Republic of the Philippines directors, Ma. Vivian Yuchengco, Adolfo M. Duarte, Myron C.
SUPREME COURT Papa, Norberto C. Nazareno, George Uy-Tioco, Antonio A, Lopa,
Manila
THIRD DIVISION
G.R. No. 138814 April 16, 2009
MAKATI STOCK EXCHANGE, INC., MA. VIVIAN YUCHENGCO,
ADOLFO M. DUARTE, MYRON C. PAPA, NORBERTO C.
NAZARENO, GEORGE UY-TIOCO, ANTONIO A. LOPA,
RAMON B. ARNAIZ, LUIS J.L. VIRATA, and ANTONIO
GARCIA, JR. Petitioners,
vs.
MIGUEL V. CAMPOS, substituted by JULIA ORTIGAS VDA.
DE CAMPOS,1 Respondent.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari under Rule 45 seeking
the reversal of the Decision2 dated 11 February 1997 and
Resolution dated 18 May 1999 of the Court of Appeals in CA-G.R.
SP No. 38455.
The facts of the case are as follows:
SEC Case No. 02-94-4678 was instituted on 10 February 1994 by
respondent Miguel V. Campos, who filed with the Securities,
Investigation and Clearing Department (SICD) of the Securities
and Exchange Commission (SEC), a Petition against herein
petitioners Makati Stock Exchange, Inc. (MKSE) and MKSE
Ramon B. Arnaiz, Luis J.L. Virata, and Antonio Garcia, Jr.
Respondent, in said Petition, sought: (1) the nullification of the
Resolution dated 3 June 1993 of the MKSE Board of Directors,
which allegedly deprived him of his right to participate equally in
the allocation of Initial Public Offerings (IPO) of corporations
registered with MKSE; (2) the delivery of the IPO shares he was
allegedly deprived of, for which he would pay IPO prices; and (3)
the payment of P2 million as moral damages, P1 million as
exemplary damages, and P500,000.00 as attorneys fees and
litigation expenses.
On 14 February 1994, the SICD issued an Order granting
respondents prayer for the issuance of a Temporary Restraining
Order to enjoin petitioners from implementing or enforcing the 3
June 1993 Resolution of the MKSE Board of Directors.
The SICD subsequently issued another Order on 10 March 1994
granting respondents application for a Writ of Preliminary
Injunction, to continuously enjoin, during the pendency of SEC
Case No. 02-94-4678, the implementation or enforcement of the
MKSE Board Resolution in question. Petitioners assailed this
SICD Order dated 10 March 1994 in a Petition for Certiorari filed
with the SEC en banc, docketed as SEC-EB No. 393.
On 11 March 1994, petitioners filed a Motion to Dismiss
respondents Petition in SEC Case No. 02-94-4678, based on the
following grounds: (1) the Petition became moot due to the
cancellation of the license of MKSE; (2) the SICD had no
jurisdiction over the Petition; and (3) the Petition failed to state a
cause of action.
The SICD denied petitioners Motion to Dismiss in an Order dated
4 May 1994. Petitioners again challenged the 4 May 1994 Order
of SICD before the SEC en banc through another Petition for
Certiorari, docketed as SEC-EB No. 403.
In an Order dated 31 May 1995 in SEC-EB No. 393, the SEC en
banc nullified the 10 March 1994 Order of SICD in SEC Case No.
02-94-4678 granting a Writ of Preliminary Injunction in favor of
respondent. Likewise, in an Order dated 14 August 1995 in SEC-
EB No. 403, the SEC en banc annulled the 4 May 1994 Order of
SICD in SEC Case No. 02-94-4678 denying petitioners Motion to
Dismiss, and accordingly ordered the dismissal of respondents
Petition before the SICD.
Respondent filed a Petition for Certiorari with the Court of
Appeals assailing the Orders of the SEC en banc dated 31 May
1995 and 14 August 1995 in SEC-EB No. 393 and SEC-EB No.
403, respectively. Respondents Petition before the appellate
court was docketed as CA-G.R. SP No. 38455.
On 11 February 1997, the Court of Appeals promulgated its
Decision in CA-G.R. SP No. 38455, granting respondents
Petition for Certiorari, thus:
WHEREFORE, the petition in so far as it prays for annulment of
the Orders dated May 31, 1995 and August 14, 1995 in SEC-EB
Case Nos. 393 and 403 is GRANTED. The said orders are
hereby rendered null and void and set aside.
Petitioners filed a Motion for Reconsideration of the foregoing
Decision but it was denied by the Court of Appeals in a
Resolution dated 18 May 1999.
Hence, the present Petition for Review raising the following
arguments:
I.
THE SEC EN BANC DID NOT COMMIT GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION WHEN IT DISMISSED THE PETITION FILED BY
RESPONDENT BECAUSE ON ITS FACE, IT FAILED TO STATE
A CAUSE OF ACTION.
II.
THE GRANT OF THE IPO ALLOCATIONS IN FAVOR OF
RESPONDENT WAS A MERE ACCOMMODATION GIVEN TO
HIM BY THE BOARD OF [DIRECTORS] OF THE MAKATI
STOCK EXCHANGE, INC.
III.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE
SEC EN BANC COMMITTED GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN
IT MADE AN EXTENDED INQUIRY AND PROCEEDED TO
MAKE A DETERMINATION AS TO THE TRUTH OF
RESPONDENTS ALLEGATIONS IN HIS PETITION AND USED
AS BASIS THE EVIDENCE ADDUCED DURING THE HEARING
ON THE APPLICATION FOR THE WRIT OF PRELIMINARY
INJUNCTION TO DETERMINE THE EXISTENCE OR VALIDITY
OF A STATED CAUSE OF ACTION.
IV.
IPO ALLOCATIONS GRANTED TO BROKERS ARE NOT TO BE
BOUGHT BY THE BROKERS FOR THEMSELVES BUT ARE TO
BE DISTRIBUTED TO THE INVESTING PUBLIC. HENCE,
RESPONDENTS CLAIM FOR DAMAGES IS ILLUSORY AND
HIS PETITION A NUISANCE SUIT.3
On 18 September 2001, counsel for respondent manifested to
this Court that his client died on 7 May 2001. In a Resolution
dated 24 October 2001, the Court directed the substitution of
respondent by his surviving spouse, Julia Ortigas vda. de
Campos.
Petitioners want this Court to affirm the dismissal by the SEC en
banc of respondents Petition in SEC Case No. 02-94-4678 for
failure to state a cause of action. On the other hand, respondent
insists on the sufficiency of his Petition and seeks the
continuation of the proceedings before the SICD.
A cause of action is the act or omission by which a party violates
a right of another.4 A complaint states a cause of action where it
contains three essential elements of a cause of action, namely:
(1) the legal right of the plaintiff, (2) the correlative obligation of
the defendant, and (3) the act or omission of the defendant in
violation of said legal right. If these elements are absent, the
complaint becomes vulnerable to dismissal on the ground of
failure to state a cause of action.
If a defendant moves to dismiss the complaint on the ground of
lack of cause of action, he is regarded as having hypothetically
admitted all the averments thereof. The test of sufficiency of the
facts found in a complaint as constituting a cause of action is
whether or not admitting the facts alleged, the court can render a
valid judgment upon the same in accordance with the prayer
thereof. The hypothetical admission extends to the relevant and
material facts well pleaded in the complaint and inferences fairly
deducible therefrom. Hence, if the allegations in the complaint
furnish sufficient basis by which the complaint can be maintained,
the same should not be dismissed regardless of the defense that
may be assessed by the defendant.5
Given the foregoing, the issue of whether respondents Petition in
SEC Case No. 02-94-4678 sufficiently states a cause of action
may be alternatively stated as whether, hypothetically admitting to
be true the allegations in respondents Petition in SEC Case No.
02-94-4678, the SICD may render a valid judgment in accordance
with the prayer of said Petition.
A reading of the exact text of respondents Petition in SEC Case
No. 02-94-4678 is, therefore, unavoidable. Pertinent portions of
the said Petition reads:
7. In recognition of petitioners invaluable services, the general
membership of respondent corporation [MKSE] passed a
resolution sometime in 1989 amending its Articles of
Incorporation, to include the following provision therein:
"ELEVENTH WHEREAS, Mr. Miguel Campos is the only
surviving incorporator of the Makati Stock Exchange, Inc. who
has maintained his membership;
"WHEREAS, he has unselfishly served the Exchange in various
capacities, as governor from 1977 to the present and as
President from 1972 to 1976 and again as President from 1988 to
the present;
"WHEREAS, such dedicated service and leadership which has
contributed to the advancement and well being not only of the
Exchange and its members but also to the Securities industry,
needs to be recognized and appreciated;
"WHEREAS, as such, the Board of Governors in its meeting held
on February 09, 1989 has correspondingly adopted a resolution
recognizing his valuable service to the Exchange, reward the
same, and preserve for posterity such recognition by proposing a
resolution to the membership body which would make him as
Chairman Emeritus for life and install in the Exchange premises a
commemorative bronze plaque in his honor;
"NOW, THEREFORE, for and in consideration of the above
premises, the position of the "Chairman Emeritus" to be occupied
by Mr. Miguel Campos during his lifetime and irregardless of his
continued membership in the Exchange with the Privilege to
attend all membership meetings as well as the meetings of the
Board of Governors of the Exchange, is hereby created."
8. Hence, to this day, petitioner is not only an active member of
the respondent corporation, but its Chairman Emeritus as well.
9. Correspondingly, at all times material to this petition, as an
active member and Chairman Emeritus of respondent
corporation, petitioner has always enjoyed the right given to all
the other members to participate equally in the Initial Public
Offerings (IPOs for brevity) of corporations.
10. IPOs are shares of corporations offered for sale to the public,
prior to the listing in the trading floor of the countrys two stock
exchanges. Normally, Twenty Five Percent (25%) of these shares
are divided equally between the two stock exchanges which in
turn divide these equally among their members, who pay therefor
at the offering price.
11. However, on June 3, 1993, during a meeting of the Board of
Directors of respondent-corporation, individual respondents
passed a resolution to stop giving petitioner the IPOs he is
entitled to, based on the ground that these shares were allegedly
benefiting Gerardo O. Lanuza, Jr., who these individual
respondents wanted to get even with, for having filed cases
before the Securities and Exchange (SEC) for their
disqualification as member of the Board of Directors of
respondent corporation.
12. Hence, from June 3, 1993 up to the present time, petitioner
has been deprived of his right to subscribe to the IPOs of
corporations listing in the stock market at their offering prices.
13. The collective act of the individual respondents in depriving
petitioner of his right to a share in the IPOs for the
aforementioned reason, is unjust, dishonest and done in bad
faith, causing petitioner substantial financial damage.6
There is no question that the Petition in SEC Case No. 02-94-
4678 asserts a right in favor of respondent, particularly,
respondents alleged right to subscribe to the IPOs of
corporations listed in the stock market at their offering prices; and
stipulates the correlative obligation of petitioners to respect
respondents right, specifically, by continuing to allow respondent
to subscribe to the IPOs of corporations listed in the stock market
at their offering prices.
However, the terms right and obligation in respondents Petition
are not magic words that would automatically lead to the
conclusion that such Petition sufficiently states a cause of action.
Right and obligation are legal terms with specific legal meaning. A
right is a claim or title to an interest in anything whatsoever that is
enforceable by law.7 An obligation is defined in the Civil Code as
a juridical necessity to give, to do or not to do.8 For every right
enjoyed by any person, there is a corresponding obligation on the
part of another person to respect such right. Thus, Justice J.B.L.
Reyes offers9 the definition given by Arias Ramos as a more
complete definition:
An obligation is a juridical relation whereby a person (called the
creditor) may demand from another (called the debtor) the
observance of a determinative conduct (the giving, doing or not
doing), and in case of breach, may demand satisfaction from the
assets of the latter.
The Civil Code enumerates the sources of obligations:
Art. 1157. Obligations arise from:
(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts.
Therefore, an obligation imposed on a person, and the
corresponding right granted to another, must be rooted in at least
one of these five sources. The mere assertion of a right and claim
of an obligation in an initiatory pleading, whether a Complaint or
Petition, without identifying the basis or source thereof, is merely
a conclusion of fact and law. A pleading should state the ultimate
facts essential to the rights of action or defense asserted, as
distinguished from mere conclusions of fact or conclusions of
law.10 Thus, a Complaint or Petition filed by a person claiming a
right to the Office of the President of this Republic, but without
stating the source of his purported right, cannot be said to have
sufficiently stated a cause of action. Also, a person claiming to be
the owner of a parcel of land cannot merely state that he has a
right to the ownership thereof, but must likewise assert in the
Complaint either a mode of acquisition of ownership or at least a
certificate of title in his name.
In the case at bar, although the Petition in SEC Case No. 02-94-
4678 does allege respondents right to subscribe to the IPOs of
corporations listed in the stock market at their offering prices, and
petitioners obligation to continue respecting and observing such
right, the Petition utterly failed to lay down the source or basis of
respondents right and/or petitioners obligation.
Respondent merely quoted in his Petition the MKSE Board
Resolution, passed sometime in 1989, granting him the position
of Chairman Emeritus of MKSE for life. However, there is nothing
in the said Petition from which the Court can deduce that
respondent, by virtue of his position as Chairman Emeritus of
MKSE, was granted by law, contract, or any other legal source,
the right to subscribe to the IPOs of corporations listed in the
stock market at their offering prices.
A meticulous review of the Petition reveals that the allocation of
IPO shares was merely alleged to have been done in accord with
a practice normally observed by the members of the stock
exchange, to wit:
IPOs are shares of corporations offered for sale to the public,
prior to their listing in the trading floor of the countrys two stock
exchanges. Normally, Twenty-Five Percent (25%) of these shares
are divided equally between the two stock exchanges which in
turn divide these equally among their members, who pay therefor
at the offering price.11(Emphasis supplied)
A practice or custom is, as a general rule, not a source of a
legally demandable or enforceable right.12 Indeed, in labor cases,
benefits which were voluntarily given by the employer, and which
have ripened into company practice, are considered as rights that
cannot be diminished by the employer.13 Nevertheless, even in
such cases, the source of the employees right is not custom, but
ultimately, the law, since Article 100 of the Labor Code explicitly
prohibits elimination or diminution of benefits.
There is no such law in this case that converts the practice of
allocating IPO shares to MKSE members, for subscription at their
offering prices, into an enforceable or demandable right. Thus,
even if it is hypothetically admitted that normally, twenty five
percent (25%) of the IPOs are divided equally between the two
stock exchanges -- which, in turn, divide their respective
allocation equally among their members, including the Chairman
Emeritus, who pay for IPO shares at the offering price -- the Court
cannot grant respondents prayer for damages which allegedly
resulted from the MKSE Board Resolution dated 3 June 1993
deviating from said practice by no longer allocating any shares to
respondent.1avvphi1
Accordingly, the instant Petition should be granted. The Petition in
SEC Case No. 02-94-4678 should be dismissed for failure to
state a cause of action. It does not matter that the SEC en banc,
in its Order dated 14 August 1995 in SEC-EB No. 403,
overstepped its bounds by not limiting itself to the issue of
whether respondents Petition before the SICD sufficiently stated
a cause of action. The SEC en banc may have been mistaken in
considering extraneous evidence in granting petitioners Motion to
Dismiss, but its discussion thereof are merely superfluous and
obiter dictum. In the main, the SEC en banc did correctly dismiss
the Petition in SEC Case No. 02-94-4678 for its failure to state
the basis for respondents alleged right, to wit:
Private respondent Campos has failed to establish the basis or
authority for his alleged right to participate equally in the IPO
allocations of the Exchange. He cited paragraph 11 of the
amended articles of incorporation of the Exchange in support of
his position but a careful reading of the said provision shows
nothing therein that would bear out his claim. The provision
merely created the position of chairman emeritus of the Exchange
but it mentioned nothing about conferring upon the occupant
thereof the right to receive IPO allocations.14
With the dismissal of respondents Petition in SEC Case No. 02-
94-4678, there is no more need for this Court to resolve the
propriety of the issuance by SCID of a writ of preliminary
injunction in said case.
WHEREFORE, the Petition is GRANTED. The Decision of the
Court of Appeals dated 11 February 1997 and its Resolution
dated 18 May 1999 in CA-G.R. SP No. 38455 are REVERSED
and SET ASIDE. The Orders dated 31 May 1995 and 14 August
1995 of the Securities and Exchange Commission en banc in
SEC-EB Case No. 393 and No. 403, respectively, are hereby
reinstated. No pronouncement as to costs.
SO ORDERED.
MINITA V. CHICO-NAZARIO
Associate Justice
WE CONCUR:
CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson
 1
MA. ALICIA AUSTRIA- ANTONIO EDUARDO B. Per Resolution of 24 October 2001.
MARTINEZ NACHURA
Associate Justice Associate Justice 2
Penned by Associate Justice Eubulo G. Verzola with
Associate Justices Jesus M. Elbinias and Hilarion L.
DIOSDADO M. PERALTA Aquino, concurring; rollo, pp. 30-36.
Associate Justice
3
Rollo, p. 144.
ATTE S TATI O N
4
Revised Rules of Court, Rule 2, Section 2.
I attest that the conclusions in the above Decision were reached
in consultation before the case was assigned to the writer of the 5
Fil-Estate Golf and Development, Inc. v. Court of
opinion of the Courts Division. Appeals, 333 Phil. 465, 490-491 (1996).

