bars, Spirals are uneven 2" to 4",

(2) Absence of effective and desirable integration of the 3 bars in the cluster. (9) Column A3 Lack of lateral ties,

(3) Oversize coarse aggregates: 1-1/4 to 2" were used. Specification requires no larger (10) Column A4 Spirals cut off and welded to two separate clustered vertical bars,
than 1 inch.
(11) Column A4 (second floor) Column is completely hollow to a height of 30"
(4) Reinforcement assembly is not concentric with the column, eccentricity being 3" off
when on one face the main bars are only 1 1/2" from the surface. (12) Column A5 Spirals were cut from the floor level to the bottom of the spandrel
beam to a height of 6 feet,
(5) Prevalence of honeycombs,
(13) Column A6 No spirals up to a height of 30" above the ground floor level,
(6) Contraband construction joints,
(14) Column A7 Lack of lateral ties or spirals,
(7) Absence, or omission, or over spacing of spiral hoops,
c. Summary of alleged defects as reported by the experts of the Third-Party defendants.
(8) Deliberate severance of spirals into semi-circles in noted on Col. A5, ground floor,
Ground floor columns.
(9) Defective construction joints in Columns A3, C7, D7 and D4, ground floor.
(1) Column A4 Spirals are cut,
(10) Undergraduate concrete is evident,
(2) Column A5 Spirals are cut,
(11) Big cavity in core of Column 2A-4, second floor,
(3) Column A6 At lower 18" spirals are absent,
(12) Columns buckled at different planes. Columns buckled worst where there are no
spirals or where spirals are cut. Columns suffered worst displacement where the (4) Column A7 Ties are too far apart,
eccentricity of the columnar reinforcement assembly is more acute.
(5) Column B5 At upper fourth of column spirals are either absent or improperly
b. Summary of alleged defects as reported by Engr. Antonio Avecilla. spliced,

Columns are first (or ground) floor, unless otherwise stated. (6) Column B6 At upper 2 feet spirals are absent,

(1) Column D4 Spacing of spiral is changed from 2" to 5" on centers, (7) Column B7 At upper fourth of column spirals missing or improperly spliced.

(2) Column D5 No spiral up to a height of 22" from the ground floor, (8) Column C7 Spirals are absent at lowest 18"

(3) Column D6 Spacing of spiral over 4 1/2,(4) Column D7 - Lack of lateral ties, (9) Column D5 At lowest 2 feet spirals are absent,

(5) Column C7 Absence of spiral to a height of 20" from the ground level, Spirals are at (10) Column D6 Spirals are too far apart and apparently improperly spliced,
2" from the exterior column face and 6" from the inner column face,
(11) Column D7 Lateral ties are too far apart, spaced 16" on centers.
(6) Column B6 Lack of spiral on 2 feet below the floor beams,
There is merit in many of these allegations. The explanations given by the engineering
experts for the defendants are either contrary to general principles of engineering design allegation and assertion that it is the plumber or his men who may have done the cutting
for reinforced concrete or not applicable to the requirements for ductility and strength of (and this was flatly denied by the plumber) no conclusive proof was presented. The
reinforced concrete in earthquake-resistant design and construction. engineering experts for the defendants asserted that they could have no motivation for
cutting the bar because they can simply replace the spirals by wrapping around a new set
We shall first classify and consider defects which may have appreciable bearing or relation of spirals. This is not quite correct. There is evidence to show that the pouring of concrete
to the earthquake-resistant property of the building. for columns was sometimes done through the beam and girder reinforcements which were
already in place as in the case of column A4 second floor. If the reinforcement for the
As heretofore mentioned, details which insure ductility at or near the connections between girder and column is to subsequently wrap around the spirals, this would not do for the
columns and girders are desirable in earthquake-resistant design and construction. The elasticity of steel would prevent the making of tight column spirals and loose or improper
omission of spirals and ties or hoops at the bottom and/or tops of columns contributed spirals would result. The proper way is to produce correct spirals down from the top of the
greatly to the loss of earthquake-resistant strength. The plans and specifications required main column bars, a procedure which can not be done if either the beam or girder
that these spirals and ties be carried from the floor level to the bottom reinforcement of reinforcement is already in place. The engineering experts for the defendants strongly
the deeper beam (p. 1, Specifications, p. 970, Reference 11). There were several clear assert and apparently believe that the cutting of the spirals did not materially diminish the
evidences where this was not done especially in some of the ground floor columns which strength of the column. This belief together with the difficulty of slipping the spirals on the
failed. top of the column once the beam reinforcement is in place may be a sufficient motivation
for the cutting of the spirals themselves. The defendants, therefore, should be held
There were also unmistakable evidences that the spacings of the spirals and ties in the responsible for the consequences arising from the loss of strength or ductility in column
columns were in many cases greater than those called for in the plans and specifications A5 which may have contributed to the damages sustained by the building.
resulting again in loss of earthquake-resistant strength. The assertion of the engineering
experts for the defendants that the improper spacings and the cutting of the spirals did The lack of proper length of splicing of spirals was also proven in the visible spirals of the
not result in loss of strength in the column cannot be maintained and is certainly contrary columns where spalling of the concrete cover had taken place. This lack of proper splicing
to the general principles of column design and construction. And even granting that there contributed in a small measure to the loss of strength.
be no loss in strength at the yield point (an assumption which is very doubtful) the cutting
or improper spacings of spirals will certainly result in the loss of the plastic range or The effects of all the other proven and visible defects although minor can certainly be
ductility in the column and it is precisely this plastic range or ductility which is desirable accumulated so that they can contribute to an appreciable loss in earthquake-resistant
and needed for earthquake-resistant strength. chanrobles virtual lawlibrary strength. The engineering experts for the defendants submitted an estimate on some of
these defects in the amount of a few percent. If accumulated, therefore, including the
There is no excuse for the cavity or hollow portion in the column A4, second floor, and effect of eccentricity in the column the loss in strength due to these minor defects may
although this column did not fail, this is certainly an evidence on the part of the contractor run to as much as ten percent.
of poor construction.
To recapitulate: the omission or lack of spirals and ties at the bottom and/or at the top of
The effect of eccentricities in the columns which were measured at about 2 1/2 inches some of the ground floor columns contributed greatly to the collapse of the PBA building
maximum may be approximated in relation to column loads and column and beam since it is at these points where the greater part of the failure occurred. The liability for
moments. The main effect of eccentricity is to change the beam or girder span. The effect the cutting of the spirals in column A5, ground floor, in the considered opinion of the
on the measured eccentricity of 2 1/2 inches, therefore, is to increase or diminish the Commissioner rests on the shoulders of the defendants and the loss of strength in this
column load by a maximum of about 1% and to increase or diminish the column or beam column contributed to the damage which occurred.
movements by about a maximum of 2%. While these can certainly be absorbed within the
factor of safety, they nevertheless diminish said factor of safety. It is reasonable to conclude, therefore, that the proven defects, deficiencies and violations
of the plans and specifications of the PBA building contributed to the damages which
The cutting of the spirals in column A5, ground floor is the subject of great contention resulted during the earthquake of August 2, 1968 and the vice of these defects and
between the parties and deserves special consideration. deficiencies is that they not only increase but also aggravate the weakness mentioned in
the design of the structure. In other words, these defects and deficiencies not only tend to
The proper placing of the main reinforcements and spirals in column A5, ground floor, is add but also to multiply the effects of the shortcomings in the design of the building. We
the responsibility of the general contractor which is the UCCI. The burden of proof, may say, therefore, that the defects and deficiencies in the construction contributed
therefore that this cutting was done by others is upon the defendants. Other than a strong greatly to the damage which occurred.
 the loss of strength of the cut spirals and inelastic deflections of the supposed lattice work
Since the execution and supervision of the construction work in the hands of the defeated the purpose of the spiral containment in the column and resulted in the loss of
contractor is direct and positive, the presence of existence of all the major defects and strength, as evidenced by the actual failure of this column.
deficiencies noted and proven manifests an element of negligence which may amount to
imprudence in the construction work." (pp. 42-49, Commissioners Report). Again, the Court concurs in the findings of the Commissioner on these issues and fails to
find any sufficient cause to disregard or modify the same. As found by the Commissioner,
As the parties most directly concerned with this portion of the Commissioners report, the the "deviations made by the defendants from the plans and specifications caused
defendants voiced their objections to the same on the grounds that the Commissioner indirectly the damage sustained and that those deviations not only added but also
should have specified the defects found by him to be "meritorious" ; that the aggravated the damage caused by the defects in the plans and specifications prepared by
Commissioner failed to indicate the number of cases where the spirals and ties were not third-party defendants." (Rollo, Vol. I, pp. 128-142)
carried from the floor level to the bottom reinforcement of the deeper beam, or where the
spacing of the spirals and ties in the columns were greater than that called for in the The afore-mentioned facts clearly indicate the wanton negligence of both the defendant
specifications; that the hollow in column A-4, second floor, the eccentricities in the and the third-party defendants in effecting the plans, designs, specifications, and
columns, the lack of proper length of splicing of spirals, and the cut in the spirals in construction of the PBA building and We hold such negligence as equivalent to bad faith in
column A-5, ground floor, did not aggravate or contribute to the damage suffered by the the performance of their respective tasks.
building; that the defects in the construction were within the tolerable margin of safety;
and that the cutting of the spirals in column A-5, ground floor, was done by the lumber or Relative thereto, the ruling of the Supreme Court in Tucker v. Milan (49 O.G. 4379, 4380)
his men, and not by the defendants. which may be in point in this case, reads: jgc:chanroble s.com.ph

Answering the said objections, the Commissioner stated that, since many of the defects "One who negligently creates a dangerous condition cannot escape liability for the natural
were minor only the totality of the defects was considered. As regards the objection as to and probable consequences thereof, although the act of a third person, or an act of God
failure to state the number of cases where the spirals and ties were not carried from the for which he is not responsible, intervenes to precipitate the loss."cralaw virtua1aw library

floor level to the bottom reinforcement, the Commissioner specified groundfloor columns
B-6 and C-5, the first one without spirals for 03 inches at the top, and in the latter, there
were no spirals for 10 inches at the bottom. The Commissioner likewise specified the first
storey columns where the spacings were greater than that called for in the specifications
to be columns B-5, B-6, C-7, C-6, C-5, D-5 and B-7. The objection to the failure of the
Commissioner to specify the number of columns where there was lack of proper length of
splicing of spirals, the Commissioner mentioned groundfloor columns B-6 and B-5 where
all the splices were less than 1-1/2 turns and were not welded, resulting in some loss of
strength which could be critical near the ends of the columns. He answered the
supposition of the defendants that the spirals and the ties must have been looted, by
calling attention to the fact that the missing spirals and ties were only in two out of the 25
columns, which rendered said supposition to be improbable.
The Commissioner conceded that the hollow in column A-4, second floor, did not
aggravate or contribute to the damage, but averred that it is "evidence of poor
construction." On the claim that the eccentricity could be absorbed within the factor of
safety, the Commissioner answered that, while the same may be true, it also contributed
to or aggravated the damage suffered by the building.
As already discussed, the destruction was not purely an act of God. Truth to tell hundreds
of ancient buildings in the vicinity were hardly affected by the earthquake. Only one thing
spells out the fatal difference; gross negligence and evident bad faith, without which the
damage would not have occurred.
WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special
and environmental circumstances of this case, We deem it reasonable to render a decision
imposing, as We do hereby impose, upon the defendant and the third-party defendants
(with the exception of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra, p. 10)
indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00)
Pesos to cover all damages (with the exception of attorneys fees) occasioned by the loss
of the building (including interest charges and lost rentals) and an additional ONE
HUNDRED THOUSAND (P100,000.00) Pesos as and for attorneys fees, the total sum being
payable upon the finality of this decision. Upon failure to pay on such finality, twelve
(12%) per cent interest per annum shall be imposed upon afore-mentioned amounts from
finality until paid. Solidary costs against the defendant and third-party defendants (except
Roman Ozaeta).

The objection regarding the cutting of the spirals in Column A-5, groundfloor, was SO ORDERED
answered by the Commissioner by reiterating the observation in his report that
irrespective of who did the cutting of the spirals, the defendants should be held liable for Feria (Chairman), Fernan, Alampay and Cruz, JJ., concur.
the same as the general contractor of the building. The Commissioner further stated that
 THIRD DIVISION

[G.R. No. 113003. October 17, 1997.]

ALBERTA YOBIDO and CRESENCIO YOBIDO, Petitioners, v. COURT OF APPEALS,

LENY TUMBOY, ARDEE TUMBOY and JASMIN TUMBOY, Respondents.

DECISION

ROMERO, J.:

In this petition for review on certiorari of the decision of the Court of Appeals, the issue is
whether or not the explosion of a newly installed tire of a passenger vehicle is a fortuitous
event that exempts the carrier from liability for the death of a passenger.

On April 26, 1988, spouses Tito and Leny Tumboy and their minor children named Ardee
and Jasmin, boarded at Mangagoy, Surigao del Sur, a Yobido Liner bus bound for Davao
City. Along Picop Road in Km. 17, Sta. Maria, Agusan del Sur, the left front tire of the bus
exploded. The bus fell into a ravine around three (3) feet from the road and struck a tree.
The incident resulted in the death of 28-year-old Tito Tumboy, and physical injuries to
other passengers. the inner tube of the left front tire "was pressed between the inner circle of the left wheel
and the rim which had slipped out of the wheel." In this case, however, "the cause of the
On November 21, 1988, a complaint for breach of contract of carriage, damages and explosion remains a mystery until at present." As such, the court added, the tire blowout
attorneys fees was filed by Leny and her children against Alberta Yobido, the owner of the was "a caso fortuito which is completely an extraordinary circumstance independent of the
bus, and Cresencio Yobido, its driver, before the Regional Trial Court of Davao City. When will" of the defendants who should be relieved of "whatever liability the plaintiffs may have
the defendants therein filed their answer to the complaint, they raised the affirmative suffered by reason of the explosion pursuant to Article 1174 4 of the Civil Code." cralaw virtua1aw library

defense of caso fortuito. They also filed a third-party complaint against Philippine Phoenix
Surety and Insurance, Inc. This third-party defendant filed an answer with compulsory Dissatisfied, the plaintiffs appealed to the Court of Appeals. They ascribed to the lower
counterclaim. At the pre-trial conference, the parties agreed to a stipulation of facts. 1 court the following errors: (a) finding that the tire blowout was a caso fortuito; (b) failing
to hold that the defendants did not exercise utmost and/or extraordinary diligence
Upon a finding that the third party defendant was not liable under the insurance contract, required of carriers under Article 1755 of the Civil Code, and (c) deciding the case
the lower court dismissed the third party complaint. No amicable settlement having been contrary to the ruling in Juntilla v. Fontanar, 5 and Necesito v. Paras. 6
arrived at by the parties, trial on the merits ensued.
chanroblesvirtuallawlibrary

On August 23, 1993, the Court of Appeals rendered the Decision 7 reversing that of the
The plaintiffs asserted that violation of the contract of carriage between them and the lower court. It held that: jgc:chanrobles.com .ph

defendants was brought about by the drivers failure to exercise the diligence required of
the carrier in transporting passengers safely to their place of destination. According to "To Our mind, the explosion of the tire is not in itself a fortuitous event. The cause of the
Leny Tumboy, the bus left Mangagoy at 3:00 oclock in the afternoon. The winding road it blow-out, if due to a factory defect, improper mounting, excessive tire pressure, is not an
traversed was not cemented and was wet due to the rain; it was rough with crushed unavoidable event. On the other hand, there may have been adverse conditions on the
rocks. The bus which was full of passengers had cargoes on top. Since it was "running road that were unforeseeable and/or inevitable, which could make the blow-out a caso
fast," she cautioned the driver to slow down but he merely stared at her through the fortuito. The fact that the cause of the blow-out was not known does not relieve the
mirror. At around 3:30 p.m., in Trento, she heard something explode and immediately, the carrier of liability. Owing to the statutory presumption of negligence against the carrier
bus fell into a ravine. and its obligation to exercise the utmost diligence of very cautious persons to carry the
passenger safely as far as human care and foresight can provide, it is the burden of the
For their part, the defendants tried to establish that the accident was due to a fortuitous defendants to prove that the cause of the blow-out was a fortuitous event. It is not
event. Abundio Salce, who was the bus conductor when the incident happened, testified incumbent upon the plaintiff to prove that the cause of the blow-out is not caso fortuito.
that the 42-seater bus was not full as there were only 32 passengers, such that he himself
managed to get a seat. He added that the bus was running at a speed of "60 to 50" and Proving that the tire that exploded is a new Goodyear tire is not sufficient to discharge
that it was going slow because of the zigzag road. He affirmed that the left front tire that defendants burden. As enunciated in Necesito v. Paras, the passenger has neither choice
exploded was a "brand new tire" that he mounted on the bus on April 21, 1988 or only nor control over the carrier in the selection and use of its equipment and the good repute
five (5) days before the incident. The Yobido Liner secretary, Minerva Fernando, bought of the manufacturer will not necessarily, relieve the carrier from liability.
the new Goodyear tire from Davao Toyo Parts on April 20, 1988 and she was present when
it was mounted on the bus by Salce. She stated that all driver applicants in Yobido Liner Moreover, there is evidence that the bus was moving fast, and the road was wet and
underwent actual driving tests. before they were employed. Defendant Cresencio Yobido rough. The driver could have explained that the blow out that precipitated the accident
underwent such test and submitted his professional drivers license and clearances from that caused the death of Tito Tumboy could not have been prevented even if he had
the barangay, the fiscal and the police. exercised due care to avoid the same, but he was not presented as witness." cralaw virtua1aw library

On August 29, 1991, the lower court rendered a decision 2 dismissing the action for lack The Court of Appeals thus disposed of the appeal as follows: jgc:chanrobles.com .ph

of merit. On the issue of whether or not the tire blowout was a caso fortuito, it found that
"the falling of the bus to the cliff was a result of no other outside factor than the tire blow- "WHEREFORE, the judgment of the court a quo is set aside and another one entered
out." It held that the ruling in the La Mallorca and Pampanga Bus Co. v. De Jesus 3 that a ordering defendants to pay plaintiffs the sum of P50,000.00 for the death of Tito Tumboy,
tire blowout is "a mechanical defect of the conveyance or a fault in its equipment which P30,000.00 in moral damages, and P7,000.00 for funeral and burial expenses.
was easily discoverable if the bus had been subjected to a more thorough or rigid check-
up before it took to the road that morning" is inapplicable to this case. It reasoned out SO ORDERED."cralaw virtua1aw library

that in said case, it was found that the blowout was caused by the established fact that
The defendants filed a motion for reconsideration of said decision which was denied on foreseen, or which, though foreseen, was inevitable. In other words, there must be an
November 4, 1993 by the Court of Appeals. Hence, the instant petition asserting the entire exclusion of human agency from the cause of injury or loss. 14 chanrobles.com : virtual lawlibrary

position that the tire blowout that caused the death of Tito Tumboy was a caso fortuito.
Petitioners claim further that the Court of Appeals, in ruling contrary to that of the lower Under the circumstances of this case, the explosion of the new tire may not be considered
court, misapprehended facts and, therefore, its findings of fact cannot be considered final a fortuitous event. There are human factors involved in the situation. The fact that the tire
which shall bind this Court. Hence, they pray that this Court review the facts of the case. was new did not imply that it was entirely free from manufacturing defects or that it was
properly mounted on the vehicle. Neither may the fact that the tire bought and used in the
The Court did re-examine the facts and evidence in this case because of the inapplicability vehicle is of a brand name noted for quality, resulting in the conclusion that it could not
of the established principle that the factual findings of the Court of Appeals are final and explode within five days use. Be that as it may, it is settled that an accident caused either
may not be reviewed on appeal by this Court. This general principle is subject to by defects in the automobile or through the negligence of its driver is not a caso fortuito
exceptions such as the one present in this case, namely, that the lower court and the that would exempt the carrier from liability for damages. 15
Court of Appeals arrived at diverse factual findings. 8 However, upon such re-examination,
we found no reason to overturn the findings and conclusions of the Court of Appeals. Moreover, a common carrier may not be absolved from liability in case of force majeure or
fortuitous event alone. The common carrier must still prove that it was not negligent in
As a rule, when a passenger boards a common carrier, he takes the risks incidental to the causing the death or injury resulting from an accident. 16 This Court has had occasion to
mode of travel he has taken. After all, a carrier is not an insurer of the safety of its state: jgc:chanroble s.com.ph

passengers and is not bound absolutely and at all events to carry them safely and without
injury. 9 However, when a passenger is injured or dies, while traveling, the law presumes "While it may be true that the tire that blew-up was still good because the grooves & the
that the common carrier is negligent. Thus, the Civil Code provides: tire were still visible, this fact alone does not make the explosion of the tire a fortuitous
jgc:chanrobles.com .ph

event. No evidence was presented to show that the accident was due to adverse road
"Art. 1756. In case of death or injuries to passengers, common carriers are presumed to conditions or that precautions were taken by the jeepney driver to compensate for any
have been at fault or to have acted negligently, unless they prove that they observed conditions liable to cause accidents. The sudden blowing-up, therefore, could have been
extraordinary diligence as prescribed in articles 1733 and 1755." cralaw virtua1aw library caused by too much air pressure injected into the tire coupled by the fact that the jeepney
was overloaded and speeding at the time of the accident." 17
Article 1755 provides that" (a) common carrier is bound to carry the passengers safely as
far as human care and foresight can provide, using the utmost diligence of very cautious It is interesting to note that petitioners proved through the bus conductor, Salce, that the
persons, with a due regard for all the circumstances." Accordingly, in culpa contractual, bus was running at "60-50" kilometers per hour only or within the prescribed lawful speed
once a passenger dies or is injured, the carrier is presumed to have been at fault or to limit. However, they failed to rebut the testimony of Leny Tumboy that the bus was
have acted negligently. This disputable presumption may only be overcome by evidence running so fast that she cautioned the driver to slow down. These contradictory facts
that the carrier had observed extraordinary diligence as prescribed by Articles 1733, 10 must, therefore, be resolved in favor of liability in view of the presumption of negligence
1755 and 1756 of the Civil Code or that the death or injury of the passenger was due to a of the carrier in the law. Coupled with this is the established condition of the road
fortuitous event. 11 Consequently, the court need not make an express finding of fault or rough, winding and wet due to the rain. It was incumbent upon the defense to establish
negligence on the part of the carrier to hold it responsible for damages sought by the that it took precautionary measures considering partially dangerous condition of the road.
passenger. 12 As stated above, proof that the tire was new and of good quality is not sufficient proof that
it was not negligent. Petitioners should have shown that it undertook extraordinary
In view of the foregoing, petitioners contention that they should be exempt from liability diligence in the care of its carrier, such as conducting daily routinary check-ups of the
because the tire blowout was no more than a fortuitous event that could not have been vehicles parts. As the late Justice J.B.L. Reyes said: jgc:chanrobles.com .ph

foreseen, must fail. A fortuitous event is possessed of the following characteristics: (a) the
cause of the unforeseen and unexpected occurrence, or the failure of the debtor to comply "It may be impracticable, as appellee argues, to require of carriers to test the strength of
with his obligations, must be independent of human will; (b) it must be impossible to each and every part of its vehicles before each trip; but we are of the opinion that a due
foresee the event which constitutes the caso fortuito, or if it can be foreseen, it must be regard for the carriers obligations toward the traveling public demands adequate
impossible to avoid; (c) the occurrence must be such as to render it impossible for the periodical tests to determine the condition and strength of those vehicle portions the
debtor to fulfill his obligation in a normal manner; and (d) the obligor must be free from failure of which may endanger the safety of the passengers." 18
any participation in the aggravation of the injury resulting to the creditor. 13 As Article
1174 provides, no person shall be responsible for a fortuitous event which could not be Having failed to discharge its duty to overthrow the presumption of negligence with clear
and convincing evidence, petitioners are hereby held liable for damages. Article 1764 19 in
relation to Article 2206 20 of the Civil Code prescribes the amount of at least three
thousand pesos as damages for the death of a passenger. Under prevailing jurisprudence,
the award of damages under Article 2206 has been increased to fifty thousand pesos
(P50,000.00). 21
Moral damages are generally not recoverable in culpa contractual except when bad faith
had been proven. However, the same damages may be recovered when breach of contract
of carriage results in the death of a passenger, 22 as in this case. Exemplary damages,
awarded by way of example or correction for the public good when moral damages are
awarded, 23 may likewise be recovered in contractual obligations if the defendant acted in
wanton, fraudulent, reckless, oppressive, or malevolent manner. 24 Because petitioners
failed to exercise the extraordinary diligence required of a common carrier, which resulted
in the death of Tito Tumboy, it is deemed to have acted recklessly. 25 As such, private
respondents shall be entitled to exemplary damages.
WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED subject to the
modification that petitioners shall, in addition to the monetary awards therein, be liable for
the award of exemplary damages in the amount of P20,000.00. Costs against petitioners.
SO ORDERED.
Narvasa, C.J., Melo, Francisco and Panganiban, JJ., concur.
SECOND DIVISION
[G.R. No. 81100-01. February 7, 1990.]
BACOLOD-MURCIA MILLING CO., INC., Petitioner, v. HON. COURT OF APPEALS
AND ALONSO GATUSLAO, Respondents.
BACOLOD-MURCIA MILLING CO., INC., Petitioner, v. HON. COURT OF APPEALS,
ALONSO GATUSLAO, AGRO-INDUSTRIAL DEVELOPMENT OF SILAY-SARAVIA
(AIDSISA) AND BACOLOD-MURCIA AGRICULTURAL COOPERATIVE MARKETING
ASSOCIATION (BM-ACMA), Respondents.
Jalandoni, Herrera, Del Castillo & Associates for Petitioner.
Taada, Vico & Tan for respondent AIDSISA.
San Juan, Gonzalez, San Agustin & Sinense for respondents Alfonso Gatuslao and
BM-ACMA.
SYLLABUS
1. CIVIL LAW; OBLIGATIONS; FORCE MAJEURE; ELEMENTS. This Court has consistently
ruled that when an obligor is exempted from liability under the aforecited provision of the
Civil Code for a breach of an obligation due to an act of God, the following elements must
concur: (a) the cause of the breach of the obligation must be independent of the will of
the debtor; (b) the event must be either unforseeable or unavoidable; (c) the event must
be such as to render it impossible for the debtor to fulfill his obligation in a normal
manner; (b) the debtor must be free from any participation in, or aggravation of the injury
to the creditor (Vasquez v. Court of Appeals, 138 SCRA 553 [1985]; Juan F. Nakpil & Sons
v. Court of Appeals, 144 SCRA 596 [1986]).
2. ID.; ID.; ID.; ID.; EVENT MUST BE IMPOSSIBLE TO FORESEE; CASE AT BAR. In the
language of the law, the event must have been impossible to foresee, or if it could be
foreseen, must have been impossible to avoid. There must be an entire exclusion of
human agency from the cause of the injury or loss (Vasquez v. Court of Appeals, supra).
In the case at bar, despite its awareness that the conventional contract of lease would This is a petition for review on certiorari of the decision of the Court of Appeals in CA-G.R.
expire in Crop Year 1964-1965 and that refusal on the part of any one of the landowners CV Nos. 59716-59717 promulgated on September 11, 1987 affirming in toto the decision
to renew their milling contracts and the corresponding use of the right of way on their of the Court of First Instance of Negros Occidental in two consolidated civil cases, the
lands would render impossible compliance of its commitments, petitioner took a calculated dispositive portion of which reads as follows: jgc:chanroble s.com.ph

risk that all the landowners would renew their contracts. Unfortunately, the sugar
plantation of Angela Estate, Inc. which is located at the entrance of the mill was the one "PREMISES CONSIDERED, the decision appealed from is hereby affirmed in toto." cralaw virtua1aw library

which refused to renew its milling contract. As a result, the closure of the railway located
inside said plantation paralyzed the entire transportation system. Thus, the closure of the The uncontroverted facts of the case 1 are as follows: jgc:chanroble s.com.ph

railway lines was not an act of God nor does it constitute force majeure.
"1. . . .
3. ID.; ID.; RECIPROCAL OBLIGATIONS; POWER TO RESCIND IS IMPLIED IN CASE
OBLIGOR FAILED TO COMPLY WITH OBLIGATION. Under Article 1191 of the Civil Code, "2. BMMC is the owner and operator of the sugar central in Bacolod City, Philippines;
the power to rescind obligations is implied in reciprocal ones in case one of the obligors
should not comply with what is incumbent upon him. In fact, it is well established that the "3. ALONSO GATUSLAO is a registered planter of the Bacolod-Murcia Mill District with
party who deems the contract violated may consider it revoked or rescinded pursuant to Plantation Audit No. 3-79, being a registered owner of Lot Nos. 310, 140, 141 and 101-A
their agreement and act accordingly, even without previous court action (U.P. v. de los of the Cadastral Survey of Murcia, Negros Occidental, otherwise known as Hda. San
Angeles, 35 SCRA 102 [1970]; Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 43 Roque;
SCRA 94 [1972]).
"4. On May 24, 1957 BMMC and Alonso Gatuslao executed an Extension and Modification
4. ID.; ID.; ID.; ID.; RESCISSION NOT PERMITTED FOR A SLIGHT OR CASUAL BREACH. of Milling Contract (Annex A of the complaint in both cases) which was registered on
It is the general rule, however, that rescission of a contract will not be permitted for a September 17, 1962 in the Office of the Register of Deeds of Negros Occidental, and
slight or casual breach, but only for such substantial and fundamental breach as would annotated on Transfer Certificates of Title Nos. T-24207, RT-2252, RT-12035, and RT-
defeat the very object of the parties in making the agreement. The question of whether a 12036 covering said Lot Nos. 310, 140, 141 and 101-A;
breach of a contract is substantial depends upon the attendant circumstances (Universal
Food Corporation v. Court of Appeals, Et Al., 33 SCRA 1 [1970]). "5. That since the crop year 1957-1953 up to crop year 1967-1968, inclusive, Alonso
Gatuslao has been milling all the sugarcane grown and produced on said Lot Nos. 310,
5. ID.; ID.; ID.; OFFENDING PARTY HAS FORFEITED RIGHT TO ENFORCEMENT OF TERMS 140, 141 and 101-A with the Mill of BMMC;
OF CONTRACT. BMMC cannot claim enforcement of the contract. As ruled by this Court,
by virtue of the violations of the terms of the contract, the offending party has forfeited "6. Since the crop year 1920-21 to crop year 1967-1963, inclusive, the canes of planters
any right to its enforcement (Boysaw v. Interphil Promotions, Inc., 148 SCRA 645 [1987]). adhered to the mill of BMMC were transported from the plantation to the mill by means of
cane cars and through railway system operated by BMMC;

"7. The loading points at which planters Alonso Gatuslao was and should deliver and load
all his canes produced in his plantation, Hda. San Roque, were at the Arimas Line, Switch
DECISION 2, and from which loading stations, BMMC had been hauling planter Gatuslaos sugar cane
to its mill or factory continuously until the crop year 1967-68;

"8. BMMC had not been able to use its came cars and railway system for the cargo crop
year 1968-1969;
PARAS, J.:
"9. Planter Alonso Gatuslao on various dates requested transportation facilities of BMMC to
be sent to his loading stations or switches for purposes of hauling and milling his
sugarcane crops of crop year 1968-1969;

"10. The estimated gross production of Hda. San Roque for the crop year 1968-1969 is
4,500 piculs." cralaw virtua1aw library preliminary injunction enjoining the lower court from enforcing the writ of preliminary
injunction issued by the latter on October 4, 1965.
The records show that since the crop year 1920-1921 to the crop year 1967-1968, the
canes of the adhered planters were transported from the plantation to the mill of BMMC by The writ of preliminary injunction issued by the Court was lifted temporarily on motion
means of cane cars and through a railway system operated by BMMC which traversed the that through the mediation of the President of the Philippines the Angela Estate and the
land of the adherent planters, corresponding to the rights of way on their lands granted by Gonzaga Estate agreed with the Central to allow the use of the railroad tracks passing
the planters to the Central for the duration of the milling contracts which is for "un periodo through the hacienda Helvetia during the 1967-1968 milling season only, for the same
de cuarenta y cinco anos o cosechas, a contar desde la cosecha de 1920-1921" 2 (a purpose for which they had been previously used, but it was understood that the lifting of
period of 45 years or harvests, beginning with a harvest of 1920-1921). the writ was without prejudice to the respective rights and positions of the parties in the
case and not deemed a waiver of any of their respective claims and allegations in G.R. No.
BMMC constructed the railroad tracks in 1920 and the adherent planters granted the L-27084 or in any other case between the same parties, future or pending. The Court
BMMC a right of way over their lands as provided for in the milling contracts. The owners resolved to approve the motion only up to and including June 30, 1968 to give effect to
of the hacienda Helvetia were among the signatories of the milling contracts. When their the agreement but to be deemed automatically reinstated beginning July 1, 1968 (Angela
milling contracts with petitioner BMMC expired at the end of the 1964-1965 crop year, the Estate, Inc. and Fernando F. Gonzaga, Inc. v. Court of First Instance of Negros Occidental,
corresponding right of way of the owners of the hacienda Helvetia granted to the Central ibid.)
also expired.chanrobles lawlibrary : rednad

The temporary lifting of the writ of preliminary injunction assured the milling of the 1967-
Thus, the BMMC was unable to use its railroad facilities during the crop year 1968-1969 1968 crop but not the produce of the succeeding crop years which situation was duly
due to the closure in 1968 of the portion of the railway traversing the hacienda Helvetia as communicated by the President and General Manager of the BMMC to the President of
per decision of the Court in Angela Estate, Inc. and Fernando F. Gonzaga, Inc. v. Court of Bacolod-Murcia Sugar Farmers Corporation (BMSFC) on January 2, 1968. 3
First Instance of Negros Occidental, G.R. No. L-27084, (24 SCRA 500 [1968]). In the
same case the Court ruled that the Centrals conventional right of way over the hacienda On October 30, 1968, Alonso Gatuslao, one of private respondents herein, and his wife,
Helvetia ceased with the expiration of its amended milling contracts with the landowners Maria H. Gatuslao, filed Civil Case No. 8719 in the Court of First Instance of Negros
of the hacienda at the end of the 1964-1965 crop year and that in the absence of a Occidental, against petitioner herein, Bacolod-Murcia Milling Co., Inc. (BMMC), for breach
renewal contract or the establishment of a compulsory servitude of right of way on the of contract, praying among others, for the issuance of a writ of preliminary mandatory
same spot and route which must be predicated on the satisfaction of the preconditions injunction ordering defendant to immediately send transportation facilities and haul the
required by law, there subsists no right of way to be protected. already cut sugarcane to the mill site and principally praying after hearing, that judgment
be rendered declaring the rescission of the milling contract executed by plaintiffs and
Consequently, the owners of the hacienda Helvetia required the Central to remove the defendant in 1957 for seventeen (17) years or up to crop year 1973-74, invoking as
railway tracks in the hacienda occupying at least 3,245 lineal meters with a width of 7 ground the alleged failure and/or inability of defendant to comply with its specific
meters or a total of 22,715 square meters, more or less. That was the natural obligation of providing the necessary transportation facilities to haul the sugarcane of
consequence of the expiration of the milling contracts with the landowners of the hacienda Gatuslao from plaintiffs plantation specifically for the crop year 1967-1968. Plaintiffs
Helvetia (Angela Estate, Inc. and Fernando Gonzaga, Inc. v. Court of First Instance of further prayed for the recovery of actual and compensatory damages as well as moral and
Negros Occidental, ibid). BMMC filed a complaint for legal easement against the owners of exemplary damages and attorneys fees. 4
the hacienda, with the Court of First Instance of Negros Occidental which issued on
October 4, 1965 an ex parte writ of preliminary injunction restraining the landowners from In answer, defendant BMMC claimed that despite its inability to use its railways system for
reversing and/or destroying the railroad tracks in question and from impeding, obstructing its locomotives and cane cars to haul the sugarcanes of all its adhered planters including
or in any way preventing the passage and operation of plaintiffs locomotives and cane plaintiffs for the 1968-69 crop year allegedly due to force majeure, in order to comply with
cars over defendants property during the pendency of the litigation and maintained the its obligation, defendant hired at tremendous expense, private trucks as prime movers for
same in its subsequent orders of May 31, and November 26, 1966. The outcome of the its trailers to be used for hauling of the canes, especially for those who applied for and
case, however, was not favorable to the plaintiff BMMC. In the same case the landowners requested transportation facilities. Plaintiffs, being one of said planters, instead of loading
asked this Court to restrain the lower court from enforcing the writ of preliminary their cut canes for the 1968-69 crop on the cargo trucks of defendant, loaded their cut
injunction it issued, praying that after the hearing on the merits, the restraining order be canes on trucks provided by the Bacolod-Murcia Agricultural Cooperative Marketing
made permanent and the orders complained of be annulled and set aside. The Court gave Association, Inc. (B-M ACMA) which transported plaintiffs canes of the 1968-69
due course to the landowners petition and on August 10, 1967 issued the writ of sugarcanes crop. Defendant prayed in its counterclaim for the dismissal of Civil Case No.
8719 for the recovery of actual damages, moral and exemplary damages and for dismissed; and
attorneys fees. 5
(2) The complaint in Civil Case No. 8745 as well as the counterclaims therein are ordered
On November 21, 1968, BMMC filed in the same court Civil Case No. 8745 against Alonso dismissed, without costs."cralaw virtua1aw library

Gatuslao, the Agro-Industrial Development of Silay-Saravia (AIDSISA) and the Bacolod-

Murcia Agricultural Cooperative Marketing Associations, Inc. (B-M ACMA), seeking specific
performance under the mining contract executed on May 24, 1957 between plaintiff and
defendant Alonso Gatuslao praying for the issuance of writs of preliminary mandatory
injunction to stop the alleged violation of the contract by defendant Alonso Gatuslao in
confederation, collaboration and connivance with defendant BM-ACMA, AIDSISA, and for
the recovery of actual, moral and exemplary damages and attorneys fees. 6
Bacolod-Murcia Milling Co., Inc. defendant in Civil Case No. 8719 and plaintiff in Civil Case
No. 8745 appealed the case to respondent Court of Appeals which affirmed in toto (Rollo,
p. 81) the decision of the lower court. The motion for reconsideration filed by defendant-
appellant Bacolod-Murcia Milling Company, petitioner herein, was denied by the appellate
court for lack of merit. 11 Hence, this petition.
The issues 12 raised by petitioner are as follows: chanrob1es virtual 1aw library

Defendant Alonso Gatuslao and the Bacolod-Murcia Agricultural Cooperative Marketing

Association, Inc. filed their answer on January 27, 1969 with compulsory counter-claims, I
stating by way of special and affirmative defense, among others, that the case is barred
by another action pending between the same parties for the same cause of action. 7

Defendant Agro-Industrial Development Corporation of Silay-Saravia, Inc. filed its answer WHETHER OR NOT THE CLOSURE OF PETITIONERS RAILROAD LINES CONSTITUTE FORCE
on February 8, 1969, alleging among others by way of affirmative defense that before it MAJEURE.
agreed to mill the sugarcane of its co-defendant Alonso Gatuslao, it carefully ascertained
and believed in good faith that: (a) plaintiff was incapable of milling the sugarcane of II
AIDSISAs co-defendant planters as well as the sugarcane of other planters formerly
adherent to plaintiff; (b) plaintiff had in effect agreed to a rescission of its milling
contracts with its adhered planters, including the defendant planter, because of inadequate
means of transportation and had warned and advised them to mill their sugarcane WHETHER OR NOT PRIVATE RESPONDENT GATUSLAO HAS THE RIGHT TO RESCIND THE
elsewhere, and had thus induced them to believe, and act on the belief, that it could not MILLING CONTRACT WITH PETITIONER UNDER ARTICLE 1191 OF THE CIVIL CODE.
mill their sugarcane and that it would not object to their milling with other centrals; and
(c) up to now plaintiff is incapable of hauling the sugarcane of AlDSISAs co-defendants to III
plaintiffs mill site for milling purposes.
chanroble s virtual lawlibrary

The two cases, Civil Cases Nos. 8719 and 8745 were consolidated for joint trial before
Branch II of the Court of First Instance of Negros Occidental. 8 On September 8, 1969, WHETHER OR NOT PRIVATE RESPONDENT GATUSLAO WAS JUSTIFIED IN VIOLATING HIS
the parties in both civil cases filed their partial stipulation of facts which included a MILLING CONTRACT WITH PETITIONER.
statement of the issues raised by the parties. 9
IV
On February 6, 1976, the lower court rendered judgment declaring the milling contract
dated May 24, 1957 rescinded. The dispositive portion of the decision 10 reads: jgc:chanrobles.com .ph

"WHEREFORE, judgment is hereby rendered as follows: WHETHER OR NOT PRIVATE RESPONDENTS GATUSLAO AND B-M ACMA ARE GUILTY OF
BAD FAITH IN THE EXERCISE OF THEIR DUTIES AND ARE IN ESTOPPEL TO QUESTION
chanrob1es virtual 1aw library

(1) In Civil Case No. 8719 the milling contract (Exh. "121") dated May 24, 1957 is hereby THE ADEQUACY OF THE TRANSPORTATION FACILITIES OF PETITIONER AND ITS CAPACITY
declared rescinded or resolved and the defendant Bacolod-Murcia Company, Inc. is hereby TO MILL AND HAUL THE CANES OF ITS ADHERENT PLANTERS.
ordered to pay plaintiffs Alonso Gatuslao and Maria H. Gatuslao the amount of P2,625.00
with legal interest from the time of the filing of the complaint by way of actual damages; The crux of the issue is whether or not the termination of petitioners right of way over the
P5,000.00 as attorneys fees and the costs of the suit; defendants counterclaim is hacienda Helvetia caused by the expiration of its amended milling contracts with the
landowners of the lands in question is a fortuitous event or force majeure which will
exempt petitioner BMMC from fulfillment of its contractual obligations. efforts were geared toward the outcome of the court litigation but provided no solutions to
the transport problem early enough in case of an adverse decision.
It is the position of petitioner Bacolod-Murcia Milling Co., Inc. (BMMC) that the closure of
its railroad lines constitute force majeure, citing Article 1174 of the Civil Code, exempting The last three issues being inter-related will be treated as one. Private respondent
a person from liability for events which could not be foreseen or which though foreseen Gatuslao filed an action for rescission while BMMC filed in the same court an action against
were inevitable. Gatuslao, the Agro Industrial Development Silay Saravia (AIDSISA) and the Bacolod-
Murcia Agricultural Cooperative Marketing Association, Inc. (B-M ACMA) for specific
This Court has consistently ruled that when an obligor is exempted from liability under the performance under the milling contract.
aforecited provision of the Civil Code for a breach of an obligation due to an act of God,
the following elements must concur: (a) the cause of the breach of the obligation must be There is no question that the contract in question involves reciprocal obligations; as such
independent of the will of the debtor; (b) the event must be either unforseeable or party is a debtor and creditor of the other, such that the obligation of one is dependent
unavoidable; (c) the event must be such as to render it impossible for the debtor to fulfill upon the obligation of the other. They are to be performed simultaneously so that the
his obligation in a normal manner; (b) the debtor must be free from any participation in, performance of one is conditioned upon the simultaneous fulfillment of the other (Boysaw
or aggravation of the injury to the creditor (Vasquez v. Court of Appeals, 138 SCRA 553 v. Interphil Promotions, Inc., 148 SCRA 643 [1987]). chanrobles virtual lawlibrary

[1985]; Juan F. Nakpil & Sons v. Court of Appeals, 144 SCRA 596 [1986]). Applying the
criteria to the instant case, there can be no other conclusion than that the closure of the Under Article 1191 of the Civil Code, the power to rescind obligations is implied in
railroad tracks does not constitute force majeure. reciprocal ones in case one of the obligors should not comply with what is incumbent upon
him. In fact, it is well established that the party who deems the contract violated may
The terms of the milling contracts were clear and undoubtedly there was no reason for consider it revoked or rescinded pursuant to their agreement and act accordingly, even
BMMC to expect otherwise. The closure of any portion of the railroad track, not necessarily without previous court action (U.P. v. de los Angeles, 35 SCRA 102 [1970]; Luzon
in the hacienda Helvetia but in any of the properties whose owners decided not to renew Brokerage Co., Inc. v. Maritime Building Co., Inc., 43 SCRA 94 [1972]).
their milling contracts with the Central upon their expiration, was forseeable and
inevitable.
chanrobles.com :cralaw:re d It is the general rule, however, that rescission of a contract will not be permitted for a
slight or casual breach, but only for such substantial and fundamental breach as would
Petitioner Central should have anticipated and should have provided for the eventuality defeat the very object of the parties in making the agreement. The question of whether a
before committing itself. Under the circumstances it has no one to blame but itself and breach of a contract is substantial depends upon the attendant circumstances (Universal
cannot now claim exemption from liability. Food Corporation v. Court of Appeals, Et Al., 33 SCRA 1 [1970]).

In the language of the law, the event must have been impossible to foresee, or if it could The issue therefore, hinges on who is guilty of the breach of the milling contract. chanroblesvirtualawlibrary

be foreseen, must have been impossible to avoid. There must be an entire exclusion of
human agency from the cause of the injury or loss (Vasquez v. Court of Appeals, supra). Both parties are agreed that time is of the essence in the sugar industry; so that the
In the case at bar, despite its awareness that the conventional contract of lease would sugarcanes have to be milled at the right time, not too early or too late, if the quantity
expire in Crop Year 1964-1965 and that refusal on the part of any one of the landowners and quality of the juice are to be assured. As found by the trial court, upon the execution
to renew their milling contracts and the corresponding use of the right of way on their of the amended milling contract on May 24, 1957 for a period of 17 crop years, BMMC
lands would render impossible compliance of its commitments, petitioner took a calculated undertook expressly among its principal prestations not only to mill Gatuslaos canes but
risk that all the landowners would renew their contracts. Unfortunately, the sugar to haul them by railway from the loading stations to the mill. Atty. Solidum, Chief Legal
plantation of Angela Estate, Inc. which is located at the entrance of the mill was the one Counsel and in Charge of the Legal-Crop Loan Department of the BMMC Bacolod City
which refused to renew its milling contract. As a result, the closure of the railway located admits that the mode of transportation of canes from the fields to the mill is a vital factor
inside said plantation paralyzed the entire transportation system. Thus, the closure of the in the sugar industry; precisely for this reason the mode of transportation or hauling the
railway lines was not an act of God nor does it constitute force majeure. It was due to the canes is embodied in the milling contract. 13 But BMMC is now unable to haul the canes
termination of the contractual relationships of the parties, for which petitioner is charged by railways as stipulated because of the closure of the railway lines; so that resolution of
with knowledge. Verily, the lower court found that the Angela Estate, Inc. notified BMMC this issue ultimately rests on whether or not BMMC was able to provide adequate and
as far back as August or September 1965 of its intention not to allow the passage of the efficient transportation facilities of the canes of Gatuslao and the other planters milling
railway system thru its land after the aforesaid crop year. Adequate measures should have with BMMC during the crop year 1968-1969. As found by both the trial court and the Court
been adopted by BMMC to forestall such paralyzation but the records show none. All its of Appeals, the answer is in the negative.

Armando Guanzon, Dispatcher of the Transportation Department of BMMC testified that
when the Central was still using the railway lines, it had between 900 to 1,000 cane cars
and 10 locomotives, each locomotive pulling from 30 to 50 cane cars with maximum
capacity of 8 tons each. 14 This testimony was corroborated by Rodolfo Javelosa,
Assistant Crop Loan Inspector in the Crop Loan Department of petitioner. 15 After the
closure of the railway lines, petitioner on February 5, 1968 through its President and
General Manager, informed the National Committee of the National Federation of
Sugarcane Planters that the trucking requirement for hauling adherent planters produce
with a milling average of 3,500 tons of canes daily at an average load of 5 tons per truck
is not less than 700 trucks daily plus another 700 empty trucks to be shuttled back to the
plantations to be available for loading the same day. 16 Guanzon, however, testified that
petitioner had only 280 units of trailers, 20 tractors and 3 trucks plus 20 trucks more or
to proceed with the planting of your canes with absolute peace of mind and the certainty
that the same will be properly milled and not left to rot in the fields.
also,
"In the meantime, and before July 1, 1968, the end of the temporary arrangement we
have with Fernando Gonzaga, Inc. and the Angela Estate, Inc. for the use of the rights of
ways, our lawyers are studying the possibility of getting a new injunction from the
Supreme Court or the Court of First Instance of Negros Occidental based on the new
grounds interposed in said memorandum not heretofore raised previously nor in the
Capitol Subdivision case. And if we are doing this, it is principally to prevent any injury to
your crops or foreclosure of you property, which is just in line with the object of your
plans." cralaw virtua1aw library

less hired by the Central and given as repartos (allotments) to the different planters. 17
The 180 trailers that the Central initially had were permanently leased to some planters On March 26, 1968 the President of the Bacolod-Murcia Sugar Farmers Corporation
who had their own cargo trucks while out of the 250 BMMC trailers existing during the writing on behalf of its planter-members demanded to know the plans of the Central for
entire milling season only 70 were left available to the rest of the planters pulled by 3 the crop year 1968-1969, stating that if they fail to hear from the Central on or before the
trucks. 18 15th of April they will feel free to make their own plans in order to save their crops and
the possibility of foreclosure of their properties. 22
It is true that BMMC purchased 20 units John Deere Tractors (prime movers) and 230
units, Vanguard Trailers with land capacity of 3 tons each but that was only on October In its letter dated April 1, 1968, the president of BMMC simply informed the Bacolod-
1968 as registered in the Land Transportation Commission, Bacolod City. 19 Murcia Sugar Farmers Corporation that they were studying the possibility of getting a new
injunction from the court before expiration of their temporary arrangement with Fernando
The evidence shows that great efforts had been exerted by the planters to enter into some Gonzaga, Inc. and the Angela Estate, Inc. 23
concrete understanding with BMMC with a view of obtaining a reasonable assurance that
the latter would be able to haul and mill their canes for the 1968-1969 crop year, but to Pressing for a more definite commitment (not a mere hope or expectation), on May 30,
no avail. 20 1968 the Bacolod-Murcia Sugar Farmers Corporation requested the Central to put up a
performance bond in the amount of P13 million within a 5-day period to allay the fears of
As admitted by BMMC itself, in its communications with the planters, it is not in a position the planters that their sugar canes can not be milled at the Central in the coming milling
to provide adequate transportation for the canes in compliance with its commitment under season. 24
the milling contract. Said communications 21 were quoted by the Court of Appeals as
follows:
jgc:chanrobles.com .ph BMMCs reply was only to express optimism over the final outcome of its pending cases in
court.
"We are sorry to inform you that unless we can work out a fair and equitable solution to
this problem of closure of our railroad lines, the milling of your canes for the crop year Hence, what actually happened afterwards is that petitioner failed to provide adequate
1968-69 would be greatly hampered to the great detriment of our economy and the near transportation facilities to Gatuslao and other adherent planters. chanroblesvirtualawlibrary

elimination of the means of livelihood of most planters and the possible starvation of
thousands of laborers working in the sugar District of Bacolod-Murcia Milling Co." As found by the trial court, the experience of Alfonso Gatuslao at the start of the 1968-
cralaw virtua1aw library

1969 milling season is reflective of the inadequacies of the reparto or trailer allotment as
and well as the state of unpreparedness on the part of BMMC to meet the problem posed by
the closure of the railway lines.
"We are fully conscious of our contractual obligations to our existing Milling Contract. But,
if prevented by judicial order we will find ourselves unable to serve you in the hauling of It was established that after Gatuslao had cut his sugarcanes for hauling, no trailers
the canes through our railroad lines. It is for this reason that we suggest you explore arrived and when two trailers finally arrived on October 20, 1968 after several unheeded
other solutions to the problem in the face of such an eventuality so that you may be able requests, they were left on the national highway about one (1) kilometer away from the
loading station. Such fact was confirmed by Carlos But-og, the driver of the truck that As an extra precaution, AIDSISA provided in paragraph 15 30 of its milling contract that
hauled the trailers.25cralaw:red

"If any member of the planter has an existing milling contract with other sugar central,
Still further, Javelosa, Assistant Crop Loan Inspector, testified that the estimated then this milling contract with the Central shall be of no force and effect with respect to
production of Gatuslao for the crop year 1968-1969 was 4,400 piculs hauled by 10 cane that member or those members having such contract, if that other sugar central is able,
cars a week with a maximum capacity of 8 tons. 26 Compared with his later schedule of ready and willing, to mill said member or members canes in accordance with their said
only one trailer a week with a maximum capacity of only 3 to 4 tons, 27 there appears to milling contract." (Emphasis supplied)
be no question that the means of transportation provided by BMMC is very inadequate to
answer the needs of Gatuslao. The President of BMMC himself induced the planters to believe and to act on the belief that
said Central would not object to the milling of their canes with other centrals.
Undoubtedly, BMMC is guilty of breach of the conditions of the milling contract and that
Gatuslao is the injured party. Under the same Article 1191 of the Civil Code, the injured Under the circumstances, no evidence of bad faith on the part of private respondents
party may choose between the fulfillment and the rescission of the obligation, with the could be found much less any plausible reason to disturb the findings and conclusions of
payment of damages in either case. In fact, he may also seek rescission even after he had the trial court and the Court of Appeals.
chosen fulfillment if the latter should become impossible.
PREMISES CONSIDERED, the petition is hereby DENIED for lack of merit and the decision
Under the foregoing, Gatuslao has the right to rescind the milling contract and neither the of the Court of Appeals is hereby AFFIRMED in toto.
court a quo erred in decreeing the rescission claimed nor the Court of Appeals in affirming
the same. SO ORDERED.

Conversely, BMMC cannot claim enforcement of the contract. As ruled by this Court, by Melencio-Herrera (Chairman), Padilla, Sarmiento and Regalado, JJ., concur.
virtue of the violations of the terms of the contract, the offending party has forfeited any
right to its enforcement (Boysaw v. Interphil Promotions, Inc., 148 SCRA 645 [1987]).

Likewise, the Bacolod-Murcia Agricultural Cooperative Marketing Association, Inc. (B-M

ACMA) cannot be faulted for organizing itself to take care of the needs of its members.
Definitely, it was organized at that time when petitioner could not assure the planters that
it could definitely haul and mill their canes. More importantly, as mentioned earlier in a
letter dated January 12, 1968, J. Araneta, President & General Manager of the Central
itself suggested to the Bacolod-Murcia Sugar Farmers Corporation that it explore solutions
to the problem of hauling the canes to the milling station in the face of the eventuality of a
judicial order permanently closing the railroad lines so that the planters may be able to
proceed with their planting of the canes with absolute peace of mind and the certainty
that they will be properly milled and not left to rot in the fields. As a result, the signing of
the milling contract between private respondents AIDSISA and B-M ACMA on June 19,
1968 28 was a matter of self-preservation inasmuch as the sugarcanes were already
matured and the planters had crop loans to pay. Further delay would mean tremendous
losses. 29

In its defense AIDSISA stressed as earlier stated, that it agreed to mill the sugarcanes of
Gatuslao only after it had carefully ascertained and believed in good faith that BMMC was
incapable of milling the sugarcanes of the adherent planters because of inadequate
transportation and in fact up to now said Central is incapable of hauling the sugarcanes of
the said planters to its mill site for milling purposes.
chanroble s virtual lawlibrary
 [G.R. NO. 147334 : May 25, 2004]

GLOBE TELECOM, INC., Petitioner, v. PHILIPPINE COMMUNICATION SATELLITE

CORPORATION,Respondent.

DECISION

TINGA, J.:

Before the Court are two Petitions for Review assailing the Decision of the Court of
Appeals, dated 27 February 2001, in CA-G.R. CV No. 63619.1 cralawre d

The facts of the case are undisputed.

For several years prior to 1991, Globe Mckay Cable and Radio Corporation, now Globe
Telecom, Inc. (Globe), had been engaged in the coordination of the provision of various
communication facilities for the military bases of the United States of America (US) in
Clark Air Base, Angeles, Pampanga and Subic Naval Base in Cubi Point, Zambales. The
said communication facilities were installed and configured for the exclusive use of the US
Defense Communications Agency (USDCA), and for security reasons, were operated only
by its personnel or those of American companies contracted by it to operate said facilities.
The USDCA contracted with said American companies, and the latter, in turn, contracted
with Globe for the use of the communication facilities. Globe, on the other hand,
contracted with local service providers such as the Philippine Communications Satellite
Corporation (Philcomsat) for the provision of the communication facilities.

SECOND DIVISION
On 07 May 1991, Philcomsat and Globe entered into an Agreement whereby Philcomsat
[G.R. NO. 147324 : May 25, 2004] obligated itself to establish, operate and provide an IBS Standard B earth station (earth
station) within Cubi Point for the exclusive use of the USDCA. 2 The term of the contract
PHILIPPINE COMMUNICATIONS SATELLITE CORPORATION, Petitioner, v. GLOBE was for 60 months, or five (5) years.3 In turn, Globe promised to pay Philcomsat monthly
TELECOM, INC. (formerly and Globe Mckay Cable and Radio rentals for each leased circuit involved.4 cralawred

Corporation), Respondents.
At the time of the execution of the Agreement, both parties knew that the Military Bases Agreement. Globe invoked as basis for the letter of termination Section 8 (Default) of the
Agreement between the Republic of the Philippines and the US (RP-US Military Bases Agreement, which provides: chanroble svirtua1awlibrary

Agreement), which was the basis for the occupancy of the Clark Air Base and Subic Naval
Base in Cubi Point, was to expire in 1991. Under Section 25, Article XVIII of the 1987
Constitution, foreign military bases, troops or facilities, which include those located at the
Neither party shall be held liable or deemed to be in default for any failure to perform its
US Naval Facility in Cubi Point, shall not be allowed in the Philippines unless a new treaty
is duly concurred in by the Senate and ratified by a majority of the votes cast by the obligation under this Agreement if such failure results directly or indirectly from force
people in a national referendum when the Congress so requires, and such new treaty is majeure or fortuitous event. Either party is thus precluded from performing its obligation
recognized as such by the US Government. until such force majeure or fortuitous event shall terminate. For the purpose of this
paragraph, force majeure shall mean circumstances beyond the control of the party
Subsequently, Philcomsat installed and established the earth station at Cubi Point and the involved including, but not limited to, any law, order, regulation, direction or request of the
USDCA made use of the same. Government of the Philippines, strikes or other labor difficulties, insurrection riots, national
emergencies, war, acts of public enemies, fire, floods, typhoons or other catastrophies or
acts of God.

On 16 September 1991, the Senate passed and adopted Senate Resolution No. 141,
expressing its decision not to concur in the ratification of the Treaty of Friendship,
Cooperation and Security and its Supplementary Agreements that was supposed to extend Philcomsat sent a reply letter dated 10 August 1992 to Globe, stating that we expect
the term of the use by the US of Subic Naval Base, among others. 5 The last two [Globe] to know its commitment to pay the stipulated rentals for the remaining terms of
paragraphs of the Resolution state: chanroble svirtua1awlibrary
the Agreement even after [Globe] shall have discontinue[d] the use of the earth station
after November 08, 1992.7 Philcomsat referred to Section 7 of the Agreement, stating as
follows: chanroblesvirtua1awlibrary

FINDING that the Treaty constitutes a defective framework for the continuing relationship
between the two countries in the spirit of friendship, cooperation and sovereign equality:
7.DISCONTINUANCE OF SERVICE

Now, therefore, be it resolved by the Senate, as it is hereby resolved, To express its
decision not to concur in the ratification of the Treaty of Friendship, Cooperation and
Security and its Supplementary Agreements, at the same time reaffirming its desire to
continue friendly relations with the government and people of the United States of
America.6 cralawre d
On 31 December 1991, the Philippine Government sent a Note Verbale to the US
Should [Globe] decide to discontinue with the use of the earth station after it has been put
into operation, a written notice shall be served to PHILCOMSAT at least sixty (60) days
prior to the expected date of termination. Notwithstanding the non-use of the earth
station, [Globe] shall continue to pay PHILCOMSAT for the rental of the actual number of
T1 circuits in use, but in no case shall be less than the first two (2) T1 circuits, for the
remaining life of the agreement. However, should PHILCOMSAT make use or sell the earth
station subject to this agreement, the obligation of [Globe] to pay the rental for the
remaining life of the agreement shall be at such monthly rate as may be agreed upon by
the parties.8
cralawred

Government through the US Embassy, notifying it of the Philippines termination of the RP-
US Military Bases Agreement. TheNote Verbale stated that since the RP-US Military Bases
Agreement, as amended, shall terminate on 31 December 1992, the withdrawal of all US After the US military forces left Subic Naval Base, Philcomsat sent Globe a letter dated 24
military forces from Subic Naval Base should be completed by said date. November 1993 demanding payment of its outstanding obligations under the Agreement
amounting to US$4,910,136.00 plus interest and attorneys fees. However, Globe refused
In a letter dated 06 August 1992, Globe notified Philcomsat of its intention to discontinue to heed Philcomsats demand.
the use of the earth station effective 08 November 1992 in view of the withdrawal of US
military personnel from Subic Naval Base after the termination of the RP-US Military Bases
On 27 January 1995, Philcomsat filed with the Regional Trial Court of Makati
a Complaint against Globe, praying that the latter be ordered to pay liquidated damages
under the Agreement, with legal interest, exemplary damages, attorneys fees and costs of Philcomsat claimed that the trial court erred in ruling that: (1) the non-ratification by the
suit. The case was raffled to Branch 59 of said court.
Globe filed an Answer to the Complaint, insisting that it was constrained to end the
Agreement due to the termination of the RP-US Military Bases Agreement and the non-
ratification by the Senate of the Treaty of Friendship and Cooperation, which events
constituted force majeure under the Agreement. Globe explained that the occurrence of
said events exempted it from paying rentals for the remaining period of the Agreement.
On 05 January 1999, the trial court rendered its Decision, the dispositive portion of which
reads: chanroble svirtua1awlibrary
WHEREFORE, premises considered, judgment is hereby rendered as follows:
1.Ordering the defendant to pay the plaintiff the amount of Ninety Two Thousand Two
Hundred Thirty Eight US Dollars (US$92,238.00) or its equivalent in Philippine Currency
(computed at the exchange rate prevailing at the time of compliance or payment)
representing rentals for the month of December 1992 with interest thereon at the legal
rate of twelve percent (12%) per annum starting December 1992 until the amount is fully
paid;chanroblesvirtuallawlibrary
2.Ordering the defendant to pay the plaintiff the amount of Three Hundred Thousand
(P300,000.00) Pesos as and for attorneys fees; chanroble svirtuallawlibrary
3.Ordering the DISMISSAL of defendants counterclaim for lack of merit; and
4.With costs against the defendant.
SO ORDERED.9 cralawred
Both parties appealed the trial courts Decision to the Court of Appeals.
Senate of the Treaty of Friendship, Cooperation and Security and its Supplementary
Agreements constitutes force majeure which exempts Globe from complying with its
obligations under the Agreement; (2) Globe is not liable to pay the rentals for the
remainder of the term of the Agreement; and (3) Globe is not liable to Philcomsat for
exemplary damages.
Globe, on the other hand, contended that the RTC erred in holding it liable for payment of
rent of the earth station for December 1992 and of attorneys fees. It explained that it
terminated Philcomsats services on 08 November 1992; hence, it had no reason to pay for
rentals beyond that date.
On 27 February 2001, the Court of Appeals promulgated its Decision dismissing
Philcomsats appeal for lack of merit and affirming the trial courts finding that certain
chanroblesvirtua1awlibrary
events constituting force majeure under Section 8 the Agreement occurred and justified
the non-payment by Globe of rentals for the remainder of the term of the Agreement.
The appellate court ruled that the non-ratification by the Senate of the Treaty of
Friendship, Cooperation and Security, and its Supplementary Agreements, and the
termination by the Philippine Government of the RP-US Military Bases Agreement effective
31 December 1991 as stated in the Philippine Governments Note Verbale to the US
Government, are acts, directions, or requests of the Government of the Philippines which
constitute force majeure. In addition, there were circumstances beyond the control of the
parties, such as the issuance of a formal order by Cdr. Walter Corliss of the US Navy, the
issuance of the letter notification from ATT and the complete withdrawal of all US military
forces and personnel from Cubi Point, which prevented further use of the earth station
under the Agreement.
cralawlibrary
However, the Court of Appeals ruled that although Globe sought to terminate Philcomsats
services by 08 November 1992, it is still liable to pay rentals for the December 1992,
amounting to US$92,238.00 plus interest, considering that the US military forces and
personnel completely withdrew from Cubi Point only on 31 December 1992. 10 cralawre d
Both parties filed their respective Petitions for Review assailing the Decision of the Court
of Appeals.

In G.R. No. 147324,11 petitioner Philcomsat raises the following assignments of error:
A.THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING A DEFINITION OF FORCE
pay rentals for December 1992 even though it terminated Philcomsats services effective
08 November 1992, because the US military and personnel completely withdrew from Cubi
Point only in December 1992. Philcomsat points out that it was Globe which proposed the
five-year term of the Agreement, and that the other provisions of the Agreement, such as
Section 4.114 thereof, evince the intent of Globe to be bound to pay rentals for the entire
five-year term.15
cralawred

MAJEUREDIFFERENT FROM WHAT ITS LEGAL DEFINITION FOUND IN ARTICLE 1174 OF

THE CIVIL CODE, PROVIDES, SO AS TO EXEMPT GLOBE TELECOM FROM COMPLYING
WITH ITS OBLIGATIONS UNDER THE SUBJECT AGREEMENT. Philcomsat also maintains that contrary to the appellate courts findings, it is entitled to
attorneys fees and exemplary damages.16 cralawre d

B.THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT GLOBE TELECOM IS NOT
LIABLE TO PHILCOMSAT FOR RENTALS FOR THE REMAINING TERM OF THE AGREEMENT, In its Comment to Philcomsats Petition, Globe asserts that Section 8 of the Agreement is
DESPITE THE CLEAR TENOR OF SECTION 7 OF THE AGREEMENT. not contrary to Article 1174 of the Civil Code because said provision does not prohibit
parties to a contract from providing for other instances when they would be exempt from
fulfilling their contractual obligations. Globe also claims that the termination of the RP-US
Military Bases Agreement constitutes force majeure and exempts it from complying with
C.THE HONORABLE OCURT OF APPEALS ERRED IN DELETING THE TRIAL COURTS AWARD its obligations under the Agreement.17 On the issue of the propriety of awarding attorneys
OF ATTORNEYS FEES IN FAVOR OF PHILCOMSAT. fees and exemplary damages to Philcomsat, Globe maintains that Philcomsat is not
entitled thereto because in refusing to pay rentals for the remainder of the term of the
Agreement, Globe only acted in accordance with its rights.18 cralawre d

D.THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT GLOBE TELECOM IS NOT
LIABLE TO PHILCOMSAT FOR EXEMPLARY DAMAGES.12 cralawred

Philcomsat argues that the termination of the RP-US Military Bases Agreement cannot be December
considered a fortuitous event because the happening thereof was foreseeable. Although
In G.R. No. 147334,19 Globe, the petitioner therein, contends that the Court of Appeals
erred in finding it liable for the amount of US$92,238.00, representing rentals for
1992, since Philcomsats services were actually terminated on 08 November
1992. 20
cralawred

the Agreement was freely entered into by both parties, Section 8 should be deemed
ineffective because it is contrary to Article 1174 of the Civil Code. Philcomsat posits the
view that the validity of the parties definition of force majeure in Section 8 of the In its Comment, Philcomsat claims that Globes petition should be dismissed as it raises a
Agreement as circumstances beyond the control of the party involved including, but not factual issue which is not cognizable by the Court in a Petition for Review on Certiorari .21
limited to, any law, order, regulation, direction or request of the Government of the
cralawre d

Philippines, strikes or other labor difficulties, insurrection riots, national emergencies, war,
acts of public enemies, fire, floods, typhoons or other catastrophies or acts of God, should
be deemed subject to Article 1174 which defines fortuitous events as events which could On 15 August 2001, the Court issued a Resolution giving due course to Philcomsats
not be foreseen, or which, though foreseen, were inevitable. 13 cralawred
Petition in G.R. No.147324 and required the parties to submit their respective
memoranda.22 cralawre d

Philcomsat further claims that the Court of Appeals erred in holding that Globe is not liable
to pay for the rental of the earth station for the entire term of the Agreement because it Similarly, on 20 August 2001, the Court issued a Resolution giving due course to the
runs counter to what was plainly stipulated by the parties in Section 7 thereof.Moreover, Petition filed by Globe in G.R. No. 147334and required both parties to submit their
said ruling is inconsistent with the appellate courts pronouncement that Globe is liable to memoranda.23 cralawre d
 Art. 1174. Except in cases specified by the law, or when it is otherwise declared by
stipulation, or when the nature of the obligation requires the assumption of risk, no
Philcomsat and Globe thereafter filed their respective Consolidated Memoranda in the two person shall be responsible for those events which, could not be foreseen, or which,
cases, reiterating their arguments in their respective petitions. though foreseen were inevitable.