CONSUELO YNARES-SANTIAGO 6
Rollo, pp. 50-52.
Associate Justice
Chairperson, Third Division 7
Bailey v. Miller, 91 N.E. 24, 25, Ind. App. 475, cited in
37A Words and Phrases 363.
C E RTI F I CATI O N
8
Civil Code, Article 1156.
Pursuant to Section 13, Article VIII of the Constitution, and the
Division Chairpersons Attestation, it is hereby certified that the 9
Lawyers Journal, 31 January 1951, p. 47.
conclusions in the above Decision were reached in consultation
before the case was assigned to the writer of the opinion of the 10
Abad v. Court of First Instance of Pangasinan, G.R.
Courts Division. Nos. 58507-08, 26 February 1992, 206 SCRA 567, 579-
580.
REYNATO S. PUNO
Chief Justice 11
Rollo, pp. 51-52.

12
A distinction, however, should be made between
Municipal Law and Public International Law. Custom is
one of the primary sources of International Law, and is
Footnotes thus a source of legal rights within such sphere.
13
Arco Metal Products Co., Inc. v. Samahan ng mga
Manggagawa sa Arco Metal-NAFLU, G.R. No. 170734, 14
May 2008, 554 SCRA 110, 118.

14
Rollo, p. 95.
 Republic of the Philippines The facts of the case are narrated by the CA in this wise:
SUPREME COURT
Manila "On May 24, 1989, [respondent] Republic-Asahi Glass
Corporation (Republic-Asahi) entered into a contract with x x x
FIRST DIVISION Jose D. Santos, Jr., the proprietor of JDS Construction (JDS), for
the construction of roadways and a drainage system in Republic-
G.R. No. 147561 June 22, 2006 Asahis compound in Barrio Pinagbuhatan, Pasig City, where
[respondent] was to pay x x x JDS five million three hundred
STRONGHOLD INSURANCE COMPANY, INC., Petitioner, thousand pesos (P5,300,000.00) inclusive of value added tax for
vs. said construction, which was supposed to be completed within a
REPUBLIC-ASAHI GLASS CORPORATION, Respondent. period of two hundred forty (240) days beginning May 8, 1989. In
order to guarantee the faithful and satisfactory performance of its
undertakings x x x JDS, shall post a performance bond of seven
DECISION
hundred ninety five thousand pesos (P795,000.00). x x x JDS
executed, jointly and severally with [petitioner] Stronghold
PANGANIBAN, CJ: Insurance Co., Inc. (SICI) Performance Bond No. SICI-
25849/g(13)9769.
Asurety companys liability under the performance bond it issues
is solidary. The death of the principal obligor does not, as a rule, "On May 23, 1989, [respondent] paid to x x x JDS seven hundred
extinguish the obligation and the solidary nature of that liability. ninety five thousand pesos (P795,000.00) by way of
downpayment.
The Case
"Two progress billings dated August 14, 1989 and September 15,
Before us is a Petition for Review1 under Rule 45 of the Rules of 1989, for the total amount of two hundred seventy four thousand
Court, seeking to reverse the March 13, 2001 Decision2 of the six hundred twenty one pesos and one centavo (P274,621.01)
Court of Appeals (CA) in CA-GR CV No. 41630. The assailed were submitted by x x x JDS to [respondent], which the latter
Decision disposed as follows: paid. According to [respondent], these two progress billings
accounted for only 7.301% of the work supposed to be
"WHEREFORE, the Order dated January 28, 1993 issued by the undertaken by x x x JDS under the terms of the contract.
lower court is REVERSED and SET ASIDE. Let the records of the
instant case be REMANDED to the lower court for the reception "Several times prior to November of 1989, [respondents]
of evidence of all parties."3 engineers called the attention of x x x JDS to the alleged
alarmingly slow pace of the construction, which resulted in the
The Facts fear that the construction will not be finished within the stipulated
240-day period. However, said reminders went unheeded by x x x
JDS.
"On November 24, 1989, dissatisfied with the progress of the
work undertaken by x x x JDS, [respondent] Republic-Asahi
extrajudicially rescinded the contract pursuant to Article XIII of
said contract, and wrote a letter to x x x JDS informing the latter
of such rescission. Such rescission, according to Article XV of the
contract shall not be construed as a waiver of [respondents] right
to recover damages from x x x JDS and the latters sureties.
"[Respondent] alleged that, as a result of x x x JDSs failure to
comply with the provisions of the contract, which resulted in the
said contracts rescission, it had to hire another contractor to
finish the project, for which it incurred an additional expense of
three million two hundred fifty six thousand, eight hundred
seventy four pesos (P3,256,874.00).
"On January 6, 1990, [respondent] sent a letter to [petitioner] SICI
filing its claim under the bond for not less than P795,000.00. On
March 22, 1991, [respondent] again sent another letter reiterating
its demand for payment under the aforementioned bond. Both
letters allegedly went unheeded.
"[Respondent] then filed [a] complaint against x x x JDS and SICI.
It sought from x x x JDS payment of P3,256,874.00 representing
the additional expenses incurred by [respondent] for the
completion of the project using another contractor, and from x x x
JDS and SICI, jointly and severally, payment of P750,000.00 as
damages in accordance with the performance bond; exemplary
damages in the amount of P100,000.00 and attorneys fees in the
amount of at least P100,000.00.
"According to the Sheriffs Return dated June 14, 1991, submitted
to the lower court by Deputy Sheriff Rene R. Salvador, summons
were duly served on defendant-appellee SICI. However, x x x
Jose D. Santos, Jr. died the previous year (1990), and x x x JDS
Construction was no longer at its address at 2nd Floor, Room
208-A, San Buena Bldg. Cor. Pioneer St., Pasig, Metro Manila,
and its whereabouts were unknown.
"On July 10, 1991, [petitioner] SICI filed its answer, alleging that
the [respondents] money claims against [petitioner and JDS]
have been extinguished by the death of Jose D. Santos, Jr. Even
if this were not the case, [petitioner] SICI had been released from
its liability under the performance bond because there was no
liquidation, with the active participation and/or involvement,
pursuant to procedural due process, of herein surety and
contractor Jose D. Santos, Jr., hence, there was no
ascertainment of the corresponding liabilities of Santos and SICI
under the performance bond. At this point in time, said liquidation
was impossible because of the death of Santos, who as such can
no longer participate in any liquidation. The unilateral liquidation
on the party (sic) of [respondent] of the work accomplishments
did not bind SICI for being violative of procedural due process.
The claim of [respondent] for the forfeiture of the performance
bond in the amount of P795,000.00 had no factual and legal
basis, as payment of said bond was conditioned on the payment
of damages which [respondent] may sustain in the event x x x
JDS failed to complete the contracted works. [Respondent] can
no longer prove its claim for damages in view of the death of
Santos. SICI was not informed by [respondent] of the death of
Santos. SICI was not informed by [respondent] of the unilateral
rescission of its contract with JDS, thus SICI was deprived of its
right to protect its interests as surety under the performance
bond, and therefore it was released from all liability. SICI was
likewise denied due process when it was not notified of plaintiff-
appellants process of determining and fixing the amount to be
spent in the completion of the unfinished project. The procedure
contained in Article XV of the contract is against public policy in
that it denies SICI the right to procedural due process. Finally,
SICI alleged that [respondent] deviated from the terms and
conditions of the contract without the written consent of SICI, thus
the latter was released from all liability. SICI also prayed for the
award of P59,750.00 as attorneys fees, and P5,000.00 as
litigation expenses.
"On August 16, 1991, the lower court issued an order dismissing
the complaint of [respondent] against x x x JDS and SICI, on the
ground that the claim against JDS did not survive the death of its
sole proprietor, Jose D. Santos, Jr. The dispositive portion of the
[O]rder reads as follows:
ACCORDINGLY, the complaint against the defendants Jose D.
Santos, Jr., doing business under trade and style, JDS
Construction and Stronghold Insurance Company, Inc. is ordered
DISMISSED.
SO ORDERED.
"On September 4, 1991, [respondent] filed a Motion for
Reconsideration seeking reconsideration of the lower courts
August 16, 1991 order dismissing its complaint. [Petitioner] SICI
field its Comment and/or Opposition to the Motion for
Reconsideration. On October 15, 1991, the lower court issued an
Order, the dispositive portion of which reads as follows:
WHEREFORE, premises considered, the Motion for
Reconsideration is hereby given due course. The Order dated 16
August 1991 for the dismissal of the case against Stronghold
Insurance Company, Inc., is reconsidered and hereby reinstated
(sic). However, the case against defendant Jose D. Santos, Jr.
(deceased) remains undisturbed.
Motion for Preliminary hearing and Manifestation with Motion
filed by [Stronghold] Insurance Company Inc., are set for hearing
on November 7, 1991 at 2:00 oclock in the afternoon.
SO ORDERED.
"On June 4, 1992, [petitioner] SICI filed its Memorandum for
Bondsman/Defendant SICI (Re: Effect of Death of defendant Jose
D. Santos, Jr.) reiterating its prayer for the dismissal of
[respondents] complaint.
"On January 28, 1993, the lower court issued the assailed Order
reconsidering its Order dated October 15, 1991, and ordered the
case, insofar as SICI is concerned, dismissed. [Respondent] filed
its motion for reconsideration which was opposed by [petitioner]
SICI. On April 16, 1993, the lower court denied [respondents]
motion for reconsideration. x x x."4
Ruling of the Court of Appeals
The CA ruled that SICIs obligation under the surety agreement
was not extinguished by the death of Jose D. Santos, Jr.
Consequently, Republic-Asahi could still go after SICI for the
bond.
The appellate court also found that the lower court had erred in
pronouncing that the performance of the Contract in question had
become impossible by respondents act of rescission. The
Contract was rescinded because of the dissatisfaction of
respondent with the slow pace of work and pursuant to Article XIII
of its Contract with JDS.
The CA ruled that "[p]erformance of the [C]ontract was
impossible, not because of [respondents] fault, but because of
the fault of JDS Construction and Jose D. Santos, Jr. for failure
on their part to make satisfactory progress on the project, which
amounted to non-performance of the same. x x x [P]ursuant to
the [S]urety [C]ontract, SICI is liable for the non-performance of
said [C]ontract on the part of JDS Construction."5
6
Hence, this Petition.
Issue
Petitioner states the issue for the Courts consideration in the
following manner:
"Death is a defense of Santos heirs which Stronghold could also
adopt as its defense against obligees claim."7
More precisely, the issue is whether petitioners liability under the
performance bond was automatically extinguished by the death of
Santos, the principal.
The Courts Ruling
The Petition has no merit.
Sole Issue:
Effect of Death on the Suretys Liability
Petitioner contends that the death of Santos, the bond principal,
extinguished his liability under the surety bond. Consequently, it
says, it is automatically released from any liability under the bond.
As a general rule, the death of either the creditor or the debtor
does not extinguish the obligation.8 Obligations are transmissible
to the heirs, except when the transmission is prevented by the
law, the stipulations of the parties, or the nature of the
obligation.9 Only obligations that are personal10 or are identified
with the persons themselves are extinguished by death. 11
Section 5 of Rule 8612 of the Rules of Court expressly allows the
prosecution of money claims arising from a contract against the
estate of a deceased debtor. Evidently, those claims are not
actually extinguished.13 What is extinguished is only the obligees
action or suit filed before the court, which is not then acting as a
probate court.14
In the present case, whatever monetary liabilities or obligations
Santos had under his contracts with respondent were not
intransmissible by their nature, by stipulation, or by provision of
law. Hence, his death did not result in the extinguishment of those
obligations or liabilities, which merely passed on to his
estate.15 Death is not a defense that he or his estate can set up to
wipe out the obligations under the performance bond.
Consequently, petitioner as surety cannot use his death to
escape its monetary obligation under its performance bond.
The liability of petitioner is contractual in nature, because it
executed a performance bond worded as follows:
"KNOW ALL MEN BY THESE PRESENTS:
"That we, JDS CONSTRUCTION of 208-A San Buena Building,
contractor, of Shaw Blvd., Pasig, MM Philippines, as principal and
the STRONGHOLD INSURANCE COMPANY, INC. a corporation
duly organized and existing under and by virtue of the laws of the
Philippines with head office at Makati, as Surety, are held and
firmly bound unto the REPUBLIC ASAHI GLASS CORPORATION
and to any individual, firm, partnership, corporation or association
supplying the principal with labor or materials in the penal sum of
SEVEN HUNDRED NINETY FIVE THOUSAND (P795,000.00),
Philippine Currency, for the payment of which sum, well and truly
to be made, we bind ourselves, our heirs, executors,
administrators, successors and assigns, jointly and severally,
firmly by these presents.
"The CONDITIONS OF THIS OBLIGATION are as follows;
"WHEREAS the above bounden principal on the ___ day of
__________, 19__ entered into a contract with the REPUBLIC
ASAHI GLASS CORPORATION represented by
_________________, to fully and faithfully. Comply with the site
preparation works road and drainage system of Philippine Float
Plant at Pinagbuhatan, Pasig, Metro Manila.
"WHEREAS, the liability of the Surety Company under this bond
shall in no case exceed the sum of PESOS SEVEN HUNDRED
NINETY FIVE THOUSAND (P795,000.00) Philippine Currency,
inclusive of interest, attorneys fee, and other damages, and shall
not be liable for any advances of the obligee to the principal.
"WHEREAS, said contract requires the said principal to give a
good and sufficient bond in the above-stated sum to secure the
full and faithfull performance on its part of said contract, and the
satisfaction of obligations for materials used and labor employed
upon the work;
"NOW THEREFORE, if the principal shall perform well and truly
and fulfill all the undertakings, covenants, terms, conditions, and
agreements of said contract during the original term of said
contract and any extension thereof that may be granted by the
obligee, with notice to the surety and during the life of any
guaranty required under the contract, and shall also perform well
and truly and fulfill all the undertakings, covenants, terms,
conditions, and agreements of any and all duly authorized
modifications of said contract that may hereinafter be made,
without notice to the surety except when such modifications
increase the contract price; and such principal contractor or his or
its sub-contractors shall promptly make payment to any
individual, firm, partnership, corporation or association supplying
the principal of its sub-contractors with labor and materials in the
prosecution of the work provided for in the said contract, then,
this obligation shall be null and void; otherwise it shall remain in
full force and effect. Any extension of the period of time which
may be granted by the obligee to the contractor shall be
considered as given, and any modifications of said contract shall
be considered as authorized, with the express consent of the
Surety.
"The right of any individual, firm, partnership, corporation or
association supplying the contractor with labor or materials for the
prosecution of the work hereinbefore stated, to institute action on
the penal bond, pursuant to the provision of Act No. 3688, is
hereby acknowledge and confirmed."16
As a surety, petitioner is solidarily liable with Santos in
accordance with the Civil Code, which provides as follows:
"Art. 2047. By guaranty a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the principal debtor
in case the latter should fail to do so.
"If a person binds himself solidarily with the principal debtor, the
provisions of Section 4,17 Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship."
 xxxxxxxxx ARTEMIO V. PANGANIBAN
Chief Justice
"Art. 1216. The creditor may proceed against any one of the Chairman, First Division
solidary debtors or some or all of them simultaneously. The
demand made against one of them shall not be an obstacle to WE CONCUR:
those which may subsequently be directed against the others, so
long as the debt has not been fully collected."
CONSUELO MA. ALICIA
Elucidating on these provisions, the Court in Garcia v. Court of YNARES-SANTIAGO AUSTRIA-MARTINEZ
Appeals18 stated thus: Associate Justice Asscociate Justice

"x x x. The suretys obligation is not an original and direct one for
the performance of his own act, but merely accessory or collateral
ROMEO J. CALLEJO, MINITA V. CHICO-
to the obligation contracted by the principal. Nevertheless,
SR. NAZARIO
although the contract of a surety is in essence secondary only to
Associate Justice Asscociate Justice
a valid principal obligation, his liability to the creditor or promisee
of the principal is said to be direct, primary and absolute; in other
words, he is directly and equally bound with the principal. x x x."19
C E RTI F I CATI O N
Under the law and jurisprudence, respondent may sue,
separately or together, the principal debtor and the petitioner Pursuant to Section 13, Article VIII of the Constitution, I certify
herein, in view of the solidary nature of their liability. The death of that the conclusions in the above Decision were reached in
the principal debtor will not work to convert, decrease or nullify consultation before the case was assigned to the writer of the
the substantive right of the solidary creditor. Evidently, despite the opinion of the Courts Division.
death of the principal debtor, respondent may still sue petitioner
alone, in accordance with the solidary nature of the latters liability ARTEMIO V. PANGANIBAN
under the performance bond. Chief Justice

WHEREFORE, the Petition is DENIED and the Decision of the

Court of Appeals AFFIRMED. Costs against petitioner.