The Court is tasked to resolve the following issues: (1) whether the termination of the RP- A fortuitous event under Article 1174 may either be an act of God, or natural occurrences
US Military Bases Agreement, the non-ratification of the Treaty of Friendship, Cooperation such as floods or typhoons,24 or an act of man, such as riots, strikes or wars.25 cralawred

and Security, and the consequent withdrawal of US military forces and personnel from
Cubi Point constitute force majeure which would exempt Globe from complying with its
obligation to pay rentals under its Agreement with Philcomsat; (2) whether Globe is liable
to pay rentals under the Agreement for the month of December 1992; and (3) whether Philcomsat and Globe agreed in Section 8 of the Agreement that the following events shall
Philcomsat is entitled to attorneys fees and exemplary damages. be deemed events constituting force majeure: chanroblesvirtua1awlibrary

No reversible error was committed by the Court of Appeals in issuing the 1.Any law, order, regulation, direction or request of the Philippine Government; chanroblesvirtuallawlibrary

assailed Decision; hence the petitions are denied.

2.Strikes or other labor difficulties; chanroblesvirtuallawlibrary

3.Insurrection; chanroblesvirtuallawlibrary

There is no merit is Philcomsats argument that Section 8 of the Agreement cannot be

given effect because the enumeration of events constituting force majeure therein unduly 4.Riots; chanroblesvirtuallawlibrary

expands the concept of a fortuitous event under Article 1174 of the Civil Code and is
therefore invalid. 5.National emergencies; chanroble svirtuallawlibrary

6.War; chanroblesvirtuallawlibrary

In support of its position, Philcomsat contends that under Article 1174 of the Civil Code, 7.Acts of public enemies; chanroble svirtuallawlibrary

an event must be unforeseen in order to exempt a party to a contract from complying with
8.Fire, floods, typhoons or other catastrophies or acts of God;
its obligations therein. It insists that since the expiration of the RP-US Military Bases
chanroblesvirtuallawlibrary

Agreement, the non-ratification of the Treaty of Friendship, Cooperation and Security and 9.Other circumstances beyond the control of the parties.
the withdrawal of US military forces and personnel from Cubi Point were not
unforeseeable, but were possibilities known to it and Globe at the time they entered into
the Agreement, such events cannot exempt Globe from performing its obligation of paying
rentals for the entire five-year term thereof. Clearly, the foregoing are either unforeseeable, or foreseeable but beyond the control of
the parties. There is nothing in the enumeration that runs contrary to, or expands, the
concept of a fortuitous event under Article 1174.

However, Article 1174, which exempts an obligor from liability on account of fortuitous
events or force majeure, refers not only to events that are unforeseeable, but also to
those which are foreseeable, but inevitable:
Furthermore, under Article 130626 of the Civil Code, parties to a contract may establish
such stipulations, clauses, terms and conditions as they may deem fit, as long as the
same do not run counter to the law, morals, good customs, public order or public
policy.27 cralawre d
Article 1159 of the Civil Code also provides that [o]bligations arising from contracts have
the force of law between the contracting parties and should be complied with in good
faith.28 Courts cannot stipulate for the parties nor amend their agreement where the same
does not contravene law, morals, good customs, public order or public policy, for to do so
would be to alter the real intent of the parties, and would run contrary to the function of
the courts to give force and effect thereto.29
cralawred
Resolution No. 141 of the Philippine Senate and the Note Verbale of the Philippine
Government to the US Government are acts, direction or request of the Government of
the Philippines and circumstances beyond the control of the defendant. The formal order
from Cdr. Walter Corliss of the USN, the letter notification from ATT and the complete
withdrawal of all the military forces and personnel from Cubi Point in the year-end 1992
are also acts and circumstances beyond the control of the defendant.

Not being contrary to law, morals, good customs, public order, or public policy, Section 8
of the Agreement which Philcomsat and Globe freely agreed upon has the force of law
between them.30 cralawre d
Considering the foregoing, the Court finds and so holds that the afore-narrated
circumstances constitute force majeure or fortuitous event(s) as defined under paragraph
8 of the Agreement.

From the foregoing, the Court finds that the defendant is exempted from paying the
rentals for the facility for the remaining term of the contract.
In order that Globe may be exempt from non-compliance with its obligation to pay rentals
under Section 8, the concurrence of the following elements must be established: (1) the
event must be independent of the human will; (2) the occurrence must render it
impossible for the debtor to fulfill the obligation in a normal manner; and (3) the obligor As a consequence of the termination of the RP-US Military Bases Agreement (as amended)
must be free of participation in, or aggravation of, the injury to the creditor.31 the continued stay of all US Military forces and personnel from Subic Naval Base would no
cralawred

The Court agrees with the Court of Appeals and the trial court that the abovementioned
requisites are present in the instant case. Philcomsat and Globe had no control over the
non-renewal of the term of the RP-US Military Bases Agreement when the same expired in
1991, because the prerogative to ratify the treaty extending the life thereof belonged to
the Senate. Neither did the parties have control over the subsequent withdrawal of the US
military forces and personnel from Cubi Point in December 1992:
chanroble svirtua1awlibrary
longer be allowed, hence, plaintiff would no longer be in any position to render the service
it was obligated under the Agreement. To put it blantly (sic), since the US military forces
and personnel left or withdrew from Cubi Point in the year end December 1992, there was
no longer any necessity for the plaintiff to continue maintaining the IBS
facility.32 (Emphasis in the original.)
The aforementioned events made impossible the continuation of the Agreement until the

end of its five-year term without fault on the part of either party. The Court of Appeals
was thus correct in ruling that the happening of such fortuitous events rendered Globe
exempt from payment of rentals for the remainder of the term of the Agreement.
Obviously the non-ratification by the Senate of the RP-US Military Bases Agreement (and
its Supplemental Agreements) under its Resolution No. 141. (Exhibit 2) on September 16,
1991 is beyond the control of the parties. This resolution was followed by the sending on
December 31, 1991 o[f] a Note Verbale (Exhibit 3) by the Philippine Government to the Moreover, it would be unjust to require Globe to continue paying rentals even though
US Government notifying the latter of the formers termination of the RP-US Military Bases Philcomsat cannot be compelled to perform its corresponding obligation under the
Agreement (as amended) on 31 December 1992 and that accordingly, the withdrawal of Agreement. As noted by the appellate court: chanroble svirtua1awlibrary

all U.S. military forces from Subic Naval Base should be completed by said date.
Subsequently, defendant [Globe] received a formal order from Cdr. Walter F. Corliss II
Commander USN dated July 31, 1992 and a notification from ATT dated July 29, 1992 to
terminate the provision of T1s services (via an IBS Standard B Earth Station) effective We also point out the sheer inequity of PHILCOMSATs position. PHILCOMSAT would like to
November 08, 1992. Plaintiff [Philcomsat] was furnished with copies of the said order and charge GLOBE rentals for the balance of the lease term without there being any
letter by the defendant on August 06, 1992. corresponding telecommunications service subject of the lease.It will be grossly unfair and
iniquitous to hold GLOBE liable for lease charges for a service that was not and could not
have been rendered due to an act of the government which was clearly beyond GLOBEs
control. The binding effect of a contract on both parties is based on the principle that the
obligations arising from contracts have the force of law between the contracting parties,
and there must be mutuality between them based essentially on their equality under
which it is repugnant to have one party bound by the contract while leaving the other
party free therefrom (Allied Banking Corporation v. Court of Appeals, 284 SCRA
357 ). 33cralawre d
Exemplary damages may be awarded in cases involving contracts or quasi-contracts, if the
erring party acted in a wanton, fraudulent, reckless, oppressive or malevolent manner.41 In
the present case, it was not shown that Globe acted wantonly or oppressively in not
heeding Philcomsats demands for payment of rentals. It was established during the trial of
the case before the trial court that Globe had valid grounds for refusing to comply with its
contractual obligations after 1992.

WHEREFORE, the Petitions are DENIED for lack of merit. The assailed Decision of the
With respect to the issue of whether Globe is liable for payment of rentals for the month of Court of Appeals in CA-G.R. CV No. 63619 is AFFIRMED.
December 1992, the Court likewise affirms the appellate courts ruling that Globe should
pay the same.

Although Globe alleged that it terminated the Agreement with Philcomsat effective 08 SO ORDERED.
November 1992 pursuant to the formal order issued by Cdr. Corliss of the US Navy, the
date when they actually ceased using the earth station subject of the Agreement was not
established during the trial.34 However, the trial court found that the US military forces and
personnel completely withdrew from Cubi Point only on 31 December 1992. 35 Thus, until
that date, the USDCA had control over the earth station and had the option of using the
same. Furthermore, Philcomsat could not have removed or rendered ineffective said
communication facility until after 31 December 1992 because Cubi Point was accessible
only to US naval personnel up to that time. Hence, the Court of Appeals did not err when
it affirmed the trial courts ruling that Globe is liable for payment of rentals until December
1992. FIRST DIVISION

[G.R. No. 97873. August 12, 1993.]

Neither did the appellate court commit any error in holding that Philcomsat is not entitled PILIPINAS BANK, Petitioner, v. THE HON. COURT OF APPEALS, and LILIA R.
to attorneys fees and exemplary damages. ECHAUS,Respondents.

Gella, Reyes, Danguilan and Associates for the petitioner.

The award of attorneys fees is the exception rather than the rule, and must be supported
Manuel L. Melotindos for the respondents.
by factual, legal and equitable justifications.36 In previously decided cases, the Court
awarded attorneys fees where a party acted in gross and evident bad faith in refusing to
satisfy the other partys claims and compelled the former to litigate to protect his
rights;37 when the action filed is clearly unfounded,38 or where moral or exemplary
damages are awarded.39 However, in cases where both parties have legitimate claims
DECISION
against each other and no party actually prevailed, such as in the present case where the
claims of both parties were sustained in part, an award of attorneys fees would not be
warranted.40 cralawre d

QUIASON, J.:
 6) Costs of suit" (Rollo, p. 78).

On March 22, 1985, petitioner appealed the decision of the trial court to the Court of
This is a petition for certiorari under Rule 45 of the Revised Rules of Court to review the Appeals, which docketed the appeal as CA-G.R. No. 06017. On the same day, private
Resolution of the Court of Appeals in CA-G.R. CV No. 06017 promulgated on March 14, respondent filed a Motion for Immediate Execution Pending Appeal. The trial court granted
1991. The Resolution was rendered in response to private respondents motion for the motion for execution pending appeal in an Order dated April 3, 1985. Petitioner
clarification of the decision of the Court of Appeals in CA-G.R. No. 06017. The matters challenged the Order dated April 3, 1985 before the Court of Appeals in CA-G.R. No. SP
sought to be clarified arose in the course of the execution of the decision of the Regional No. 05909.
Trial Court, Branch 71, Antipolo, Rizal in Civil Case No. 239-A, as modified by the decision
of the Court of Appeals in CA-G.R. CV No. 06017. On October 30, 1986, the Court of Appeals modified the Order dated April 3, 1985, by
limiting the execution pending appeal against petitioner to P5,517,707.00 and deferring
In Civil Case No. 239-A, private respondent filed a complaint against petitioner and its the execution of the award for moral, exemplary and nominal damages to await the final
president, Constantino Bautista, for collection of a sum of money. The complaint alleged: judgment of the main case in CA-G.R. No. 06017. On June 17, 1987, the Supreme Court
(1) that petitioner and Greatland Realty Corporation (Greatland) executed a "Dacion en in G.R. No. L-76506 affirmed the Order dated October 30, 1986 of the Court of Appeals.
Pago," wherein Greatland conveyed to petitioner several parcels of land in consideration of
the sum of P7,776,335.69; (2) that Greatland assigned P2,300,000.00 out of the total On July 1, 1988, the trial court granted the new motion for execution pending appeal filed
consideration of the Dacion en Pago, in favor of private respondent; and (3) that by private respondent pursuant to the Resolution of the Supreme Court dated June 17,
notwithstanding her demand for payment, petitioner in bad faith, refused and failed to pay 1987, upon the filing of the required bond. Petitioner complied with the writ of execution
the said amount assigned to her. pending appeal by issuing two managers checks in the total amount of P5,517,707.00
(one for P4,965,936.30 payable to private respondent and another for P551,770.70
Petitioner, while admitting the execution of the Dacion en Pago, claimed: (1) that its payable to the Clerk of Court, RTC, Antipolo, Rizal).
former president had no authority to enter into such agreement; (2) that it never ratified
the same; and (3) that assuming arguendo that the agreement was binding, the The check payable to private respondent was encashed on July 15, 1988.
conditions stipulated therein were never fulfilled.
On June 28, 1990, the Court of Appeals rendered a decision in CA-G.R. No. CV-06017,
Dismissing petitioners defenses as unmeritorious, the trial court ruled in favor of which modified the judgment of the trial court as follows: jgc:chanroble s.com.ph

private Respondent. The trial court ordered petitioner and its co-defendant, jointly and
severally, to pay private respondent as follows: jgc:chanrobles.com .ph
"1. The defendant-appellant Pilipinas Bank, formerly known as Filipinas Manufacturers
Bank is ordered to pay the plaintiff-appellee the following: chanrob1es virtual 1aw library

"1) P2,300,000.00 the total amount assigned by Greatland in her favor out of the
P2,300,000.00 liability of defendant Pilipinas to Greatland plus legal interest from the (a) The sum of Two Million Three Hundred Thousand (2,300,000.00) Pesos, representing
dates of assignments until fully paid; the total amount assigned by Greatland to her, with interest at the legal rate starting July
24, 1981, date when demand was first made (Exh. "F" and "G");
2) P3,217,707.00 representing the total actual damages suffered by the plaintiff plus legal
interest until fully paid;
chanroble s.com : virtual law library
(b) The sum of One Hundred Thousand (P100,000.00) Pesos in moral damages, to
assuage moral sufferings and embarrassment of plaintiff-appellee as a consequence of
3) P1,000,000.00 in moral damages to partially assuage the extreme moral sufferings of appellant-banks unwarranted acts;
plaintiff inflicted upon her person considering the bad faith on the part of the defendants
and their failure to act with justice, and to give what is lawfully due her and observe (c) The sum of Twenty Five Thousand (P25,000.00) Pesos, as exemplary damages to serve
honesty and good faith; as an example or correction for the public good;

4) P100,000.00 exemplary and nominal damages to vindicate plaintiffs violated rights; (d) The sum equivalent to ten (10) percent of the principal claim awarded, representing
attorneys fees; and.
5) Attorneys fees equivalent to 15% of the total award in favor of the plaintiff;
2. Constantino Bautista is absolved of personal liability" (Rollo, pp. 31-32).
Petitioner filed a motion for extension of time to file a Petition for Review on Certiorari withd) The discharge of the surety bond whether total or partial, depending on the
the Supreme Court, which however was withdrawn on July 23, 1990. Private respondent, computation of the interest;
on her part, filed a motion for reconsideration of the decision of the Court of Appeals in
CA-G.R. No. 06017, which likewise was withdrawn on August 13, 1990. e) The award of attorneys fees equivalent to 10% of the principal award, whether this
chanroble s.com : virtual law library

should totally go to plaintiff-appellees former counsel or to be shared on the basis of

Hence, the decision of the Court of Appeals rendered in CA-G.R. No. 06017 became final quantum meruit with the undersigned counsel; and
and executory.
f) Aside from this final award of 10% attorneys fees chargeable against defendant-
On September 4, 1990, petitioner filed a motion in the trial court praying that private appellant, whether or not former counsel of plaintiff-appellee can still collect from her the
respondent and Standard Insurance Co. (which furnished the bond required in the balance of 15% out of the 25% attorneys fees under Exh, `N" (Rollo, p. 32).
advance execution of the decision of the trial court) to refund to her the excess payment
of P1,898,623.67 with interests at 6% (Rollo, pp. 83-84). In its Resolution promulgated on March 14, 1991, the Court of Appeals clarified that: jgc:chanroble s.com.ph

It must be recalled that while private respondent was able to collect P5,517,707.00 from "a) The legal rate of interest on the principal award of P2,300,000.00 should be 12% per
petitioner pursuant to the writ of advance execution allowed in CA-G.R. No. SP No. 05909, annum in accordance with Circular No. 416 dated July 29, 1974 of the Central Bank. cralawnad

the final judgment in the main case (CA-G.R. No. 06017) awarded to private respondent
damages in the total amount of only P2,655,000.00 (P2,300,000.00 representing the b) The computation of compounding interest annually has no basis, therefore, not allowed
amount assigned by Greatland to private respondent, P100,000.00 as moral damages; in the instant case;
P25,000.00 as exemplary damages and attorneys fees equivalent to 10% of the
P2,300,000.00), together "with interest on the amount of P2,300,000.00 at the legal rate c) The payment of premium on the bond in the sum of P259,813.50 as cost, being without
starting July 24, 1981, date when demand was first made (Exh. "F" and "G")." legal and factual basis, is denied;
cralaw virtua1aw library

Private respondent opposed the motion of petitioner with respect to the rate of interest to d) The surety bond posted by plaintiff-appellee may be released after satisfaction of the
be charged on the amount of P2,300,000.00. According to private respondent, the legal decision; and
interest on the principal amount of P2,300,000.00 due her should be 12% per annum
pursuant to CB Circular No. 416 and not 6% per annum as computed by petitioner. e) Payment/distribution of attorneys fees may/shall be litigated in a separate proceeding
if the parties cannot settle their differences amicably.
On October 12, 1990, the trial court, while ordering the refund to petitioner of the excess
payment, fixed the interest rate due on the amount of P2,300,000.00 at 12% per annum SO ORDERED" (Rollo, pp. 35-36).
as proposed by private respondent, instead of 6% per annum as proposed by petitioner.
In this appeal, petitioner claims that the Court of Appeals erred: chanrob1es virtual 1aw library

On October 16, 1990, petitioner moved to reconsider the Order dated October 12, 1990 of
the trial court, which however could not be acted upon because on October 23, 1990, (1) In ruling that the legal rate of interest on the amount of P2,300,000.00 adjudged to be
private respondent filed a Motion for Clarification with the Court of Appeals in CA-G.R. CV paid by petitioner to private respondent is 12% per annum.
No. 06017, regarding the following matters: jgc:chanrobles.com .ph

(2) In not holding that the refund to which petitioner is entitled should earn interest at the
"a) The legal rate of interest on the principal award of P2,300,000.00 from July 24, 1981 rate of 12% per annum.
(as per decision) up to July 14, 1988 (date of actual payment made by defendant-
appellant to plaintiff-appellee per execution pending appeal); (3) In not holding that the surety bond should only be released after actual refund (Rollo,
p. 18).
b) The imposition of such legal rate of interest on the accrued interest from July 24,
1981 up to July 14, 1988; The Court of Appeals was of the theory that the action in Civil Case No. 239-A filed by
private respondent against petitioner "involves forbearance of money, as the principal
c) The amount of the costs of suit will include premium on surety bond; award to plaintiff-appellee (private respondent) in the amount of P2,300,000.00 was the
overdue debt of defendant-appellant to her since July 1981. The case is, in effect, a simple
collection of the money due to plaintiff-appellee, as the unpaid creditor from the defendant Note that Circular No. 416, fixing the rate of interest at 12% per annum, deals with (1)
bank, the debtor" (Resolution, p. 3; Rollo, p. 33). Applying Central Bank Circular No. 416, loans; (2) forbearance of any money, goods or credit; and (3) judgments. chanroblesvirtualawlibrary

the Court of Appeals held that the applicable rate of interest is 12% per annum.
In Reformina v. Tomol, Jr., 139 SCRA 260 [1985], the Court held that the judgments
Petitioner argues that the applicable law is Article 2209 of the Civil Code, not the Central spoken of and referred to in Circular No. 416 are "judgments in litigation involving loans or
Bank Circular No. 416. Said Article 2209 provides: forbearance of any money, goods or credits. Any other kind of monetary judgment which
jgc:chanroble s.com.ph

has nothing to do with nor involving loans or forbearance of any money, goods or credits
"Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor does not fall within the coverage of the said law for it is not, within the ambit of the
incurs in delay, the indemnity for damages, there being no stipulation to the contrary, authority granted to the Central Bank." cralaw virtua1aw library

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." Reformina was affirmed in Philippine Virginia Tobacco Administration v. Tensuan, 188
cralaw virtua1aw library

SCRA 628 [1990], which emphasized that the "judgments" contemplated in Circular No.
Presidential Decree No. 116 authorized the Monetary Board to prescribe the maximum 417 "are judgments involving said loans or forbearance only and not in judgments in
rate or rates of interest for the loan or renewal thereof or the forbearance of any money, litigation that have nothing to do with loans . . ." cralaw virtua1aw library

goods or credits and amended the Usury Law (Act No. 2655) for that purpose.
We held that Circular No. 416 does not apply to judgments involving damages (Reformina
As amended, the Usury Law now provides: jgc:chanroble s.com.ph v. Tomol, Jr., supra; Philippine Virginia Tobacco Administration v. Tensuan, supra) and
compensation in expropriation proceedings (National Power Corporation v. Angas, 208
"SECTION 1. The rate of interest for the loan or forbearance of any money, goods, or SCRA 542 [1992]). We also held that Circular No. 416 applies to judgments involving the
credits and the rate allowed in judgments, in the absence of express contract as to such payment of unliquidated cash advances to an employee by his employer (Villarica v. Court
rate of interest, shall be six per centum per annum or such rate as may be prescribed by of Appeals, 123 SCRA 259 [1983]) and the return of money paid by a buyer of a leasehold
the Monetary Board of the Central Bank of the Philippines for that purpose in accordance right but which contract was voided due to the fault of the seller (Buisier v. Court of
with the authority hereby granted." cralaw virtua1aw library Appeals, 154 SCRA 438 [1987]).

"SECTION. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate What then is the nature of the judgment ordering petitioner to pay private respondent the
or rates of interest for the loan or renewal thereof or the forbearance of any money, goods amount of P2,300,000.00?
or credits, and to charge such rate or rates whenever warranted by prevailing economic
and social conditions: Provided, That such changes shall not be made oftener than once The said amount was a portion of the P7,776,335.69 which petitioner was obligated to pay
every twelve months. Greatland as consideration for the sale of several parcels of land by Greatland to
petitioner. The amount of P2,300,000.00 was assigned by Greatland in favor of
"In the exercise of the authority herein granted, the Monetary Board may prescribe higher private Respondent. The said obligation therefore arose from a contract of purchase and
maximum rates for consumer loans or renewals thereof as well as such loans made by sale and not from a contract of loan or mutuum. Hence, what is applicable is the rate of
pawnshops, finance companies and other similar credit institutions although the rates 6% per annum as provided in Article 2209 of the Civil Code of the Philippines and not the
prescribed for these institutions need not necessarily be uniform." rate of 12% per annum as provided in Circular No. 416.
cralaw virtua1aw library

Acting on the authority vested on it by the Usury Law, as amended by P.D. No. 116, the Petitioner next contends that, consistent with its thesis that Circular No. 416 applies only
Monetary Board of Central Bank issued Central Bank Circular No. 416, which provides: to judgments involving the payment of loans or forbearance of money goods and credit,
jgc:chanrobles.com .ph

the Court of Appeals should have ordered private respondent to pay interest at the rate of
"By virtue of the authority granted to it under Section 1 of Act 2655, as amended, 12% on the overpayment collected by her pursuant to the advance execution of the
otherwise known as the `Usury Law the Monetary Board in its Resolution No. 1622 dated judgment.
July 29, 1974, has prescribed that the rate of interest for the loan, or forbearance of any
money, goods, or credits and the rate allowed in judgments, in the absence of express Again, we sustain petitioners contention as correct.
contract as to such rate of interest, shall be twelve (12%) per cent per annum. This
Circular shall take effect immediately." (Italics supplied). Private respondent was paid in advance the amount of P5,517,707.00 by petitioner
pursuant to the order for the execution pending appeal of the judgment of the trial court.
On appeal, the Court of Appeals reduced the total damages to P3,619,083.33, leaving a
balance of P1,898,623.67 to be refunded by private respondent to petitioner. In an
execution pending appeal, funds are advanced by the losing party to the prevailing party
with the implied obligation of the latter to repay the former, in case the appellate court
cancels or reduces the monetary award.

Under Section 5 of Rule 39 of the Revised Rules of Court where "the judgment executed is
reversed totally or partially on appeal, the trial court, on motion, after the case is
remanded to it, may issue such orders of restitution, as equity and justice may warrant
under the circumstances." It was to guarantee the restitution contemplated by Section 5
of Rule 39 of the Revised Rules of Court that private respondent was required by the trial
court to post a bond before the writ of advance execution was issued.

In the case before us, the excess amount ordered to be refunded by private respondent
EN BANC
falls within the ruling in Viloria and Buiser that Circular No. 416 applies to cases where
money is transferred from one person to another and the obligation to return the same or
[G.R. No. 97412. July 12, 1994.]
a portion thereof is subsequently adjudged.
EASTERN SHIPPING INES, INC., Petitioner, v. HON. COURT OF APPEALS AND
Finally, petitioner questions as vague the ruling of the Court of Appeals that the surety
MERCANTILE INSURANCE COMPANY, INC., Respondents.
bond given to secure the advance execution may be discharged "upon the finality and
satisfaction of the decision." We believe that this ruling of the Court of Appeals is clear
enough in ordering that the surety bond shall be released only after private respondent
has fully refunded the overpayment to petitioner. chanroble s lawlibrary : rednad

SYLLABUS
WHEREFORE, the petition is GRANTED. The Resolution of the Court of Appeals appealed
from is MODIFIED in that (1) the amount of P2,300,000.00 adjudged to be paid by
petitioner to private respondent shall earn interest of 6% per annum and (2) the amount
of P1,898,623.67 to be refunded by private respondent to petitioner shall earn interest of
12% per annum. Costs against privateRespondent.
1. CIVIL LAW; COMMON CARRIERS; TIME FRAME WITHIN WHICH DILIGNCE REQUIRED IN
SHIPMENT OF GOODS LAST. The common carriers duty to observe the requisite
SO ORDERED.
diligence in the shipment of goods lasts from the time the articles are surrendered to or
unconditionally placed in the possession of, and received by, the carrier for transportation
Cruz , Grio-Aquino, Davide, Jr. and Bellosillo, JJ., concur.
until delivered to, or until the lapse of a reasonable time for their acceptance, by the
person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon v. Court of Appeals,
161 SCRA 646; Kui Bai v. Dollar Steamship Lines, 52 Phil. 863).

2. ID.; ID.; ID.; PRESUMPTION OF CARRIERS FAULT ON LOST OR DAMAGED GOODS

SHIPPED; CASE AT BAR NOT AN EXCEPTION. When the goods shipped either are lost or
arrive in damaged condition, a presumption arises against the carrier of its failure to
observe that diligence, and there need not be an express finding of negligence to hold it
liable (Art. 1735, Civil Code; Philippine National Railways v. Court of Appeals, 139 SCRA
87; Metro Port Service v. Court of Appeals, 131 SCRA 365). There are, of course,
exceptional cases when such presumption of fault is not observed but these cases,
enumerated in Article 1734 of the Civil Code, are exclusive, not one of which can be
applied to this case. whether the applicable rate of interest, referred to above, is twelve percent (12%) or six
percent (6%). chanrobles lawlibrary : rednad

3. ID.; DAMAGES; INTEREST AWARDED AS A CONCEPT THEREOF; RATE AND ACCRUAL

THEREOF, HOW DETERMINED. With regard particularly to an award of interest in the The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and
concept of actual and compensatory damages, the rate of interest, as well as the accrual undisputed facts that have led to the controversy are hereunder reproduced: jgc:chanroble s.com.ph

thereof, is imposed, as follows: 1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of money, the interest due should "This is an action against defendants shipping company, arrastre operator and broker-
be that which may have been stipulated in writing. Furthermore, the interest due shall forwarded for damages sustained by a shipment while in defendants custody, filed by the
itself earn legal interest from the time it is judicially demanded. In the absence of insurer-subrogee who paid the consignee the value of such losses/damages.
stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of "On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan
the Civil Code. 2. When a obligation, not constituting a loan or forbearance of money, is for delivery vessel `SS EASTERN COMET owned by defendant Eastern Shipping Lines
breached, an interest on the amount of damages awarded may be imposed at the under Bill of Lading No. YMA-8 (Exh. B). The shipment was insured under plaintiffs Marine
discretion of the court at the rate of 6% per annum. No interest, however, shall be Insurance Policy No. 81/01177 for P36,382,466.38.
adjudged on unliquidated claims or damages except when or until the demand can be
established with reasonable certainty. Accordingly, where the demand is established with "Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the
reasonable certainty, the interest shall begin to run from the time the claim is made custody of defendant Metro Port Services, Inc. The latter excepted to one drum, said to be
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so in bad order, which damage was unknown to plaintiff.
reasonably established at the time the demand is made, the interest shall begin to run
only from the date of the judgment of the court is made (at which time the quantification "On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from
of damages may be deemed to have been reasonably ascertained). The actual base for defendant Metro Port Service, Inc., one drum opened and without seal (per Request for
the computation of legal interest shall, in any case, be on the amount of finally adjudged. Bad Order Survey. (Exh. D).
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or "On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this the shipment to the consignees warehouse. The latter excepted to one drum which
interim period being deemed to be by then an equivalent to a forbearance of credit. contained spillages, while the rest of the contents was adulterated/fake (per Bad Order
Waybill No. 10649, Exh. E).

"Plaintiff contended that due to the losses/damage sustained by said drum, the consignee
suffered losses totaling P19,032.95, due to the fault and negligence of defendants. Claims
DECISION were presented against defendants who failed and refused to pay the same (Exhs. H, I, J,
K, L).
chanroble s virtual lawlibrary

"As a consequence of the losses sustained, plaintiff was compelled to pay the consignee
P19,032.95 under the aforestated marine insurance policy, so that it became subrogated
VITUG, J.:to all the rights of action of said consignee against defendants (per Form of Subrogation,
Release and Philbanking check, Exhs. M, N, and O)." (pp. 85-86, Rollo.)

There were, to be sure, other factual issues that confronted both courts. Here, the
appellate court said: jgc:chanroble s.com.ph

The issues, albeit not completely novel, are: (a) whether or not a claim for damage
sustained on a shipment of goods can be a solidary, or joint and several, liability of the
common carrier, the arrastre operator and the customs broker; (b) whether the payment
of legal interest on an award of loss or damage is to be computed from the time the
complaint is filed or from the date the decision appealed from is rendered; and (c)
"Defendants filed their respective answers, traversing the material allegations of the
compliant contending that: As for defendant Eastern Shipping it alleged that the shipment
was discharged in good order from the vessel unto the custody of Metro Port Service so
that any damage/losses incurred after the shipment was incurred after the shipment was
turned over to the latter, is no longer its liability (p. 17, Record); Metroport averred that opportunity to remove or dispose of the goods (Art. 1738, NCC). Defendant Eastern
although subject shipment was discharged unto its custody, portion of the same was Shippings own exhibit, the Turn-Over Survey of Bad Order Cargoes (Exhs. 3-Eastern)
already in bad order (p. 11, Record); Allied Brokerage alleged that plaintiff has no cause of states that on December 12, 1981 one drum was found open.
action against it, not having negligent or at fault for the shipment was already in damage
and bad order condition when received by it, but nonetheless, it still exercised extra "and thus held: chanrob1es virtual 1aw library

ordinary care and diligence in he handling/delivery of the cargo to consignee in the same
condition shipment was received by it. WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered: chanrob1es virtual 1aw library

"From the evidence that court found the following: jgc:chanrobles.com .ph A. Ordering defendants to pay plaintiff, jointly and severally: chanrob1es virtual 1aw library

"The issues are: chanrob1es virtual 1aw library
1. Whether or not the shipment sustained losses/damages;
2. Whether or not these losses/damages were sustained while in the custody of
defendants (in whose respective custody, if determinable);
1. The amount of P19,032.95 with the present legal interest of 12% per annum from
October 1, 1982, the date of filing of this complaints, until fully paid (the liability of
defendant Eastern Shipping, Inc. shall not exceed US$500 per case or the CIF value of the
loss, whichever is lesser, while the liability of defendant Metro Port Service, Inc. shall be to
the extent of the actual invoice value of each package, crate box or container in no case to
chanroble s.com.ph : virtual law library exceed P5,000.00 each, pursuant to Section 6.01 of the Management Contract); cralawnad

3. Whether or not defendant(s) should be held liable for the losses/damages (see 2. P3,000.00 as attorneys fees, and
plaintiffs pre-Trial Brief, Records, p. 34; Allieds pre-Trial Brief, adopting plaintiffs Records,
p. 38). 3. Costs.

As to the first issue, there can be no doubt that the shipment sustained losses/damages. B. Dismissing the counterclaims and crossclaim of defendant/cross-claimant Allied
The two drums were shipped in good order and condition, as clearly shown by the Bill of Brokerage Corporation.
Lading and Commercial Invoice which do not indicate any damages drum that was shipped
(Exhs. B and C). But when on December 12, 1981 the shipment was delivered to SO ORDERED. (p. 207, Record).
defendant Metro Port Service, Inc., it excepted to one drum in bad order.
"Dissatisfied, defendants recourse to US.
Correspondingly, as to the second issue, it follows that the losses/damages were
sustained while in the respective and/or successive custody and possession of defendants "The appeal is devoid of merit.
carrier (Eastern), arrastre operator (Metro Port) and broker (Allied Brokerage). This
becomes evident when the Marine Cargo Survey Report (Exh. G), with its Additional "After a careful scrunity of the evidence on record. We find that the conclusion drawn
Survey Notes, are considered. In the latter notes, it is stated that when the shipment was therefrom is correct. As there is sufficient evidence that the shipment sustained damage
landed on vessel to dock of Pier # 15, South Harbor, Manila on December 12, 1981, it while in the successive possession of appellants, and therefore they are liable to the
was observed that one (1) fiber drum (was) in damaged condition, covered by the appellee, as subrogee for the amount it paid to the consignee." (pp. 87-89, Rollo.)
vessels Agents Bad order Tally Sheet No. 86427. The report further states that when
defendant Allied Brokerage withdrew the shipment, from defendant arrastre operators The Court of Appeal thus affirmed in toto the judgment of the court a quo.
custody on January 7, 1982, one drum was found opened without seal, cello bag partly
torn but contents intact. Net unrecovered spillages was 15 kgs. The report went on to In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and
state that when the drums reached the consignee, one drum was found with grave abuse of discretion on the part of the appellate court when
adulterated/faked contents. It is obvious, therefore, that these losses/damages occurred
before the shipment reached the consignee while under the successive custodies of I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE ARRASTRE
defendants. Under Art. 1737 of the New Civil Code, the common carriers duty to observe OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF PRIVATE RESPONDENT AS
extraordinary diligence in the vigilance of goods remains in full force and effect even if the GRANTED IN THE QUESTIONED DECISION;
goods are temporarily unloaded and stored in transit in the warehouse of the carrier at the
place of destination, until the consignee has been advised and has had reasonable II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE RESPONDENT
SHOULD COMMENCE FROM THE DATE OF THE FILING OF THE COMPLAINT AT THE RATE in the successive possession of appellants" (the herein petitioner among them).
OF TWELVE PERCENT PER ANNUM INSTEAD OF FROM THE DATE OF THE DECISION OF Accordingly, the liability imposed on Eastern Shipping Lines, Inc., the sole petitioner in this
THE TRIAL COURT AND ONLY AT THE RATE OF SIX PERCENT PER ANNUM, PRIVATE case, is inevitable regardless of whether there are others solidarily liable with it. chanroble s lawlibrary : rednad

RESPONDENTS CLAIM BEING INDISPUTABLY UNLIQUIDATED.

It is over the issue of legal interest adjudged by the appellate court that deserves more
The petition is, in part, granted. than just a passing remark.

In this decision, we have begun by saying that the questions raised by petitioner carrier Let us first see a chronological recitation of the major rulings of this Court: chanrob1es virtual 1aw library

are not all that novel. Indeed, we do have a fairly good number of previous decisions this
Court can merely tack to. chanrobles virtual lawlibrary The early case of Malayan Insurance Co., Inc., v. Manila Port Service, 2 decided 3 on 15
may 1969, involved a suit for recovery of money arising out of short deliveries and
The common carriers duty to observe the requisite diligence in the shipment of goods pilferage of goods. In this case, appellee Malayan Insurance (the plaintiff in the lower
lasts from the time the articles are surrendered to or unconditionally placed in the court) averred in its complaint that the total amount of its claim for the value of the
possession of, and received by, the carrier for transportation until delivered to, or until the undelivered goods amounted to P3,947.20. This demand, however, was neither
lapse of a reasonable time for their acceptance, by the person entitled to receive them established in its totality nor definitely ascertained. In the stipulation of facts later entered
(Arts. 1736-1738, Civil Code; Ganzon v. Court of Appeals, 161 SCRA 646; Kui Bai v. Dollar into by the parties, in lieu of proof, the amount of P1,447.51 was agreed upon. The trial
Steamship Lines, 52 Phil. 863).When the goods shipped either are lost or arrive in court rendered judgment ordering the appellants (defendants) Manila Port Service and
damaged condition, a presumption arises against the carrier of its failure to observe that Manila Railroad Company to pay appellee Malayan Insurance the sum of P1,447.51 with
diligence, and there need not be an express finding of negligence to hold it liable (Art. legal interest thereon from the date the complaint was filed on 28 December 1962 until
1735, Civil Code; Philippine National Railways v. Court of Appeals, 139 SCRA 87; Metro full payment thereof. The appellants then assailed, inter alia, the award of legal interest.
Port Service v. Court of Appeals, 131 SCRA 365). There are, of course, exceptional cases In sustaining the appellants, this Court ruled: jgc:chanrobles.com .ph

when such presumption of fault is not observed but these cases, enumerated in Article
1734 1 of the Civil Code, are exclusive, not one of which can be applied to this case. "Interest upon an obligation which calls for the payment of money, absent a stipulation, is
the legal rate. Such interest normally is allowable from the date of demand, judicial or
The question of charging both the carrier and the arrastre operator with the obligation of extrajudicial. The trial court opted for judicial demand as the starting point.
properly delivering the goods to the consignee has, too, been passed upon by the Court.
In Firemans Fund Insurance v. Metro Port Services (182 SCRA 455), we have explained in "But then upon the provisions of Article 2213 of the Civil Code, interest cannot be
holding the carrier and the arrastre operator liable in solidum, thus: recovered upon unliquidated claims or damages, except when the demand can be
chanrobles virtual lawlibrary

established with reasonable certainty. And as was held by this Court in Rivera v. Perez 4 ,
"The legal relationship between the consignee and the arrastre operator is akin to that of a L-6998, February 29, 1956, if the suit were for damages, unliquidated and not known
depositor and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5 [1967]. The until definitely ascertained, assessed and determined by the courts after proof (Montilla c.
relationship between the consignee and the common carrier is similar to that of the Corporacion de P. P. Agustinos, 25 Phil. 447; Lichauco v. Guzman, 38 Phil. 302), then,
consignee and the arrastre operator (Northern Motors, Inc. v. Prince Line, Et Al., 107 Phil. interest should be from the date of the decision." (Emphasis supplied). chanroble s virtual lawlibrary

253 [1960]). Since it is the duty of the ARRASTRE to take good care of the goods that are
in its custody and to deliver them in good condition to the consignee, such responsibility The case of Reformina v. Tomol, 5 rendered on 11 October 1985, was for "Recovery of
also devolves upon the CARRIER. Both the ARRASTRE and the CARRIER are therefore Damages for Injury to Person and Loss of Property." After trial, the lower court decreed: jgc:chanrobles.com .ph

charged with the obligation to deliver the goods in goods condition to the consignee." cralaw virtua1aw library

"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party
We do not, of course, imply by the above pronouncement that the arrastre operator and defendants and against the defendants and third party plaintiffs as follows: jgc:chanroble s.com.ph

the customs broker are themselves always and necessarily liable solidarily with the carrier,
or vice-versa, nor that attendant facts in a given case may not vary the rule. The instant "Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay
petition has been brought solely by Eastern Shipping Lines which, being the carrier and jointly and severally the following persons: jgc:chanrobles.com .ph

not having been able to rebut the presumption of fault, is, in any event, to be held liable
in this particular case. A factual finding of both the court a quo and the appellate court, we "(a) . . .
take note, is that "there is sufficient evidence that the shipment sustained damage while
"x x x the legal interest which is six percent per annum."

"(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00 which
is the value of the boat F B Pacita III together with its accessories, fishing gear and
equipment minus P80,000.00 which is the value of the insurance recovered and the
amount of P10,000.00 a month as the estimated monthly loss suffered by them as a
result of the fire of May 6, 1969 up to the time they are actually paid or already the total
sum of P370,000.00 as of June 4, 1972 with legal interest from the filing of the complaint
until paid and to pay attorneys fees of P5,000.00 with costs against defendants and third
The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz, 7 promulgated
on 28 July 1986. The case was for damages occasioned by an injury to person and loss of
property. The trial court awarded private respondent Pedro Manabat actual and
compensatory damages in the amount of P72,500.00 with legal interest thereon from the
filing of the complaint until fully paid. Relying on the Reformina v. Tomol case, this Court 8
modified the interest award from 12% to 6% interest per annum but sustained the time
computation thereof, i.e., from the filing of the complaint until fully paid.
chanrobles virtual lawlibrary

party plaintiffs." (Emphasis supplied.)

In Nakpil and Sons v. Court of Appeals, 9 the trial court, in an action for the recovery of
On appeal of the Court of Appeals, the latter modified the amount of damages awarded damages arising from the collapse of a building, ordered inter alia, the "defendant United
but sustained the trial court in adjudging legal interest from the filing of the complaint Construction Co., Inc. (one of the petitioners) . . . to pay the plaintiff, . . ., the sum of
until fully paid. When the appellate courts decision became final, the case was remanded P989,335.68 with interest at the legal rate from November 29, 1968, the date of the filing
to the lower court for execution, and this was when the trial court issued its assailed of the complaint until full payment . . . ." Save from the modification of the amount
resolution which applied the 6% interest per annum prescribed in Article 2209 of the Civil granted by the lower court, the Court of Appeals sustained the trial courts decision. When
Code. In their petition for review on certiorari, the petitioners contended that Central Bank taken to this Court for review, the case, on 03 October 1986, was decided, thus: jgc:chanroble s.com.ph

Circular No. 416, providing thus chanrobles virtual lawlibrary

"WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special
"By virtue of the authority granted to it under Section 1 of Act 2655, as amended, and environmental circumstances of this case, we deem it reasonable to render a decision
Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that the imposing, as We do hereby impose, upon the defendant and the third-party defendants
rate of interest for the loan, or forbearance of any money, goods, or credits and the rate (with the exception of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra. p. 10)
allowed in judgments, in the absence of express contract as to such rate of interest, shall indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00)
be twelve (12%) percent per annum. This Circular shall take effect immediately." Pesos to cover all damages (with the exception of attorneys fees) occasioned by the loss
(Emphasis found in the text) of the building and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and
for attorneys fees, the total sum being payable upon the finality of this decision. Upon
should have, instead, been applied. This Court 6 ruled: jgc:chanrobles.com .ph failure to pay on such finality, twelve (12%) per cent interest per annum shall be imposed
upon aforementioned amounts from finality until paid. Solidary costs against the
"The judgments spoken of and referred to are judgments in litigations involving loans or defendant and third-party defendants (except Roman Ozaeta)." (Emphasis supplied).
forbearance of any money, goods or credits. any other kind of monetary judgment which
has nothing to do with, nor involving loans or forbearance of any money, goods or credits A motion for reconsideration was filed by United Construction, contending that "the
does not fall within the coverage of the said law for it is not within the ambit of the interest of twelve (12%) per cent per annum imposed on the total amount of the
authority granted to the Central Bank. monetary award was in contravention of law." The Court 10 ruled out the applicability of
the Reformina and Philippine Rabbit Bus Lines cases and, in its resolution of 15 April 1988,
"x x x it explained:chanroble s law library

"Coming to the case at bar, the decision herein sought to be executed is one rendered in "There should be no dispute that the imposition of 12% interest pursuant to Central Bank
an Action for Damages for injury to persons and loss of property and does not involve any Circular No. 416 . . . is applicable only in the following: (1) loans; (2) forbearance of any
loan, much less forbearances of any money, goods or credits. As correctly argued by the money, goods or credit; and (3) rate allowed in judgments (judgments spoken of refer to
private respondents, the law applicable to the said case is Article 2209 of the New Civil judgments involving loans or forbearance of any money, goods or credits. (Philippine
Code which reads Rabbit Bus Lines Inc. v. Cruz, 143 SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139
SCRA 260 [1985]). It is true that in the instant case, there is neither a loan or a
ARTICLE 2209. If the obligation consists in the payment of a sum of money, and the forbearance, but then no interest is actually imposed provided the sums referred to in the
debtor incurs in delay, the indemnity for damages, there being no stipulation to the judgment are paid upon the finality of the judgment. It is delay in the payment of such
contrary, shall be the payment of interest agreed upon, and in the absence of stipulation, final judgment, that will cause the imposition of the interest.

"It will be noted that in the cases already adverted to, the rate of interest is imposed on
the total sum, from the filing of the complaint until paid; in other words, as part of the
judgment for damages. Clearly, they are not applicable to the instant case." (Emphasis
supplied)
The subsequent case of American Express International, Inc., v. International Appellate
Court 11 was a petition for review on certiorari from the decision, dated 27 February
1985, of the then Intermediate Appellate Court reducing the amount of moral and
exemplary damages awarded by the trial court, to P240,000.00 and P100,000.00,
The Court reiterated that the 6% interest per annum on the damages should be computed
from the time the complaint was filed until the amount is fully paid.
Quite recently, the Court had another occasion to rule on the matter. National Power
Corporation v. Angas, 14 decided on 08 May 1992, involved the expropriation of certain
parcels of land. After conducting a hearing on the complaints for eminent domain, the trial
court ordered the petitioner to pay the private respondents certain sums of money as just
compensation for their lands so expropriated "with legal interest thereon . . . until fully
paid." Again, in applying the 6% legal interest per annum under the Civil Code, the Court
15 declared:chanrobles law library : red

respectively, and its resolution, dated 29 April 1985, restoring the amount of damages
awarded by the trial court, i.e., P2,000,000,00 as moral damages and P400,000.00 as
exemplary damages with interest thereon at 12% per annum from notice of judgment,
plus costs of suit. In a decision of 09 November 1988, this Court, while recognizing the
right of the private respondent to recover damages, held the award, however, for moral
damages by the trial court, later sustained by the IAC, to be inconceivably large. The
Court 12 thus set aside the decision of the appellate court and rendered a new one,
"ordering the petitioner to pay private respondent the sum of One Hundred Thousand
(P100,000.00) Pesos as moral damages, with six (6%) percent interest thereon computed
from the finality of this decision until paid." (Emphasis supplied).
chanrobles virtual lawlibrary
". . ., (T)he transaction involved is clearly not a loan or forbearance of money, goods or
credits but expropriation of certain parcels of land for a public purpose, the payment of
which is without stipulation regarding interest, and the interest adjudged by the trial court
is in the nature of indemnity for damages. The legal interest required to be paid on the
amount of just compensation for the properties expropriated is manifestly in the form of
indemnity for damages for the delay in the payment thereof. Therefore, since the kind of
interest involved in the joint judgment of the lower court sought to be enforced in this
case is interest by way of damages, and not by way of earnings from loans, etc. Art. 2209
of the Civil Code shall apply." cralaw virtua1aw library

Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz 13 which Concededly, there have been seeming variances in the above holdings. The cases can
arose from a breach of employment contract. For having been illegally dismissed, the perhaps be classified into two groups according to the similarity of the issues involved and
petitioner was awarded by the trial court moral and exemplary damages without, however, the corresponding rulings rendered by the court. The" first group" would consist of the
providing any legal interest thereon. When the decision was appealed to the Court of cases of Reformina v. Tomol (1985), Philippine Rabbit Bus LInes v. Cruz (1986), Florendo
Appeals, the latter held:jgc:chanrobles.com .ph v. Ruiz (1989) and National Power Corporation v. angas (1992). In the "second group"
would be Malayan Insurance Company v. Manila Port Service (1969), Nakpil and Sons v.
"WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental Court of Appeals (1988), and American Express International v. Intermediate Appellate
dated October 31, 1972 is affirmed in all respects, with the modification that defendants- Court (1988). chanrobles law library : red

appellants, except defendant-appellant Merton Munn, are ordered to pay, jointly and
severally, the amounts stated in the dispositive portion of the decision, including the sum In the" first group," the basic issue focus on the application of either the 6% (under the
of P1,400.00 in concept of compensatory damages, with interest at the legal rate from the Civil Code) or 12% (under the Central Bank Circular) interest per annum. It is easily
date of the filing of the complaint until fully paid." (Emphasis supplied) discernible in these cases that there has been a consistent holding that the Central Bank
Circular imposing the 12% interest per annum applies only to loans or forbearance 16 of
The petition for review to this Court was denied. The records were thereupon transmitted money, goods or credits, as well as to judgments involving such loan or forbearance of
to the trial court, and an entry of judgment was made. The writ of execution issued by the money, goods or credits, and that the 6% interest under the Civil Code governs when the
trial court directed that only compensatory damages should earn interest at 6% per transaction involves the payment of indemnities in the concept of damage arising from the
annum from the date of the filing of the complaint. Ascribing grave abuse of discretion on breach of a delay in the performance of obligations in general. Observe, too, that in these
the part of the trial judge, a petition for certiorariassailed the said order. This court said: cases, a common time frame in the computation of the 6% interest per annum has been
jgc:chanroble s.com.ph

applied, i.e., from the time the complaint is filed until the adjudged amount is fully paid.
". . ., it is to be noted that the Court of Appeals ordered the payment of interest at the
legal rate from the time of the filing of the complaint. . . . Said circular [Central Bank The "second group," did not alter the pronounced rule on the application of the 6% or
Circular No. 416] does not apply to actions based on a breach of employment contract like 12% interest per annum, 17 depending on whether or not the amount involved is a loan
the case at bar." (Emphasis supplied) or forbearance, on the one hand, or one of indemnity for damage, on the other hand.
Unlike, however, the "first group" which remained consistent in holding that the running of
the legal interest should be from the time of the filing of the complaint until fully paid, the
"second group" varied on the commencement of the running of the legal interest. 3. When the judgment of the court awarding a sum of money becomes final and
chanroble svirtualawlibrary

executory, the rate of legal interest, whether the case falls under paragraph 1 or
Malayan held that the amount awarded should bear legal interest from the date of the paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this
decision of the court a quo, explaining that "if the suit were for damages, unliquidated interim period being deemed to be by then an equivalent to a forbearance of credit.
and not known until definitely ascertained, assessed and determined by the courts after
proof, then, interest should be from the date of the decision." American Express WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the
International v. IAC, introduced a different time frame for reckoning the 6% interest by MODIFICATION that the legal interest to be paid is SIX PERCENT(6%) on the amount due
ordering it to be "computed from the finality of (the) decision until paid." The Nakpil and computed from the decision, dated 03 February 1988, of the court a quo. A TWELVE
Sons case ruled that 12% interest per annum should be imposed from the finality of the PERCENT (12%) interest, in lieu of SIX PERCENT (6%), shall be imposed on such amount
decision until the judgment amount is paid. upon finality of this decision until the payment thereof.
chanroblesvirtualawlibrary

The ostensible discord is not difficult to explain. The factual circumstances may have SO ORDERED.
called for different applications, guided by the rule that the courts are vested with
discretion, depending on the equities of each case, on the award of interest. Nonetheless, Narvasa, C.J., Cruz, Feliciano, Padilla, Bidin, Regalado, Davide, Jr., Romero, Bellosillo,
it may not be unwise, by way of clarification and reconciliation, to suggest the following Melo, Quiason, Puno and Kapunan, JJ., concur.
rules of thumb for future guidance.
Mendoza, J., took no part.
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts
or quasi-delicts 18 is breached, the contravenor can be held liable for damages. 19 The
provisions under Title XVIII on "Damages" of the Civil Code govern in determining the
measure of reoverable damages. 20

II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as
follows: chanroble s.com:cralaw:red

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e.,
a loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. 21 Furthermore, the interest due shall itself earn legal interest from
the time it is judicially demanded. 22 In the absence of stipulation, the rate of interest
shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Article 1169 23 of the Civil Code.

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

interest on the amount of damages awarded may be imposed at the discretion of the court
24 at the rate of 6% per annum. 25 No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established with
reasonable certainty. 26 Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the
date of the judgment of the court is made (at which time the quantification of damages
may be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount of finally adjudged.
chanroble s.com:chanrobles.com .ph
chanrobles virtualawlibrary
 DECISION

HERMOSISIMA, JR., J.:

Questions of law which are of first impression are sought to be resolved in this case:
Should the rate of interest on a loan or forbearance of money, goods or credits, as
stipulated in a contract, far in excess of the ceiling prescribed under or pursuant to the
Usury Law, prevail over Section 2 of Central Bank Circular No 905 which prescribes that
the rate of interest thereof shall continue to be 12% per annum? Do the Courts have the
discretion to arbitrarily override stipulated interest rates of promissory notes and
stipulated interest rates of promissory notes and thereby impose a 12% interest on the
loans, in the absence of evidence justifying the imposition of a higher rate?

This is a petition for review on certiorari for the purpose of assailing the decision of
Honorable Judge Fernando V. Gorospe of the Regional Trial Court of Makati, Branch 61,
dated March 30, 1993, which found private respondent Eusebio liable to petitioner for a
sum of money. Interest was lowered by the court a quo from 23% per annum as agreed
upon by the parties to 12% per annum.

The undisputed facts are as follows: chanrob1es virtual 1aw library

On April 27, 1983, private respondent Magtanggol Eusebio executed Promissory Note No.
TL/74/178/83 in favor of petitioner Security Bank and Trust Co. (SBTC) in the total
amount of One Hundred Thousand Pesos (P100,000.00) payable in six monthly
installments with a stipulated interest of 23% per annum up to the fifth installment. 1

On July 28, 1983, respondent Eusebio again executed Promissory Note No. TL/74/1296/83
in favor of petitioner SBTC. Respondent bound himself to pay the sum of One Hundred
Thousand Pesos (P100,000.00) in six (6) monthly installments plus 23% interest per
FIRST DIVISION
annum. 2
[G.R. No. 113926. October 23, 1996.]
Finally, another Promissory Note No. TL74/1491/83 was executed on August 31, 1983 in
the amount of Sixty Five Thousand Pesos (P65,000.00). Respondent agreed to pay this
SECURITY BANK AND TRUST COMPANY, Petitioner, v. REGIONAL TRIAL COURT
note in six (6) monthly installments plus interest at the rate of 23% per annum. 3
OF MAKATI, BRANCH 61, MAGTANGGOL EUSEBIO and LEILA
VENTURA, Respondents.
On all the abovementioned promissory notes, private respondent Leila Ventura signed as
co-maker. 4 (3) defendant Leila Ventura should likewise be held liable to pay the balance on the
promissory notes since she has signed as co-maker and as such, is liable jointly and
Upon maturity which fell on the different dates below, the principal balance remaining on severally with defendant Eusebio without a need for demand upon her. 7
the notes stood at: chanrob1es virtual 1aw library

1) PN No. TL/74/748/83 P16,665.00 as of September 1983.
2) PN No. TL/74/1296/83 P83,333.00 as of August 1983.
3) PN No. TL/74/1991/83 P65,000.00 as of August 1983.
Upon the failure and refusal of respondent Eusebio to pay the aforestated balance
payable, a collection case was filed in court by petitioner SBTC. 5 On March 30, 1993, the Usury Law.
court a quo rendered a judgment in favor of petitioner SBTC, the dispositive portion which
reads:jgc:chanrobles.com .ph
Consequently, an Order was issued by the court a quo denying the motion to grant the
rates of interest beyond 12% per annum; and holding defendant Leila Ventura jointly and
severally liable with co-defendant Eusebio.
Hence, this petition.
The sole issue to be settled in this petition is whether or not the 23% rate of interest per
annum agreed upon by petitioner bank and respondents is allowable and not against the
We find merit in this petition.

"WHEREFORE, premises above-considered, and plaintiffs claim having been duly proven, From the examination of the records, it appears that indeed the agreed rate of interest as
judgment is hereby rendered in favor of plaintiff and as against defendant Eusebio who is stipulated on the three (3) promissory notes is 23% per annum. 8 The applicable provision
hereby ordered to: chanrob1es virtual 1aw library of law is the Central Bank Circular No. 905 which took effect on December 22, 1982,
particularly Sections 1 and 2 which state: 9
1. Pay the sum of P16,665.00, plus interest of 12% per annum starting 27 September
1983, until fully paid; "Sec. 1. The rate of interest, including commissions, premiums, fees and other charges,
on a loan or forbearance of any money, goods or credits, regardless of maturity and
2. Pay the sum of P83,333.00, plus interest of 12% per annum starting 28 August 1983, whether secured or unsecured, that may be charged or collected by any person, whether
until fully paid; natural or judicial, shall not be subject to any ceiling prescribed under or pursuant to the
Usury Law, as amended.
3. Pay the sum of P65,000.00, plus interest of 12% per annum starting 31 August 1983,
until fully paid; "Sec. 2. The rate of interest for the loan or forbearance of any money, goods or credits
and the rate allowed in judgments, in the absence of express contract as to such rate of
4. Pay the sum equivalent to 20% of the total amount due and payable to plaintiff as and interest, shall continue to be twelve per cent (12%) per annum." cralaw virtua1aw library

by way of attorneys fees; and to

CB Circular 905 was issued by the Central Banks Monetary Board pursuant to P.D. 1684
5. Pay the costs of this suit. empowering them to prescribe the maximum rates of interest for loans and certain
forbearances, to wit: jgc:chanroble s.com.ph

SO ORDERED." 6
"SEC. 1. Section 1-a of Act No. 2655, as amended, is hereby amended to read as
On August 6, 1993, a motion for partial reconsideration was filed by petitioner SBTC follows:jgc:chanroble s.com.ph

contending that: chanrob1es virtual 1aw library

"SEC. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or
(1) the interest rate agreed upon by the parties during the signing of the promissory notes rates of interest for the loan or renewal thereof or the forbearance of any money, goods or
was 23% per annum; credits, and to change such rate or rates whenever warranted by prevailing economic and
social conditions: Provided, That changes in such rate or rates may be effected gradually
(2) the interests awarded should be compounded quarterly from due date as provided in on scheduled dates announced in advance.
the three (3) promissory notes;
"In the exercise of the authority herein granted, the Monetary Board may prescribe higher
maximum rates for loans of low priority, such as consumer loans or renewals thereof as the stipulations therein. In fact, in the Comment filed by respondent Eusebio to this court,
well as such loans made by pawnshops, finance companies and other similar credit he chose not to question the decision and instead expressed his desire to negotiate with
institutions although the rates prescribed for these institutions need not necessarily be the petitioner bank for "terms within which to settle his obligation." 14
uniform. The Monetary Board is also authorized to prescribed different maximum rate or
rates for different types of borrowings, including deposits and deposit substitutes, or loans IN VIEW OF THE FOREGOING, the decision of the respondent court a quo, is hereby
of financial intermediaries." 10 AFFIRMED with the MODIFICATION that the rate of interest that should be imposed be
23% per annum.
This court has ruled in the case of Philippine National Bank v. Court of Appeals 11 that: jgc:chanroble s.com.ph

SO ORDERED.
"P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to
stipulate freely regarding any subsequent adjustment in the interest rate that shall accrue Padilla, Bellosillo, Vitug and Kapunan, JJ., concur.
on a loan or forbearance of money, goods or credits. In fine, they can agree to adjust,
upward or downward, the interest previously stipulated." cralaw virtua1aw library

All the promissory notes were signed in 1983 and, therefore, were already covered by CB
Circular No. 905. Contrary to the claim of respondent court, this circular did not repeal nor
in anyway amend the Usury Law but simply suspended the latters effectivity.

Basic is the rule of statutory construction that when the law is clear and unambiguous, the
court is left with no alternative but to apply the same according to its clear language. As
we have held in the case of Quijano v. Development Bank of the Philippines: 12

". . . We cannot see any room for interpretation or construction in the clear and
unambiguous language of the above-quoted provision of law. This Court had steadfastly
adhered to the doctrine that its first and fundamental duty is the application of the law
according to its express terms, interpretation being called for only when such literal
application is impossible. No process of interpretation or construction need be resorted to
where a provision of law peremptorily calls for application. Where a requirement or
condition is made in explicit and unambiguous terms, no discretion is left to the judiciary.
It must see to it that its mandate is obeyed."cralaw virtua1aw library

The rate of interest was agreed upon by the parties freely. Significantly, respondent did
not question that rate. It is not for respondent court a quo to change the stipulations in
the contract where it is not illegal. Furthermore, Article 1306 of the New Civil Code
provides that contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals,
good customs, public order, or public policy. We find no valid reason for the respondent
court a quo to impose a 12% rate of interest on the principal balance owing to petitioner
by respondent in the presence of a valid stipulation. In a loan or forbearance of money,
the interest due should be that stipulated in writing, and in the absence thereof, the rate
shall be 12% per annum. 13 Hence, only in the absence of a stipulation can the court
impose the 12% rate of interest.

The promissory notes were signed by both parties voluntarily. Therefore, stipulations
therein are binding between them. Respondent Eusebio, likewise, did not question any of
 1. CIVIL LAW; CONTRACTS; BINDING EFFECT OF AGREEMENT BETWEEN PARTIES;
PREMISED ON THE PRINCIPLE OF MUTUALITY AND OBLIGATORY. The binding effect of
any agreement between parties to a contract is premised on two settled principles: (1)
that any obligation arising from contract has the force of law between the parties; and (2)
that there must be mutuality between the parties based on their essential equality. Any
contract which appears to be heavily weighed in favor of one of the parties so as to lead to
an unconscionable result is void. Any stipulation regarding the validity or compliance of
the contract which is left solely to the will of one of the parties, is likewise, invalid.

2. ID.; SPECIAL CONTRACTS; LOAN; INTEREST ARE REQUIRED TO BE EXPRESSLY

STIPULATED IN WRITING. The manner of agreement is itself explicitly stipulated by the
Civil Code when it provides, in Article 1956 that "No interest shall be due unless it has
been expressly stipulated in writing" What has been "stipulated in writing" from a perusal
of interest rate provision of the credit agreement signed between the parties is that
petitioners were bound merely to pay 21 % interest, subject to a possible escalation or
de-escalation, when 1) the circumstances warrant such escalation or de-escalation; 2)
within the limits allowed by law., and (3) upon agreement.

3. ID.; ID.; ID.; LIFTING OF USURY CEILING; DOES NOT GRANT BANKS CARTE BLANCHE
AUTHORITY TO RAISE INTEREST; RULE UNDER CB CIRCULAR 905. While the Usury Law
ceiling on interest rates was lifted by C.B. Circular 905, nothing in the said circular could
possibly be read as granting respondent bank carte blanche authority to raise interest
rates to levels which would either enslave its borrowers or lead to a hemorrhaging of their
assets. Borrowing represents a transfusion of capital from lending institutions to industries
and businesses in order to stimulate growth. This would not, obviously, be the effect of
PNBs unilateral and lopsided policy regarding the interest rates of petitioners borrowings
in the instant case.

4. ID.; ID.; ID.; ID.; CANNOT BE INVOKED TO JUSTIFY ESCALATION CLAUSES, NOT
BEING A GRANT OF SPECIFIC AUTHORITY. Apart from violating the principle of
mutuality of contracts, there is authority for disallowing the interest rates imposed by
FIRST DIVISION
respondent bank, for the credit agreement specifically requires that the increase be
"within the limits allowed by law." In the case of PNB v. Court of Appeals, cited above, this
[G.R. No. 113412. April 17, 1996.]
Court clearly emphasized that C.B. Circular No. 905 could not be properly invoked to
justify the escalation clauses of such contracts, not being a grant of specific authority.
Spouses PONCIANO ALMEDA and EUFEMIA P. ALMEDA, Petitioner, v. THE COURT
OF APPEALS and PHILIPPINE NATIONAL BANK, Respondents.
5. ID.; ID.; ID.; ESCALATION CLAUSES; VALID AS LONG AS NOT SOLELY POTESTATIVE
BUT BASED ON REASONABLE AND VALID GROUNDS. Escalation clauses are not
basically wrong or legally objectionable so long as they are not solely potestative but
based on reasonable and valid grounds. Here, as clearly demonstrated above, not only the
increases of the interest rates on the basis of the escalation clause patently unreasonable
SYLLABUS
and unconscionable, but also there are no valid and reasonable standards upon which the
increases are anchored.
SPECIAL CONDITIONS
6. ID.; ID.; MORTGAGE; AUTOMATIC FORECLOSURE PROVISIONS OF PD 385; CAN BE
INVOKED AFTER SETTLEMENT OF QUESTION INVOLVING INTEREST AND ONLY AFTER x x x
DEBTOR REFUSE TO MEET OBLIGATION FOLLOWING SUCH DETERMINATION. In the
first place, because of the dispute regarding the interest rate increases, an issue which
was never settled on merit in the courts below, the exact amount of petitioners
obligations could not be determined. Thus, the foreclosure provisions of P.D. 385 could be The loan shall be subject to interest at the rate of twenty one per cent (21 %) per annum,
validly invoked by respondent only after settlement of the question involving the interest payable semi-annually in arrears, the first interest payment to become due and payable
rate on the loan, and only after the spouses refuse to meet their obligations following such six (6) months from date of initial release of the loan. The loan shall likewise be subject to
determination. the appropriate service charge and a penalty charge of three per cent (3%) per annum to
be imposed on any amount remaining unpaid or not rendered when due.
7. STATUTORY CONSTRUCTION; THE PHRASE "WITHIN THE LIMITS ALLOWED BY LAW"
REFERS TO LEGISLATIVE ENACTMENTS NOT ADMINISTRATIVE CIRCULARS. The x x x
escalation clause of the credit agreement requires that the same be made "within the
limits allowed by law," obviously referring specifically to legislative enactments not
administrative circulars. Note that the phrase "limits imposed by law," refers only to the
escalation clause. However, the same agreement allows reduction on the basis of law or III. OTHER CONDITIONS
the Monetary Board. Had the parties intended the word "law" to refer to both legislative
enactments and administrative circulars and issuances, the agreement would not have (c) Interest and Charges
gone as far as making a distinction between "law or the Monetary Board Circulars" in
referring to mutually agreed upon reductions in interest rates. (1) The Bank reserves the right to increase the interest rate within the limits allowed by
law at any time depending on whatever policy it may adopt in the future; provided, that
the interest rate on this/these accommodations shall be correspondingly decreased in the
event that the applicable maximum interest rate is reduced by law or by the Monetary
Board. In either case, the adjustment in the interest rate agreed upon shall take effect on
DECISION the effectivity date of the increase or decrease of the maximum interest rate. 1

Between 1981 and 1984, petitioners made several partial payments on the loan totaling
P7,735,004.66, 2 a substantial portion of which was applied to accrued interest. 3 On
March 31, 1984, respondent bank, over petitioners raised the interest rate to 28%,
KAPUNAN, J.:allegedly pursuant to Section III-c (1) of its credit agreement. Said interest rate
thereupon increased from an initial 21% to a high of 68% between March of 1984 to
September. 1986. 4

Petitioner protested the increase in interest rates, to no avail. Before the loan was to
On various dates in 1981, the Philippine National Bank granted to herein petitioners, the mature in March, 1988, the spouses filed on February 6, 1988 a petition for declaratory
spouses Ponciano L. Almeda and Eufemia P. Almeda several loan/credit accommodations relief with prayer for a writ of preliminary injunction and temporary restraining order with
totaling P 18.0 Million pesos payable in a period of six years at an interest rate of 21% per the Regional Trial Court of Makati, docketed as Civil Case No. 18872. In said petition,
annum. To secure the loan, the spouses Almeda executed a Real Estate Mortgage Contract which was raffled to Branch 134 presided by Judge Ignacio Capulong, the spouses sought
covering a 3,500 square meter parcel of land, together with the building erected thereon clarification as to whether or not the PNB could unilaterally raise interest rates on the loan,
(the Marvin Plaza) located at Pasong Tamo, Makati, Metro Manila. A credit agreement pursuant to the credit agreements escalation clause, and in relation to Central Bank
embodying the terms and conditions of the loan was executed between the parties. Circular No. 905. As a preliminary measure, the lower court, on March 3, 1988, issued a
Pertinent portions of the said agreement are quoted below: chanrob1es virtual 1aw library writ of preliminary injunction enjoining the Philippine National Bank from enforcing an
interest rate above the 21% stipulated in the credit agreement. By this time the spouses
were already in default of their loan obligations.
Invoking the Law on Mandatory Foreclosure (Act 3135, as amended and P.D. 385), the
PNB countered by ordering the extrajudicial foreclosure of petitioners mortgaged
properties and scheduled an auction sale for March 14, 1989. Upon motion by petitioners,
however, the lower court, on April 5, 1989, granted a supplemental writ of preliminary
injunction, staying the public auction of the mortgaged property.
On January 15, 1990, upon the posting of a counterbond by the PNB, the trial court
dissolved the supplemental writ of preliminary injunction. Petitioners filed a motion for
reconsideration. In the interim, respondent bank once more set a new date for the
foreclosure sale of Marvin Plaza which was March 12, 1990. Prior to the scheduled date,
however, petitioners tendered to respondent bank the amount of P40,142,518.00,
consisting of the principal (P18,000,000.00) and accrued interest calculated at the
originally stipulated rate of 21%. The PNB refused to accept the payment. 5
As a result of PNBs refusal of the tender of payment, Petitioners, on March 8, 1990,
formally consigned the amount of P40,142,518.00 with the Regional Trial Court in Civil
Case No. 90-663. They prayed therein for a writ of preliminary injunction with a temporary In its comment dated April 19, 1994, respondent bank vigorously denied that the
restraining order. The case was raffled to Branch 147, presided by Judge Teofilo Guadiz.
On March 15, 1990, respondent bank sought the dismissal of the case.
On March 30, 1990 Judge Guadiz in Civil Case No 90-663 issued an order granting the writ pursuant to P.D. 385, after petitioners were unable to pay their loan obligations to the
of preliminary injunction enjoining the foreclosure sale of "Marvin Plaza" scheduled on
March 12, 1990. On April 17, 1990 respondent bank filed a motion for reconsideration of
the said order.
4. Order of Judge Capulong dated October 20, 1992 denying respondent banks motion for
reconsideration.
On August 27, 1993, respondent court rendered its decision setting aside the assailed
orders and upholding respondent banks right to foreclose the mortgaged property
pursuant to Act 3135, as amended and P.D. 385. Petitioners Motion for Reconsideration
and Supplemental Motion for Reconsideration, dated September 15, 1993 and October 28,
1993, respectively, were denied by respondent court in its resolution dated January 10,
1994.
Hence the instant petition.
This appeal by certiorari from the respondent courts decision dated August 27, 1993
raises two principal issues namely: 1) Whether or not respondent bank was authorized to
raise its interest rates from 21% to as high as 68% under the credit agreement; and 2)
Whether or not respondent bank is granted to foreclose the Marvin Plaza under the
mandatory foreclosure provisions of P.D. 385.
increases in the interest rates were illegal, unilateral, excessive and arbitrary, it argues
that the escalated rates of interest it imposed was based on the agreement of the parties.
Respondent bank further contends that it had a right to foreclose the mortgaged property
bank based on the increased rates upon maturity in 1984.
The instant petition is impressed with merit.