SO ORDERED. Footnotes

1
Rollo, pp. 9-20.
2 10
Id. at 23-37. Seventeenth Division. Penned by Justice
Remedios A. Salazar-Fernando, with the concurrence of
Justices Romeo A. Brawner (Division chair) and Juan Q.
Enriquez Jr. (member).
3
Assailed CA Decision, p. 14; rollo, p. 36.
4
Id. at 2-5; id. at 24-27.
5
Id. at 13-14; id. at 35-36.
6 Civil Code, supra note 8.
To resolve old cases, the Court created the Committee
on Zero Backlog of Cases on January 26, 2006.
Consequently, the Court resolved to prioritize the
adjudication of long-pending cases by redistributing them
among all the justices. This case was recently raffled and
assigned to the undersigned ponente for study and report.
7 sickness of the decedent, and judgment for money
Petitioners Memorandum, p. 6; rollo, p. 172. Original in
uppercase.
8
A. Tolentino, Commentaries And Jurisprudence On The
Civil Code 272, Vol. IV (1991).
9
Id. See also the Civil Code, Art. 1311, which states:
"Art. 1311. Contracts take effect only between the
parties, their assigns and heirs, except in case
where the rights and obligations arising from the
contract are not transmissible by their nature, or
by stipulation or by provision of law. The heir is
not liable beyond the value of the property he
received from the decedent."
Examples of purely personal actions are those for
support, divorce, annulment of marriage, legal separation
(Lapuz Sy v. Eufemio, 43 SCRA 177, January 31, 1972).
See also Javier Security Special Watchman Agency v.
Shell-Craft & Button Corp., 117 Phil. 218, January 31,
1963, for an illustration of a contract that is not
transmissible by its nature, as when the special or
personal qualification of the obligor constitutes one of the
principal motives of the contract.
11
A. Tolentino, Commentaries And Jurisprudence On The
12
"SEC. 5. Claims which must be filed under the notice. If
not filed, barred; exceptions.--All claims for money against
the decedent, arising from contract, express or implied,
whether the same be due, not due, or contingent, all
claims for funeral expenses and expenses for the last
against the decedent, must be filed within the time limited
in the notice; otherwise they are barred forever, except
that they may be set forth as counterclaims in any action
that the executor or administrator may bring against the
claimants. x x x."
13
E. Paras, Rules Of Court Annotated 125, Vol. 1 (1989).
14
Id.
15
See Limjoco v. Intestate of Fragante, 80 Phil. 776, April
27, 1948; Suiliong &Co. v. Chio-Taysan, 12 Phil. 13,
November 11, 1908; Pavia v. De La Rosa, 8 Phil. 70,
March 18, 1907.
16
Performance Bond; rollo, p. 69.

17
This refers to the Civil Code, Arts. 1207 to 1222.

18
191 SCRA 493, November 20, 1990. See also
International Finance Corporation v. Imperial Textile Mills,
Inc., GR 160324, November 15, 2005.

19
Id. at 495-496, per Cruz, J.
 Office of the Solicitor General (OSG), seeking the reversal and
setting aside of the Decision[2] dated 25 January 2007 of the Court
THIRD DIVISION of Appeals in CA-G.R. CV No. 76298, which affirmed in toto the
Joint Decision[3] dated 29 May 2002 of the Regional Trial Court
(RTC) of Makati City, Branch 138, in Civil Cases No. 00-1208 and
THE OFFICE OF THE G.R. No. 177056
No. 00-1210; and (2) the Resolution[4]dated 14 March 2007 of the
SOLICITOR GENERAL,
Petitioner, Present: appellate court in the same case which denied the Motion for
Reconsideration of the OSG. The RTC adjudged that
YNARES-SANTIAGO, J., respondents Ayala Land Incorporated (Ayala Land), Robinsons
- versus - Chairperson, Land Corporation (Robinsons), Shangri-la Plaza Corporation
CHICO-NAZARIO,
VELASCO, JR., (Shangri-la), and SM Prime Holdings, Inc. (SM Prime) could not
AYALA LAND NACHURA, and be obliged to provide free parking spaces in their malls to their
INCORPORATED, PERALTA, JJ. patrons and the general public.
ROBINSONS LAND
CORPORATION, SHANGRI-
LA PLAZA CORPORATION Promulgated: Respondents Ayala Land, Robinsons, and Shangri-la
and SM PRIME HOLDINGS, maintain and operate shopping malls in various locations in Metro
INC., Manila. Respondent SM Prime constructs, operates, and leases
Respondents. September 18, 2009 out commercial buildings and other structures, among which, are
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
SM City, Manila; SM Centerpoint, Sta. Mesa, Manila; SM
- - - -x
City, North Avenue, Quezon City; and SM Southmall, Las Pias.

DECISION Respondent Parking Fees

Ayala Land On weekdays, P25.00 for the first four hours

CHICO-NAZARIO, J.: and P10.00 for every succeeding hour; on
weekends, flat rate of P25.00 per day

Before this Court is a Petition for Review on Certiorari, Robinsons P20.00 for the first three hours and P10.00 for every
[1]
under Rule 45 of the Revised Rules of Court, filed by petitioner succeeding hour

Shangri-la Flat rate of P30.00 per day

SM Prime P10.00 to P20.00 (depending on whether the
parking space is outdoors or indoors) for the first
three hours and 59 minutes, and P10.00 for every
succeeding hour or fraction thereof

The shopping malls operated or leased out by
respondents have parking facilities for all kinds of motor vehicles,
either by way of parking spaces inside the mall buildings or in
separate buildings and/or adjacent lots that are solely devoted for
use as parking spaces. Respondents Ayala Land, Robinsons, and
SM Prime spent for the construction of their own parking
facilities. Respondent Shangri-la is renting its parking facilities,
consisting of land and building specifically used as parking
spaces, which were constructed for the lessors account.
Respondents expend for the maintenance and
administration of their respective parking facilities. They provide
security personnel to protect the vehicles parked in their parking
facilities and maintain order within the area. In turn, they collect
the following parking fees from the persons making use of their
parking facilities, regardless of whether said persons are mall
patrons or not:
The parking tickets or cards issued by respondents to vehicle
owners contain the stipulation that respondents shall not be
responsible for any loss or damage to the vehicles parked in
respondents parking facilities.
In 1999, the Senate Committees on Trade and Commerce
and on Justice and Human Rights conducted a joint investigation
for the following purposes: (1) to inquire into the legality of the
prevalent practice of shopping malls of charging parking fees; (2)
assuming arguendo that the collection of parking fees was legally
authorized, to find out the basis and reasonableness of the
parking rates charged by shopping malls; and (3) to determine
the legality of the policy of shopping malls of denying liability in
cases of theft, robbery, or carnapping, by invoking the waiver
clause at the back of the parking tickets. Said Senate Committees
invited the top executives of respondents, who operate the major
malls in the country; the officials from the Department of Trade
and Industry (DTI), Department of Public Works and Highways
(DPWH), Metro Manila Development Authority (MMDA), and
other local government officials; and the Philippine Motorists
Association (PMA) as representative of the consumers group.
After three public hearings held on 30 September, 3
November, and 1 December 1999, the afore-mentioned Senate
Committees jointly issued Senate Committee Report No.
225[5] on 2 May 2000, in which they concluded:
In view of the foregoing, the Committees find
that the collection of parking fees by shopping malls is
contrary to the National Building Code and is therefor
[sic] illegal.While it is true that the Code merely
requires malls to provide parking spaces, without
specifying whether it is free or not, both Committees
believe that the reasonable and logical interpretation of
the Code is that the parking spaces are for free. This
interpretation is not only reasonable and logical but
finds support in the actual practice in other countries
like the United States of America where parking
spaces owned and operated by mall owners are free of
charge.
Figuratively speaking, the Code has
expropriated the land for parking something similar to
the subdivision law which require developers to devote
so much of the land area for parks.
Moreover, Article II of R.A. No. 9734
following recommendations:
(Consumer Act of the Philippines) provides that it is the
policy of the State to protect the interest of the
consumers, promote the general welfare and establish
standards of conduct for business and
industry. Obviously, a contrary interpretation (i.e.,
justifying the collection of parking fees) would be going
against the declared policy of R.A. 7394.
Section 201 of the National Building Code
gives the responsibility for the administration and
enforcement of the provisions of the Code, including
the imposition of penalties for administrative violations
thereof to the Secretary of Public Works. This set up,
however, is not being carried out in reality.
In the position paper submitted by the
Metropolitan Manila Development Authority (MMDA),
its chairman, Jejomar C. Binay, accurately pointed out
that the Secretary of the DPWH is responsible for the
implementation/enforcement of the National Building
Code. After the enactment of the Local Government
Code of 1991, the local government units (LGUs) were
tasked to discharge the regulatory powers of the
DPWH. Hence, in the local level, the Building Officials
enforce all rules/ regulations formulated by the DPWH
relative to all building plans, specifications and designs
including parking space requirements. There is,
however, no single national department or agency
directly tasked to supervise the enforcement of the
provisions of the Code on parking, notwithstanding the
national character of the law.[6]
Senate Committee Report No. 225, thus, contained the
In light of the foregoing, the Committees on
Trade and Commerce and Justice and Human Rights
hereby recommend the following:
1. The Office of the Solicitor General should institute the
necessary action to enjoin the collection of
parking fees as well as to enforce the penal
sanction provisions of the National Building
Code. The Office of the Solicitor General should
likewise study how refund can be exacted from
mall owners who continue to collect parking
fees.
2. The Department of Trade and Industry pursuant to the
provisions of R.A. No. 7394, otherwise known as
the Consumer Act of the Philippines should
enforce the provisions of the Code relative to
parking. Towards this end, the DTI should
formulate the necessary implementing rules and
regulations on parking in shopping malls, with
prior consultations with the local government
units where these are located. Furthermore, the
DTI, in coordination with the DPWH, should be
empowered to regulate and supervise the
 construction and maintenance of parking
establishments.
3. Finally, Congress should amend and update the
National Building Code to expressly prohibit
shopping malls from collecting parking fees by
at the same time, prohibit them from invoking
the waiver of liability.[7]
Respondent SM Prime thereafter received information
that, pursuant to Senate Committee Report No. 225, the DPWH
Secretary and the local building officials of Manila, Quezon City,
and Las Pias intended to institute, through the OSG, an action to
enjoin respondent SM Prime and similar establishments from
collecting parking fees, and to impose upon said establishments
penal sanctions under Presidential Decree No. 1096, otherwise
known as the National Building Code of the Philippines (National
Building Code), and its Implementing Rules and Regulations
(IRR). With the threatened action against it, respondent SM Prime
filed, on 3 October 2000, a Petition for Declaratory Relief [8] under
Rule 63 of the Revised Rules of Court, against the DPWH
Secretary and local building officials of Manila, Quezon City, and
Las Pias. Said Petition was docketed as Civil Case No. 00-1208
and assigned to the RTC of Makati City, Branch 138, presided
over by Judge Sixto Marella, Jr. (Judge Marella). In its Petition,
respondent SM Prime prayed for judgment:
a) Declaring Rule XIX of the Implementing Rules
and Regulations of the National Building Code as ultra
vires, hence, unconstitutional and void;
b) Declaring [herein respondent SM Prime]s
clear legal right to lease parking spaces appurtenant to
its department stores, malls, shopping centers and other
commercial establishments; and
c) Declaring the National Building Code of the
Philippines Implementing Rules and Regulations as
ineffective, not having been published once a week for
three (3) consecutive weeks in a newspaper of general
circulation, as prescribed by Section 211 of Presidential
Decree No. 1096.
[Respondent SM Prime] further prays for such
other reliefs as may be deemed just and equitable under
the premises.[9]
The very next day, 4 October 2000, the OSG filed a
Petition for Declaratory Relief and Injunction (with Prayer for
Temporary Restraining Order and Writ of Preliminary Injunction)
[10]
against respondents. This Petition was docketed as Civil Case
No. 00-1210 and raffled to the RTC of Makati, Branch 135,
presided over by Judge Francisco B. Ibay (Judge Ibay). Petitioner
prayed that the RTC:
1. After summary hearing, a temporary
restraining order and a writ of preliminary injunction be
issued restraining respondents from collecting parking
fees from their customers; and
2. After hearing, judgment be rendered declaring
that the practice of respondents in charging parking fees
 is violative of the National Building Code and its
Implementing Rules and Regulations and is therefore
invalid, and making permanent any injunctive writ issued
in this case.
Other reliefs just and equitable under the
premises are likewise prayed for.[11]
On 23 October 2000, Judge Ibay of the RTC of Makati
City, Branch 135, issued an Order consolidating Civil Case No.
00-1210 with Civil Case No. 00-1208 pending before Judge
Marella of RTC of Makati, Branch 138.
As a result of the pre-trial conference held on the morning
of 8 August 2001, the RTC issued a Pre-Trial Order [12] of even
date which limited the issues to be resolved in Civil Cases No.
00-1208 and No. 00-1210 to the following:
1. Capacity of the plaintiff [OSG] in Civil Case No.
00-1210 to institute the present proceedings and relative
thereto whether the controversy in the collection of
parking fees by mall owners is a matter of public welfare.
2. Whether declaratory relief is proper.
3. Whether respondent Ayala Land, Robinsons,
Shangri-La and SM Prime are obligated to provide
parking spaces in their malls for the use of their patrons or
the public in general, free of charge.
4. Entitlement of the parties of [sic] award of
damages.[13]
On 29 May 2002, the RTC rendered its Joint Decision in
Civil Cases No. 00-1208 and No. 00-1210.
The RTC resolved the first two issues affirmatively. It
ruled that the OSG can initiate Civil Case No. 00-1210 under
Presidential Decree No. 478 and the Administrative Code of
1987.[14] It also found that all the requisites for an action for
declaratory relief were present, to wit:
The requisites for an action for declaratory relief
are: (a) there is a justiciable controversy; (b) the
controversy is between persons whose interests are
adverse; (c) the party seeking the relief has a legal
interest in the controversy; and (d) the issue involved is
ripe for judicial determination.
SM, the petitioner in Civil Case No. 001-1208
[sic] is a mall operator who stands to be affected directly
by the position taken by the government officials sued
namely the Secretary of Public Highways and the
Building Officials of the local government units where it
operates shopping malls. The OSG on the other hand
acts on a matter of public interest and has taken a
position adverse to that of the mall owners whom it sued.
The construction of new and bigger malls has been
announced, a matter which the Court can take judicial
notice and the unsettled issue of whether mall operators
should provide parking facilities, free of charge needs to
be resolved.[15]
 As to the third and most contentious issue, the RTC
pronounced that:
The Building Code, which is the enabling law
and the Implementing Rules and Regulations do not
impose that parking spaces shall be provided by the mall
owners free of charge. Absent such
directive[,] Ayala Land, Robinsons, Shangri-la and SM
[Prime] are under no obligation to provide them for free.
Article 1158 of the Civil Code is clear:
Obligations derived from law are not
presumed. Only those expressly determined
in this Code or in special laws are
demandable and shall be regulated by the
precepts of the law which establishes them;
and as to what has not been foreseen, by
the provisions of this Book (1090).[]
xxxx
The provision on ratios of parking slots to
several variables, like shopping floor area or
customer area found in Rule XIX of the
Implementing Rules and Regulations cannot be
construed as a directive to provide free parking
spaces, because the enabling law, the Building
Code does not so provide. x x x.
To compel Ayala Land, Robinsons, Shangri-
La and SM [Prime] to provide parking spaces for
free can be considered as an unlawful taking of
property right without just compensation.
Parking spaces in shopping malls are
privately owned and for their use, the mall operators
collect fees. The legal relationship could be either
lease or deposit. In either case[,] the mall owners
have the right to collect money which translates into
income. Should parking spaces be made free, this
right of mall owners shall be gone. This, without just
compensation. Further, loss of effective control over
their property will ensue which is frowned upon by
law.
The presence of parking spaces can be
viewed in another light. They can be looked at as
necessary facilities to entice the public to increase
patronage of their malls because without parking
spaces, going to their malls will be
inconvenient. These are[,] however[,] business
considerations which mall operators will have to
decide for themselves. They are not sufficient to
justify a legal conclusion, as the OSG would like the
Court to adopt that it is the obligation of the mall
owners to provide parking spaces for free.[16]
The RTC then held that there was no sufficient evidence
to justify any award for damages.
The RTC finally decreed in its 29 May 2002 Joint Decision in Civil
Cases No. 00-1208 and No. 00-1210 that:
FOR THE REASONS GIVEN, the Court
declares that Ayala Land[,] Inc., Robinsons Land
Corporation, Shangri-la Plaza Corporation and
SM Prime Holdings[,] Inc. are not obligated to
 provide parking spaces in their malls for the use of
their patrons or public in general, free of charge.
All counterclaims in Civil Case No. 00-
1210 are dismissed.
No pronouncement as to costs.[17]
CA-G.R. CV No. 76298 involved the separate appeals of the
OSG[18] and respondent SM Prime[19] filed with the Court of
Appeals. The sole assignment of error of the OSG in its
Appellants Brief was:
THE TRIAL COURT ERRED IN HOLDING THAT
THE NATIONAL BUILDING CODE DID NOT
INTEND MALL PARKING SPACES TO BE FREE
OF CHARGE[;][20]
while the four errors assigned by respondent SM Prime in its
Appellants Brief were:
I pure question of law, not reviewable by the Court of Appeals.
THE TRIAL COURT ERRED IN FAILING TO
DECLARE RULE XIX OF THE IMPLEMENTING
RULES AS HAVING BEEN ENACTED ULTRA
VIRES, HENCE, UNCONSTITUTIONAL AND
VOID.
II
THE TRIAL COURT ERRED IN FAILING TO
DECLARE THE IMPLEMENTING RULES
INEFFECTIVE FOR NOT HAVING BEEN
PUBLISHED AS REQUIRED BY LAW.
III
THE TRIAL COURT ERRED IN FAILING TO
DISMISS THE OSGS PETITION FOR
DECLARATORY RELIEF AND INJUNCTION FOR
FAILURE TO EXHAUST ADMINISTRATIVE
REMEDIES.
IV
THE TRIAL COURT ERRED IN FAILING TO
DECLARE THAT THE OSG HAS NO LEGAL
CAPACITY TO SUE AND/OR THAT IT IS NOT A
REAL PARTY-IN-INTEREST IN THE INSTANT
CASE.[21]
Respondent Robinsons filed a Motion to Dismiss Appeal of the
OSG on the ground that the lone issue raised therein involved a
The Court of Appeals promulgated its Decision in CA-G.R. CV
No. 76298 on 25 January 2007. The appellate court agreed with
respondent Robinsons that the appeal of the OSG should suffer
the fate of dismissal, since the issue on whether or not the
National Building Code and its implementing rules require
shopping mall operators to provide parking facilities to the public
for free was evidently a question of law. Even so, since CA-G.R.
CV No. 76298 also included the appeal of respondent SM Prime,
which raised issues worthy of consideration, and in order to
satisfy the demands of substantial justice, the Court of Appeals
proceeded to rule on the merits of the case.
In its Decision, the Court of Appeals affirmed the capacity of the
OSG to initiate Civil Case No. 00-1210 before the RTC as the
legal representative of the government, [22] and as the one
deputized by the Senate of the Republic of
the Philippines through Senate Committee Report No. 225.
The Court of Appeals rejected the contention of
respondent SM Prime that the OSG failed to exhaust
administrative remedies. The appellate court explained that an
administrative review is not a condition precedent to judicial relief
where the question in dispute is purely a legal one, and nothing of
an administrative nature is to be or can be done.
The Court of Appeals likewise refused to rule on the
validity of the IRR of the National Building Code, as such issue
was not among those the parties had agreed to be resolved by
the RTC during the pre-trial conference for Civil Cases No. 00-
1208 and No. 00-1210. Issues cannot be raised for the first time
on appeal.Furthermore, the appellate court found that the
controversy could be settled on other grounds, without touching
on the issue of the validity of the IRR. It referred to the settled rule
that courts should refrain from passing upon the constitutionality
of a law or implementing rules, because of the principle that bars
judicial inquiry into a constitutional question, unless the resolution
thereof is indispensable to the determination of the case.
Lastly, the Court of Appeals declared that Section 803 of
the National Building Code and Rule XIX of the IRR were clear
and needed no further construction.Said provisions were only
intended to control the occupancy or congestion of areas and
structures. In the absence of any express and clear provision of
law, respondents could not be obliged and expected to provide
parking slots free of charge.
The fallo of the 25 January 2007 Decision of the Court of
Appeals reads:
WHEREFORE, premises considered, the
instant appeals are DENIED. Accordingly,
appealed Decision is hereby AFFIRMED in toto.[23]
In its Resolution issued on 14 March 2007, the Court of Appeals
denied the Motion for Reconsideration of the OSG, finding that
the grounds relied upon by the latter had already been carefully
considered, evaluated, and passed upon by the appellate court,
and there was no strong and cogent reason to modify much less
reverse the assailed judgment.
The OSG now comes before this Court, via the instant
Petition for Review, with a single assignment of error:
THE COURT OF APPEALS SERIOUSLY ERRED
IN AFFIRMING THE RULING OF THE LOWER
 COURT THAT RESPONDENTS ARE NOT parking and loading space requirements shall be
OBLIGED TO PROVIDE FREE PARKING observed:
SPACES TO THEIR CUSTOMERS OR THE
PUBLIC.[24] 1. The parking space ratings listed below are
minimum off-street requirements for
specific uses/occupancies for
The OSG argues that respondents are mandated to buildings/structures:
1.1 The size of an average automobile
provide free parking by Section 803 of the National Building Code
parking slot shall be computed as
and Rule XIX of the IRR. 2.4 meters by 5.00 meters for
perpendicular or diagonal
According to Section 803 of the National Building Code: parking, 2.00 meters by 6.00
meters for parallel parking. A
truck or bus parking/loading slot
SECTION 803. Percentage of Site
shall be computed at a minimum
Occupancy
of 3.60 meters by 12.00
meters. The parking slot shall be
(a) Maximum site occupancy shall be
drawn to scale and the total
governed by the use, type of construction, and
number of which shall be
height of the building and the use, area, nature,
indicated on the plans and
and location of the site; and subject to the
specified whether or not parking
provisions of the local zoning requirements and in
accommodations, are attendant-
accordance with the rules and regulations
managed. (See Section 2 for
promulgated by the Secretary.
computation of parking
requirements).
In connection therewith, Rule XIX of the old IRR, xxxx
[25]
provides:
1.7 Neighborhood shopping center 1
RULE XIX PARKING AND LOADING SPACE slot/100 sq. m. of shopping floor
REQUIREMENTS area

Pursuant to Section 803 of the National

Building Code (PD 1096) providing for maximum
site occupancy, the following provisions on
 The OSG avers that the aforequoted provisions should be
read together with Section 102 of the National Building Code,
which declares:
SECTION 102. Declaration of Policy
It is hereby declared to be the policy of the
State to safeguard life, health, property, and public
welfare, consistent with the principles of sound
environmental management and control; and to this
end, make it the purpose of this Code to provide for all
buildings and structures, a framework of minimum
standards and requirements to regulate and control
their location, site, design, quality of materials,
construction, use, occupancy, and maintenance.
The requirement of free-of-charge parking, the OSG argues,
greatly contributes to the aim of safeguarding life, health,
property, and public welfare, consistent with the principles of
sound environmental management and control. Adequate parking
spaces would contribute greatly to alleviating traffic congestion
when complemented by quick and easy access thereto because
of free-charge parking. Moreover, the power to regulate and
control the use, occupancy, and maintenance of buildings and
structures carries with it the power to impose fees and,
conversely, to control -- partially or, as in this case, absolutely --
the imposition of such fees.
The Court finds no merit in the present Petition.
The explicit directive of the afore-quoted statutory and
regulatory provisions, garnered from a plain reading thereof, is
that respondents, as operators/lessors of neighborhood shopping
centers, should provide parking and loading spaces, in
accordance with the minimum ratio of one slot per 100 square
meters of shopping floor area. There is nothing therein pertaining
to the collection (or non-collection) of parking fees by
respondents. In fact, the term parking fees cannot even be found
at all in the entire National Building Code and its IRR.
Statutory construction has it that if a statute is clear and
unequivocal, it must be given its literal meaning and applied
without any attempt at interpretation. [26]Since Section 803 of the
National Building Code and Rule XIX of its IRR do not mention
parking fees, then simply, said provisions do not regulate the
collection of the same. The RTC and the Court of Appeals
correctly applied Article 1158 of the New Civil Code, which states:
Art. 1158. Obligations derived from law are not
presumed. Only those expressly determined in this
Code or in special laws are demandable, and shall be
regulated by the precepts of the law which establishes
them; and as to what has not been foreseen, by the
provisions of this Book. (Emphasis ours.)
Hence, in order to bring the matter of parking fees within
the ambit of the National Building Code and its IRR, the OSG had
to resort to specious and feeble argumentation, in which the
Court cannot concur.