On August 16, 1991, Civil Case No. 90-663 we transferred to Branch 66 presided by Judge The binding effect of any agreement between parties to a contract is premised on two
Eriberto Rosario who issued an order consolidating said case with Civil Case 18871 settled principles:(1) that any obligation arising from contract has the force of law
presided by Judge Ignacio Capulong. between the parties; and (2) that there must be mutuality between the parties based on
their essential equality. 6 Any contract which appears to be heavily weighed in favor of
For Judge Ignacios refusal to lift the writ of preliminary injunction issued March 30, 1990, one of the parties so as to lead to an unconscionable result is void. Any stipulation
respondent bank filed a petition for Certiorari, Prohibition and Mandamus with respondent regarding the validity or compliance of the contract which is left solely to the will of one of
Court of Appeals, assailing the following orders of the Regional Trial Court: the parties, is likewise, invalid.
chanrob1es virtual 1aw library

1. Order dated March 30, 1990 of Judge Guadiz granting the writ of preliminary injunction It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank
restraining the foreclosure sale of Marvin Plaza set on March 12, 1990; unilaterally altered the terms of its contract with petitioners by increasing the interest
rates on the loan without the prior assent of the latter. In fact, the manner of agreement
2. Order of Judge Ignacio Capulong dated January 10, 1992 denying respondent banks is itself explicitly stipulated by the Civil Code when it provides, in Article 1956 that "No
motion to lift the writ of injunction issued by Judge Guadiz as well as its motion to dismiss interest shall be due unless it has been expressly stipulated in writing" What has been
Civil Case No. 90-663; "stipulated in writing" from a perusal of interest rate provision of the credit agreement
signed between the parties is that petitioners were bound merely to pay 21% interest,
3. Order of Judge Capulong dated July 3, 1992 denying respondent banks subsequent subject to a possible escalation or de-escalation, when 1) the circumstances warrant such
motion to lift the writ of preliminary injunction; and escalation or de-escalation; 2) within the limits allowed by law; and 3) upon agreement.
Indeed, the interest rate which appears to have been agreed upon by the parties to the
contract in this case was the 21 % rate stipulated in the interest provision. Any doubt
about this is in fact readily resolved by a careful reading of the credit agreement because
the same plainly uses the phrase "interest rate agreed upon," in reference to the original
21 % interest rate. The interest provision states: chanrob1es virtual 1aw library
where the parties do not bargain on equal footing, the weaker partys (the debtor)
participation being reduced to the alternative to take it or lease it (Qua v. 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.

PNBs successive increases of the interest rate on the private respondents loan, over the
(c) Interest and Charges latters protest, were arbitrary as they violated an express provision of the Credit
Agreement (Exh. 1) Section 9.01 that its terms may be amended only by an instrument in
(1) The Bank reserves the right to increase the interest rate within the limits allowed by writing signed by the party to be bound as burdened by such amendment. The increases
law at any time depending on whatever policy it may adopt in the future; provided, that imposed by PNB also contravene Art. 1956 of the Civil Code which provides that no
the interest rate on this/these accommodations shall be correspondingly decreased in the interest shall be due unless it has been expressly stipulated in writing.
event that the applicable maximum interest rate is reduced by law or by the Monetary
Board. In either case, the adjustment in the interest rate agreed upon shall take effect on The debtor herein never agreed in writing to pay the interest increases fixed by the PNB
the effectivity date of the increase or decrease of the maximum interest rate. beyond 24% per annum, hence, he is not bound to pay a higher rate than that.

In Philippine National Bank v. Court of Appeals, 7 this Court disauthorized respondent That an increase in the interest rate from 18% to 48% within a period of four (4) months
bank from unilaterally raising the interest rate in the borrowers loan from 18% to 32%, is excessive, as found by the Court of Appeals, is indisputable.
41% and 48% partly because the aforestated increases violated the principle of mutuality
of contracts expressed in Article 1308 of the Civil Code. The Court held: Clearly, the galloping increases in interest rate imposed by respondent bank on
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petitioners loan, over the latters vehement protests, were arbitrary.

CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest
rates Moreover, respondent banks reliance on C.B. Circular No 905, Series of 1982 did not
authorize the bank, or any lending institution for that matter, to progressively increase
. . . increases in interest rates are not subject to any ceiling prescribed by the Usury Law. interest rates on borrowings to an extent which would have made it virtually impossible
for debtors to comply with their own obligations. True, escalation clauses in credit
but it did not authorize the PNB, or any bank for that matter, to unilaterally and agreements are perfectly valid and do not contravene public policy. Such clauses, however,
successively increase the agreed interest rates from 18% to 48% within a span of four (4) (as are stipulations in other contracts) are nonetheless still subject to laws and provisions
months, in violation of P.D. 116 which limits such changes to once every twelve months governing agreements between parties, which agreements while they may be the law
between the contracting parties implicitly incorporate provisions of existing law.
Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest rate Consequently, while the Usury Law ceiling on interest rates was lifted by C.B. Circular 905,
on the private respondents loan, violated the mutuality of contracts ordained in Article nothing in the said circular could possibly be read as granting respondent bank carte
1308 of the Civil Code:chanrob1es virtual 1aw library blanche authority to raise interest rates to levels which would either enslave its borrowers
or lead to a hemorrhaging of their assets. Borrowing represents a transfusion of capital
ART. 1308. The contract must bind both contracting parties; its validity or compliance from lending institutions to industries and businesses in order to stimulate growth. This
cannot be left to the will of one of them. would not, obviously, be the effect of PNBs unilateral and lopsided policy regarding the
interest rates of petitioners borrowings in the instant case.
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 Apart from violating the principle of mutuality of contracts, there is authority for
contract containing a condition which makes its fulfillment dependent exclusively upon the disallowing the interest rates imposed by respondent bank, for the credit agreement
uncontrolled will of one of the contracting parties, is void (Garcia v. Rita Legarda, Inc., 21 specifically requires that the increase be "within the limits allowed by law." In the case of
SCRA 555). Hence, even assuming that the P1.8 million loan agreement between the PNB PNB v. Court of Appeals, cited above, this Court clearly emphasized that C.B. Circular No.
and the private respondent gave the PNB a license (although in fact there was none) to 905 could not be properly invoked to justify the escalation clauses of such contracts, not
increase the interest rate at will during the term .of the loan, that license would have been being a grant of specific authority.
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, Furthermore, the escalation clause of the credit agreement requires that the same be
made "within the limits allowed by law," obviously referring specifically to legislative Clause allowing the increase in the event that any law or Central Bank regulation is
enactments not administrative circulars. Note that the phrase "limits imposed by law," promulgated increasing the maximum rate for loans. The guidelines thus presuppose that
refers only to the escalation clause. However, the same agreement allows reduction on the a Central Bank regulation is not within the term any law.
basis of law or the Monetary Board. Had the parties intended the word "law" to refer to
both legislative enactments and administrative circulars and issuances, the agreement The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980,
would not have gone as far as making a distinction between "law or the Monetary Board adding section 7-a to the Usury Law, providing that parties to an agreement pertaining to
Circulars" in referring to mutually agreed upon reductions in interest rates. This distinction a loan could stipulate that the rate of interest agreed upon may be increased in the event
was the subject of the Courts disquisition in the case of Banco Filipino Savings and that the applicable maximum rate of interest is increased by law or by the Monetary
Mortgage Bank v. Navarro 8 where the Court held that: Board. To quote:
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What should be resolved is whether BANCO FILIPINO can increase the interest rate on the Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or
LOAN from 12% to 17% per annum under the Escalation Clause. It is our considered credits may stipulate that the rate of interest agreed upon may be increased in the event
opinion that it may not. that the applicable maximum rate of interest

The Escalation Clause reads as follows: chanrob1es virtual 1aw library is increased by law or by the Monetary Board: chanrob1es virtual 1aw library

I/We hereby authorize Banco Filipino to correspondingly increase 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
the interest rate stipulated in this contract without advance notice to me/us in the event. applicable maximum rate of interest is reduced by law or by the Monetary Board;

a law 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.
increasing (Paragraphing and Italics supplied).

the lawful rates of interest that may be charged 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
on this particular 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
kind of loan. (Paragraphing and Italics supplied) rate of interest is reduced by law or by the Monetary Board.

It is clear from the stipulation between the parties that the interest rate may be increased Petitioners never agreed in writing to pay the increased interest rates demanded by
in the event a law should be enacted increasing the lawful rate of interest that may be respondent bank in contravention to the tenor of their credit agreement. That an increase
charged on this particular kind of loan. The Escalation Clause was dependent on an in interest rates from 18% to as much as 68% is excessive and unconscionable is
increase of rate made by law alone. indisputable. Between 1981 and 1984, petitioners had paid an amount equivalent to
virtually half of the entire principal (P7,735,004.66) which was applied to interest alone.
CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly By the time the spouses tendered the amount of P40,142,518.00 in settlement of their
issued is not strictly a statute or a law, it has, however, the force and effect of law." obligations, respondent bank was demanding P58,377,487.00 over and above those
(Emphasis supplied). "An administrative regulation adopted pursuant to law has the force amounts already previously paid by the spouses.
and effect of law." "That administrative rules and regulations have the force of law can no
longer be questioned." cralaw virtua1aw library Escalation clauses are not basically wrong or legally objectionable so long as they are not
solely potestative but based on reasonable and valid grounds. 9 Here, as clearly
The distinction between a law and an administrative regulation is recognized in the demonstrated above, not only the increases of the interest rates on the basis of the
Monetary Board guidelines quoted in the latter to the BORROWER of Ms. Paderes of escalation clause patently unreasonable and unconscionable, but also there are no valid
September 24, 1976 (supra). According to the guidelines, for a loans interest to be and reasonable standards upon which the increases are anchored.
subject to the increases provided in CIRCULAR No. 494, there must be an Escalation
We go now to respondent banks claim that the principal issue in the case at bench to allow the parties below to present their evidence.
involves its right to foreclose petitioners properties under P.D. 385. We find respondents
pretense untenable. Furthermore, petitioners made a valid consignation of what they, in good faith and in
compliance with the letter of the Credit Agreement, honestly believed to be the real
Presidential Decree No. 385 was issued principally to guarantee that government financial amount of their remaining obligations with the respondent bank. The latter could not
institutions would not be denied substantial cash inflows necessary to finance the therefore claim that there was no honest-to-goodness attempt on the part of the spouses
governments development projects all over the country by large borrowers who resort to to settle their obligations. Respondents rush to inequitably invoke the foreclosure
litigation to prevent or delay the governments collection of their debts or loans. 10 In provisions of P.D. 385 through its legal machinations in the courts below, in spite of the
facilitating collection of debts through its automatic foreclosure provisions, the unsettled differences in interpretation of the credit agreement was obviously made in bad
government is however, not exempted from observing basic principles of law, and ordinary faith, to gain the upper hand over petitioners.
fairness and decency under the due process clause of the Constitution. 11
In the face of the unequivocal interest rate provisions in the credit agreement and in the
In the first place, because of the dispute regarding the interest rate increases, an issue law requiring the parties to agree to changes in the interest rate in writing, we hold that
which was never settled on merit in the courts below, the exact amount of petitioners the unilateral and progressive increases imposed by respondent PNB were null and void.
obligations could not be determined. Thus, the foreclosure provisions of P.D. 385 could be Their effect was to increase the total obligation on an eighteen million peso loan to an
validly invoked by respondent only after settlement of the question involving the interest amount way over three times that which was originally granted to the borrowers. That
rate on the loan, and only after the spouses refused to meet their obligations following these increases, occasioned by crafty manipulations in the interest rates is unconscionable
such determination. In Filipinas Marble Corporation v. Intermediate Appellate Court, 12 and neutralizes the salutary policies of extending loans to spur business cannot be
involving P.D. 385s provisions on mandatory foreclosure, we held that: disputed.
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We cannot, at this point, conclude that respondent DBP together with the Bancom people WHEREFORE, PREMISES CONSIDERED, the decision of the Court of Appeals dated August
actually misappropriated and misspent the $5 million loan in whole or in part although the 27, 1993, as well as the resolution dated February 10, 1994 is hereby REVERSED AND SET
trial court found that there is persuasive evidence that such acts were committed by ASIDE. The case is remanded to the Regional Trial Court of Makati for further proceedings.
the Respondent. This matter should rightfully be litigated below in the main action.
Pending the outcome of such litigation, P.D. 385 cannot automatically be applied for if it is SO ORDERED.
really proven that respondent DBP. is responsible for the misappropriation of the loan,
even if only in part, then the foreclosure of the petitioners properties under the provisions Bellosillo and Hermosisima, Jr., JJ., concur.
of P.D. 385 to satisfy the whole amount of the loan would be a gross mistake. It would
unduly prejudice the petitioner, its employees and their families. Padilla and Vitug, JJ., took no part.

Only after trial on the merits of the main case can the true amount of the loan which was
applied wisely or not, for the benefit of the petitioner be determined. Consequently, the
extent of the loan where there was no failure of consideration and which may be properly
satisfied by foreclosure proceedings under P.D. 385 will have to await the presentation of
evidence in a trial on the merits.

In Republic Planters Bank v. Court of Appeals 13 the Court reiterating the dictum in
Filipinas Marble Corporation, held:chanrob1es virtual 1aw library

The enforcement of P.D. 385 will sweep under the rug this iceberg of a scandal in the
sugar industry during the Marcos Martial Law years. This we can not allow to happen. For
the benefit of future generations, all the dirty linen in the PHILSUCUCOM/NASUTRA/RPB
closets have to be exposed in public so that the same may NEVER be repeated.

It is of paramount national interest, that we allow the trial court to proceed with dispatch
 WHEREFORE, the Court finds by preponderance of evidence that Plaintiff has proved its cause
of action and right to relief. Accordingly, judgment is hereby rendered in favor of the Plaintiff
and against Defendant, ordering the Defendant to pay plaintiff:

1. The sum of P67,340.00 as demurrage charges, with interest at the legal rate from the date
of the extrajudicial demand until fully paid;

2. A sum equivalent to ten (10%) percent of the total amount due as Attorney's fees and
litigation expenses.

Send copy to respective counsel of the parties.

FIRST DIVISION

SO ORDERED. 4

G.R. No. 116863 February 12, 1998

KENG HUA PAPER PRODUCTS CO. INC., Petitioner, vs. COURT OF APPEALS; REGIONAL The Facts
TRIAL COURT OF MANILA, BR. 21; and SEA-LAND SERVICE, INC., Respondents.

The factual antecedents of this case as found by the Court of Appeals are as follows:

Plaintiff (herein private respondent), a shipping company, is a foreign corporation licensed to do

PANGANIBAN, J.: business in the Philippines. On June 29, 1982, plaintiff received at its Hong Kong terminal a
sealed container, Container No. SEAU 67523, containing seventy-six bales of "unsorted waste
paper" for shipment to defendant (herein petitioner), Keng Hua Paper Products, Co. in Manila. A
bill of lading (Exh. A) to cover the shipment was issued by the plaintiff.
What is the nature of a bill of lading? When does a bill of lading become binding on a
consignee? Will an alleged overshipment justify the consignee's refusal to receive the goods
described in the bill of lading? When may interest be computed on unpaid demurrage charges?
On July 9, 1982, the shipment was discharged at the Manila International Container Port.
Notices of arrival were transmitted to the defendant but the latter failed to discharge the
shipment from the container during the "free time" period or grace period. The said shipment
Statement of the Case remained inside the plaintiff's container from the moment the free time period expired on July
29, 1982 until the time when the shipment was unloaded from the container on November 22,
1983, or a total of four hundred eighty-one (481) days. During the 481-day period, demurrage
charges accrued. Within the same period, letters demanding payment were sent by the plaintiff
These are the main questions raised in this petition assailing the Decision 1 of the Court of to the defendant who, however, refused to settle its obligation which eventually amounted to
Appeals 2 promulgated on May 20, 1994 in C.A.-G.R. CV No. 29953 affirming in toto the P67,340.00. Numerous demands were made on the defendant but the obligation remained
decision 3 dated September 28, 1990 in Civil Case No. 85-33269 of the Regional Trial Court of unpaid. Plaintiff thereafter commenced this civil action for collection and damages.
Manila, Branch 21. The dispositive portion of the said RTC decision reads:
In its answer, defendant, by way of special and affirmative defense, alleged that it purchased
fifty (50) tons of waste paper from the shipper in Hong Kong, Ho Kee Waste Paper, as
manifested in Letter of Credit No. 824858 (Exh. 7. p. 110. Original Record) issued by Equitable In the main, the case revolves around the question of whether petitioner bound by the bill of
Banking Corporation, with partial shipment permitted; that under the letter of credit, the lading. We shall, thus, discuss the above four issues as they intertwine with this main question.
remaining balance of the shipment was only ten (10) metric tons as shown in Invoice No. H-
15/82 (Exh. 8, p. 111, Original Record); that the shipment plaintiff was asking defendant to
accept was twenty (20) metric tons which is ten (10) metric tons more than the remaining
balance; that if defendant were to accept the shipment, it would be violating Central Bank rules The Court's Ruling
and regulations and custom and tariff laws; that plaintiff had no cause of action against the
defendant because the latter did not hire the former to carry the merchandise; that the cause
of action should be against the shipper which contracted the plaintiff's services and not against
The petition is partly meritorious. We affirm petitioner's liability for demurrage, but modify the
defendant; and that the defendant duly notified the plaintiff about the wrong shipment through
interest rate thereon.
a letter dated January 24, 1983 (Exh. D for plaintiff, Exh. 4 for defendant, p. 5. Folder of
Exhibits).

Main Issue: Liability Under the Bill of Lading

As previously mentioned, the RTC found petitioner liable for demurrage; attorney's fees and
expenses of litigation. The petitioner appealed to the Court of Appeals, arguing that the lower
court erred in (1) awarding the sum of P67,340 in favor of the private respondent, (2) rejecting A bill of lading serves two functions. First, it is a receipt for the goods shipped. Second, it is a
petitioner's contention that there was overshipment, (3) ruling that petitioner's recourse was contract by which three parties, namely, the shipper, the carrier, and the consignee undertake
against the shipper, and (4) computing legal interest from date of extrajudicial demand. 5 specific responsibilities and assume stipulated obligations. 9 A "bill of lading delivered and
accepted constitutes the contract of carriage even though not signed," 10because the
"(a)cceptance of a paper containing the terms of a proposed contract generally constitutes an
acceptance of the contract and of all of its terms and conditions of which the acceptor has
Respondent Court of Appeals denied the appeal and affirmed the lower court's decision in toto.
actual or constructive notice." 11 In a nutshell, the acceptance of a bill of lading by the shipper
In a subsequent resolution, it also denied the petitioner's motion for reconsideration.
6
and the consignee, with full knowledge of its contents, gives rise to the presumption that the
Hence, this petition for review. 7 same was a perfected and binding contract. 12

The Issues In the case at bar, both lower courts held that the bill of lading was a valid and perfected
contract between the shipper (Ho Kee), the consignee (Petitioner Keng Hua), and the carrier
(Private Respondent Sea-Land). Section 17 of the bill of lading provided that the shipper and
the consignee were liable for the payment of demurrage charges for the failure to discharge the
In its memorandum, petitioner submits the following issues: containerized shipment beyond the grace period allowed by tariff rules. Applying said
stipulation, both lower courts found petitioner liable. The aforementioned section of the bill of
lading reads:

I. Whether or not petitioner had accepted the bill of lading;

II. Whether or not the award of the sum of P67,340.00 to private respondent was proper;
III. Whether or not petitioner was correct in not accepting the overshipment;
IV. Whether or not the award of legal interest from the date of private respondent's
extrajudicial demand was proper; 8
17. COOPERAGE FINES. The shipper and consignee shall be liable for, indemnify the carrier and
ship and hold them harmless against, and the carrier shall have a lien on the goods for, all
expenses and charges for mending cooperage, baling, repairing or reconditioning the goods, or
the van, trailers or containers, and all expenses incurred in protecting, caring for or otherwise
made for the benefit of the goods, whether the goods be damaged or not, and for any
payment, expense, penalty fine, dues, duty, tax or impost, loss, damage,
detention, demurrage, or liability of whatsoever nature, sustained or incurred by or levied upon
the carrier or the ship in connection with the goods or by reason of the goods being or having
been on board, or because of shipper's failure to procure consular or other proper permits,
certificates or any papers that may be required at any port or place or shipper's failure to
supply information or otherwise to comply with all laws, regulations and requirements of law in
connection with the goods of from any other act or omission of the shipper or consignee:
(Emphasis supplied.)
by private respondent to petitioner in November 1982, or four months after petitioner received
the bill of lading. If the notice has any legal significance at all, it is to highlight petitioner's
prolonged failure to object to the bill of lading. Contrary to petitioner's contention, the notice
and the letter support - not belie - the findings of the two lower courts that the bill of lading
was impliedly accepted by petitioner.

As aptly stated by Respondent Court of Appeals:

Petitioner contends, however, that it should not be bound by the bill of lading because it never
gave its consent thereto. Although petitioner admits "physical acceptance" of the bill of lading,
it argues that its subsequent actions belie the finding that it accepted the terms and conditions
printed therein. 13 Petitioner cites as support the "Notice of Refused or On Hand Freight" it In the instant case, (herein petitioner) cannot and did not allege non-receipt of its copy of the
received on November 2, 1982 from private respondent, which acknowledged that petitioner bill of lading from the shipper. Hence, the terms and conditions as well as the various entries
declined to accept the shipment. Petitioner adds that it sent a copy of the said notice to the contained therein were brought to its knowledge. (Herein petitioner) accepted the bill of lading
shipper on December 23, 1982. Petitioner points to its January 24, 1983 letter to the private without interposing any objection as to its contents. This raises the presumption that (herein
respondent, stressing "that its acceptance of the bill of lading would be tantamount to an act of petitioner) agreed to the entries and stipulations imposed therein.
smuggling as the amount it had imported (with full documentary support) was only (at that
time) for 10,000 kilograms and not for 20,313 kilograms as stated in the bill of lading" and
"could lay them vulnerable to legal sanctions for violation of customs and tariff as well as
Central Bank laws." 14 Petitioner further argues that the demurrage "was a consequence of the Moreover, it is puzzling that (herein petitioner) allowed months to pass, six (6) months to be
shipper's mistake" of shipping more than what was bought. The discrepancy in the amount of exact, before notifying (herein private respondent) of the "wrong shipment". It was only on
waste paper it actually purchased, as reflected in the invoice vis-a-vis the excess amount in the January 24, 1983 that (herein petitioner) sent (herein private respondent) such a letter of
bill of lading, allegedly justifies its refusal to accept the shipment. 15 notification (Exh D for plaintiff, Exh. 4 for defendant; p. 5, Folder of Exhibits). Thus, for the
duration of those six months (herein private respondent never knew the reason for (herein
petitioner's) refusal to discharge the shipment.

Petitioner Bound by
the Bill of Lading
After accepting the bill of lading, receiving notices of arrival of the shipment, failing to object
thereto, (herein petitioner) cannot now deny that it is bound by the terms in the bill of lading.
If it did not intend to be bound, (herein petitioner) would not have waited for six months to
We are not persuaded. Petitioner admits that it "received the bill of lading immediately after the lapse before finally bringing the matter to (herein private respondent's attention. The most
arrival of the shipment"16 on July 8, 1982. 17 Having been afforded an opportunity to examine logical reaction in such a case would be to immediately verify the matter with the other parties
the said document, petitioner did not immediately object to or dissent from any term or involved. In this case, however, (herein petitioner) unreasonably detained (herein private
stipulation therein. It was only six months later, on January 24, 1983, that petitioner sent a respondent's) vessel to the latter's prejudice. 19
letter to private respondent saying that it could not accept the shipment. Petitioner's inaction
for such a long period conveys the clear inference that it accepted the terms and conditions of
the bill of lading. Moreover, said letter spoke only of petitioner's inability to use the delivery
permit, i.e. to pick up the cargo, due to the shipper's failure to comply with the terms and Petitioner's attempt to evade its obligation to receive the shipment on the pretext that this may
conditions of the letter of credit, for which reason the bill of lading and other shipping cause it to violate customs, tariff and central bank laws must likewise fail. Mere apprehension
documents were returned by the "banks" to the shipper. 18 The letter merely proved petitioner's of violating said laws, without a clear demonstration that taking delivery of the shipment has
refusal to pick up the cargo, not its rejection of the bill of lading. become legally impossible, 20
cannot defeat the petitioner's contractual obligation and liability
under the bill of lading.

Petitioner's reliance on the Notice of Refused or On Hand Freight, as proof of its nonacceptance
of the bill of lading, is of no consequence. Said notice was not written by petitioner; it was sent In any event, the issue of whether petitioner accepted the bill of lading was raised for the first
time only in petitioner's memorandum before this Court. Clearly, we cannot now entertain an
issue raised for the very first time on appeal, in deference to the well-settled doctrine that
"(a)n issue raised for the first time on appeal and not raised timely in the proceedings in the
lower court is barred by estoppel. Questions raised on appeal must be within the issues framed
by the parties and, consequently, issues not raised in the trial court cannot be raised for the
first time on appeal." 21
In the case at bar, the prolonged failure of petitioner to receive and discharge the cargo from
the private respondent's vessel constitutes a violation of the terms of the bill of lading. It
should thus be liable for demurrage to the former.
Petitioner's position is puerile. The amount of demurrage charges in the sum of P67,340 is a
factual conclusion of the trial court that was affirmed by the Court of Appeals and, thus, binding
on this Court. 24 Besides, such factual finding is supported by the extant evidence. 25 The
apparent discrepancy was a result of the variance of the dates when the two demands were
made. Necessarily, the longer the cargo remained unclaimed, the higher the demurrage. Thus,
while in his letter dated April 24, 1983, 26 private respondent's counsel demanded payment of
only P37,800, the additional demurrage incurred petitioner due to its continued refusal to
receive delivery of the cargo ballooned to P67,340 by November 22, 1983. The testimony of
Counsel Sofronio Larcia as regards said letter of April 24, 1983 elucidates, viz:

Q Now, after you sent this letter, do you know what happened?

In The Apollon, 22
Justice Story made the following relevant comment on the nature of A Defendant continued to refuse to take delivery of the shipment and the shipment stayed at
demurrage: the port for a longer period.

Q So, what happened to the shipment?

In truth, demurrage is merely an allowance or compensation for the delay or detention of a A The shipment incurred additional demurrage charges which amounted to P67,340.00 as of
vessel. It is often a matter of contract, but not necessarily so. The very circumstance that in November 22, 1983 or more than a year after - almost a year after the shipment arrived at the
ordinary commercial voyages, a particular sum is deemed by the parties a fair compensation port.
for delays, is the very reason why it is, and ought to be, adopted as a measure of
compensation, in cases ex delicto. What fairer rule can be adopted than that which founds itself Q So, what did you do?
upon mercantile usage as to indemnity, and fixes a recompense upon the deliberate
consideration of all the circumstances attending the usual earnings and expenditures in A We requested our collection agency to pursue the collection of this amount. 27
common voyages? It appears to us that an allowance, by way of demurrage, is the true
measure of damages in all cases of mere detention, for that allowance has reference to the
ship's expenses, wear and tear, and common employment. 23
Bill of Lading Separate from

Other Letter of Credit Arrangements

In a letter of credit, there are three distinct and independent contracts:

Amount of Demurrage Charges

(1) the contract of sale between the buyer and the seller, (2) the contract of the buyer with the
issuing bank, and (3) the letter of credit proper in which the bank promises to pay the seller
Petitioner argues that it is not obligated to pay any demurrage charges because, prior to the pursuant to the terms and conditions stated therein. "Few things are more clearly settled in law
filing of the complaint, private respondent made no demand for the sum of P67,340. Moreover, than that the three contracts which make up the letter of credit arrangement are to be
private respondent's loss and prevention manager, Loi Gillera, demanded P50,260; but its maintained in a state of perpetual separation." 28 A transaction involving the purchase of goods
counsel, Sofronio Larcia, subsequently asked for a different amount of P37,800. may also require, apart from a letter of credit, a contract of transportation specially when the
seller and the buyer are not in the same locale or country, and the goods purchased have to be
transported to the latter.
Hence, the contract of carriage, as stipulated in the bill of lading in the present case, must be 3. When the judgment of the court awarding a sum of money becomes final and executory, the
treated independently of the contract of sale between the seller and the buyer, and the contract rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
for the issuance of a letter of credit between the buyer and the issuing bank. Any discrepancy 12% per annum from such finality until its satisfaction, this interim period being deemed to be
between the amount of the goods described in the commercial invoice in the contract of sale by then an equivalent to a forbearance of credit. 31
and the amount allowed in the letter of credit will not affect the validity and enforceability of
the contract of carriage as embodied in the bill of lading. As the bank cannot be expected to
look beyond the documents presented to it by the seller pursuant to the letter of
credit, 29 neither can the carrier be expected to go beyond the representations of the shipper in The case before us involves an obligation not arising from a loan or forbearance of money;
the bill of lading and to verify their accuracy vis-a-viz the commercial invoice and the letter of a thus, pursuant to Article 2209 of the Civil Code, the applicable interest rate is six percent per
credit. Thus, the discrepancy between the amount of goods indicated in the invoice and the annum. Since the bill of lading did not specify the amount of demurrage, and the sum claimed
amount in the bill of lading cannot negate petitioner's obligation to private respondent arising by private respondent increased as the days went by, the total amount demanded cannot be
from the contract of transportation. Furthermore, private respondent, as carrier, had no deemed to have been established with reasonable certainty until the trial court rendered its
knowledge of the contents of the container. The contract of carriage was under the judgment. Indeed, "(u)nliquidated damages or claims, it is said, are those which are not or
arrangement known as "Shipper's Load And Count," and shipper was solely responsible for the cannot be known until definitely ascertained, assessed and determined by the courts after
loading of the container while carrier was oblivious to the contents of the shipment. Petitioner's presentation of proof. " Consequently, the legal interest rate is six percent, to be computed
32

remedy in case of overshipment lies against the seller/shipper, not against the carrier.
Payment of Interest
from September 28, 1990, the date of the trial court's decision. And in accordance
withPhilippine National Bank 33 and Eastern Shipping, 34 the rate of twelve percent per
annum shall be charged on the total then outstanding, from the time the judgment becomes
final and executory until its satisfaction.