The OSG cannot rely on Section 102 of the National
Building Code to expand the coverage of Section 803 of the same
Code and Rule XIX of the IRR, so as to include the regulation of
parking fees. The OSG limits its citation to the first part of Section
102 of the National Building Code declaring the policy of the State
to safeguard life, health, property, and public welfare, consistent
with the principles of sound environmental management and
control; but totally ignores the second part of said provision,
which reads, and to this end, make it the purpose of this Code to
provide for all buildings and structures, a framework of
minimum standards and requirements to regulate and control
their location, site, design, quality of materials, construction, use,
occupancy, and maintenance. While the first part of Section 102
of the National Building Code lays down the State policy, it is the
second part thereof that explains how said policy shall be carried
out in the Code. Section 102 of the National Building Code is not
an all-encompassing grant of regulatory power to the DPWH
Secretary and local building officials in the name of life, health,
property, and public welfare. On the contrary, it limits the
regulatory power of said officials to ensuring that the minimum
standards and requirements for all buildings and structures, as
set forth in the National Building Code, are complied with.
Consequently, the OSG cannot claim that in addition to
fixing the minimum requirements for parking spaces for buildings,
Rule XIX of the IRR also mandates that such parking spaces be
provided by building owners free of charge. If Rule XIX is not
covered by the enabling law, then it cannot be added to or
included in the implementing rules. The rule-making power of
administrative agencies must be confined to details for regulating
the mode or proceedings to carry into effect the law as it has
been enacted, and it cannot be extended to amend or expand the
statutory requirements or to embrace matters not covered by the
statute. Administrative regulations must always be in harmony
with the provisions of the law because any resulting discrepancy
between the two will always be resolved in favor of the basic law.
[27]
From the RTC all the way to this Court, the OSG
repeatedly referred to Republic v. Gonzales[28] and City of Ozamis
v. Lumapas[29] to support its position that the State has the power
to regulate parking spaces to promote the health, safety, and
welfare of the public; and it is by virtue of said power that
respondents may be required to provide free parking
facilities. The OSG, though, failed to consider the substantial
differences in the factual and legal backgrounds of these two
cases from those of the Petition at bar.
In Republic, the Municipality of Malabon sought to eject
the occupants of two parcels of land of the public domain to give
way to a road-widening project. It was in this context that the
Court pronounced:
Indiscriminate parking along F. Sevilla
Boulevard and other main thoroughfares was
prevalent; this, of course, caused the build up of
 traffic in the surrounding area to the great
discomfort and inconvenience of the public who
use the streets. Traffic congestion constitutes a
threat to the health, welfare, safety and
convenience of the people and it can only be
substantially relieved by widening streets and
providing adequate parking areas.
The Court, in City of Ozamis, declared that the City had
been clothed with full power to control and regulate its streets for
the purpose of promoting public health, safety and welfare. The
City can regulate the time, place, and manner of parking in the
streets and public places; and charge minimal fees for the street
parking to cover the expenses for supervision, inspection and
control, to ensure the smooth flow of traffic in the environs of the
public market, and for the safety and convenience of the public.
Republic and City of Ozamis involved parking in the local
streets; in contrast, the present case deals with privately owned
parking facilities available for use by the general
public. In Republic and City of Ozamis, the concerned local
governments regulated parking pursuant to their power to control
and regulate their streets; in the instant case, the DPWH
Secretary and local building officials regulate parking pursuant to
their authority to ensure compliance with the minimum standards
and requirements under the National Building Code and its
IRR. With the difference in subject matters and the bases for the
regulatory powers being invoked, Republic and City of Ozamis do
not constitute precedents for this case.
Indeed, Republic and City of Ozamis both contain
pronouncements that weaken the position of the OSG in the case
at bar. In Republic, the Court, instead of placing the burden on
private persons to provide parking facilities to the general public,
mentioned the trend in other jurisdictions wherein the municipal
governments themselves took the initiative to make more parking
spaces available so as to alleviate the traffic problems, thus:
Under the Land Transportation and Traffic
Code, parking in designated areas along public streets
or highways is allowed which clearly indicates that
provision for parking spaces serves a useful purpose.
In other jurisdictions where traffic is at least as
voluminous as here, the provision by municipal
governments of parking space is not limited to parking
along public streets or highways. There has been a
marked trend to build off-street parking facilities with
the view to removing parked cars from the streets.
While the provision of off-street parking facilities or
carparks has been commonly undertaken by private
enterprise, municipal governments have been
constrained to put up carparks in response to public
necessity where private enterprise had failed to keep
up with the growing public demand. American courts
have upheld the right of municipal governments to
construct off-street parking facilities as clearly
redounding to the public benefit.[30]
In City of Ozamis, the Court authorized the collection by
the City of minimal fees for the parking of vehicles along the
streets: so why then should the Court now preclude respondents
from collecting from the public a fee for the use of the mall
parking facilities? Undoubtedly, respondents also incur expenses
in the maintenance and operation of the mall parking facilities,
such as electric consumption, compensation for parking
attendants and security, and upkeep of the physical structures.
It is not sufficient for the OSG to claim that the power to
regulate and control the use, occupancy, and maintenance of
buildings and structures carries with it the power to impose fees
and, conversely, to control, partially or, as in this case, absolutely,
the imposition of such fees. Firstly, the fees within the power of
regulatory agencies to impose are regulatory fees. It has been
settled law in this jurisdiction that this broad and all-compassing
governmental competence to restrict rights of liberty and property
carries with it the undeniable power to collect a regulatory fee. It
looks to the enactment of specific measures that govern the
relations not only as between individuals but also as between
private parties and the political society. [31] True, if the regulatory
agencies have the power to impose regulatory fees, then
conversely, they also have the power to remove the same. Even
so, it is worthy to note that the present case does not involve the
imposition by the DPWH Secretary and local building officials of
regulatory fees upon respondents; but the collection by
respondents of parking fees from persons who use the mall
parking facilities.Secondly, assuming arguendo that the DPWH
Secretary and local building officials do have regulatory powers
over the collection of parking fees for the use of privately owned
parking facilities, they cannot allow or prohibit such collection
arbitrarily or whimsically. Whether allowing or prohibiting the
collection of such parking fees, the action of the DPWH Secretary
and local building officials must pass the test of classic
reasonableness and propriety of the measures or means in the
promotion of the ends sought to be accomplished. [32]
Keeping in mind the aforementioned test of
reasonableness and propriety of measures or means, the Court
notes that Section 803 of the National Building Code falls under
Chapter 8 on Light and Ventilation. Evidently, the Code deems it
necessary to regulate site occupancy to ensure that there is
proper lighting and ventilation in every building. Pursuant thereto,
Rule XIX of the IRR requires that a building, depending on its
specific use and/or floor area, should provide a minimum number
of parking spaces. The Court, however, fails to see the
connection between regulating site occupancy to ensure proper
light and ventilation in every building vis--vis regulating the
collection by building owners of fees for the use of their parking
spaces. Contrary to the averment of the OSG, the former does
not necessarily include or imply the latter. It totally escapes this
Court how lighting and ventilation conditions at the malls could be
affected by the fact that parking facilities thereat are free or paid
for.
The OSG attempts to provide the missing link by arguing
that:
 Under Section 803 of the National Building
Code, complimentary parking spaces are required to
enhance light and ventilation, that is, to avoid traffic
congestion in areas surrounding the building, which
certainly affects the ventilation within the building itself,
which otherwise, the annexed parking spaces would
have served. Free-of-charge parking avoids traffic
congestion by ensuring quick and easy access of
legitimate shoppers to off-street parking spaces
annexed to the malls, and thereby removing the
vehicles of these legitimate shoppers off the busy
streets near the commercial establishments.[33]
The Court is unconvinced. The National Building Code
regulates buildings, by setting the minimum specifications and
requirements for the same. It does not concern itself with traffic
congestion in areas surrounding the building. It is already a
stretch to say that the National Building Code and its IRR also
intend to solve the problem of traffic congestion around the
buildings so as to ensure that the said buildings shall have
adequate lighting and ventilation. Moreover, the Court cannot
simply assume, as the OSG has apparently done, that the traffic
congestion in areas around the malls is due to the fact that
respondents charge for their parking facilities, thus, forcing
vehicle owners to just park in the streets. The Court notes that
despite the fees charged by respondents, vehicle owners still use
the mall parking facilities, which are even fully occupied on some
days. Vehicle owners may be parking in the streets only because
there are not enough parking spaces in the malls, and not
because they are deterred by the parking fees charged by
respondents. Free parking spaces at the malls may even have
the opposite effect from what the OSG envisioned: more people
may be encouraged by the free parking to bring their own
vehicles, instead of taking public transport, to the malls; as a
result, the parking facilities would become full sooner, leaving
more vehicles without parking spaces in the malls and parked in
the streets instead, causing even more traffic congestion.
Without using the term outright, the OSG is actually
invoking police power to justify the regulation by the State,
through the DPWH Secretary and local building officials, of
privately owned parking facilities, including the collection by the
owners/operators of such facilities of parking fees from the public
for the use thereof. The Court finds, however, that in totally
prohibiting respondents from collecting parking fees from the
public for the use of the mall parking facilities, the State would be
acting beyond the bounds of police power.
Police power is the power of promoting the public welfare
by restraining and regulating the use of liberty and property. It is
usually exerted in order to merely regulate the use and enjoyment
of the property of the owner. The power to regulate, however,
does not include the power to prohibit. A fortiori, the power to
regulate does not include the power to confiscate. Police power
does not involve the taking or confiscation of property, with the
exception of a few cases where there is a necessity to confiscate
private property in order to destroy it for the purpose of protecting
peace and order and of promoting the general welfare; for
instance, the confiscation of an illegally possessed article, such
as opium and firearms. [34]
When there is a taking or confiscation of private property
for public use, the State is no longer exercising police power, but
another of its inherent powers, namely, eminent domain. Eminent
domain enables the State to forcibly acquire private lands
intended for public use upon payment of just compensation to the
owner.[35]
Normally, of course, the power of eminent domain results
in the taking or appropriation of title to, and possession of, the
expropriated property; but no cogent reason appears why the
said power may not be availed of only to impose a burden upon
the owner of condemned property, without loss of title and
possession.[36] It is a settled rule that neither acquisition of title nor
total destruction of value is essential to taking. It is usually in
cases where title remains with the private owner that inquiry
should be made to determine whether the impairment of a
property is merely regulated or amounts to a compensable
taking. A regulation that deprives any person of the profitable use
of his property constitutes a taking and entitles him to
compensation, unless the invasion of rights is so slight as to
permit the regulation to be justified under the police power.
Similarly, a police regulation that unreasonably restricts the right
to use business property for business purposes amounts to a
taking of private property, and the owner may recover therefor. [37]
Although in the present case, title to and/or possession of
the parking facilities remain/s with respondents, the prohibition
against their collection of parking fees from the public, for the use
of said facilities, is already tantamount to a taking or confiscation
of their properties. The State is not only requiring that
respondents devote a portion of the latters properties for use as
parking spaces, but is also mandating that they give the public
access to said parking spaces for free. Such is already an
excessive intrusion into the property rights of respondents. Not
only are they being deprived of the right to use a portion of their
properties as they wish, they are further prohibited from profiting
from its use or even just recovering therefrom the expenses for
the maintenance and operation of the required parking facilities.
The ruling of this Court in City Government of Quezon
City v. Judge Ericta[38] is edifying. Therein, the City Government of
Quezon City passed an ordinance obliging private cemeteries
within its jurisdiction to set aside at least six percent of their total
area for charity, that is, for burial grounds of deceased
paupers. According to the Court, the ordinance in question was
null and void, for it authorized the taking of private property
without just compensation:
There is no reasonable relation between the
setting aside of at least six (6) percent of the total area of
all private cemeteries for charity burial grounds of
deceased paupers and the promotion of' health, morals,
good order, safety, or the general welfare of the people.
The ordinance is actually a taking without compensation
of a certain area from a private cemetery to benefit
 paupers who are charges of the municipal corporation.
Instead of' building or maintaining a public cemetery for
this purpose, the city passes the burden to private
cemeteries.
'The expropriation without compensation of a
portion of private cemeteries is not covered by Section
12(t) of Republic Act 537, the Revised Charter of
Quezon City which empowers the city council to prohibit
the burial of the dead within the center of population of
the city and to provide for their burial in a proper place
subject to the provisions of general law regulating burial
grounds and cemeteries. When the Local Government
Code, Batas Pambansa Blg. 337 provides in Section
177(q) that a sangguniang panlungsod may "provide for
the burial of the dead in such place and in such manner
as prescribed by law or ordinance" it simply authorizes
the city to provide its own city owned land or to buy or
expropriate private properties to construct public
cemeteries. This has been the law, and practise in the
past. It continues to the present. Expropriation, however,
requires payment of just compensation. The questioned
ordinance is different from laws and regulations requiring
owners of subdivisions to set aside certain areas for
streets, parks, playgrounds, and other public facilities
from the land they sell to buyers of subdivision lots. The
necessities of public safety, health, and convenience are
very clear from said requirements which are intended to
insure the development of communities with salubrious
and wholesome environments. The beneficiaries of the
regulation, in turn, are made to pay by the subdivision
developer when individual lots are sold to homeowners.
In conclusion, the total prohibition against the collection by
respondents of parking fees from persons who use the mall
parking facilities has no basis in the National Building Code or its
IRR. The State also cannot impose the same prohibition by
generally invoking police power, since said prohibition amounts to
a taking of respondents property without payment of just
compensation.
Given the foregoing, the Court finds no more need to address the
issue persistently raised by respondent SM Prime concerning the
unconstitutionality of Rule XIX of the IRR. In addition, the said
issue was not among those that the parties, during the pre-trial
conference for Civil Cases No. 12-08 and No. 00-1210, agreed to
submit for resolution of the RTC. It is likewise axiomatic that the
constitutionality of a law, a regulation, an ordinance or an act will
not be resolved by courts if the controversy can be, as in this
case it has been, settled on other grounds.[39]
WHEREFORE, the instant Petition for Review
on Certiorari is hereby DENIED. The Decision dated 25 January
2007 and Resolution dated 14 March 2007 of the Court of
Appeals in CA-G.R. CV No. 76298, affirming in toto the Joint
Decision dated 29 May 2002 of the Regional Trial Court of Makati
City, Branch 138, in Civil Cases No. 00-1208 and No. 00-1210 are
hereby AFFIRMED. No costs.
SO ORDERED.
MINITA V. CHICO-NAZARIO
Associate Justice
 CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Third Division
WE CONCUR:

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the

CONSUELO YNARES-SANTIAGO Division Chairpersons Attestation, it is hereby certified that the
Associate Justice conclusions in the above Decision were reached in consultation
Chairperson before the case was assigned to the writer of the opinion of the
Courts Division.

REYNATO S. PUNO
Chief Justice
PRESBITERIO J. VELASCO, JR. ANTONIO EDUARDO B.
NACHURA
Associate Justice Associate Justice
[1]
Rollo, pp. 26-43.
[2]
Penned by Associate Justice Myrna Dimaranan Vidal with
Associate Justices Jose L. Sabio, Jr. and Jose C. Reyes,
DIOSDADO M. PERALTA concurring; rollo, pp. 45-58.
Associate Justice [3]
Penned by Judge Sixto Marella, Jr.; rollo, pp. 250-260.
[4]
Rollo, pp. 59-60.
[5]
Id. at 410-431.
ATTESTATION [6]
Id. at 420-421.
[7]
Id. at 421-422.
I attest that the conclusions in the above Decision were reached [8]
Id. at 64-89.
in consultation before the case was assigned to the writer of the [9]
Id. at 86-87.
opinion of the Courts Division. [10]
Id. at 90-95.
[11]
Id. at 93-94.
[12]
Penned by Judge Sixto Marella, Jr., id., at 61-63.
[13]
Id. at 62-63.
[14]
Section 1 of Presidential Decree No. 478 and Section 35, intervention is necessary or when
Chapter12, Title III of the Administrative Code of 1987, requested by the Court.
enumerate the powers and functions of the OSG. xxxx
[15]
Rollo, p. 252. (11) Act and represent the
[16]
Id. at 258-260. Republic and/or the people before any
[17]
Id. at 260. court, tribunal, body or commission in any
[18]
Id. at 263-272. matter, action or proceeding which, in his
[19]
Id. at 461-516. opinion, affects the welfare of the people
[20]
Id. at 263. as the ends of justice may require; x x x.
[21]
Id. at 462.
[22] [23]
Citing Section 35, Chapter XII, Title III, Book IV of Executive Rollo, p. 57.
[24]
Order No. 292, otherwise known as the Administrative Id. at 33.
[25]
Code of 1987, which provide: A Revised IRR took effect on 30 April 2005. Rule XIX of the old
SECTION 35. Powers and IRR was reproduced in Table VII.4 (Minimum Required
Functions. The Office of the Solicitor Off-Street (Off-RROW)-cum-On-Site Parking Slot,
General shall represent the Government Parking Area and Loading/Unloading Space
of the Philippines, its agencies and Requirements by Allowed Use or Occupancy) of the
instrumentalities and its officials and Revised IRR.
[26]
agents in any litigation, proceeding, Soria v. Desierto, 490 Phil. 749, 754 (2005).
[27]
investigation or matter requiring the Land Bank of the Philippines v. Court of Appeals, 327 Phil.
services of a lawyer. When authorized by 1048, 1052 (1996).
[28]
the President or head of the office G.R. No. 45338-39, 31 July 1991, 199 SCRA 788, 793.
[29]
concerned, it shall also represent 160 Phil. 33 (1975).
[30]
government-owned or controlled Republic v. Gonzales, supra note 28 at 793.
[31]
corporations. The Office of the Solicitor Republic v. Philippine Rabbit Bus Lines, 143 Phil. 158, 163
General shall constitute the law office of (1970).
the Government and, as such, shall
[32]
discharge duties requiring the services of Acebedo Optical Company, Inc. v. Court of Appeals, 385 Phil.
a lawyer. It shall have the following 956, 969 (2000).
[33]
specific powers and functions: Rollo, pp. 36-37.
[34]
xxxx See City Government of Quezon City v. Judge Ericta, 207 Phil.
(3) Appear in any court in any 648, 654 (1983).
[35]
action involving the validity of any treaty, Acua v. Arroyo, G.R. No. 79310, 14 July 1989, 175 SCRA 343,
law, executive order or proclamation, rule 370.
or regulation when in his judgment his
[36]
Republic of the Philippines v. Philippine Long Distance
Telephone Company, 136 Phil. 20, 29 (1969).
[37]
See J. Romeros Dissenting Opinion in Telecommunications
and Broadcast Attorneys of the Philippines v.
Commission on Elections, 352 Phil. 153, 191 (1998). See
also People v. Fajardo, 104 Phil. 443, 447-448 (1958).
[38]
Supra note 34 at 656-657.
[39]
Ty v. Trampe, G.R. No. 117577, 1 December 1995, 250 SCRA
500, 520.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-11028 April 17, 1959