Petitioner posits that it "first knew" of the demurrage claim of P67,340 only when it received,
by summons, private respondent's complaint. Hence, interest may not be allowed to run from
the date of private respondent's extrajudicial demands on March 8, 1983 for P50,260 or on
April 24, 1983 for P37,800, considering that, in both cases, "there was no demand for
interest." 30 We agree.
Finally, the Court notes that the matter of attorney's fees was taken up only in the dispositive
portion of the trial court's decision. This falls short of the settled requirement that the text of
the decision should state the reason for the award of attorney's fees, for without such
justification, its award would be a "conclusion without a premise, its basis being improperly left
to speculation and conjecture." 35

WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that the legal
Jurisprudence teaches us: interest of six percent per annum shall be computed from September 28, 1990 until its full
payment before finality of judgment. The rate of interest shall be adjusted to twelve
percent per annum, computed from the time said judgment became final and executory until
full satisfaction. The award of attorney's fees is DELETED.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the court at
the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or
damages except when or until the demand can be established with reasonable certainty. SO ORDERED.
Accordingly, where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code)
but when such certainty cannot be so reasonably established at the time the demand is made,
the interest shall begin to run only from the date the judgment of the court is made (at which Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ., concur.
time the quantification of damages may be deemed to have been reasonably ascertained).The
actual base for the computation of legal interest shall, in any case, be on the amount finally
adjudged.
 Underwriting and Consultancy Agreements executed by and between petitioner First Metro
Investment Corp. (FMIC) and respondent Este del Sol Mountain Reserve, Inc. (Este del
Sol) simultaneously with the Loan Agreement dated January 31, 1978 were mere
subterfuges to camouflage the usurious interest charged by petitioner FMIC. chanrob1es virtua1 1aw 1ibrary

The facts of the case are as follows: chanrob1es virtual 1aw library

It appears that on January 31, 1978, petitioner FMIC granted respondent Este del Sol a
loan of Seven Million Three Hundred Eighty-Five Thousand Five Hundred Pesos
(P7,385,500.00) to finance the construction and development of the Este del Sol Mountain
Reserve, a sports/resort complex project located at Barrio Puray, Montalban, Rizal. 4

Under the terms of the Loan Agreement, the proceeds of the loan were to be released on
staggered basis. Interest on the loan was pegged at sixteen (16%) percent per annum
based on the diminishing balance. The loan was payable in thirty-six (36) equal and
consecutive monthly amortizations to commence at the beginning of the thirteenth month
from the date of the first release in accordance with the Schedule of Amortization. 5 In
case of default, an acceleration clause was, among others, provided and the amount due
was made subject to a twenty (20%) percent one-time penalty on the amount due and
such amount shall bear interest at the highest rate permitted by law from the date of
default until full payment thereof plus liquidated damages at the rate of two (2%) percent
per month compounded quarterly on the unpaid balance and accrued interests together
SECOND DIVISION with all the penalties, fees, expenses or charges thereon until the unpaid balance is fully
paid, plus attorneys fees equivalent to twenty-five (25%) percent of the sum sought to be
[G.R. No. 141811. November 15, 2001.] recovered, which in no case shall be less than Twenty Thousand Pesos (P20,000.00) if the
services of a lawyer were hired. 6
FIRST METRO INVESTMENT CORPORATION, Petitioner, v. ESTE DEL SOL
MOUNTAIN RESERVE, INC., VALENTIN S. DAEZ, JR., MANUEL Q. SALIENTES, MA. In accordance with the terms of the Loan Agreement, respondent Este del Sol executed
ROCIO A. DE VEGA, ALEXANDER G. ASUNCION, ALBERTO * M. LADORES, VICENTE several documents 7 as security for payment, among them, (a) a Real Estate Mortgage
M. DE VERA, JR., and FELIPE B. SESE,Respondents. dated January 31, 1978 over two (2) parcels of land being utilized as the site of its
development project with an area of approximately One Million Twenty-Eight Thousand
DECISION and Twenty-Nine (1,028,029) square meters and particularly described in TCT Nos. N-
24332 and N-24356 of the Register of Deeds of Rizal, inclusive of all improvements, as
well as all the machineries, equipment, furnishings and furnitures existing thereon; and
(b) individual Continuing Suretyship agreements by co-respondents Valentin S. Daez, Jr.,
Manuel Q. Salientes, Ma. Rocio A. De Vega, Alexander G. Asuncion, Alberto M. Ladores,
DE LEON, JR., J.:Vicente M. De Vera, Jr. and Felipe B. Sese, all dated February 2, 1978, to guarantee the
payment of all the obligations of respondent Este del Sol up to the aggregate sum of
Seven Million Five Hundred Thousand Pesos (P7,500,000.00) each. 8

Before us is a petition for review on certiorari of the Decision 1 of the Court of Appeals 2
dated November 8, 1999 in CA-G.R. CV No. 53328 reversing the Decision 3 of the
Regional Trial Court of Pasig City, Branch 159 dated June 2, 1994 in Civil Case No. 39224.
Essentially, the Court of Appeals found and declared that the fees provided for in the
Respondent Este del Sol also executed, as provided for by the Loan Agreement, an
Underwriting Agreement on January 31, 1978 whereby petitioner FMIC shall underwrite on
a best-efforts basis the public offering of One Hundred Twenty Thousand (120,000)
common shares of respondent Este del Sols capital stock for a one-time underwriting fee
of Two Hundred Thousand Pesos (P200,000.00). In addition to the underwriting fee, the
Underwriting Agreement provided that for supervising the public offering of the shares,
respondent Este del Sol shall pay petitioner FMIC an annual supervision fee of Two
Hundred Thousand Pesos (P200,000.00) per annum for a period of four (4) consecutive Balance 8,326,727.46
years. The Underwriting Agreement also stipulated for the payment by respondent Este
del Sol to petitioner FMIC a consultancy fee of Three Hundred Thirty-Two Thousand Five One time penalty of 20% of the entire unpaid
Hundred Pesos (P332,500.00) per annum for a period of four (4) consecutive years.
Simultaneous with the execution of and in accordance with the terms of the Underwriting obligations under Section 6.02 (ii) of
Agreement, a Consultancy Agreement was also executed on January 31, 1978 whereby
respondent Este del Sol engaged the services of petitioner FMIC for a fee as consultant to Loan Agreement 1,665,345.49
render general consultancy services. 9
Past due interest under Section 6.02 (iii)
In three (3) letters all dated February 22, 1978 petitioner billed respondent Este del Sol
for the amounts of [a] Two Hundred Thousand Pesos (P200,000.00) as the underwriting of loan Agreement: chanrob1es virtual 1aw library

fee of petitioner FMIC in connection with the public offering of the common shares of stock
of respondent Este del Sol; [b] One Million Three Hundred Thirty Thousand Pesos @ 19% p.a. from 2-22-79 to 11-30-79
(P1,330,000.00) as consultancy fee for a period of four (4) years; and [c] Two Hundred
Thousand Pesos (P200,000.00) as supervision fee for the year beginning February, 1978, (281 days) 1,481,879.93
in accordance to the Underwriting Agreement. 10 The said amounts of fees were deemed
paid by respondent Este del Sol to petitioner FMIC which deducted the same from the first @ 21% p.a. from 11-30-79 to 6-23-80
release of the loan. chanrob1es virtua1 1aw 1ibrary

(206 days) 1,200,714.10

Since respondent Este del Sol failed to meet the schedule of repayment in accordance with
a revised Schedule of Amortization, it appeared to have incurred a total obligation of Other charges publication of extra judicial
Twelve Million Six Hundred Seventy-Nine Thousand Six Hundred Thirty Pesos and Ninety-
Eight Centavos (P12,679,630.98) per the petitioners Statement of Account dated June 23, foreclosure of REM made on
1980, 11 to wit:chanrob1es virtual 1aw library

5-23-80 & 6-6-80 4,964.00

STATEMENT OF ACCOUNT OF

ESTE DEL SOL MOUNTAIN RESERVE, INC.
Total Amount Due and Collectible as of
AS OF JUNE 23, 1980
June 23, 1980 P12,679,630.98
PARTICULARS AMOUNT
============
Total amount due as of 11-22-78 per
Accordingly, petitioner FMIC caused the extrajudicial foreclosure of the real estate
revised amortization schedule dated mortgage on June 23, 1980. 12 At the public auction, petitioner FMIC was the highest
bidder of the mortgaged properties for Nine Million Pesos (P9,000,000.00). The total
1-3-78 P7,999,631.42 amount of Three Million One Hundred Eighty-Eight Thousand Six Hundred Thirty Pesos and
Seventy-Five Centavos (P3,188,630.75) was deducted therefrom, that is, for the
Interest on P7,999,631.42 @ 16% p.a. from publication fee for the publication of the Sheriffs Notice of Sale, Four Thousand Nine
Hundred Sixty-Four Pesos (P4,964.00); for Sheriffs fees for conducting the foreclosure
11-22-78 to 2-22-79 (92 days) 327,096.04 proceedings, Fifteen Thousand Pesos (P15,000.00); and for Attorneys fees, Three Million
One Hundred Sixty-Eight Thousand Six Hundred Sixty-Six Pesos and Seventy-Five
Centavos (P3,168,666.75). The remaining balance of Five Million Eight Hundred Eleven for in the Underwriting and Consultancy Agreements were mere subterfuges to
Thousand Three Hundred Sixty-Nine Pesos and Twenty-Five Centavos (P5,811,369.25) camouflage the excessively usurious interest charged by the petitioner FMIC on the loan of
was applied to interests and penalty charges and partly against the principal, due as of respondent Este del Sol; and that the stipulated penalties, liquidated damages and
June 23, 1980, thereby leaving a balance of Six Million Eight Hundred Sixty-Three attorneys fees were "excessive, iniquitous, unconscionable and revolting to the
Thousand Two Hundred Ninety-Seven Pesos and Seventy-Three Centavos (P6,863,297.73) conscience," and declared that in lieu thereof, the stipulated one time twenty (20%)
on the principal amount of the loan as of June 23, 1980. 13 percent penalty on the amount due and ten (10%) percent of the amount due as
attorneys fees would be reasonable and suffice to compensate petitioner FMIC for those
Failing to secure from the individual respondents, as sureties of the loan of respondent items. Thus, the appellate court dismissed the complaint as against the individual
Este del Sol by virtue of their continuing surety agreements, the payment of the alleged respondents sureties and ordered petitioner FMIC to pay or reimburse respondent Este del
deficiency balance, despite individual demands sent to each of them, 14 petitioner Sol the amount of Nine Hundred Seventy-One Thousand Pesos (P971,000.00)
instituted on November 11, 1980 the instant collection suit 15 against the respondents to representing the difference between what is due to the petitioner and what is due to
collect the alleged deficiency balance of Six Million Eight Hundred Sixty-Three Thousand respondent Este del Sol, based on the following computation: 17
Two Hundred Ninety-Seven Pesos and Seventy-Three Centavos (P6,863,297.73) plus
interest thereon at twenty-one (21%) percent per annum from June 24, 1980 until fully A: DUE TO THE [PETITIONER]
paid, and twenty-five (25%) percent thereof as and for attorneys fees and costs. chanrob1es virtua1 1aw 1ibrary

Principal of Loan P7,382,500.00

In their Answer, the respondents sought the dismissal of the case and set up several
special and affirmative defenses, foremost of which is that the Underwriting and Add: 20% one-time
Consultancy Agreements executed simultaneously with and as integral parts of the Loan
Agreement and which provided for the payment of Underwriting, Consultancy and Penalty 1,476,500.00
Supervision fees were in reality subterfuges resorted to by petitioner FMIC and imposed
upon respondent Este del Sol to camouflage the usurious interest being charged by Attorneys fees 900,000.00 P9,759,000.00
petitioner FMIC. 16

The petitioner FMIC presented as its witnesses during the trial: Cesar Valenzuela, its
former Senior Vice-President, Felipe Neri, its Vice-President for Marketing, and Dennis Less: Proceeds of foreclosure
Aragon, an Account Manager of its Account Management Group, as well as documentary
evidence. On the other hand, co-respondents Vicente M. De Vera, Jr. and Valentin S. Daez, Sale 9,000,000.00
Jr., and Perfecto Doroja, former Senior Manager and Assistant Vice-President of FMIC,
testified for the respondents.

After the trial, the trial court rendered its decision in favor of petitioner FMIC, the Deficiency P759,000.00
dispositive portion of which reads: chanrob1es virtual 1aw library

===========
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendants,
ordering defendants jointly and severally to pay to plaintiff the amount of P6,863,297.73 B. DUE TO [RESPONDENT ESTE DEL SOL]
plus 21% interest per annum, from June 24, 1980, until the entire amount is fully paid,
plus the amount equivalent to 25% of the total amount due, as attorneys fees, plus costs Return of usurious interest in the form of: chanrob1es virtual 1aw library

of suit.
Underwriting fee P 200,000.00
Defendants counterclaims are dismissed, for lack of merit.
Supervision fee 200,000.00
Finding the decision of the trial court unacceptable, respondents interposed an appeal to
the Court of Appeals. On November 8, 1999, the appellate court reversed the challenged Consultancy fee 1,330,000.00
decision of the trial court. The appellate court found and declared that the fees provided
 INDIVIDUAL RESPONDENTS, ARE STILL OBLIGATED TO THE PETITIONER.

Total amount due Este P1,730,000.00 Petitioner essentially assails the factual findings and conclusion of the appellate court that
the Underwriting and Consultancy Agreements were executed to conceal a usurious loan.
============ Inquiry upon the veracity of the appellate courts factual findings and conclusion is not the
function of this Court for the Supreme Court is not a trier of facts. Only when the factual
The appellee is, therefore, obliged to return to the appellant Este del Sol the difference of findings of the trial court and the appellate court are opposed to each other does this
P971,000.00 or (P1,730,000.00 less P759,000.00). Court exercise its discretion to re-examine the factual findings of both courts and weigh
which, after considering the record of the case, is more in accord with law and justice. cralaw : re d

Petitioner moved for reconsideration of the appellate courts adverse decision. However,
this was denied in a Resolution 18 dated February 9, 2000 of the appellate court. After a careful and thorough review of the record including the evidence adduced, we find
chanrob1es virtua1 1aw 1ibrary

no reason to depart from the findings of the appellate court.

Hence, the instant petition anchored on the following assigned errors: 19
THE APPELLATE COURT HAS DECIDED QUESTIONS OF SUBSTANCE IN A WAY NOT IN
ACCORD WITH LAW AND WITH APPLICABLE DECISIONS OF THIS HONORABLE COURT
WHEN IT: chanrob1es virtual 1aw library
a] HELD THAT ALLEGEDLY THE UNDERWRITING AND CONSULTANCY AGREEMENTS
SHOULD NOT BE CONSIDERED SEPARATE AND DISTINCT FROM THE LOAN AGREEMENT, Circular No. 905 did not repeal nor in any way amend the Usury Law but simply
AND INSTEAD, THEY SHOULD BE CONSIDERED AS A SINGLE CONTRACT.
b] HELD THAT THE UNDERWRITING AND CONSULTANCY AGREEMENTS ARE "MERE
SUBTERFUGES TO CAMOUFLAGE THE USURIOUS INTEREST CHARGED" BY THE
PETITIONER.
c] REFUSED TO CONSIDER THE TESTIMONIES OF PETITIONERS WITNESSES ON THE
SERVICES PERFORMED BY PETITIONER.
d] REFUSED TO CONSIDER THE FACT [i] THAT RESPONDENTS HAD WAIVED THEIR RIGHT for the law will not permit a usurious loan to hide itself behind a legal form. Parol evidence
TO SEEK RECOVERY OF THE AMOUNTS THEY PAID TO PETITIONER, AND [ii] THAT
RESPONDENTS HAD ADMITTED THE VALIDITY OF THE UNDERWRITING AND
CONSULTANCY AGREEMENTS.
First, there is no merit to petitioner FMICs contention that Central Bank Circular No. 905
which took effect on January 1, 1983 and removed the ceiling on interest rates for secured
and unsecured loans, regardless of maturity, should be applied retroactively to a contract
executed on January 31, 1978, as in the case at bar, that is, while the Usury Law was in
full force and effect. It is an elementary rule of contracts that the laws, in force at the time
the contract was made and entered into, govern it. 20 More significantly, Central Bank
suspended the latters effectivity. 21 The illegality of usury is wholly the creature of
legislation. A Central Bank Circular cannot repeal a law. Only a law can repeal another law.
22 Thus, retroactive application of a Central Bank Circular cannot, and should not, be
presumed. 23
Second, when a contract between two (2) parties is evidenced by a written instrument,
such document is ordinarily the best evidence of the terms of the contract. Courts only
need to rely on the face of written contracts to determine the intention of the parties.
However, this rule is not without exception. 24 The form of the contract is not conclusive
is admissible to show that a written document though legal in form was in fact a device to
cover usury. If from a construction of the whole transaction it becomes apparent that
there exists a corrupt intention to violate the Usury Law, the courts should and will permit
no scheme, however ingenious, to becloud the crime of usury.25 cralaw:red

e] MADE AN ERRONEOUS COMPUTATION ON SUPPOSEDLY "WHAT IS DUE TO EACH PARTY

AFTER THE FORECLOSURE SALE", AS SHOWN IN PP. 34-35 OF THE ASSAILED DECISION, In the instant case, several facts and circumstances taken altogether show that the
EVEN GRANTING JUST FOR THE SAKE OF ARGUMENT THAT THE APPELLATE COURT WAS Underwriting and Consultancy Agreements were simply cloaks or devices to cover an
CORRECT IN STIGMATIZING [i] THE PROVISIONS OF THE LOAN AGREEMENT THAT REFER illegal scheme employed by petitioner FMIC to conceal and collect excessively usurious
TO STIPULATED PENALTIES, LIQUIDATED DAMAGES AND ATTORNEYS FEES AS interest, and these are: chanrob1es virtual 1aw library

SUPPOSEDLY "EXCESSIVE, INIQUITOUS AND UNCONSCIONABLE AND REVOLTING TO THE

CONSCIENCE" AND [ii] THE UNDERWRITING, SUPERVISION AND CONSULTANCY
SERVICES AGREEMENT AS SUPPOSEDLY "MERE SUBTERFUGES TO CAMOUFLAGE THE
USURIOUS INTEREST CHARGED" UPON THE RESPONDENT ESTE BY PETITIONER.
f] REFUSED TO CONSIDER THE FACT THAT RESPONDENT ESTE, AND THUS THE
a) The Underwriting and Consultancy Agreements are both dated January 31, 1978 which
is the same date of the Loan Agreement. 26 Furthermore, under the Underwriting
Agreement payment of the supervision and consultancy fees was set for a period of four
(4) years 27 to coincide ultimately with the term of the Loan Agreement. 28 This fact
means that all the said agreements which were executed simultaneously were set to
mature or shall remain effective during the same period of time. borrower for the lenders services which are of little value or which are not in fact to be
chanrob1es virtua1 1aw 1ibrary

rendered, such as in the instant case. 42 In this connection, Article 1957 of the New Civil
b) The Loan Agreement dated January 31, 1978 stipulated for the execution and delivery Code clearly provides that: chanrob1es virtual 1aw library

of an underwriting agreement 29 and specifically mentioned that such underwriting

agreement is a condition precedent 30 for petitioner FMIC to extend the loan to Art. 1957. Contracts and stipulations, under any cloak or device whatever, intended to
respondent Este del Sol, indicating and as admitted by petitioner FMICs employees, 31 circumvent the laws against usury shall be void. The borrower may recover in accordance
that such Underwriting Agreement is "part and parcel of the Loan Agreement." 32 with the laws on usury. chanrob1es virtua1 1aw 1ibrary

c) Respondent Este del Sol was billed by petitioner on February 28, 1978 One Million Three In usurious loans, the entire obligation does not become void because of an agreement for
Hundred Thirty Thousand Pesos (P1,330,000.00) 33 as consultancy fee despite the clear usurious interest; the unpaid principal debt still stands and remains valid but the
provision in the Consultancy Agreement that the said agreement is for Three Hundred stipulation as to the usurious interest is void, consequently, the debt is to be considered
Thirty-Two Thousand Five Hundred Pesos (P332,500.00) per annum for four (4) years and without stipulation as to the interest. 43 The reason for this rule was adequately explained
that only the first year consultancy fee shall be due upon signing of the said consultancy in the case of Angel Jose Warehousing Co., Inc. v. Chelda Enterprises 44 where this Court
agreement. 34 held: chanrob1es virtual 1aw library

d) The Underwriting, Supervision and Consultancy fees in the amounts of Two Hundred
Thousand Pesos (P200,000.00), and one Million Three Hundred Thirty Thousand Pesos
(P1,330,000.00), respectively, were billed by petitioner to respondent Este del Sol on
February 22, 1978, 35 that is, on the same occasion of the first partial release of the loan
in the amount of Two Million Three Hundred Eighty-Two Thousand Five Hundred Pesos
(P2,382,500.00). 36 It is from this first partial release of the loan that the said
corresponding bills for Underwriting, Supervision and Constantly fees were conducted and
apparently paid, thus, reverting back to petitioner FMIC the total amount of One Million
Seven Hundred Thirty Thousand Pesos (P1,730,000.00) as part of the amount loaned to
respondent Este del Sol. 37
In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the
principal debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal.
The illegality lies only as to the prestation to pay the stipulated interest; hence, being
separable, the latter only should be deemed void, since it is the only one that is illegal.
Thus, the nullity of the stipulation on the usurious interest does not affect the lenders
right to receive back the principal amount of the loan. With respect to the debtor, the
amount paid as interest under a usurious agreement is recoverable by him, since the
payment is deemed to have been made under restraint, rather than voluntarily. 45
This Court agrees with the factual findings and conclusion of the appellate court, to wit: chanrob1es virtual 1aw library

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

any share of stock of respondent Este del Sol and much less to supervise such a We find the stipulated penalties, liquidated damages and attorneys fees, excessive,
syndicate, thus failing to comply with its obligation under the Underwriting Agreement. 38iniquitous and unconscionable and revolting to the conscience as they hardly allow the
Besides, there was really no need for an Underwriting Agreement since respondent Este borrower any chance of survival in case of default. And true enough, ESTE folded up when
del Sol had its own licensed marketing arm to sell its shares and all its shares have beenthe appellee extrajudicially foreclosed on its (ESTEs) development project and literally
sold through its marketing arm. 39 closed its offices as both the appellee and ESTE were at the time holding office in the
same building. Accordingly, we hold that 20% penalty on the amount due and 10% of the
f) Petitioner FMIC failed to comply with its obligation under the Consultancy Agreement, proceeds of the foreclosure sale as attorneys fees would suffice to compensate the
40 aside from the fact that there was no need for a Consultancy Agreement, since appellee, especially so because there is no clear showing that the appellee hired the
respondent Este del Sols officers appeared to be more competent to be consultants in the services of counsel to effect the foreclosure, it engaged counsel only when it was seeking
development of the projected sports/resort complex. 41 the recovery of the alleged deficiency.

All the foregoing established facts and circumstances clearly belie the contention of Attorneys fees as provided in penal clauses are in the nature of liquidated damages. So
petitioner FMIC that the Loan, Underwriting and Consultancy Agreements are separate long as such stipulation does not contravene any law, morals, or public order, it is binding
and independent transactions. The Underwriting and Consultancy Agreements which were upon the parties. Nonetheless, courts are empowered to reduce the amount of attorneys
executed and delivered contemporaneously with the Loan Agreement on January 31, 1978 fees if the same is "iniquitous or unconscionable." 46 Articles 1229 and 2227 of the New
were exacted by petitioner FMIC as essential conditions for the grant of the loan. An Civil Code provide that: chanrob1es virtual 1aw library

apparently lawful loan is usurious when it is intended that additional compensation for the
loan be disguised by an ostensibly unrelated contract providing for payment by the Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable.

Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be

equitably reduced if they are iniquitous or unconscionable.

In the case at bar, the amount of Three Million One Hundred Eighty-Eight Thousand Six
Hundred Thirty Pesos and Seventy-Five Centavos (93,188,630.75) for the stipulated
attorneys fees equivalent to twenty-five (25%) percent of the alleged amount due, as of
the date of the auction sale on June 23, 1980, is manifestly exorbitant and
unconscionable. Accordingly, we agree with the appellate court that a reduction of the
attorneys fees to ten (10%) percent is appropriate and reasonable under the facts and
circumstances of this case.

Lastly, there is no merit to petitioner FMICs contention that the appellate court erred in
awarding an amount allegedly not asked nor prayed for by respondents. Whether the
exact amount of the relief was not expressly prayed for is of no moment for the reason
that the relief was plainly warranted by the allegations of the respondents as well as by
the facts as found by the appellate court. A party is entitled to as much relief as the facts
may warrant. 47

In view of all the foregoing, the Court is convinced that the appellate court committed no
reversible error in its challenged Decision.
chanrob1es virtua1 1aw 1ibrary

WHEREFORE, the instant petition is hereby DENIED, and the assailed Decision of the Court
of Appeals is AFFIRMED. Costs against petitioner.

SO ORDERED.

Bellosillo, Mendoza, Quisumbing, and Buena, JJ., concur.

 Rate = P198/day

Date of Decision = Aug. 18, 1998

Length of Service = 8 yrs. & 1 month

EN BANC P198.00 x 26 days x 8
= P41,184.00
months
G.R. No. 189871, August 13, 2013

DARIO NACAR, Petitioner, v. GALLERY FRAMES AND/OR FELIPE BORDEY,

JR., Respondents.
BACKWAGES
DECISION

PERALTA, J.:
Date Dismissed = January 24, 1997

Rate per day = P196.00

This is a petition for review on certiorari assailing the Decision1 dated September 23, 2008
of the Court of Appeals (CA) in CA-G.R. SP No. 98591, and the Resolution2 dated October Date of Decisions = Aug. 18, 1998
9, 2009 denying petitioners motion for reconsideration.

The factual antecedents are undisputed.

a) 1/24/97 to
Petitioner Dario Nacar filed a complaint for constructive dismissal before the Arbitration 2/5/98 = 12.36 mos.
Branch of the National Labor Relations Commission (NLRC) against respondents Gallery
P196.00/day x 12.36
Frames (GF) and/or Felipe Bordey, Jr., docketed as NLRC NCR Case No. 01-00519-97. = P62,986.56
mos.
On October 15, 1998, the Labor Arbiter rendered a Decision3 in favor of petitioner and
found that he was dismissed from employment without a valid or just cause. Thus,
petitioner was awarded backwages and separation pay in lieu of reinstatement in the
b) 2/6/98 to
amount of P158,919.92. The dispositive portion of the decision, reads:
8/18/98 = 6.4 months
With the foregoing, we find and so rule that respondents failed to discharge the burden of
showing that complainant was dismissed from employment for a just or valid cause. All Prevailing Rate per day = P62,986.00
the more, it is clear from the records that complainant was never afforded due process
before he was terminated. As such, we are perforce constrained to grant complainants P198.00 x 26 days x 6.4
prayer for the payments of separation pay in lieu of reinstatement to his former position, = P32,947.20
mos.
considering the strained relationship between the parties, and his apparent reluctance to
be reinstated, computed only up to promulgation of this decision as follows: cralawlibrary

TOTAL = P95.933.76

SEPARATION PAY
xxxx

WHEREFORE, premises considered, judgment is hereby rendered finding respondents

Date Hired = August 1990 guilty of constructive dismissal and are therefore, ordered:
 1. To pay jointly and severally the complainant the amount of sixty-two thousand
nine hundred eighty-six pesos and 56/100 (P62,986.56) Pesos representing his On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the
separation pay; NLRC to be final and executory. Consequently, another pre-execution conference was held,
chanr0blesvirtualawlibrary

but respondents failed to appear on time. Meanwhile, petitioner moved that an Alias Writ
2. To pay jointly and severally the complainant the amount of nine (sic) five thousand of Execution be issued to enforce the earlier recomputed judgment award in the sum of
nine hundred thirty-three and 36/100 (P95,933.36) representing his backwages; P471,320.31.18 cralaw virtualaw library

and
The records of the case were again forwarded to the Computation and Examination Unit
3. All other claims are hereby dismissed for lack of merit. for recomputation, where the judgment award of petitioner was reassessed to be in the
total amount of only P147,560.19.
SO ORDERED. 4
cralaw virtualaw library

Respondents appealed to the NLRC, but it was dismissed for lack of merit in the Petitioner then moved that a writ of execution be issued ordering respondents to pay him
Resolution5 dated February 29, 2000. Accordingly, the NLRC sustained the decision of the the original amount as determined by the Labor Arbiter in his Decision dated October 15,
Labor Arbiter. Respondents filed a motion for reconsideration, but it was denied. 6 1998, pending the final computation of his backwages and separation pay.
cralaw virtualaw library

Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On August On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the
24, 2000, the CA issued a Resolution dismissing the petition. Respondents filed a Motion judgment award that was due to petitioner in the amount of P147,560.19, which petitioner
for Reconsideration, but it was likewise denied in a Resolution dated May 8, 2001. 7 eventually received. cralaw virtualaw library

Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332. Petitioner then filed a Manifestation and Motion praying for the re-computation of the
Finding no reversible error on the part of the CA, this Court denied the petition in the monetary award to include the appropriate interests.19
Resolution dated April 17, 2002.8
cralaw virtualaw library

cralaw virtualaw library

On May 10, 2005, the Labor Arbiter issued an Order20 granting the motion, but only up to
An Entry of Judgment was later issued certifying that the resolution became final and the amount of P11,459.73. The Labor Arbiter reasoned that it is the October 15, 1998
executory on May 27, 2002.9 The case was, thereafter, referred back to the Labor Arbiter.Decision that should be enforced considering that it was the one that became final and
A pre-execution conference was consequently scheduled, but respondents failed to executory. However, the Labor Arbiter reasoned that since the decision states that the
appear.10
cralaw virtualaw library

separation pay and backwages are computed only up to the promulgation of the said
decision, it is the amount of P158,919.92 that should be executed. Thus, since petitioner
On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his already received P147,560.19, he is only entitled to the balance of P11,459.73.
backwages be computed from the date of his dismissal on January 24, 1997 up to the
finality of the Resolution of the Supreme Court on May 27, 2002.11 Upon recomputation, Petitioner then appealed before the NLRC,21 which appeal was denied by the NLRC in its
the Computation and Examination Unit of the NLRC arrived at an updated amount in the Resolution22dated September 27, 2006. Petitioner filed a Motion for Reconsideration, but it
sum of P471,320.31.12 cralaw virtualaw library

was likewise denied in the Resolution23 dated January 31, 2007.

On December 2, 2002, a Writ of Execution13 was issued by the Labor Arbiter ordering the
Sheriff to collect from respondents the total amount of P471,320.31. Respondents filed a
Motion to Quash Writ of Execution, arguing, among other things, that since the Labor
Arbiter awarded separation pay of P62,986.56 and limited backwages of P95,933.36, no
more recomputation is required to be made of the said awards. They claimed that after
the decision becomes final and executory, the same cannot be altered or amended
anymore.14 On January 13, 2003, the Labor Arbiter issued an Order15 denying the motion.
Thus, an Alias Writ of Execution16 was issued on January 14, 2003.
Respondents again appealed before the NLRC, which on June 30, 2003 issued a
Resolution17 granting the appeal in favor of the respondents and ordered the
recomputation of the judgment award.
Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No.
98591.
On September 23, 2008, the CA rendered a Decision24 denying the petition. The CA opined
that since petitioner no longer appealed the October 15, 1998 Decision of the Labor
Arbiter, which already became final and executory, a belated correction thereof is no
longer allowed. The CA stated that there is nothing left to be done except to enforce the
said judgment. Consequently, it can no longer be modified in any respect, except to
correct clerical errors or mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution 25 dated
October 9, 2009. the judgment. Also in Session Delights, the dismissed employee failed to appeal the
decision of the labor arbiter. The Court clarified, thus:
Hence, the petition assigning the lone error: In concrete terms, the question is whether a re-computation in the course of execution of
I the labor arbiter's original computation of the awards made, pegged as of the time the
decision was rendered and confirmed with modification by a final CA decision, is legally
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED, proper. The question is posed, given that the petitioner did not immediately pay the
COMMITTED GRAVE ABUSE OF DISCRETION AND DECIDED CONTRARY TO LAW IN awards stated in the original labor arbiter's decision; it delayed payment because it
UPHOLDING THE QUESTIONED RESOLUTIONS OF THE NLRC WHICH, IN TURN, continued with the litigation until final judgment at the CA level.
SUSTAINED THE MAY 10, 2005 ORDER OF LABOR ARBITER MAGAT MAKING THE
DISPOSITIVE PORTION OF THE OCTOBER 15, 1998 DECISION OF LABOR ARBITER A source of misunderstanding in implementing the final decision in this case proceeds
LUSTRIA SUBSERVIENT TO AN OPINION EXPRESSED IN THE BODY OF THE SAME from the way the original labor arbiter framed his decision. The decision consists
DECISION.26 cralaw virtualaw library essentially of two parts.
Petitioner argues that notwithstanding the fact that there was a computation of backwages
in the Labor Arbiters decision, the same is not final until reinstatement is made or until The first is that part of the decision that cannot now be disputed because it has been
finality of the decision, in case of an award of separation pay. Petitioner maintains that confirmed with finality. This is the finding of the illegality of the dismissal and the awards
considering that the October 15, 1998 decision of the Labor Arbiter did not become final of separation pay in lieu of reinstatement, backwages, attorney's fees, and legal interests.
and executory until the April 17, 2002 Resolution of the Supreme Court in G.R. No.
151332 was entered in the Book of Entries on May 27, 2002, the reckoning point for the The second part is the computation of the awards made. On its face, the computation the
computation of the backwages and separation pay should be on May 27, 2002 and not labor arbiter made shows that it was time-bound as can be seen from the figures used in
when the decision of the Labor Arbiter was rendered on October 15, 1998. Further, the computation. This part, being merely a computation of what the first part of the
petitioner posits that he is also entitled to the payment of interest from the finality of the decision established and declared, can, by its nature, be re-computed. This is the part,
decision until full payment by the respondents. too, that the petitioner now posits should no longer be re-computed because the
computation is already in the labor arbiter's decision that the CA had affirmed. The public
On their part, respondents assert that since only separation pay and limited backwages and private respondents, on the other hand, posit that a re-computation is necessary
were awarded to petitioner by the October 15, 1998 decision of the Labor Arbiter, no more because the relief in an illegal dismissal decision goes all the way up to reinstatement if
recomputation is required to be made of said awards. Respondents insist that since the reinstatement is to be made, or up to the finality of the decision, if separation pay is to be
decision clearly stated that the separation pay and backwages are computed only up to given in lieu reinstatement.
[the] promulgation of this decision, and considering that petitioner no longer appealed
the decision, petitioner is only entitled to the award as computed by the Labor Arbiter in That the labor arbiter's decision, at the same time that it found that an illegal dismissal
the total amount of P158,919.92. Respondents added that it was only during the had taken place, also made a computation of the award, is understandable in light of
execution proceedings that the petitioner questioned the award, long after the decision Section 3, Rule VIII of the then NLRC Rules of Procedure which requires that a
had become final and executory. Respondents contend that to allow the further computation be made. This Section in part states:
recomputation of the backwages to be awarded to petitioner at this point of the [T]he Labor Arbiter of origin, in cases involving monetary awards and at all events, as far
proceedings would substantially vary the decision of the Labor Arbiter as it violates the as practicable, shall embody in any such decision or order the detailed and full amount
rule on immutability of judgments. awarded.
Clearly implied from this original computation is its currency up to the finality of the labor
The petition is meritorious. arbiter's decision. As we noted above, this implication is apparent from the terms of the
computation itself, and no question would have arisen had the parties terminated the case
The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v. and implemented the decision at that point.
Court of Appeals (Sixth Division),27 wherein the issue submitted to the Court for resolution
was the propriety of the computation of the awards made, and whether this violated the However, the petitioner disagreed with the labor arbiter's findings on all counts - i.e., on
principle of immutability of judgment. Like in the present case, it was a distinct feature of the finding of illegality as well as on all the consequent awards made. Hence, the
the judgment of the Labor Arbiter in the above-cited case that the decision already petitioner appealed the case to the NLRC which, in turn, affirmed the labor arbiter's
provided for the computation of the payable separation pay and backwages due and did decision. By law, the NLRC decision is final, reviewable only by the CA on jurisdictional
not further order the computation of the monetary awards up to the time of the finality of grounds.
 up to that point.31 cralaw virtualaw library