LAO CHIT, plaintiff-appellee,
vs.
SECURITY BANK and TRUST CO. and CONSOLIDATED
INVESTMENT, INC., defendants-appellants.
Nicetas A. Suanes for appellee.
Augusto S. Francisco for appellant Security Bank and Trust Co.
Jesus S. Nava for appellant Consolidated Investments, Inc.
CONCEPCION, J.:
In May, 1949, the consolidated Investments, Inc., hereafter
referred to as the lessor, leased to Domingo T. Dikit part of the
lobby, on the ground floor of the Consolidated Building, at Plaza
Goiti, Manila, to be used as offices of the proposed Bank of
Manila, then being organized by said Dikit and Jose Silva.
Pursuant to the lease contract between the parties (Exhibits 2, 2-
A and 2-B), the lessee undertook to construct, at the expense
thereof, such walls, partitions and other improvements as may be
necessary to make the leased premises suitable for banking
purposes, and such partitions and improvements "shall become
the property" of the lessor "upon the termination and/or
rescission" of said contract. It appears that, pursuant to another
contract. It appears that, pursuant to another entered into June,
1949, between Dikit and Silva on the one hand, and plaintiff Lao
Chit, on the other (Exhibit A-1, and A-2 and A-3), the latter
furnished the materials and the work for said walls, partitions and
improvements, at a total cost of P59,365, payable "as soon as the
Bank of Manila opens for business, and is given a permit by the
Central Bank." This permit however, was never issued. The
proposed Bank of Manila did not open for business, and rentals
due under said lease contract, at the rate of P5,000 a month,
beginning from October, 1949, were not paid. On December 3,
1949, the lessor instituted Civil Case No. 9708 of the Municipal
Court of Manila against Dikit, for unlawful detainer. After
appropriate proceedings, said court rendered judgement on
March 27, 1950, sentencing Dikit.
. . . to vacate the premises described in the complaint, and to
pay the plaintiff the sum of P10,000.00, under the first cause of
action, corresponding rentals due from October to November,
1949, plus the sum of P227.80, under the second cause of
action, for electric consumption up to November 30, 1949; plus
the rents that will become due from December 1, 1949, at the
rate P5,000.00 per month until the date said defendant finally
vacates and surrenders possession to the plaintiff and costs of
this suit. (Exhibit 3.)
Dikit appealed from this decision to the Court of First Instance of
Manila, where the case was docketed as Civil Case No. 11214 of
said court. He likewise, applied, in the Supreme Court in Case
G.R. No. L-3621, entitled "Domingo Dikit vs. Hon Ramon
Icasiano" for a writ of certiorari against the municipal judge
who had rendered the aforementioned decision in the ejectment
case. Said cases No. 11214 and L-3621 were soon dismissed,
however, upon agreement of the parties, dated May 22, 1951,
whereby Dikit, among other things, relinquished whatever rights
have to the possession of the leased premises and disclaimed all
rights to and over any and all improvements introduced therein
while he was in possession thereof.
Prior to said decision, but after the commencement of the said
Case No. 9708 Lao Chit had filed Civil Case No. 10178 of the
Court of First Instance of Manila, against Dikit and Silva, for the
recovery of what was due from them by reason of the
aforementioned improvements introduced by Lao Chit. On June
30, 1953, judgement was rendered in said Case No. 10178 the
dispositive part of which reads as follows:
 WHEREFORE, judgement is hereby rendered in favor of the
plaintiff and against the defendants, sentencing the latter to
pay the former, jointly and severally, the sum of P59,365.00,
which is the total of the claim under the second, third and
fourth causes of action, the same to be paid within 15 days
from notice, with legal interest from the date of the filing of the
complaint until its full payment; and in the event the
defendants fail to pay within the period of grace herein fixed,
the fixtures herein referred to (which by express agreement of
the parties shall remain the plaintiff's property until they are
fully paid for) shall be returned to the plaintiff. The defendants
shall also pay jointly and severally the plaintiff by way of
damages an amount equivalent to 12% of the aforementioned
sum of P59,365.00. The defendants shall likewise pay the
plaintiff, jointly and severally, another sum equivalent to 25% of
the amounts claimed in the first and sixth causes of action,
besides amount claimed in the first and sixth causes of action,
besides an amount equivalent to six (6%) of the sums due and
payable under the second and third causes of action as
attorney's fees, with costs against them. (Exhibit A.)
In due course, the corresponding writ of execution (Exhibits D-1
and D-3) of this judgment was subsequently issued. Later on it
was returned by the sheriff unsatisfied, with the statement that
neither Dikit nor Silva had any property registered in their
respective names, and that the whereabouts of Silva was
unknown (Exhibits D-2 and D-4). Meanwhile, or on September
10, 1953, Lao Chit brought the present action against the Security
Bank and Trust Company (Hereafter referred to as the Bank), to
which the lessor had, since July 1, 1951, leased the premises in
question (after it had been vacated by Silva), together with the
fixtures and improvements introduced therein by Lao Chit. In its
complaint, Lao Chit demanded payment of P1,000 a month, by
way of rental for the use of said fixtures and improvements by the
Bank, in addition to expenses of litigation, attorney's fees and
costs. In its answer, the Bank alleged that it held and used said
improvements pursuant to its contract of lease with the lessor and
that it had paid the rentals due and complied with its other
obligations under said contract, and set up a counterclaim for
damages. Soon thereafter, or on November 5, 1953, Lao Chit
demanded payment of the aforementioned sum of P59,365, plus
P1,000 a month from June, 1951, from the lessor, which did not
heed the demand, whereupon the complaint herein was, on
December 18, 1953, amended to include said lessor as one of
the defendants. The latter alleged, in its answer, that the
improvements in question were introduced at the initiative and
expense of Dikit and Silva, as lessees of the premises above
referred to, and that, as permanent fixtures, said improvements
form an integral part of the Consolidated Investments Building,
and belong to the lessor and owner thereof, not to plaintiff herein,
who has no contractual or juridical relation with the lessor. The
lessor, likewise, sought to recover, by way of counterclaim, the
sum of P50,000, as damages for its inclusion as defendant
herein, aside from attorney's fees and costs. In due course, the
Court of First Instance of Manila rendered judgment on December
28, 1955, the dispositive part of which reads:
WHEREFORE, judgment is hereby rendered, sentencing the
defendant, Consolidated Investments, Inc., to pay to the
plaintiff the value of the permanent improvements in the sum
of P59,365.00, and, together with the defendant, Security
Bank and Trust Company, to pay, jointly and severally, for the
use of the permanent improvements, at the rate of P1,000.00
monthly from June, 1951 to July 31, 1954, and thereafter, until
January, 1955, by the defendant, Consolidated Investments,
Inc., alone, at the same rate, and in both instances, plus legal
interest until full payment thereof; in addition, the defendant,
Consolidated Investments, Inc., is further ordered to pay to the
plaintiff the amount equivalent to 80% of whatever amount is
due from it, as reimbursement for plaintiff's litigation expenses,
 including attorney's contingent fees, aside from moral,
nominal, moderate and exemplary damages in the amount of
P2,000.00, and the costs of suit.
Defendants' counterclaim are hereby both dismissed for lack
of merits and in view of the above conclusion of the Court.
Their respective motions for reconsideration and new trial having
been denied, the defendants have appealed from this decision.
It is apparent to us that the lower court erred in rendering
judgment against the Bank. This defendant had occupied and
used the premises in question, including the partitions, fixtures
and other improvements made therein by Lao Chit, pursuant to a
contract of lease entered into with lessor, the right of which to
enter into said contract is not disputed. Moreover, the Bank had
paid the rentals and fulfilled its other obligations under said
contract. Again, it cannot be denied that the improvements
introduced by Lao Chit became property of the lessor, not only
because such improvements are permanent in nature and cannot
be removed without impairing the building to which they were
attached, but, also, because the contract of lease between Dikit
and Silva on the hand, and the lessor, on the other hand,
provided explicitly that the latter shall own those improvements
"upon the expiration and/or rescission" of said contract, and the
same has already been resolved. Although Lao Chit was not a
party to said contract, this stipulation is binding upon him, he
having introduced said improvements pursuant to his contract
with Dikit, from whom he derived, therefore, his right to enter the
building and make the improvements. In short, insofar as the
construction thereof, Lao Chit was, vis-a-vis the lessor, a mere
agent or representative of Dikit and, as such, was privy to the
undertakings of Dikit under his contract of lease with the lessor.
The lower court held the latter liable to Lao Chit upon the ground
that Lao Chit was a builder in good faith, under the provisions of
the Old Civil Code, and under the theory of undue enrichment.
As regards the first ground, Article 361 of the Civil Code of Spain,
on which the lower court relied, provides:
The owner of land on which anything has been built, sown, or
planted, in good faith, shall be entitled to appropriate the thing
so built, sown, or planted, upon paying the compensation
mentioned in Articles 453 and 454, or to compel the person
who has built or planted to pay him the value of the land, and
the person who sowed thereon to pay the proper rent thereof.
It is well settled, however, that this provisions refers to one who
builds upon a land which he believes to be his property (Alburo
vs. Villanueva, 7 Phil., 277; Cortes vs. Ramon, 46 Phil., 184;
Rivera vs. Trinidad, 48 Phil., 396; Fojas vs. Velasco, 51 Phil., 520;
Montinola vs. Bantug, 71 Phil., 449-450; Lopez Inc. vs.
Philippines & Eastern Trading Co., Inc., 98 Phil., 348; 52 Off.
Gaz., 1452). Neither Lao Chit, nor Dikit, claimed the Consolidated
Investments Building as his own. Dikit was a mere lessee and
Lao Chit was his agent, as such, in the construction of the
improvements under consideration. In any event, the Spanish text
of said Article 361, which is the original, reads:
El dueo del terreno en que se edificare, sembrare o plantare
de buena fe, tendra derecho a hacer suya la obra, siembra o
plantacion, previa la indemnizacion establecida en los
articulos 453 y 454, o a obligar al que edifico o planto a pagar
el precio del terreno, y al que sembro, la renta
correspondiente. (Emphasis supplied.)
Clearly this provision is limited in its application to "buildings"
constructed on another's land or "terreno", not to partitions,
railings, counters, shelves and other fixtures made in a
building belonging to the owner of the land. Although the verb
"edificar" in Spanish is roughly synonymous with "build" in
English, the latter is broader in its connotation than the former.
Literally, "edificar" is to undertake the construction of an edifice,
such as a fort, castle, house, church, market, tower, stadium,
barrack, stable or other similar structure. Upon the other hand,
one may build a house, as well as a fence, partition, window,
door, or even a desk or chair. It is apparent, therefore, that Lao
Chit is not entitled to the benefit of said Article 361.
The lower court, moreover, said:
. . . convincing evidence abounds, to wit: that the
improvements were made in the presence of, and with the
knowledge and consent, and even under the personal
supervision, on the part of the duly authorized representative
of the defendant, Consolidated Investments, Inc., which owns
the building. Thus, it may even be said that it was the
defendant, Consolidated Investments Inc., which had acted in
bad faith. (Record on Appeal of Consolidated Investments,
Inc., p. 56.)
and quoted, in support thereof, the second paragraph of Article
364 of the Spanish Civil Code, reading:
Bad faith on the part of the owner is deemed to exist whenever
the act has been done in his presence, with his knowledge and
tolerance, and without opposition on his part.
The foregoing view is, likewise, untenable. To begin with, this
Article 364, involves a person who builds, plants or sows upon a
land not knowing that it belongs to another. Inasmuch as, there is
no contractual relation between them, their rights are governed
by law, not by contract.
Secondly, under his contract of lease with the lessor, Dikit had a
legal right to make the improvements in question and the lessor
was legally bound to permit Dikit and his agent Lao Chit to enter
the leased premises and construct said improvements. Surely,
compliance with this valid contractual obligation does not, and
cannot, constitute bad faith on the part of the lessor. Upon the
other hand, the lessor could not legally object to, or obstruct, the
work done by Lao Chit, without being chargeable with bad faith in
the performance of said contractual obligation with Dikit.
In order to justify the application of the principle that no one
should be permitted to unjustly enrich himself at the expense of
another, His Honor the Trial Judge cited Article 356 of the Civil
Code of Spain, which provides:
He who receives fruits is obliged to pay any expenses which
may have been incurred by another in the production,
gathering, and preservation thereof.
We agree with the lessor that this Article is not in point, for:
(a) Said provision is part of Section I, Chapter II, Title II, Book II,
of the Spanish Civil Code, which section regulates the "right of
accession with respect to the products of property," and the work
done and the improvements introduced by Lao Chit are not
"products" of the lessor's property.
(b) Said Article 356 refers to "expenses" of production, gathering
and preservation" of fruits received by the owner of the property,
not to improvements, whereas the claim of Lao Chit is based
upon "improvements" introduced, not "expenses" incurred by him
for the "production, gathering and preservation" of fruits. In the
language of Manresa:
. . . el Codigo exige el propietario pague al tercer poseedor que
fue de la cosa los gastos de produccion, y en su caso los de
recoleccion y conservacion. El propietario no puede excusarse
alegando la mala fe del tercero, porque sea de buena o de mala
fe, lo cierto es que este ha hecho un gasto, no solo util para el
propietario, sino necesario, y sin el cual el propietario no
hubiera obtenido frutos de su fundo, resultando ademas que, de
no mediar indemnizacion, se consagraria el injusto principio de
que uno puede enriquecerse a costa y con dao de otro. Para
afirmarse por completo en esta opinion debe concordarse el
articulo que comentamos con los 452 a 456, relativos a los
efectos de la posesion de buena y mala fe, y que no
examinamos ahora porque el asunto se trata luego con mas
detalles.
Los gastos de produccion y demas, para que puedan
conceptuarse reembolsables por el propietario en el caso que
suponemos, deben tener dos caracteres: primero, que esten
dedicados a la produccion anual; es decir, que no se trata en
este supuesto de las bonificaciones generales del fundo.
Semejantes bonificaciones entran en la categoria de las
mejoras, que se regulan en otro lugar del Codigo (al tratar de la
posesion), y segundo, que no sean superfluos, excesivos o de
puro lujo, sino que deben ser hechos en aquella medida natural
que la condicion del cultivo o trabajo de que se trata exige. (3
Manresa [6th ed.], 196; Emphasis supplied.)
(c) The right to recover under the principle of undue enrichment is
justifiable under Article 1887 of the Spanish Civil Code, reading:
Quasi contracts are licit and purely voluntary acts which create
an obligation on the part of the actor in favor of a third person,
and, at times, a reciprocal obligation between the parties
concerned.
Its counterpart in the Civil Code of the Philippines is Article 2142,
which we quote:
Certain lawful, voluntary and unilateral acts give rise to the
juridical relation of quasi-contract to the end that no one shall be
unjustly enriched or benefited at the expense of another.
The former is part of Title XVI, Book IV of the Spanish Civil Code,
entitled "obligations incurred without contract", whereas the latter
is included in Title XVII, Book IV of the Civil Code of the
Philippines, regulating "extra-contractual obligations" or
obligations beyond, outside of, or outside the scope of, a contract.
The construction of the improvements in question was not a
"purely voluntary act" or "unilateral act" of Lao Chit. He introduced
them in a compliance with a bilateral "obligation" he undertook
under his contract with Dikit. The right of Dikit to enter into such
contract, in turn, sprang from his lease contract with the lessor. As
a privy to Dikit's rights under this contract, insofar as said
improvements are concerned, Lao Chit's title thereto, as against
the lessor, is governed, therefore, by such contract of lease, not
by any quasi-contract, or by the principles of equity, as
distinguished from law, contracts or quasi-contracts.
(d) For the principle of undue enrichment to apply, there must be
"enrichment" and the same must be "undue" or "unjust".
In the case at bar, Dikit failed to pay the agreed monthly rental of
P5,000 from October, 1949. Up to July 1, 1951, when the
premises in question were leased to the Bank, the rentals due
from Dikit aggregated, therefore, P105,000. Thus, despite the fact
that the lessor had become the owner of the improvements in
question, worth P59,365.00, is still suffered a loss of over
P45,000.00. Such "loss" negates the idea of "enrichment".
Neither may the latter be deemed to have taken place in the
sense that said improvements had increased the productive
capacity of the leased premises, for, despite said improvements,
the Bank agreed to pay, beginning from July 1, 1951, only P4,000
a month, or P1,000 a month less than the rental stipulated with
Dikit.
Regardless of the foregoing, Lao Chit had no reason to believe
and he does not claim to have acted under the belief that Dikit
owned the leased premises. In fact, the circumstances
surrounding the case are such as to leave the room for doubt that
Lao Chit knew that Dikit was not the owner of said property and
that the same belonged to the lessor. Besides, Lao Chit should
have known that, as Dikit's agent, in the construction of the
improvements, he (Lao Chit) was subject to the limitations
imposed upon Dikit by his contract with the lessor and that the
improvements in question became property of the owner of the
building, not only by operation of law, as accessions to said
building, but, also, for specific stipulation in the contract of lease