The petitioner appropriately sought to nullify the NLRC decision on jurisdictional grounds
through a timely filed Rule 65 petition for certiorari. The CA decision, finding that NLRC Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping
exceeded its authority in affirming the payment of 13th month pay and indemnity, lapsed Lines, Inc. v. Court of Appeals,32 the Court laid down the guidelines regarding the manner
to finality and was subsequently returned to the labor arbiter of origin for execution. of computing legal interest, to wit:
II. With regard particularly to an award of interest in the concept of actual and
It was at this point that the present case arose. Focusing on the core illegal dismissal compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as
portion of the original labor arbiter's decision, the implementing labor arbiter ordered the follows:
cralawlibrary

award re-computed; he apparently read the figures originally ordered to be paid to be the
computation due had the case been terminated and implemented at the labor arbiter's 1. When the obligation is breached, and it consists in the payment of a sum of money,i.e.,
level. Thus, the labor arbiter re-computed the award to include the separation pay and the a loan or forbearance of money, the interest due should be that which may have been
backwages due up to the finality of the CA decision that fully terminated the case on the stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
merits. Unfortunately, the labor arbiter's approved computation went beyond the finality of time it is judicially demanded. In the absence of stipulation, the rate of interest shall be
the CA decision (July 29, 2003) and included as well the payment for awards the final CA 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand
decision had deleted - specifically, the proportionate 13th month pay and the indemnity under and subject to the provisions of Article 1169 of the Civil Code.
awards. Hence, the CA issued the decision now questioned in the present petition.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
We see no error in the CA decision confirming that a re-computation is necessary as it interest on the amount of damages awarded may be imposed at the discretion of the
essentially considered the labor arbiter's original decision in accordance with its basic court at the rate of 6% per annum. No interest, however, shall be adjudged on
component parts as we discussed above. To reiterate, the first part contains the finding of unliquidated claims or damages except when or until the demand can be established with
illegality and its monetary consequences; the second part is the computation of the reasonable certainty. Accordingly, where the demand is established with reasonable
awards or monetary consequences of the illegal dismissal, computed as of the time of the certainty, the interest shall begin to run from the time the claim is made judicially or
labor arbiter's original decision.28 cralaw virtualaw library extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
Consequently, from the above disquisitions, under the terms of the decision which is established at the time the demand is made, the interest shall begin to run only from the
sought to be executed by the petitioner, no essential change is made by a recomputation date the judgment of the court is made (at which time the quantification of damages may
as this step is a necessary consequence that flows from the nature of the illegality of be deemed to have been reasonably ascertained). The actual base for the computation of
dismissal declared by the Labor Arbiter in that decision.29 A recomputation (or an original legal interest shall, in any case, be on the amount finally adjudged.
computation, if no previous computation has been made) is a part of the law specifically,
Article 279 of the Labor Code and the established jurisprudence on this provision that is 3. When the judgment of the court awarding a sum of money becomes final and
read into the decision. By the nature of an illegal dismissal case, the reliefs continue to executory, the rate of legal interest, whether the case falls under paragraph 1 or
add up until full satisfaction, as expressed under Article 279 of the Labor Code. The paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this
recomputation of the consequences of illegal dismissal upon execution of the decision does interim period being deemed to be by then an equivalent to a forbearance of credit. 33 cralaw virtualaw library

not constitute an alteration or amendment of the final decision being implemented. The Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its
illegal dismissal ruling stands; only the computation of monetary consequences of this Resolution No. 796 dated May 16, 2013, approved the amendment of Section 2 34 of
dismissal is affected, and this is not a violation of the principle of immutability of final Circular No. 905, Series of 1982 and, accordingly, issued Circular No. 799, 35 Series of
judgments. 30
cralaw virtualaw library 2013, effective July 1, 2013, the pertinent portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following
That the amount respondents shall now pay has greatly increased is a consequence that it revisions governing the rate of interest in the absence of stipulation in loan contracts,
cannot avoid as it is the risk that it ran when it continued to seek recourses against the thereby amending Section 2 of Circular No. 905, Series of 1982:
Labor Arbiter's decision. Article 279 provides for the consequences of illegal dismissal in Section 1. The rate of interest for the loan or forbearance of any money, goods or credits
no uncertain terms, qualified only by jurisprudence in its interpretation of when separation and the rate allowed in judgments, in the absence of an express contract as to such rate
pay in lieu of reinstatement is allowed. When that happens, the finality of the illegal of interest, shall be six percent (6%) per annum.
dismissal decision becomes the reckoning point instead of the reinstatement that the law
decrees. In allowing separation pay, the final decision effectively declares that the Section 2. In view of the above, Subsection X305.136 of the Manual of Regulations for
employment relationship ended so that separation pay and backwages are to be computed Banks and Sections 4305Q.1,37 4305S.338 and 4303P.139of the Manual of Regulations for
Non-Bank Financial Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of
interest that would govern the parties, the rate of legal interest for loans or forbearance of
any money, goods or credits and the rate allowed in judgments shall no longer be twelve
percent (12%) per annum - as reflected in the case of Eastern Shipping Lines40 and
Subsection X305.1 of the Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3
and 4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions, before its
amendment by BSP-MB Circular No. 799 - but will now be six percent (6%) per
annum effective July 1, 2013. It should be noted, nonetheless, that the new rate could
only be applied prospectively and not retroactively. Consequently, the twelve percent
(12%) per annum legal interest shall apply only until June 30, 2013. Come July 1, 2013
the new rate of six percent (6%) per annumshall be the prevailing rate of interest when
applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B.
Olaguer v. Bangko Sentral Monetary Board,41 this Court affirmed the authority of the BSP-
MB to set interest rates and to issue and enforce Circulars when it ruled that the BSP-MB
may prescribe the maximum rate or rates of interest for all loans or renewals thereof or
the forbearance of any money, goods or credits, including those for loans of low priority
such as consumer loans, as well as such loans made by pawnshops, finance companies
and similar credit institutions. It even authorizes the BSP-MB to prescribe different
maximum rate or rates for different types of borrowings, including deposits and deposit
substitutes, or loans of financial intermediaries.
Nonetheless, with regard to those judgments that have become final and executory prior rate of interest fixed therein.
to July 1, 2013, said judgments shall not be disturbed and shall continue to be
implemented applying the rate of interest fixed therein.
To recapitulate and for future guidance, the guidelines laid down in the case
legal interest from the time it is judicially demanded. In the absence of stipulation,
the rate of interest shall be 6% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached,
an interest on the amount of damages awarded may be imposed at the discretion
of the court at the rate of 6% per annum. No interest, however, shall be adjudged
on unliquidated claims or damages, except when or until the demand can be
established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time
the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when
such certainty cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the judgment of the court
is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest
shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 6% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.
And, in addition to the above, judgments that have become final and executory prior to
July 1, 2013, shall not be disturbed and shall continue to be implemented applying the
WHEREFORE, premises considered, the Decision dated September 23, 2008 of the Court
of Appeals in CA-G.R. SP No. 98591, and the Resolution dated October 9, 2009
are REVERSED and SET ASIDE. Respondents are Ordered to Pay petitioner: cralawlibrary

of Eastern Shipping Lines42 are accordingly modified to embody BSP-MB Circular

No. 799, as follows: (1) backwages computed from the time petitioner was illegally dismissed on January 24,
1997 up to May 27, 2002, when the Resolution of this Court in G.R. No. 151332 became
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts final and executory;chanr0blesvirtualawlibrary

or quasi-delicts is breached, the contravenor can be held liable for damages. The
provisions under Title XVIII on Damages of the Civil Code govern in determining the (2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one
measure of recoverable damages. month pay per year of service; and

II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that which
may have been stipulated in writing. Furthermore, the interest due shall itself earn
(3) interest of twelve percent (12%) per annum of the total monetary awards, computed
from May 27, 2002 to June 30, 2013 and six percent (6%) per annum from July 1, 2013
until their full satisfaction.
The Labor Arbiter is hereby ORDERED to make another recomputation of the total
monetary benefits awarded and due to petitioner in accordance with this Decision.
SO ORDERED.

Sereno, C.J., Carpio, Velasco, Jr., Leonardo-De Castro, Brion, Bersamin, Del Castillo,
Abad, Villarama, Jr., Perez, Mendoza, Reyes, Perlas-Bernabe, and Leonen, JJ., concur.

THIRD DIVISION

G.R. No. 197861, June 05, 2013

SPOUSES FLORENTINO T. MALLARI AND AUREA V.

MALLARI, Petitioners, v. PRUDENTIAL BANK (NOW BANK OF THE PHILIPPINE
ISLANDS), Respondent.

DECISION
PERALTA, J.:paid, because the time deposit with the same amount under Certificate of Time Deposit
Before us is a Petition for Review on Certiorari under Rule 45, assailing the Decision1
dated June 17, 2010 and the Resolution2 dated July 20, 2011 of the Court of Appeals
(CA) in CA-G.R. CV No. 65993.
The antecedent facts are as follows: cralavvonlinelawlibrary
On April 20, 1992, petitioners filed a complaint for annulment of mortgage, deeds,
injunction, preliminary injunction, temporary restraining order and damages claiming,
among others, that: (1) the P300,000.00 loan obligation should have been considered
No. 284051 had already been assigned to respondent bank; (2) respondent bank still
added the P300,000.00 loan to the P1.7 million loan obligation for purposes of applying
the proceeds of the auction sale; and (3) they realized that there were onerous terms and
conditions imposed by respondent bank when it tried to unilaterally increase the charges
and interest over and above those stipulated. Petitioners asked the court to restrain

respondent bank from proceeding with the scheduled foreclosure sale.

On December 11, 1984, petitioner Florentino T. Mallari (Florentino) obtained from
respondent Prudential Bank-Tarlac Branch (respondent bank), a loan in the amount of
P300,000.00 as evidenced by Promissory Note (PN) No. BD 84-055.3 Under the
promissory note, the loan was subject to an interest rate of 21% per annum (p.a.),
attorney's fees equivalent to 15% of the total amount due but not less than P200.00 and,
in case of default, a penalty and collection charges of 12% p.a. of the total amount due.
The loan had a maturity date of January 10, 1985, but was renewed up to February 17,
1985. Petitioner Florentino executed a Deed of Assignment4 wherein he authorized the
respondent bank to pay his loan with his time deposit with the latter in the amount of
P300,000.00.
On December 22, 1989, petitioners spouses Florentino and Aurea Mallari (petitioners)
obtained again from respondent bank another loan of P1.7 million as evidenced by PN No.
BDS 606-895 with a maturity date of March 22, 1990. They stipulated that the loan will
bear 23% interest p.a., attorney's fees equivalent to 15% p.a. of the total amount due,
but not less than P200.00, and penalty and collection charges of 12% p.a. Petitioners
executed a Deed of Real Estate Mortgage6 in favor of respondent bank covering
petitioners' property under Transfer Certificate of Title (TCT) No. T-215175 of the Register
of Deeds of Tarlac to answer for the said loan.
Petitioners failed to settle their loan obligations with respondent bank, thus, the latter,
through its lawyer, sent a demand letter to the former for them to pay their obligations,
which when computed up to January 31, 1992, amounted to P571,218.54 for PN No.
BD 84-055 and P2,991,294.82 for PN No. BDS 606-89.
On February 25, 1992, respondent bank filed with the Regional Trial Court (RTC) of
Tarlac, a petition for the extrajudicial foreclosure of petitioners' mortgaged property for
the satisfaction of the latter's obligation of P1,700,000.00 secured by such mortgage,
thus, the auction sale was set by the Provincial Sheriff on April 23, 1992.7
On April 10, 1992, respondent bank's Assistant Manager sent petitioners two (2) separate
Statements of Account as of April 23, 1992, i.e., the loan of P300,000.00 was increased On November 15, 1999, the RTC issued its Order14 granting respondent's demurrer to
to P594,043.54, while the P1,700,000.00 loan was already P3,171,836.18. evidence, the dispositive portion of which reads:
Respondent bank filed its Answer with counterclaim arguing that: (1) the interest rates
were clearly provided in the promissory notes, which were used in computing for interest
charges; (2) as early as January 1986, petitioners' time deposit was made to apply for the
payment of interest of their P300,000.00 loan; and (3) the statement of account as of
April 10, 1992 provided for a computation of interest and penalty charges only from May
26, 1989, since the proceeds of petitioners' time deposit was applied to the payment of
interest and penalty charges for the preceding period. Respondent bank also claimed that
petitioners were fully apprised of the bank's terms and conditions; and that the
extrajudicial foreclosure was sought for the satisfaction of the second loan in the amount
of P1.7 million covered by PN No. BDS 606-89 and the real estate mortgage, and not the
P300,000.00 loan covered by another PN No. 84-055.
In an Order8 dated November 10, 1992, the RTC denied the Application for a Writ of
Preliminary Injunction. However, in petitioners' Supplemental Motion for Issuance of a
Restraining Order and/or Preliminary Injunction to enjoin respondent bank and the
Provincial Sheriff from effecting or conducting the auction sale, the RTC reversed itself
and issued the restraining order in its Order9 dated January 14, 1993.
Respondent bank filed its Motion to Lift Restraining Order, which the RTC granted in its
Order10 dated March 9, 1993. Respondent bank then proceeded with the extrajudicial
foreclosure of the mortgaged property. On July 7, 1993, a Certificate of Sale was issued
to respondent bank being the highest bidder in the amount of P3,500,000.00.
Subsequently, respondent bank filed a Motion to Dismiss Complaint11 for failure to
prosecute action for unreasonable length of time to which petitioners filed their
Opposition.12 On November 19, 1998, the RTC issued its Order13 denying respondent
bank's Motion to Dismiss Complaint.
Trial thereafter ensued. Petitioner Florentino was presented as the lone witness for the
plaintiffs. Subsequently, respondent bank filed a Demurrer to Evidence.
cralavvonlinelawlibrary
WHEREFORE, this case is hereby ordered DISMISSED. Considering there is no evidence of WHEREFORE, the instant appeal is hereby DENIED. The Order dated November 15,
bad faith, the Court need not order the plaintiffs to pay damages under the general 1999 issued by the Regional Trial Court (RTC), Branch 64, Tarlac City, in Civil Case No.
concept that there should be no premium on the right to litigate. 7550 is hereby AFFIRMED.16

NO COSTS. The CA found that the time deposit of P300,000.00 was equivalent only to the principal
amount of the loan of P300,000.00 and would not be sufficient to cover the interest,
SO ORDERED.15 nadcralavvonlinelawlibrary penalty, collection charges and attorney's fees agreed upon, thus, in the Statement of
Account dated April 10, 1992, the outstanding balance of petitioners' loan was
The RTC found that as to the P300,000.00 loan, petitioners had assigned petitioner P594,043.54. It also found not persuasive petitioners' claim that the P300,000.00 loan
Florentino's time deposit in the amount of P300,000.00 in favor of respondent bank, which was added to the P1.7 million loan. The CA, likewise, found that the interest rates and
maturity coincided with petitioners' loan maturity. Thus, if the loan was unpaid, which waspenalty charges imposed were not unconscionable and adopted in toto the findings of the
later extended to February 17, 1985, respondent bank should had just applied the time RTC on the matter.
deposit to the loan. However, respondent bank did not, and allowed the loan interest to
accumulate reaching the amount of P594,043.54 as of April 10, 1992, hence, the amount Petitioners filed their Motion for Reconsideration, which the CA denied in a Resolution
of P292,600.00 as penalty charges was unjust and without basis. dated July 20, 2011.

As to the P1.7 million loan which petitioners obtained from respondent bank after the Hence, petitioners filed this petition for review arguing that:
cralavvonline lawlibrary

P300,000.00 loan, it had reached the amount of P3,171,836.18 per Statement of Account
dated April 27, 1993, which was computed based on the 23% interest rate and 12% THE HON. COURT OF APPEALS ERRED IN AFFIRMING THE ORDER OF THE RTC-BRANCH
penalty charge agreed upon by the parties; and that contrary to petitioners' claim, 64, TARLAC CITY, DATED NOVEMBER 15, 1999, DESPITE THE FACT THAT THE SAME IS
respondent bank did not add the P300,000.00 loan to the P1.7 million loan obligation for CONTRARY TO SETTLED JURISPRUDENCE ON THE MATTER.17
purposes of applying the proceeds of the auction sale.
The issue for resolution is whether the 23% p.a. interest rate and the 12% p.a. penalty
The RTC found no legal basis for petitioners' claim that since the total obligation was P1.7 charge on petitioners' P1,700,000.00 loan to which they agreed upon is excessive or
million and respondent bank's bid price was P3.5 million, the latter should return to unconscionable under the circumstances.
petitioners the difference of P1.8 million. It found that since petitioners' obligation had
reached P2,991,294.82 as of January 31, 1992, but the certificate of sale was executed by Parties are free to enter into agreements and stipulate as to the terms and conditions of
the sheriff only on July 7, 1993, after the restraining order was lifted, the stipulated their contract, but such freedom is not absolute. As Article 1306 of the Civil Code
interest and penalty charges from January 31, 1992 to July 7, 1993 added to the loan provides, The contracting parties may establish such stipulations, clauses, terms and
already amounted to P3.5 million as of the auction sale. conditions as they may deem convenient, provided they are not contrary to law, morals,
good customs, public order, or public policy. Hence, if the stipulations in the contract are
The RTC found that the 23% interest rate p.a., which was then the prevailing loan rate of valid, the parties thereto are bound to comply with them, since such contract is the law
interest could not be considered unconscionable, since banks are not hospitable or between the parties. In this case, petitioners and respondent bank agreed upon on a 23%
equitable institutions but are entities formed primarily for profit. It also found that Article p.a. interest rate on the P1.7 million loan. However, petitioners now contend that the
1229 of the Civil Code invoked by petitioners for the reduction of the interest was not interest rate of 23% p.a. imposed by respondent bank is excessive or unconscionable,
applicable, since petitioners had not paid any single centavo of the P1.7 million loan which invoking our ruling in Medel v. Court of Appeals,18Toring v. Spouses Ganzon-
showed they had not complied with any part of the obligation. Olan,19 and Chua v. Timan.20

Petitioners appealed the RTC decision to the CA. A Comment was filed by respondent
bank and petitioners filed their Reply thereto.
On June 17, 2010, the CA issued its assailed Decision, the dispositive portion of which
reads:cralavvonline lawlibrary
We are not persuaded.
In Medel v. Court of Appeals,21 we found the stipulated interest rate of 66% p.a. or a
5.5% per month on a P500,000.00 loan excessive, unconscionable and exorbitant, hence,
contrary to morals if not against the law and declared such stipulation void. In Toring v.
Spouses Ganzon-Olan,22 the stipulated interest rates involved were 3% and 3.81% per
month on a P10 million loan, which we find under the circumstances excessive and
reduced the same to 1% per month. While in Chua v. Timan,23 where the stipulated
interest rates were 7% and 5% a month, which are equivalent to 84% and 60% p.a.,
respectively, we had reduced the same to 1% per month or 12% p.a. We said that we
need not unsettle the principle we had affirmed in a plethora of cases that stipulated
interest rates of 3% per month and higher are excessive, unconscionable and exorbitant,
hence, the stipulation was void for being contrary to morals. 24
In this case, the interest rate agreed upon by the parties was only 23% p.a., or less than of damages caused by the breach. x x x28
2% per month, which are much lower than those interest rates agreed upon by the parties
in the above-mentioned cases. Thus, there is no similarity of factual milieu for the
application of those cases.
The 1% surcharge on the principal loan for every month of default is valid. This surcharge
or penalty stipulated in a loan agreement in case of default partakes of the nature of
liquidated damages under Art. 2227 of the New Civil Code, and is separate and distinct
from interest payment. Also referred to as a penalty clause, it is expressly recognized by
law. It is an accessory undertaking to assume greater liability on the part of an obligor in
case of breach of an obligation. The obligor would then be bound to pay the stipulated
amount of indemnity without the necessity of proof on the existence and on the measure
And in Development Bank of the Philippines v. Family Foods Manufacturing Co., Ltd.,29 we
held that:cralavvonline lawlibrary

We do not consider the interest rate of 23% p.a. agreed upon by petitioners and
respondent bank to be unconscionable.
In Villanueva v. Court of Appeals,25 where the issue raised was whether the 24% p.a.
stipulated interest rate is unreasonable under the circumstances, we answered in the
x x x The enforcement of the penalty can be demanded by the creditor only when the non-
performance is due to the fault or fraud of the debtor. The non-performance gives rise to
the presumption of fault; in order to avoid the payment of the penalty, the debtor has the
burden of proving an excuse the failure of the performance was due to either force
majeure or the acts of the creditor himself.30 nadcralavvonline lawlibrary

negative and held: cralavvonlinelawlibrary

Here, petitioners defaulted in the payment of their loan obligation with respondent bank
In Spouses Zacarias Bacolor and Catherine Bacolor v. Banco Filipino Savings and and their contract provided for the payment of 12% p.a. penalty charge, and since there
Mortgage Bank, Dagupan City Branch, this Court held that the interest rate of 24% per was no showing that petitioners' failure to perform their obligation was due to force
annum on a loan of P244,000.00, agreed upon by the parties, may not be considered as majeure or to respondent bank's acts, petitioners cannot now back out on their obligation
unconscionable and excessive. As such, the Court ruled that the borrowers cannot renege to pay the penalty charge. A contract is the law between the parties and they are bound
on their obligation to comply with what is incumbent upon them under the contract of loan by the stipulations therein.
as the said contract is the law between the parties and they are bound by its stipulations.
WHEREFORE, the petition for review is DENIED. The Decision dated June 17, 2010 and
Also, in Garcia v. Court of Appeals, this Court sustained the agreement of the parties to a the Resolution dated July 20, 2011 of the Court of Appeals are hereby AFFIRMED.
24% per annum interest on an P8,649,250.00 loan finding the same to be reasonable and
clearly evidenced by the amended credit line agreement entered into by the parties as SO ORDERED.
well as two promissory notes executed by the borrower in favor of the lender.
Velasco, Jr., (Chairperson), Abad, Mendoza, and Leonen, JJ., concur.
Based on the above jurisprudence, the Court finds that the 24% per annum interest rate,
provided for in the subject mortgage contracts for a loan of P225,000.00, may not be
considered unconscionable. Moreover, considering that the mortgage agreement was EN BANC
freely entered into by both parties, the same is the law between them and they are bound
to comply with the provisions contained therein.26 [G.R. No. L-11827. July 31, 1961.]

Clearly, jurisprudence establish that the 24% p.a. stipulated interest rate was not
considered unconscionable, thus, the 23% p.a. interest rate imposed on petitioners' loan
in this case can by no means be considered excessive or unconscionable.
We also do not find the stipulated 12% p.a. penalty charge excessive or unconscionable.
In Ruiz v. CA, 27
we held: cralavvonline lawlibrary
FERNANDO A. GAITE, Plaintiff-Appellee, v. ISABELO FONACIER, GEORGE
KRAKOWER, LARAP MINES & SMELTING CO., INC., SEGUNDINA VIVAS,
FRANCISCO DANTE, PACIFICO ESCANDOR and FERNANDO TY, Defendants-
Appellants.
Alejo Mabanag for Plaintiff-Appellee.
 Simplicio U. Tapia Antonio Barredo and Pedro Guevarra, for Defendants- This appeal comes to us directly from the Court of First Instance because the claims
Appellants. involved aggregate more than P200,000.

Defendant-appellant Isabelo Fonacier was the owner and/or holder, either by himself or in
a representative capacity, of 11 iron lode mineral claims, known as the Dawahan Group,
situated in the municipality of Jose Panganiban, province of Camarines Norte.
SYLLABUS
By a "Deed of Assignment" dated September 29, 1952 (Exhibit "3"), Fonacier constituted
and appointed plaintiff-appellee Fernando A. Gaite as his true and lawful attorney-in-fact
to enter into a contract with any individual or juridical person for the exploration and
development of the mining claims aforementioned on a royalty basis of not less than
1. OBLIGATIONS AND CONTRACTS; CONDITIONAL OBLIGATIONS; EFFICACY P0.50 per ton of ore that might be extracted therefrom. On March 19, 1954, Gaite in turn
SUBORDINATED TO THE HAPPENING OF A FUTURE AND UNCERTAIN EVENT. What executed a general assignment (Record on Appeal, pp. 17-19) conveying the development
characterizes a conditional obligation is the fact that its efficacy or obligatory force is and exploitation of said mining claims unto the Larap Iron Mines, a single proprietorship
subordinated to the happening of a future and uncertain event; so that if the suspensive owned solely by and belonging to him, on the same royalty basis provided for in Exhibit
condition does not take place, the parties would stand as if the conditional obligation had "3." Thereafter Gaite embarked upon the development and exploitation of the mining
never existed. claims in question, opening and paving roads within and outside their boundaries, making
other improvements and installing facilities therein for use in the development of the
2. SALES; COMMUTATIVE AND ONEROUS NATURE OF CONTRACT OF SALES; CONTINGENT mines, and in time extracted therefrom what he claimed and estimated to be
CHARACTER OF OBLIGATION MUST CLEARLY APPEAR. A contract of sale is normally approximately 24,000 metric tons of iron ore.
commutative and onerous: not only does each of the parties assume a correlative
obligation, but each party anticipates performance by the other from the very start. For some reason or another, Isabelo Fonacier decided to revoke the authority granted by
Although the obligation of one party can be lawfully subordinated to an uncertain event, him to Gaite to exploit and develop the mining claims in question, and Gaite assented
so that the other understands that he assumes the risk of receiving nothing for what he thereto subject to certain conditions. As a result, a document entitled "Revocation of
gives, it is not in the usual course of business to do so; hence, the contingent character of Power of Attorney and Contract" was executed on December 8, 1954 (Exhibit "A"),
the obligation must clearly appear. wherein Gaite transferred to Fonacier, for the consideration of P20,000, plus 10% of the
royalties that Fonacier would receive from the mining claims, all his rights and interests on
3. ID.; ID.; HOW DOUBT IN THE INTENTION OF PARTIES IS RESOLVED. Sale is all the roads, improvements, and facilities in or outside said claims, the right to use the
essentially onerous, and if there is doubt whether the parties intended a suspensive business name "Larap Iron Mines" and its goodwill, and all the records and documents
condition or a suspensive period for the payment of the agreed price, the doubt shall be relative to the mines. In the same document, Gaite transferred to Fonacier all his rights
settled in favor of the greatest reciprocity of interests, which will obtain if the buyers and interests over the "24,000 tons of iron ore, more or less" that the former had already
obligation is deemed to be actually existing, with only its maturity postponed or deferred. extracted from the mineral claims, in consideration of the sum of P75,000, P10,000, of
which was paid upon the signing of the agreement, and

"b. The balance of SIXTY-FIVE "THOUSAND PESOS (P65,000) will be paid from and out of
the first letter of credit covering the first shipment of iron ores and or the first amount
DECISION derived from the local sale of iron ore made by the Larap Mines & Smelting Co., Inc., its
assigns, administrators, or successors in interests."cralaw virtua1aw library

To secure the payment of the said balance of P65,000.00, Fonacier promised to execute in
favor of Gaite a surety bond; and pursuant to the promise, Fonacier delivered to Gaite a
REYES, J.B.L., J.:surety bond dated December 8, 1954 with himself (Fonacier) as principal and the Larap
Mines and Smelting Co. and its stockholders George Krakower, Segundina Vivas, Pacifico
Escandor, Francisco Dante, and Fernando Ty as sureties (Exhibit "A-1"). Gaite testified,
however, that when this bond was presented to him by Fonacier together with the
"Revocation of Power of Attorney and Contract", Exhibit "A", on December 8, 1954, he issues: chanrob1es virtual 1aw library

refused to sign said Exhibit "A" unless another bond underwritten by a bonding company
was put up by defendants to secure the payment of the P65,000 balance of the price of
the iron ore in the stockpiles in the mining claims. Hence, a second bond, also dated
December 8, 1954 (Exhibit "B"), was executed by the same parties to the first bond
Exhibit "A-I", with the Far Eastern Surety and Insurance Co. as additional surety, but it
provided that the liability of the surety company would attach only when there had been
an actual sale of iron ore by the Larap Mines & Smelting Co. for an amount of not less
than P65,000, and that, furthermore, the liability of said surety company would
automatically expire on December 8, 1955. Both bonds were attached to the "Revocation
(1) Whether or not the obligation of Fonacier and his sureties to pay Gaite P65,000
became due and demandable when the defendants failed to renew the surety bond
underwritten by the Far Eastern Surety and Insurance Co., Inc. (Exhibit "B") which expired
on December 8, 1955, and
(2) Whether the estimated 24,000 tons of iron ore sold by plaintiff Gaite to defendant
Fonacier were actually in existence in the mining claims when these parties executed the
"Revocation of Power of Attorney and Contract", Exhibit "A." cralaw virtua1aw library

of Power of Attorney and Contract", Exhibit "A" and made integral parts thereof.
On the same day that Fonacier revoked the power of attorney he gave to Gaite and the
two executed and signed the "Revocation of Power of Attorney and Contract", Exhibit "A",
Fonacier entered into a "Contract of Mining Operation", ceding, transferring, and
conveying unto the Larap Mines and Smelting Co., Inc. the right to develop, exploit, and
explore the mining claims in question, together with the improvements therein and the
use of the name "Larap Iron Mines" and its goodwill, in consideration of certain royalties.
Fonacier likewise transferred, in the same document, the complete title to the
approximately 24,000 tons of iron ore which he acquired from Gaite, to the Larap Mines &
Smelting Co., in consideration for the signing by the company and its stockholders of the
surety bonds delivered by Fonacier to Gaite (Record on Appeal, pp. 82-94).
On the first question, the lower court held that the obligation of defendants to pay plaintiff
the P65,000 balance of the price of the approximately 24,000 tons of iron ore was one
with a term: i.e., that it would be paid upon the sale of sufficient iron ore by defendants,
such sale to be effected within one year or before December 8, 1955; that the giving of
security was a condition precedent to Gaites giving of credit to defendants; and that as
the latter failed to put up a good and sufficient security in lieu of the Far Eastern Surety
bond (Exhibit "B") which expired on December 8, 1955, the obligation became due and
demandable under Article 1198 of the New Civil Code.
As to the second question, the lower court found that plaintiff Gaite did have
approximately 24,000 tons of the iron ore at the mining claims in question at the time of
the execution of the contract Exhibit "A." cralaw virtua1aw library

Up to December 8, 1955, when the bond Exhibit "B" expired with respect to the Far
Eastern Surety and Insurance Company, no sale of the approximately 24,000 tons of iron Judgment was, accordingly, rendered in favor of plaintiff Gaite ordering defendants to pay
ore had been made by the Larap Mines & Smelting Co., Inc., nor had the 65,000 balance him, jointly and severally, P65,000 with interest at 6% per annum from December 9, 1965
of the price of said ore been paid to Gaite by Fonacier and his sureties. Whereupon, Gaite until full payment, plus costs. From this judgment, defendants jointly appealed to this
demanded from Fonacier and his sureties payment of said amount, on the theory that Court.
they had lost every right to make use of the period given them when their bond, Exhibit
"B", automatically expired (Exhibits "C" to "C-24"). And when Fonacier and his sureties During the pendency of this appeal, several incidental motions were presented for
failed to pay as demanded by Gaite, the latter filed the present complaint against them in resolution: a motion to declare the appellants Larap Mines & Smelting Co., Inc. and
the Court of First Instance of Manila (Civil Case No. 29310) for the payment of the George Krakower in contempt, filed by appellant Fonacier, and two motions to dismiss the
P65,000 balance of the price of the ore, consequential damages, and attorneys fees. appeal as having become academic and a motion for new trial and/or to take judicial
notice of certain documents, filed by appellee Gaite. The motion for contempt is
All the defendants except Francisco Dante set up the uniform defense that the obligation unmeritorious because the main allegation therein that the appellants Larap Mines &
sued upon by Gaite was subject to a condition that the amount of P65,000 would be Smelting Co., Inc. and Krakower had sold the iron ore here in question, which allegedly is
payable out of the first letter of credit covering the first shipment of iron ore and/or the "property in litigation", has not been substantiated; and, even if true, does not make
first amount derived from the local sale of the iron ore by the Larap Mines & Smelting Co., these appellants guilty of contempt, because what is under litigation in this appeal is
Inc.; that up to the time of the filing of the complaint, no sale of the iron ore had been appellee Gaites right to the payment of the balance of the price of the ore, and not the
made, hence the condition had not yet been fulfilled; and that consequently, the obligation iron ore itself. As for the several motions presented by appellee Gaite, it is unnecessary to
was not yet due and demandable. Defendant Fonacier also contended that only 7,573 tons resolve these motions in view of the result that we have reached in this case, which we
of the estimated 24,000 tons of iron ore sold to him by Gaite was actually delivered, and shall hereafter discuss.
counterclaimed for more than P200,000 damages.
The main issues presented by appellants in this appeal are: chanrob1es virtual 1aw library

At the trial of the case, the parties agreed to limit the presentation of evidence to two
(1) that the lower court erred in holding that the obligation of appellant Fonacier to pay
appellee Gaite the P65,000 (balance of the price of the iron ore in question) is one with a
period or term and not one with a suspensive condition, and that the term expired on
December 8, 1955; and
(2) that the lower court erred in not holding that there were only 10,954.5 tons in the
stockpiles of iron ore sold by appellee Gaite to appellant Fonacier.
The first issue involves an interpretation of the following provision in the contract Exhibit
"A" :jgc:chanroble s.com.ph
expectations, emptio spei), it is not in the usual course of business to do so; hence, the
contingent character of the obligation must clearly appear. Nothing is found in the record
to evidence that Gaite desired or assumed to run the risk of losing his rights over the ore
without getting paid for it, or that Fonacier understood that Gaite assumed any such risk.
This is proved by the fact that Gaite insisted on a bond to guarantee payment of the
P65,000, and not only upon a bond by Fonacier, the Larap Mines & Smelting Co., and the
companys stockholders, but also on one by a surety company; and the fact that
appellants did put up such bonds indicates that they admitted the definite existence of
their obligation to pay the balance of P65,000.