between Dikit and the lessor. Inasmuch as the acquisition of said
improvements by the owner of the building and lessor is ordained
by law and provided for by said contract, which is admittedly
valid, the resulting enrichment if any by said owner and
lessor, is neither "undue" nor "unjustly".
Upon the other hand, he had been reasonably vigilant, Lao Chit
could have demanded from Dikit a mortgage, or a bond, or some
other security, for the protection of his rights, yet he (Lao Chit) did
not do so. Should the lessor be required to pay Lao Chit what he
is entitled to recover from Dikit, but which he (Lao Chit) cannot
due to his oversight, carelessness or negligence collect from
Dikit, the effect would be to relieve Lao Chit of the consequences
of his own inadvertence or negligence, and hold the lessor
responsible therefor. This would be neither fair, nor just, nor
equitable.
Lastly, the lower court declared that the improvements in question
belong to Lao Chit, because it had been so held in Case No.
10718 instituted by him against Dikit and Silva. Obviously,
however, the proceedings in that case and the decision therein
rendered are not binding upon the lessor, the same being neither
a party in said case, nor a successor to the interest of the
defendants therein. Besides, the aforementioned finding is not
borne out by Lao Chit's contract with Dikit and Silva (Exhibits A-1,
A-2, A-2-a and A-3). Indeed, even if Dikit and Silva had agreed
with Lao Chit and they had no such agreement that he
would own the improvements until payment of the price thereof,
the stipulation would be, neither valid, nor binding upon the
lessor, for Dikit and Silva had no authority whatsoever to waive
the statutory right of accession of the lessor to and over said
improvements (Arts. 353 and 358, Civil Code of Spain; Arts. 440
and 445, Civil Code of the Philippines).
Wherefore, the decision appealed from is hereby reversed and
another one shall be entered dismissing the complaint, with costs
against plaintiff-appellee Lao Chit. It is so ordered.
Paras, C.J., Bengzon, Padilla, Montemayor, Reyes, A., Bautista
Angelo, Labrador and Endencia, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 97995 January 21, 1993
PHILIPPINE NATIONAL BANK, petitioner,
vs.
COURT OF APPEALS AND B.P. MATA AND CO.,
INC., respondents.
Roland A. Niedo for petitioner.
Benjamin C. Santos Law Office for respondent.
ROMERO, J.:
Rarely is this Court confronted with a case calling for the
delineation in broad strokes of the distinctions between such
closely allied concepts as the quasi-contract called "solutio
indebiti" under the venerable Spanish Civil Code and the species
of implied trust denominated "constructive trusts," commonly
regarded as of Anglo-American origin. Such a case is the one
presented to us now which has highlighted more of the affinity
and less of the dissimilarity between the two concepts as to lead
the legal scholar into the error of interchanging the two.
Presented below are the factual circumstances that brought into
juxtaposition the twin institutions of the Civil Law quasi-contract
and the Anglo-American trust.
Private Respondent B.P. Mata & Co. Inc. (Mata), is a private
corporation engaged in providing goods and services to shipping
companies. Since 1966, it has acted as a manning or crewing
agent for several foreign firms, one of which is Star Kist Foods,
Inc., USA (Star Kist). As part of their agreement, Mata makes
advances for the crew's medical expenses, National Seaman's
Board fees, Seaman's Welfare fund, and standby fees and for the
crew's basic personal needs. Subsequently, Mata sends monthly
billings to its foreign principal Star Kist, which in turn reimburses
Mata by sending a telegraphic transfer through banks for credit to
the latter's account.
Against this background, on February 21, 1975, Security Pacific
National Bank (SEPAC) of Los Angeles which had an agency
arrangement with Philippine National Bank (PNB), transmitted a
cable message to the International Department of PNB to pay the
amount of US$14,000 to Mata by crediting the latter's account
with the Insular Bank of Asia and America (IBAA), per order of
Star Kist. Upon receipt of this cabled message on February 24,
1975, PNB's International Department noticed an error and sent a
service message to SEPAC Bank. The latter replied with
instructions that the amount of US$14,000 should only be for
US$1,400.
On the basis of the cable message dated February 24, 1975
Cashier's Check No. 269522 in the amount of US$1,400
(P9,772.95) representing reimbursement from Star Kist, was
issued by the Star Kist for the account of Mata on February 25,
1975 through the Insular Bank of Asia and America (IBAA).
However, fourteen days after or on March 11, 1975, PNB effected
another payment through Cashier's Check No. 270271 in the
amount of US$14,000 (P97,878.60) purporting to be another
transmittal of reimbursement from Star Kist, private respondent's
foreign principal.
Six years later, or more specifically, on May 13, 1981, PNB
requested Mata for refund of US$14,000 (P97,878.60) after it
discovered its error in effecting the second payment.
On February 4, 1982, PNB filed a civil case for collection and
refund of US$14,000 against Mata arguing that based on a
constructive trust under Article 1456 of the Civil Code, it has a
right to recover the said amount it erroneously credited to
respondent Mata. 1
After trial, the Regional Trial Court of Manila rendered judgment
dismissing the complaint ruling that the instant case falls squarely
under Article 2154 on solutio indebiti and not under Article 1456
on constructive trust. The lower court ruled out constructive trust,
applying strictly the technical definition of a trust as "a right of
property, real or personal, held by one party for the benefit of
another; that there is a fiduciary relation between a trustee and
a cestui que trust as regards certain property, real, personal,
money or choses in action." 2
In affirming the lower court, the appellate court added in its
opinion that under Article 2154 on solutio indebiti, the person who
makes the payment is the one who commits the mistake vis-a-
vis the recipient who is unaware of such a
mistake. 3 Consequently, recipient is duty bound to return the
amount paid by mistake. But the appellate court concluded that
petitioner's demand for the return of US$14,000 cannot prosper
because its cause of action had already prescribed under Article
1145, paragraph 2 of the Civil Code which states:
The following actions must be commenced within
six years:
xxx xxx xxx
(2) Upon a quasi-contract.
This is because petitioner's complaint was filed only on
February 4, 1982, almost seven years after March 11, 1975
when petitioner mistakenly made payment to private
respondent.
Hence, the instant petition for certiorari proceeding seeking to
annul the decision of the appellate court on the basis that Mata's
obligation to return US$14,000 is governed, in the alternative, by
either Article 1456 on constructive trust or Article 2154 of the Civil
Code on quasi-contract. 4
Article 1456 of the Civil Code provides:
If property is acquired through mistake or fraud, the person
obtaining it is, by force of law, considered a trustee of an
implied trust for the benefit of the person from whom the
property comes.
On the other hand, Article 2154 states:
If something is received when there is no right to demand it,
and it was unduly delivered through mistake, the obligation to
return it arises.
Petitioner naturally opts for an interpretation under constructive
trust as its action filed on February 4, 1982 can still prosper, as it
is well within the prescriptive period of ten (10) years as provided
by Article 1144, paragraph 2 of the Civil Code. 5
If it is to be construed as a case of payment by mistake or solutio
indebiti, then the prescriptive period for quasi-contracts of six
years applies, as provided by Article 1145. As pointed out by the
appellate court, petitioner's cause of action thereunder shall have
prescribed, having been brought almost seven years after the
cause of action accrued. However, even assuming that the instant
case constitutes a constructive trust and prescription has not set
in, the present action has already been barred by laches.
To recall, trusts are either express or implied. While express
trusts are created by the intention of the trustor or of the parties,
implied trusts come into being by operation of law. 6 Implied trusts
are those which, without being expressed, are deducible from the
nature of the transaction as matters of intent or which are
superinduced on the transaction by operation of law as matters of
equity, independently of the particular intention of the parties. 7
In turn, implied trusts are subdivided into resulting and
constructive trusts. 8 A resulting trust is a trust raised by
implication of law and presumed always to have been
contemplated by the parties, the intention of which is found in the
nature of the transaction, but not expressed in the deed or
instrument of conveyance. 9 Examples of resulting trusts are
found in Articles 1448 to 1455 of the Civil Code. 10 On the other
hand, a constructive trust is one not created by words either
expressly or impliedly, but by construction of equity in order to
satisfy the demands of justice. An example of a constructive trust
is Article 1456 quoted above. 11
A deeper analysis of Article 1456 reveals that it is not a trust in
the technical sense 12 for in a typical trust, confidence is reposed
in one person who is named a trustee for the benefit of another
who is called the cestui que trust, respecting property which is
held by the trustee for the benefit of the cestui que trust. 13 A
constructive trust, unlike an express trust, does not emanate
from, or generate a fiduciary relation. While in an express trust, a
beneficiary and a trustee are linked by confidential or fiduciary
relations, in a constructive trust, there is neither a promise nor
any fiduciary relation to speak of and the so-called trustee neither
accepts any trust nor intends holding the property for the
beneficiary. 14
In the case at bar, Mata, in receiving the US$14,000 in its account
through IBAA, had no intent of holding the same for a supposed
beneficiary or cestui que trust, namely PNB. But under Article
1456, the law construes a trust, namely a constructive trust, for
the benefit of the person from whom the property comes, in this
case PNB, for reasons of justice and equity.
At this juncture, a historical note on the codal provisions on trust
and quasi-contracts is in order.
Originally, under the Spanish Civil Code, there were only two
kinds of quasi contracts: negotiorum gestio and solutio indebiti.
But the Code Commission, mindful of the position of the eminent
Spanish jurist, Manresa, that "the number of quasi contracts may
be indefinite," added Section 3 entitled "Other Quasi-Contracts." 15
Moreover, even as Article 2142 of the Civil Code defines a quasi-
contract, the succeeding article provides that: "The provisions for
quasi-contracts in this Chapter do not exclude other quasi-
contracts which may come within the purview of the preceding
article." 16
Indubitably, the Civil Code does not confine itself exclusively to
the quasi-contracts enumerated from Articles 2144 to 2175 but is
open to the possibility that, absent a pre-existing relationship,
there being neither crime nor quasi-delict, a quasi-contractual
relation may be forced upon the parties to avoid a case of unjust
enrichment. 17 There being no express consent, in the sense of a
meeting of minds between the parties, there is no contract to
speak of. However, in view of the peculiar circumstances or
factual environment, consent is presumed to the end that a
recipient of benefits or favors resulting from lawful, voluntary and
unilateral acts of another may not be unjustly enriched at the
expense of another.
Undoubtedly, the instant case fulfills the indispensable requisites
of solutio indebiti as defined in Article 2154 that something (in this
case money) has been received when there was no right to
demand it and (2) the same was unduly delivered through
mistake. There is a presumption that there was a mistake in the
payment "if something which had never been due or had already
been paid was delivered; but he from whom the return is claimed
may prove that the delivery was made out of liberality or for any
other just cause." 18
In the case at bar, a payment in the corrected amount of
US$1,400 through Cashier's Check No. 269522 had already been
made by PNB for the account of Mata on February 25, 1975.
Strangely, however, fourteen days later, PNB effected another
payment through Cashier's Check No. 270271 in the amount of
US$14,000, this time purporting to be another transmittal of
reimbursement from Star Kist, private respondent's foreign
principal.
While the principle of undue enrichment or solutio indebiti, is not
new, having been incorporated in the subject on quasi-contracts
in Title XVI of Book IV of the Spanish Civil Code entitled
"Obligations incurred without contract," 19the chapter on Trusts is
fairly recent, having been introduced by the Code Commission in
1949. Although the concept of trusts is nowhere to be found in the
Spanish Civil Code, the framers of our present Civil Code
incorporated implied trusts, which includes constructive trusts, on
top of quasi-contracts, both of which embody the principle of
equity above strict legalism. 20
In analyzing the law on trusts, it would be instructive to refer to
Anglo-American jurisprudence on the subject. Under American
Law, a court of equity does not consider a constructive trustee for
all purposes as though he were in reality a trustee; although it will
force him to return the property, it will not impose upon him the
numerous fiduciary obligations ordinarily demanded from a
trustee of an express trust. 21 It must be borne in mind that in an
express trust, the trustee has active duties of management while
in a constructive trust, the duty is merely to surrender the
property.
Still applying American case law, quasi-contractual obligations
give rise to a personal liability ordinarily enforceable by an action
at law, while constructive trusts are enforceable by a proceeding
in equity to compel the defendant to surrender specific property.
To be sure, the distinction is more procedural than substantive. 22
Further reflection on these concepts reveals that a constructive
"trust" is as much a misnomer as a "quasi-contract," so far
removed are they from trusts and contracts proper, respectively.
In the case of a constructive trust, as in the case of quasi-
contract, a relationship is "forced" by operation of law upon the
parties, not because of any intention on their part but in order to
prevent unjust enrichment, thus giving rise to certain obligations
not within the contemplation of the parties. 23
Although we are not quite in accord with the opinion that "the
trusts known to American and English equity jurisprudence are
derived from the fidei commissa of the Roman Law," 24 it is safe to
state that their roots are firmly grounded on such Civil Law
principles are expressed in the Latin maxim, "Nemo cum alterius
detrimento locupletari potest," 25 particularly the concept of
constructive trust.
Returning to the instant case, while petitioner may indeed opt to
avail of an action to enforce a constructive trust or the quasi-
contract of solutio indebiti, it has been deprived of a choice, for
prescription has effectively blocked quasi-contract as an
alternative, leaving only constructive trust as the feasible option.
Petitioner argues that the lower and appellate courts cannot
indulge in semantics by holding that in Article 1456 the recipient
commits the mistake while in Article 2154, the recipient commits
no mistake. 26 On the other hand, private respondent, invoking the
appellate court's reasoning, would impress upon us that under
Article 1456, there can be no mutual mistake. Consequently,
private respondent contends that the case at bar is one of solutio
indebiti and not a constructive trust.
We agree with petitioner's stand that under Article 1456, the law
does not make any distinction since mutual mistake is a
possibility on either side on the side of either the grantor or the
grantee. 27 Thus, it was error to conclude that in a constructive
trust, only the person obtaining the property commits a mistake.
This is because it is also possible that a grantor, like PNB in the
case at hand, may commit the mistake.
Proceeding now to the issue of whether or not petitioner may still
claim the US$14,000 it erroneously paid private respondent under
a constructive trust, we rule in the negative. Although we are
aware that only seven (7) years lapsed after petitioner
erroneously credited private respondent with the said amount and
that under Article 1144, petitioner is well within the prescriptive
period for the enforcement of a constructive or implied trust, we
rule that petitioner's claim cannot prosper since it is already
barred by laches. It is a well-settled rule now that an action to
enforce an implied trust, whether resulting or constructive, may
be barred not only by prescription but also by laches. 28
While prescription is concerned with the fact of delay, laches
deals with the effect of unreasonable delay. 29 It is amazing that it
took petitioner almost seven years before it discovered that it had
erroneously paid private respondent. Petitioner would attribute its
mistake to the heavy volume of international transactions handled
by the Cable and Remittance Division of the International
Department of PNB. Such specious reasoning is not persuasive.
It is unbelievable for a bank, and a government bank at that,
which regularly publishes its balanced financial statements
annually or more frequently, by the quarter, to notice its error only
seven years later. As a universal bank with worldwide operations,
PNB cannot afford to commit such costly mistakes. Moreover, as
between parties where negligence is imputable to one and not to
the other, the former must perforce bear the consequences of its
neglect. Hence, petitioner should bear the cost of its own
negligence.
WHEREFORE, the decision of the Court of Appeals dismissing
petitioner's claim against private respondent is AFFIRMED.
Costs against petitioner.
SO ORDERED.
Bidin, Davide, Jr. and Melo, JJ., concur.
Gutierrez, Jr., J., concurs in the result.
# Footnotes
1 Records, p. 122.
2 Salao v. Salao, G.R. No. L-26699, March 16, 12 Ramos v. Ramos, G.R. No. L-19872 December
1976, 70 SCRA 65. 3, 1974, 61 SCRA 284, citing Gayondato v.
Treasurer of the Philippine Islands, 49 Phil. 244.
3 Rollo, p. 41.
13 State ex Wirt v. Superior Court for Spokane
4 Rollo, p. 27. Country, 10 Wash. 2d, 362, 116 P. 2d 752, 755,
Article 1440 Civil Code.
5 Article 1144. The following actions must be
brought within ten years from the time the right of 14 Diaz v. Goricho, 103 Phil. 261.
action accrues:
15 Report of the Code Commission, p. 60.
xxx xxx xxx
16 Article 2143, Civil Code.
(2) Upon an obligation created by law;
17 Report of the Code Commission, pp. 159-160.
xxx xxx xxx
18 Article 2163, Civil Code.
6 Article 1441, Civil Code.
19 Lao Chit v. Security and Trust Co. and
7 89 CJS 724. Consolidated Investment, Inc., 105 Phil. 490.