3) To subordinate the obligation to pay the remaining P65,000 to the sale or shipment of
"7. That Fernando Gaite or Larap Iron Mines hereby transfers to Isabelo F. Fonacier all his the ore as a condition precedent, would be tantamount to leaving the payment at the
rights and interests over the 24,000 tons of iron ore, more or less, above-referred to discretion of the debtor, for the sale or shipment could not be made unless the appellants
together with all his rights and interests to operate the mine in consideration of the sum of took steps to sell the ore.
SEVENTY-FIVE THOUSAND PESOS (P75,000) which the latter binds to pay as follows: chanrob1es virtual 1aw library

Appellants would thus be able to postpone payment indefinitely. The desirability of

a. TEN THOUSAND PESOS (P10,000) will be paid upon the signing of this agreement. avoiding such a construction of the contract Exhibit "A" needs no stressing.

b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000) will be paid from and out of 4) Assuming that there could be doubt whether by the wording of the contract the parties
the first letter of credit covering first shipment of iron ores and/or the first amount derived intended a suspensive condition or a suspensive period (dies ad quem) for the payment of
from the local sale of iron ore made by the Larap Mines & Smelting Co., Inc., its assigns, the P65,000, the rules of interpretation would incline the scales in favor of "the greatest
administrators, or successors in interest." cralaw virtua1aw library reciprocity of interests", since sale is essentially onerous. The Civil Code of the Philippines,
Article 1378, paragraph 1, in fine, provides: jgc:chanroble s.com.ph

We find the court below to be legally correct in holding that the shipment or local sale of
the iron ore is not a condition precedent (or suspensive) to the payment of the balance of "if the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of
P65,000, but was only a suspensive period or term. What characterizes a conditional interests." cralaw virtua1aw library

obligation is the fact that its efficacy or obligatory force (as distinguished from its
demandability) is subordinated to the happening of a future and uncertain event; so that if and there can be no question that greater reciprocity obtains if the buyers obligation is
the suspensive condition does not take place, the parties would stand as if the conditional deemed to be actually existing, with only its maturity (due date) postponed or deferred,
obligation had never existed. That the parties to the contract Exhibit "A" did not intend than if such obligation were viewed as non-existent or not binding until the ore was sold.
any such state of things to prevail is supported by several circumstances: chanrob1es virtual 1aw library

The only rational view that can be taken is that the sale of the ore to Fonacier was a sale
1) The words of the contract express no contingency in the buyers obligation to pay: "The on credit, and not an aleatory contract where the transferor, Gaite, would assume the risk
balance of Sixty-Five Thousand Pesos (P65,000) will be paid out of the first letter of credit of not being paid at all; and that the previous sale or shipment of the ore was not a
covering the first shipment of iron ore . . ." etc. There is no uncertainty that the payment suspensive condition for the payment of the balance of the agreed price, but was intended
will have to be made sooner or later; what is undetermined is merely the exact date at merely to fix the future date of the payment.
which it will be made. By the very terms of the contract, therefore, the existence of the
obligation to pay is recognized; only its maturity or demandability is deferred. This issue settled, the next point of inquiry is whether appellants, Fonacier and his
sureties, still have the right to insist that Gaite should wait for the sale or shipment of the
2) A contract of sale is normally commutative and onerous: not only does each one of the ore before receiving payment; or, in other words, whether or not they are entitled to take
parties assume a correlative obligation (the seller to deliver and transfer ownership of the full advantage of the period granted them for making the payment.
thing sold and the buyer to pay the price), but each party anticipates performance by the
other from the very start. While in a sale the obligation of one party can be lawfully We agree with the court below that the appellants have forfeited the right to compel Gaite
subordinated to an uncertain event, so that the other understands that he assumes the to wait for the sale of the ore before receiving payment of the balance of P65,000,
risk of receiving nothing for what he gives (as in the case of a sale of hopes or because of their failure to renew the bond of the Far Eastern Surety Company or else
replace it with an equivalent guarantee. The expiration of the bonding companys thereof in cubic meters and then multiplying it by the estimated weight per ton of each
undertaking on December 8, 1955 substantially reduced the security of the vendors rights cubic meter.
as creditor for the unpaid P65,000, a security that Gaite considered essential and upon
which he had insisted when he executed the deed of sale of the ore to Fonacier (Exhibit The sale between the parties is a sale of a specific mass of iron ore because no provision
"A"). The case squarely comes under paragraphs 2 and 3 of Article 1198 of the Civil Code was made in their contract for the measuring or weighing of the ore sold in order to
of the Philippines:
chanrob1es virtual 1aw library complete or perfect the sale, nor was the price of P75,000 agreed upon by the parties
based upon any such measurement (see Art. 1480, second par., New Civil Code). The
(1) . . . subject-matter of the sale is, therefore, a determinate object, the mass, and not the
actual number of units or tons contained therein, so that all that was required of the seller
(2) When he does not furnish to the creditor the guaranties or securities which he has Gaite was to deliver in good faith to his buyer all of the ore found in the mass,
promised. notwithstanding that the quantity delivered is less than the amount estimated by them
(Mobile Machinery & Supply Co., Inc. v. York Oilfield Salvage Co., Inc. 171 So. 872,
(3) When by his own acts he has impaired said guaranties or securities after their applying art. 2459 of the Luisiana Civil Code). There is no charge in this case that Gaite
establishment, and when through fortuitous event they disappear, unless he immediately did not deliver to appellants all the ore found in the stockpiles in the mining claims in
gives new ones equally satisfactory." cralaw virtua1aw library question; Gaite had, therefore, complied with his promise to deliver, and appellants in turn
are bound to pay the lump price.
Appellants failure to renew or extend the surety companys bond upon its expiration
plainly impaired the securities given to the creditor (appellee Gaite), unless immediately But assuming that plaintiff Gaite undertook to sell and appellants undertook to buy, not a
renewed or replaced. definite mass, but approximately 24,000 tons of ore, so that any substantial difference in
this quantity promised and the quantity delivered would entitle the buyers to recover
There is no merit in appellants argument that Gaites acceptance of the surety companys damages for the short-delivery, was there really a short- delivery in this case?
bond with full knowledge that on its face it would automatically expire within one year was
a waiver of its renewal after the expiration date. No such waiver could have been We think not. As already stated, neither of the parties had actually measured or weighed
intended, for Gaite stood to lose and had nothing to gain thereby; and if there was any, it the whole mass of ore cubic meter by cubic meter, or ton by ton. Both parties predicate
could be rationally explained only if the appellants had agreed to sell the ore and pay their respective claims only upon an estimated number of cubic meters of ore multiplied
Gaite before the surety companys bond expired on December 8, 1955. But in the latter by the average tonnage factor per cubic meter.
case the defendants- appellants obligation to pay became absolute after one year from
the transfer of the ore to Fonacier by virtue of the deed Exhibit "A." Now, appellee Gaite asserts that there was a total of 7,375 cubic meters in the stockpiles
cralaw virtua1aw library

of ore that he sold to Fonacier, while appellants contend that by actual measurement, their
All the alternatives, therefore, lead to the same result: that Gaite acted within his rights in witness Cipriano Manlagit found the total volume of ore in the stockpiles to be only 6,609
demanding payment and instituting this action one year from and after the contract cubic meters. As to the average weight in tons per cubic meter, the parties are again in
(Exhibit "A") was executed, either because the appellant debtors had impaired the disagreement, with appellants claiming the correct tonnage factor to be 2.18 tons to a
securities originally given and thereby forfeited any further time within which to pay; or cubic meter, while appellee Gaite claims that the correct tonnage factor is about 3.7.
because the term of payment was originally of no more than one year, and the balance of
P65,000 became due and payable thereafter. In the face of the conflict of evidence, we take as the most reliable estimate of the
tonnage factor of iron ore in this case to be that made by Leopoldo F. Abad, chief of the
Coming now to the second issue in this appeal, which is whether there were really 24,000 Mines and Metallurgical Division of the Bureau of Mines, a government pensionado to the
tons of iron ore in the stockpiles sold by appellee Gaite to appellant Fonacier, and whether, States and a mining engineering graduate of the Universities of Nevada and California,
if there had been a short-delivery as claimed by appellants, they are entitled to the with almost 22 years of experience in the Bureau of Mines. This witness placed the
payment of damages, we must, at the outset, stress two things: first, that this is a case of tonnage factor of every cubic meter of iron ore at between 3 metric tons as minimum to 5
a sale of a specific mass of fungible goods for a single price or a lump sum, the quantity of metric tons as maximum. This estimate, in turn, closely corresponds to the average
"24,000 tons of iron ore, more or less", stated in the contract Exhibit "A", being a mere tonnage factor of 3.3 adopted in his corrected report (Exhibits "FF" and "FF- 1") by
estimate by the parties of the total tonnage weight of the mass; and second, that the engineer Nemesio Gamatero, who was sent by the Bureau of Mines to the mining claims
evidence shows that neither of the parties had actually measured or weighed the mass, so involved at the request of appellant Krakower, precisely to make an official estimate of the
that they both tried to arrive at the total quantity by making an estimate of the volume amount of iron ore in Gaites stockpiles after the dispute arose.
Even granting, then, that the estimate of 6,609 cubic meters of ore in the stockpiles made
by appellants witness Cipriano Manlagit is correct, if we multiply it by the average
tonnage factor of 3.3 tons to a cubic meter, the product is 21,809.7 tons, which is not
very far from the estimate of 24,000 tons made by appellee Gaite, considering that actual
weighing of each unit of the mass was practically impossible, so that a reasonable
percentage of error should be allowed anyone making an estimate of the exact quantity in
tons found in the mass. It must not be forgotten that the contract Exhibit "A" expressly
stated the amount to be 24,000 tons, more or less. (cf. Pine River Logging & Improvement
Co. v. U. S., 186 U.S. 279, 46, L. Ed. 1164).

There was, consequently, no short-delivery in this case as would entitle appellants to the
payment of damages, nor could Gaite have been guilty of any fraud in making any
misrepresentation to appellants as to the total quantity of ore in the stockpiles of the
mining claims in question, as charged by appellants since Gaites estimate appears to be
substantially correct.

WHEREFORE, finding no error in the decision appealed from, we hereby affirm the same,
with costs against appellants. THIRDDIVISION

Bengzon, C.J., Padilla, Labrador, Concepcion, Barrera, Paredes, Dizon, De Leon and [G.R.No.131784.September16,1999.]
Natividad, JJ., concur.
FELIXL.GONZALES,Petitioner,v.THEHEIRSOFTHOMASandPAULACRUZ,herein
representedbyELENAC.TALENS,Respondents.

DECISION

PANGANIBAN,J.:

If a stipulation in a contract admits of several meanings, it shall be understood as bearing

that import most adequate to render it effectual. An obligation cannot be enforced unless
the plaintiff has fulfilled the condition upon which it is premised. Hence, an obligation to
purchase cannot be implemented unless and until the sellers have shown their title to the
specific portion of the property being sold.
chanroble svirtuallawlibrary:red

The Case
Before us is a Petition for Review on Certiorari assailing the August 13, 1997 Decision 1 of
the Court of Appeals 2 in CA GR-CV No. 303754, which disposed as follows: 1. The terms of this Contract is for a period of one year upon the signing thereof. After
jgc:chanrobles.com .ph

the period of this Contract, the LESSEE shall purchase the property on the agreeable price
"WHEREFORE, the decision of the trial court dated November 16, 1990 is hereby of One Million Pesos (P1,000,000.00) payable within Two (2) Years period with an interest
REVERSED. The appellee FELIX GONZALES is hereby ordered to surrender possession of of 12% per annum subject to the devalued amount of the Philippine Peso, according to the
the property covered by the Contract of Lease/Purchase to the appellants, Heirs of following schedule of payment: chanrob1es virtual 1aw library

Thomas and Paula Cruz, and to pay to the appellants the following amounts: chanrob1es virtual 1aw library

Upon the execution of the Deed of Sale 50% and thereafter 25% every six (6) months
1. P15,000.00 per annum as rentals counted from December 1, 1984 until the appellants thereafter, payable within the first ten (10) days of the beginning of each period of six (6)
shall have recovered possession of the property subject of the Contract of months.
Lease/Purchase;
2. The LESSEE shall pay by way of annual rental an amount equivalent to Two Thousand
2. P15,000.00 as attorneys fees; and Five Hundred (P2,500.00) Pesos per hectare, upon the signing of this contract on Dec. 1,
1983.
3. Costs of suit." 3

On the other hand, the trial court 4 Decision, 5 which was reversed by the CA, ruled as x x x
follows:
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"WHEREFORE, premises considered, this Court hereby renders judgment in favor of the
defendant, Felix Gonzales, and against the plaintiffs, as follows:
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9. The LESSORS hereby commit themselves and shall undertake to obtain a separate and
distinct T.C.T. over the herein leased portion to the LESSEE within a reasonable period of
(1) Ordering the dismissal of the case; time which shall not in any case exceed four (4) years, after which a new Contract shall be
executed by the herein parties which shall be the same in all respects with this Contract of
(2) Sentencing the plaintiffs, jointly and severally, the sum of P20,000.00 as moral Lease/Purchase insofar as the terms and conditions are concerned.
damages and the other sum of P10,000.00 as and for attorneys fees; and

(3) To pay the costs." 6 x x x

The Facts
(Exhibits A, A-1; pp. 157-158. Records)

"The defendant Gonzales paid the P2,500.00 per hectare or P15,000.00 annual rental on
We hereby reproduce, unedited, the Court of Appeals summary of the facts of this case as the half-portion of the property covered by Transfer Certificate of Title No. 12111 in
follows:
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accordance with the second provision of the Contract of Lease/Purchase (p. 12, TSN,
September 14, 1989) and thereafter took possession of the property, installing thereon
"On December 1, 1983, Paula Ao Cruz together with the plaintiffs heirs of Thomas and the defendant Jesus Sambrano as his caretaker (pp. 16-17, 27, TSN, December 12,
Paula Cruz, namely Ricardo A. Cruz, Carmelita M. Cruz, Salome A. Cruz, Irenea C. 1989). The defendant Gonzales did not, however, exercise his option to purchase the
Victoria, Leticia C. Salvador and Elena C. Talens, entered into a Contract of property immediately after the expiration of the one-year lease on November 30, 1984
Lease/Purchase with the defendant, Felix L. Gonzales, the sole proprietor and manager of (pp. 19-20, TSN, September 14, 1989). He remained in possession of the property
Felgon Farms, of a half-portion of a parcel of land containing an area of 12 hectares, more without paying the purchase price provided for in the Contract of Lease/Purchase (Ibid.)
or less, and an accretion of 2 hectares, more or less, situated in Rodriguez Town, Province and without paying any further rentals thereon (p. 36, TSN, November 7, 1989). chanrobles virtualawlibrary chanroble s.com :chanrobles.com .ph

of Rizal and covered by Transfer Certificate of Title No. 12111 (Exhibit A, p. 157,
Records). The contract of Lease/Purchase contains the following provisions: "A letter was sent by one of the plaintiffs-heirs Ricardo Cruz to the defendant Gonzales
chanrob1es virtual 1aw library
informing him of the lessors decision to rescind the Contract of Lease/Purchase due to a (3) Whether or not plaintiffs can terminate the Contract of Lease. (p. 4, Decision; p. 262,
breach thereof committed by the defendant (Exhibit C; p. 162, Records). The letter also Records)
served as a demand on the defendant to vacate the premises within 10 days from receipt
of said letter (Ibid.). "After the termination of the pre-trial conference, the trial court proceeded to hear the
case on the merits and arrived at its appealed decision based on the following findings and
"The defendant Gonzales refused to vacate the property and continued possession thereof conclusions: chanrob1es virtual 1aw library

(p. 2, Record). The matter was therefore brought before the barangay captain of San
Isidro, but owing to the defendants refusal to appear before the barangay, a certification Paragraph 9 of the contract clearly indicates that the lessors-plaintiffs shall obtain a
allowing the case to be brought to Court was issued on March 18, 1987 (Exhibit E; p. 165, Transfer Certificate of Title in the name of the lessee within 4 years before a new contract
Records). is to be entered into under the same terms and conditions as the original Contract of
Lease/Purchase. Thus, before a deed of Sale can be entered into between the plaintiffs
"The lessor, Paula Ao Cruz died the following day, March 19, 1987 (p. 9, TSN, September and the defendant, the plaintiffs have to obtain the Transfer Certificate of Title in favor of
14, 1989). the defendant. Article 1181 of the New Civil Code states that: In conditional obligations,
the acquisition of rights, as well as the extinguishment or loss of those already acquired,
"A final demand letter to vacate the premises was sent by the remaining lessors who are shall depend upon the happening of the event which constitutes the condition. When the
also the heirs of the deceased lessor Paula Ao Cruz, through their counsel on August 24, obligation assumed by a party to a contract is expressly subjected to a condition, the
1987 which the defendant Gonzales received but did not heed (Exhibits D and D-1; pp. obligation cannot be enforced against him unless the condition is complied with (Wise &
163-164, Records). Co. v. Kelly, 37 Phil. 695; PNB v. Philippine Trust Co., 68 Phil. 48). chanroble s virtualawlibrary chanrobles.com:chanrobles.com.ph

"The property subject of the Contract of Lease/Purchase is currently the subject of an
Extra-Judicial Partition (Exhibits G and G-1; pp. 168-169, Records). Title to the property
remains in the name of the plaintiffs predecessors-in-interest, Bernardina Calixto and
Severo Cruz (Exhibit B; p. 160, Records).
"Alleging breach of the provisions of the Contract of Lease/Purchase, the plaintiffs filed a either case. He may seek rescission, even after he has chosen fulfillment, if the latter
complaint for recovery of possession of the property subject of the contract with
damages, both moral and compensatory and attorneys fees and litigation expenses (p. 3, the plaintiff is the party who did not perform, he is not entitled to insist upon the
Records).
"Alleging breach of paragraph nine of the Contract of Lease/Purchase, and payment of
only P50,000.00 of the P500,000.00 agreed down payment on the purchase price of
P1,000,000.00, the defendant Gonzales filed his answer on November 23, 1987 praying
for a dismissal of the complaint filed against him and an award of moral, exemplary and
actual damages, as well as litigation expenses (pp. 19-22, Records).
"The defendant Sambrano was, upon motion, declared in default for failure to file an
answer despite valid service of summons (p. 30, Records).
"The parties limited the issues to be resolved to: chanrob1es virtual 1aw library
The failure of the plaintiffs to secure the Transfer Certificate of Title, as provided for in the
contract, does not entitle them to rescind the contract[.] Article 1191 of the New Civil
Code states that: The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him. The injured party
may choose between the fulfillment of the obligation, with the payment of damages in
should become impossible . . . The power to rescind is given to the injured party. Where
performance of the contract by the defendant or recover damages by reason of his own
breach (Mateos v. Lopez, 6 Phil. 206; Borque v. Yu Chipco, 14 Phil. 95). An action for
specific performance of a contract is an equitable proceeding, and he who seeks to enforce
it must himself be fair and reasonable, and do equity (Seva v. Berwin, 48 Phil. 581). In
this case, plaintiffs failed to comply with the conditions precedent after 2-1/2 years from
the execution of the contract so as to entitle them to rescind the contract. Although the
contract stated that the same be done within 4 years from execution, still, the defendant
has to be assured that the land subject of the case will be transferred in his name without
any encumbrances, as the Extra-Judicial Partition dated July 17, 1989 was being
processed, and continues to be in process to this date. The failure to secure the Transfer
Certificate of Title in favor of the defendant entitles not the plaintiffs but, rather, the
defendant to either rescind or to ask for specific performances.

(1) Whether or not paragraph 9 of the contract is a condition precedent before the Are the plaintiffs entitled to terminate the Contract of Lease? Article 1670 of the New Civil
defendant is to pay the down payment; Code states that: chanrob1es virtual 1aw library

(2) Whether or not plaintiffs can rescind the Contract of Lease/Purchase; and If at the end of the contract the lessee should continue enjoying the thing leased for
fifteen days with the acquies[c]ence of the lessor and unless a notice to the contrary by
either party has previously been given, it is understood that there is an implied new lease, II
not for the period of the original contract, but for the time established in Articles 1682 and
1687. The other terms of the original contract shall be revived.

Article 1682 of the New Civil Code states that: chanrob1es virtual 1aw library
THE TRIAL COURT EQUALLY ERRED IN NOT GRANTING THE RELIEFS PLEADED AND
PRAYED FOR BY PLAINTIFFS-APPELLANTS IN THEIR COMPLAINT. (p. 42, Rollo)
The lease of a piece of rural land, when its duration has not been fixed, is understood to
have been made for all the time necessary for the gathering of the fruits which the whole "The case was submitted for decision without the appellees brief as per the Courts
estate leased may yield in one year, or which it may yield once, although two or more resolution dated July 8, 1992 (p. 71, Rollo)." chanrobles virtual lawlibrary

years may have to elapse for the purpose.

The plaintiffs filed the complaint on October 12, 1987 after making an extra-judicial Ruling of the Court of Appeals
demand on July 2, 1986. The contract was entered into on December 1, 1983. The
demand was thus made more than a year and a half from the expiry date of the original
lease considering that there was no payment made for the second year of the lease. If one
has to consider the fact that the defendant was given the option to purchase the property The Court of Appeals reversed the trial court in this wise: jgc:chanroble s.com.ph

after two years, then, the lease would presumably run for at least two years. If that is so,
then, the demand was made seven months after the expiration of the two-year lease. Still, "The trial court, in its decision interpreted the ninth provision of the Contract of
this demand by the plaintiffs will come under the implied new lease of Articles 1682 and Lease/Purchase to mean that before the appellee exercises his option to purchase the
1670 so that the plaintiffs are not entitled to terminate the Contract of Lease. property by paying the 50% plus interest on the P1,000,000.00 purchase price, the
appellants must first transfer the title to the property in the appellees name. The Court
In sum, the plaintiffs cannot terminate the Contract of Lease due to their failure to notify finds this interpretation of the provision strained if not altogether absurd. The transfer of
the defendant in due time of their intention to that effect. Nor can they rescind the title to the property in the appellees name cannot be interpreted as a condition precedent
Contract of Purchase in view of the fact that there is a condition precedent which the to the payment of the agreed purchase price because such interpretation not only runs
plaintiffs have not fulfilled. It is the defendant now who has the option to either rescind or counter [to] the explicit provisions of the contract but also is contrary to the normal
demand the performance of the contract. Moreover, according to Article 1654 of the New course of things anent the sale of real properties. The terms of the contract [are] explicit
Civil Code, the lessor is obliged to deliver the thing which is the object of the contract in and require no interpretation. Upon the expiration of the lease, the lessee shall purchase
such condition as to render it fit for the use intended. Considering that the lessors- the property. Besides, the normal course of things anent the sale of real properties
plaintiffs have not delivered the property in whole over the protest of the defendant, the dictates that there must first be payment of the agreed purchase price before transfer of
latter suffered damages therefor. (p. 4-6, Decision; pp. 262-264, Records) title to the vendees name can be made.

"Their complaint thus dismissed, the plaintiffs, now appellants, assign the trial court of "This was precisely what the appellants and Paula Ao Cruz had in mind when they had
having committed the following errors: chanrob1es virtual 1aw library
the ninth provision incorporated in the Contract of Lease/Purchase. They had asked for a
period of 4 years from the time they receive the downpayment of 50% within which to
have [the] title to the property transferred in the name of the appellee. The reason for this
I four (4) year period is [that] title to the property still remains in the name of the original
owners, the predecessors-in-interest of the herein appellants and [transferring] the title to
their names and eventually to the lessee-purchaser, appellee herein, would take quite
some time.
THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT PLAINTIFFS-APPELLANTS COULD
NOT VALIDLY RESCIND AND TERMINATE THE LEASE/PURCHASE CONTRACT (EXHIBIT A) "The appellee wanted to have the title to the property transferred in his name first before
AND THEREAFTER TO TAKE POSSESSION OF THE LAND IN QUESTION AND EJECT he exercises his option to purchase allegedly in accordance with the ninth provision of the
THEREFROM DEFENDANTS-APPELLEES. contract. But the ninth provision does not give him this right. A reading of the contract in
its entirety shows that the 4 year period asked for by the appellants within which to have
title to the property transferred in the appellees name will only start to run when the
appellee exercises his option to purchase. Since the appellee never exercised his option to hand, requires herein respondents to obtain a separate and distinct Transfer Certificate of
purchase, then appellee is not entitled to have the title to the property transferred in his Title (TCT) over the property, viz.: jgc:chanrobles.com .ph

name." cralaw virtua1aw library

Attributing reversible errors to the appellate court, petitioner elevated the case to this
Court. 7
"9. The LESSORS hereby commit themselves and shall undertake to obtain a separate and
distinct T.C.T. over the lease portion to the LESSEE within a reasonable period of time
which shall not in any case exceed four (4) years, after which a new Contract shall be
executed by the herein parties which shall be the same in all respects with this Contract of
Lease/Purchase insofar as the terms and conditions are concerned." cralaw virtua1aw library

The Issues
Alleging that petitioner has not purchased the property after the lapse of one year,
respondents seek to rescind the Contract and to recover the property. Petitioner, on the
other hand, argues that he could not be compelled to purchase the property, because
In his Memorandum, 8 petitioner submits the "following main issues" : respondents have not complied with paragraph nine, which obligates them to obtain a
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separate and distinct title in their names. He contends that paragraph nine was a condition
"I. Whether or not the Court of Appeals has gravely erred and committed grave abuse of precedent to the purchase of the property. chanroblesvirtualawlibrary

discretion in the interpretation of [the] law between the parties.

To be sure, this paragraph and the entire agreement, for that matter is not a model
"II. Whether or not the Court of Appeals committed serious mistakes in the finding of facts of how a contract should be worded. It is an invitation to a litigation, as in fact the parties
which resulted [in] departing from the usual course of judicial proceedings." had to go all to way up to this Court to plead for a resolution of their conflict which is
cralaw virtua1aw library

rooted in their failure to express themselves clearly. Small wonder, even the two lower
For these issues to be resolved, petitioner asks this Court to answer the following courts gave contradictory understanding of this provision, thereby necessitating the
questions: jgc:chanrobles.com .ph
intervention of the highest court of the land.

"1. Is there a conflict between the statement in paragraph 1 of the Lease/Purchase Both the trial court and the Court of Appeals (CA) interpreted this provision to mean that
Contract and that [in] paragraph No. 9 thereof? the respondents had obliged themselves to obtain a TCT in the name of petitioner-lessee.
The trial court held that this obligation was a condition precedent to petitioners purchase
"2. Is paragraph 9 of the Lease/Purchase Contract a condition precedent before petitioner of the property. Since respondents had not performed their obligation, they could not
could exercise his option to buy the property? compel petitioner to buy the parcel of land. The CA took the opposite view, holding that
the property should be purchased first before respondents may be obliged to obtain a TCT
"3. Can plaintiff rescind or terminate the Contract of Lease after the one-year period?" in the name of petitioner-lessee-buyer.

In fine, the resolution of this case depends upon the proper interpretation of paragraph As earlier noted, petitioner disagrees with the interpretation of the two courts and
nine of the Contract. maintains that respondents were obligated to procure a TCT in their names before he
could be obliged to purchase the property in question.

The Courts Ruling Basic is the rule in the interpretation of contracts that if some stipulation therein should
admit of several meanings, it shall be understood as bearing that import most adequate to
render it effectual. 9 Considering the antecedents of the ownership of the disputed lot, it
appears that petitioners interpretation renders clause nine most effectual.
The Petition is meritorious.
The record shows that at the time the contract was executed, the land in question was still
Main Issue: Interpretation of Paragraph Nine registered in the name of Bernardina Calixto and Severo Cruz, respondents predecessors-
in-interest. There is no showing whether respondents were the only heirs of Severo Cruz
In its first paragraph, the disputed agreement provides that petitioner shall lease the or whether the other half of the land in the name of Bernardina Calixto was adjudicated to
property for one year, after which he "shall purchase" it. Paragraph nine, on the other them by any means. In fact, they admit that extrajudicial proceedings were still ongoing.
Hence, when the Contract of Lease/Purchase was executed, there was no assurance that Read in its entirety, however, paragraph nine does not say that the TCT should be obtained
the respondents were indeed the owners of the specific portion of the lot that petitioner in the name of the lessee. In fact, paragraph nine requires respondents to obtain a "TCT
wanted to buy, and if so, in what concept and to what extent. over the herein leased portion to the LESSEE," thereby showing that the crucial phrase "to
the LESSEE" adverts to "the leased portion" and not to the name which should appear in
Thus, the clear intent of the ninth paragraph was for respondents to obtain a separate and the new TCT.
distinct TCT in their names. This was necessary to enable them to show their ownership of
the stipulated portion of the land and their concomitant right to dispose of it. Absent any Furthermore, the CA interpretation ignores the other part of paragraph nine, stating that
title in their names, they could not have sold the disputed parcel of land. after a separate TCT had been obtained, "a new contract shall be executed by the herein
parties which shall be the same in all respects with this Contract of Lease/Purchase insofar
It is a well-settled principle in law that no one can give what one does not have nemo as the terms and conditions are concerned." cralaw virtua1aw library

dat quod non habet. Accordingly, one can sell only what one owns or is authorized to sell,
and the buyer can acquire no more than what the seller can transfer legally. 10 If, as the CA held, petitioner should purchase the property first before the title can be
transferred to his name, why should there be a waiting period of four years before the
Because the property remained registered in the names of their predecessors-in-interest, parties can execute the new contract evidencing the sale? Why should the petitioner still
private respondents could validly sell only their undivided interest in the estate of Severo be required to pay rentals after it purchases and pays for the property? The Contract could
Cruz, the extent of which was however not shown in the records. There being no partition not have envisioned this absurd scenario.
of the estate thus far, there was no guarantee as to how much and which portion would be
adjudicated to respondents. Clearly, the appellate courts literal interpretation of the first portion of paragraph nine
renders the latter portion thereof ineffectual. In other words, that portion can only mean
In a contract of sale, the title to the property passes to the vendee upon the delivery of that the respondents should first obtain a TCT in their names, after which petitioner is
the thing sold. 11 In this case, the respondent could not deliver ownership or title to a given time to purchase and pay for the property.
specific portion of the yet undivided property. True, they could have intended to sell their
hereditary interest, but in the context of the Contract of Lease/Purchase, the parties under Respondents insist that "the obligation of petitioner to buy the disputed land immediately
paragraph nine wanted the specific portion of the land to be segregated, identified and after the termination of the one year lease period is explicit." 12 However, it is more
specifically titled. Hence, by the said Contract, the respondents as sellers were given a reasonable to state that the first paragraph was effectively modified by the ninth. To
maximum of four years within which to acquire a separate TCT in their names, preparatory repeat, petitioner can be compelled to perform his obligation under the first paragraph,
to the execution of the deed of sale and the payment of the agreed price in the manner only after respondents have complied with the ninth. Unless and until respondents have
described in paragraph nine. chanrobles.com .ph : virtual law library done so, the first paragraph cannot be enforced against petitioner.

This interpretation is bolstered by the P50,000 petitioner advanced to respondents in In sum, we hold that the ninth provision was intended to ensure that respondents would
order to help them expedite the transfer of the TCT to their names. Ineluctably, the have a valid title over the specific portion they were selling to petitioner. Only after the
intention of the parties was to have the title transferred first to respondents names as a title is assured may the obligation to buy the land and to pay the sums stated in the
condition for the completion of the purchase. Contract be enforced within the period stipulated. Verily, the petitioners obligation to
purchase has not yet ripened and cannot be enforced until and unless respondents can
In holding that clause nine was not a condition precedent to the purchase of the property, prove their title to the property subject of the Contract.
the CA relied on a literal interpretation to the effect that the TCT should be obtained in the
name of the petitioner-vendee. It reasoned that the title could be transferred to the name Secondary Issues: chanrob1es virtual 1aw library

of the buyer only after the completion of the purchase. Thus, petitioner should first
purchase the property before respondents could be obliged to transfer the TCT to his Ninth Clause Was a Condition Precedent
name.
Because the ninth clause required respondents to obtain a separate and distinct TCT in
We disagree. The literal interpretation not only ignores the factual backdrop of the case; it their names and not in the name of petitioner, it logically follows that such undertaking
also utilizes a faulty parsing of paragraph nine, which should purportedly read as follows: was a condition precedent to the latters obligation to purchase and pay for the land. Put
"The lessors . . . shall undertake to obtain a separate and distinct TCT . . . to the LESSEE differently, petitioners obligation to purchase the land is a conditional one and is governed
within a reasonable period of time which shall not in any case exceed four (4) years . . ." by Article 1181 of the Civil Code. 13

Condition has been defined as "every future and uncertain event upon which an obligation
or provision is made to depend. It is a future and uncertain event upon which the
acquisition or resolution of rights is made to depend by those who execute the juridical
act." 14 Without it, the sale of the property under the Contract cannot be perfected, and
petitioner cannot be obliged to purchase the property. "When the consent of a party to a
contract is given subject to the fulfillment of a suspensive condition, the contract is not
perfected unless that condition is first complied with." 15
the transfer of the TCT to their names, which is a condition precedent to petitioners
obligation. This Court has held that "there can be no rescission (or more properly,
resolution) of an obligation as yet non-existent, because the suspensive condition has not
happened." 18
Since the reversal of the CA Decision is inevitable, the trial courts judgment should be
reinstated. However, we find no sufficient factual or legal justifications for the awards of
moral damages and attorneys fees.

The Court has held that" [w]hen the obligation assumed by a party to a contract is WHEREFORE, the petition is GRANTED and the appealed Decision is REVERSED and SET
expressly subjected to a condition, the obligation cannot be enforced against him unless ASIDE. The Decision of the trial court is REINSTATED, but the award of moral damages
the condition is complied with." 16 Furthermore," [t]he obligatory force of a conditional and attorneys fees is DELETED for lack of basis. No costs.
obligation is subordinated to the happening of a future and uncertain event, so that if that
event does not take place, the parties would stand as if the conditional obligation had SO ORDERED.
never existed." 17
Melo, Purisima and Gonzaga-Reyes, JJ., concur.
In this case, the obligation of the petitioner to buy the land cannot be enforced unless
respondents comply with the suspensive condition that they acquire first a separate and Vitug, J., took no part; did not participate in deliberations (in PHILJA on official business).
distinct TCT in their names. The suspensive condition not having been fulfilled, then the
obligation of the petitioner to purchase the land has not arisen.
chanroble s law library : red

Respondents Cannot Rescind the Contract

In the same vein, respondents cannot rescind the contract, because they have not caused