8 89 CJS 722. 20 Report of the Code Commission, p. 26.

9 89 CJS 725. 21 Scott on Trusts, Volume 3, p. 2315.

10 Aquino, Civil Code, Vol. II. pp. 556-557; Ramos 22 Ibid, p. 2312.
v. Ramos, G.R. No. L-19872, December 3, 1974,
61 SCRA 284. 23 Scott on Trusts, Volume 3, p. 2316.

11 Salao v. Salao, G.R. No. L-26699, March 16, 24 Government v. Abadilla, 46 Phil. 642 and
1976, 70 SCRA 65. Miguel et al v. Court of Appeals,
L-20274, October 30, 1969, 29 SCRA 760.
25 Translated as, "No one should be allowed to
enrich himself unjustly at the expense of another."
(Jenk Cent. Cas. 4; 10 Barb. [N.Y.] 626, 633,
"Cyclopedic Law Dictionary," 2nd Edition, p. 688).

26 Rollo, p. 32.

27 Tolentino, Civil Code of the Philippines, Vol. IV,

p. 685.

28 Villagonzalo v. IAC, G.R. No. 711110,

November 22, 1988, 167 SCRA 535; Perez v. Ong
Chua, No. L-36850, September 23, 1982, 116
SCRA 732, 90 CJS 887-889 and 54 Am Jur., pp.
449-450.

29 Mapa III v. Guanzon, G.R. No. L-25605, June

20, 1977, 77 SCRA 387.

FIRST DIVISION

[G.R. No. 146807. May 9, 2002]

PADCOM CONDOMINIUM CORPORATION, petitioner, vs.
ORTIGAS CENTER ASSOCIATION, INC., respondent.
DECISION
DAVIDE, JR., C.J.:
Challenged in this case is the 30 June 2000 decision [1] of the
Court of Appeals in CA-G.R. CV No. 60099, reversing and setting
aside the 1 September 1997 decision [2] of the Regional Trial Court
of Pasig City, Branch 264, in Civil Case No. 63801.[3]
Petitioner Padcom Condominium Corporation (hereafter
PADCOM) owns and manages the Padilla Office Condominium
Building (PADCOM Building) located at Emerald Avenue, Ortigas
Center, Pasig City. The land on which the building stands was
originally acquired from the Ortigas & Company, Limited
Partnership (OCLP), by Tierra Development Corporation (TDC)
under a Deed of Sale dated 4 September 1974. Among the terms
and conditions in the deed of sale was the requirement that the
transferee and its successor-in-interest must become members of
an association for realty owners and long-term lessees in the
area later known as the Ortigas Center. Subsequently, the said
lot, together with improvements thereon, was conveyed by TDC in
favor of PADCOM in a Deed of Transfer dated 25 February 1975.
[4]
In 1982, respondent Ortigas Center Association, Inc.
(hereafter the Association) was organized to advance the
interests and promote the general welfare of the real estate
owners and long-term lessees of lots in the Ortigas Center. It
sought the collection of membership dues in the amount of two
thousand seven hundred twenty-four pesos and forty centavos
(P2,724.40) per month from PADCOM. The corporate books
showed that PADCOM owed the Association P639,961.47,
representing membership dues, interests and penalty charges
from April 1983 to June 1993.[5] The letters exchanged between
the parties through the years showed repeated demands for
payment, requests for extensions of payment, and even a
settlement scheme proposed by PADCOM in September 1990.
In view of PADCOMs failure and refusal to pay its arrears in
monthly dues, including interests and penalties thereon, the
Association filed a complaint for collection of sum of money
before the trial court below, which was docketed as Civil Case
No. 63801. The Association averred that purchasers of lands
within the Ortigas Center complex from OCLP are obligated under
their contracts of sale to become members of the
Association. This obligation was allegedly passed on to PADCOM
when it bought the lot from TDC, its predecessor-in-interest.[6]
In its answer, PADCOM contended that it is a non-stock, non-
profit association, and for it to become a special member of the
Association, it should first apply for and be accepted for
membership by the latters Board of Directors. No automatic
membership was apparently contemplated in the Associations By-
laws. PADCOM added that it could not be compelled to become a
member without violating its right to freedom of association. And
since it was not a member of the Association, it was not liable for
membership dues, interests and penalties.[7]
During the trial, the Association presented its accountant as
lone witness to prove that PADCOM was, indeed, one of its
members and, as such, did not pay its membership dues.
PADCOM, on the other hand, did not present its evidence;
instead it filed a motion to dismiss by way of demurrer to
evidence. It alleged that the facts established by the Association
showed no right to the relief prayed for. It claimed that the
provisions of the Associations By-laws and the Deed of Transfer
did not contemplate automatic membership. Rather, the owner or
long-term lessee becomes a member of the Association only after
applying with and being accepted by its Board of
Directors. Assuming further that PADCOM was a member of the
Association, the latter failed to show that the collection of monthly
dues was a valid corporate act duly authorized by a proper
resolution of the Associations Board of Directors.[8]
After due consideration of the issues raised in the motion to
dismiss, the trial court rendered a decision dismissing the
complaint.[9]
The Association appealed the case to the Court of Appeals,
which docketed the appeal as CA-G.R. CV No. 60099. In its
decision[10] of 30 June 2000, the Court of Appeals reversed and
set aside the trial courts dismissal of Civil Case No. 63801, and
decreed as follows:
WHEREFORE, the appealed decision dated September 1, 1997
is REVERSED and SET ASIDE and, in lieu thereof, a new one is
entered ordering the appellee (PADCOM) to pay the appellant
(the Association) the following:
1) P639,961.47 as and for membership dues in arrears inclusive
of earned interests and penalties; and
2) P25,000.00 as and for attorneys fees.
Costs against the appellees.
SO ORDERED.
The Court of Appeals justified its ruling by declaring that
PADCOM automatically became a member of the Association
when the land was sold to TDC. The intent to pass the obligation
to prospective transferees was evident from the annotation of the
same clause at the back of the Transfer Certificate of Title
covering the lot. Despite disavowal of membership, PADCOMs
membership in the Association was evident from these facts: (1)
PADCOM was included in the Associations list of bona
fide members as of 30 March 1995; (2) Narciso Padilla,
PADCOMs President, was one of the Associations incorporators;
and (3) having received the demands for payment, PADCOM not
only acknowledged them, but asked for and was granted
repeated extensions, and even proposed a scheme for the
settlement of its obligation. The Court of Appeals also ruled that
PADCOM cannot evade payment of its obligation to the
Association without violating equitable principles underlying
quasi-contracts. Being covered by the Associations avowed
purpose to promote the interests and welfare of its members,
PADCOM cannot be allowed to expediently deny and avoid the
obligation arising from such membership.
Dissatisfied with the adverse judgment of the Court of
Appeals, PADCOM filed the petition for review in this case. It
raises the sole issue of whether it can be compelled to join the
association pursuant to the provision on automatic
membership appearing as a condition in the Deed of Sale of 04
September 1974 and the annotation thereof on Transfer
Certificate of Title No. 457308.
PADCOM contends that it cannot be compelled to be a
member of the Association solely by virtue of the automatic
membership clause that appears on the title of the property and
the Deed of Transfer. In 1975, when it bought the land, the
Association was still inexistent. Therefore, the provision on
automatic membership was anticipatory in nature, subject to the
actual formation of the Association and the subsequent
formulation of its implementing rules.
PADCOM likewise maintains that the Associations By-laws
requires an application for membership. Since it never sought
membership, the Court of Appeals erred in concluding that it was
a member of the Association by implication. Aside from the lack of
evidence proving such membership, the Association has no basis
to collect monthly dues since there is no board resolution defining
and prescribing how much should be paid.
For its part, the Association claims that the Deed of Sale
between OCLP and TDC clearly stipulates automatic membership
for the owners of lots in the Ortigas Center, including their
successors-in-interest. The filing of applications and acceptance
thereof by the Board of Directors of the Association are, therefore,
mere formalities that can be dispensed with or waived. The
provisions of the Associations By-laws cannot in any manner alter
or modify the automatic membership clause imposed on a
property owner by virtue of an annotation of encumbrance on his
title.
The Association likewise asserts that membership therein
requires the payment of certain amounts for its operations and
activities, as may be authorized by its Board of Directors. The
membership dues are for the common expenses of the
homeowners for necessary services.
After a careful examination of the records of this case, the
Court sees no reason to disturb the assailed decision. The
petition should be denied.
Section 44 of Presidential Decree No. 1529[11] mandates that:
SEC. 44. Statutory liens affecting title. Every registered owner
receiving a certificate of title in pursuance of a decree of
registration, and every subsequent purchaser of registered land
taking a certificate of title for value and in good faith, shall hold
the same free from all encumbrances except those noted on said
certificate and any of the following encumbrances which may be
subsisting, namely: xxx
Under the Torrens system of registration, claims and liens of
whatever character, except those mentioned by law, existing
against the land binds the holder of the title and the whole world.
[12]
It is undisputed that when the land in question was bought by
PADCOMs predecessor-in-interest, TDC, from OCLP, the sale
bound TDC to comply with paragraph (G) of the covenants,
conditions and restrictions of the Deed of Sale, which reads as
follows:[13]
G. AUTOMATIC MEMBERSHIP WITH THE ASSOCIATION:
The owner of this lot, its successor-in-interest hereby binds
himself to become a member of the ASSOCIATION which will be
formed by and among purchasers, fully paid up Lot BUYERS,
Building Owners and the COMPANY in respect to COMPANY
OWNED LOTS.
The OWNER of this lot shall abide by such rules and regulations
that shall be laid down by the ASSOCIATION in the interest of
security, maintenance, beautification and general welfare of the
OFFICE BUILDING zone. The ASSOCIATION when organized
shall also, among others, provide for and collect assessments
which shall constitute a lien on the property, junior only to liens of
the Government for taxes.
Evidently, it was agreed by the parties that dues shall be
collected from an automatic member and such fees or
assessments shall be a lien on the property.
This stipulation was likewise annotated at the back of
Transfer Certificate of Title No. 457308 issued to TDC. [14] And
when the latter sold the lot to PADCOM on 25 February 1975, the
Deed of Transfer expressly stated:[15]
NOW, THEREFORE, for and in consideration of the foregoing
premises, the DEVELOPER, by these presents, cedes, transfers
and conveys unto the CORPORATION the above-described
parcel of land evidenced by Transfer Certificate of Title No.
457308, as well as the Common and Limited Common Areas of
the Condominium project mentioned and described in the Master
Deed with Declaration of Restrictions (Annex A hereof), free from
all liens and encumbrances, except those already annotated at
the back of said Transfer Certificate of Title No. 457308, xxx
This is so because any lien annotated on previous certificates of
title should be incorporated in or carried over to the new transfer
certificates of title. Such lien is inseparable from the property as it
is a right in rem, a burden on the property whoever its owner may
be. It subsists notwithstanding a change in ownership; in short,
the personality of the owner is disregarded. [16] As emphasized
earlier, the provision on automatic membership was annotated in
the Certificate of Title and made a condition in the Deed of
Transfer in favor of PADCOM. Consequently, it is bound by and
must comply with the covenant.
Moreover, Article 1311 of the Civil Code provides that
contracts take effect between the parties, their assigns and
heirs. Since PADCOM is the successor-in-interest of TDC, it
follows that the stipulation on automatic membership with the
Association is also binding on the former.
We are not persuaded by PADCOMs contention that the By-
laws of the Association requires application for membership and
acceptance thereof by the Board of Directors. Section 2 of the By-
laws[17] reads:
Section 2. Regular Members. Upon acceptance by the Board of
Directors of Ortigas Center Association, Inc., all real estate
owners, or long-term lessees of lots within the boundaries of the
Association as defined in the Articles of Incorporation become
regular members, provided, however that the long-term lessees
of a lot or lots in said area shall be considered as the regular
members in lieu of the owners of the same. Likewise, regular
membership in the Association automatically ceases upon the
cessation of a member to be an owner or long-term lessee of real
estate in the area.
A lessee shall be considered a long-term lessee if his lease is in
writing and for a period of two (2) years or more. Membership of a
long-term lessee in the Association shall be co-terminus with his
legal possession (or his lease) of the lot/s in the area. Upon the
lessees cessation of membership in the Association, the owner
shall automatically succeed the lessee as member thereat.
As lot owner, PADCOM is a regular member of the
Association. No application for membership is necessary. If at all,
acceptance by the Board of Directors is a ministerial function
considering that PADCOM is deemed to be a regular member
upon the acquisition of the lot pursuant to the automatic
membership clause annotated in the Certificate of Title of the
property and the Deed of Transfer.
Neither are we convinced by PADCOMs contention that the
automatic membership clause is a violation of its freedom of
association. PADCOM was never forced to join the association. It
could have avoided such membership by not buying the land from
TDC. Nobody forced it to buy the land when it bought the building
with the annotation of the condition or lien on the Certificate of
Title thereof and accepted the Deed. PADCOM voluntarily agreed
to be bound by and respect the condition, and thus to join the
Association.
In addition, under the principle of estoppel, PADCOM is
barred from disclaiming membership in the Association. In
estoppel, a person, who by his act or conduct has induced
another to act in a particular manner, is barred from adopting an
inconsistent position, attitude or course of conduct that thereby
causes loss or injury to another.[18]
We agree with the Court of Appeals conclusion from the facts
or circumstances it enumerated in its decision and enumerated
above that PADCOM is, indeed, a regular member of the
Association. These facts and circumstances are sufficient
grounds to apply the doctrine of estoppel against PADCOM.
Having ruled that PADCOM is a member of the Association, it
is obligated to pay its dues incidental thereto. Article 1159 of the
Civil Code mandates:
Art. 1159. Obligations arising from contracts have the force of law
between the contracting parties and should be complied with in
good faith.
Assuming in gratis argumenti that PADCOM is not a member
of the Association, it cannot evade payment without violating the
equitable principles underlying quasi-contracts. Article 2142 of the
Civil Code provides:
Art. 2142. Certain lawful, voluntary and unilateral acts give rise to
the juridical relation of quasi-contract to the end that no one shall
be unjustly enriched or benefited at the expense of another.
Generally, it may be said that a quasi-contract is based on
the presumed will or intent of the obligor dictated by equity and by
the principles of absolute justice. Examples of these principles
are: (1) it is presumed that a person agrees to that which will
benefit him; (2) nobody wants to enrich himself unjustly at the
expense of another; or (3) one must do unto others what he
would want others to do unto him under the same circumstances.
[19]
As resident and lot owner in the Ortigas area, PADCOM was
definitely benefited by the Associations acts and activities to
promote the interests and welfare of those who acquire property
therein or benefit from the acts or activities of the Association.
Finally, PADCOMs argument that the collection of monthly
dues has no basis since there was no board resolution defining
how much fees are to be imposed deserves scant
consideration.Suffice it is to say that PADCOM never protested
upon receipt of the earlier demands for payment of membership
dues. In fact, by proposing a scheme to pay its obligation,
PADCOM cannot belatedly question the Associations authority to
assess and collect the fees in accordance with the total land area
owned or occupied by the members, which finds support in a
resolution dated 6 November 1982 of the Associations
incorporating directors[20] and Section 2 of its By-laws.[21]
WHEREFORE, the petition is hereby DENIED for lack of
merit.
Costs against petitioner.
SO ORDERED.
Puno, Kapunan, Ynares-Santiago, and Austria-Martinez,
JJ., concur.
[1]
Rollo, 29. Per Martin, Jr., F., J., ponente, with Valdez, Jr., S. and
Fernando, S., JJ., concurring.
[2]
Id., 95-106, Per Judge Leoncio M. Janolo, Jr.
[3]
Entitled Ortigas Center Association, Inc. v. Padcom
Condominium Corporation.
[4]
Rollo, 115-118.
[5]
Annex G; Rollo, 74.
[6]
Rollo, 50-54.
[7]
Rollo, 55-59.
[8]
Id., 80-93.
[9]
Id., 106.
[10]
Supra note 1.
[11]
Amending and Codifying the Laws Relative to Registration of
Property and for Other Purposes.
[12]
See Narciso Pea, Narciso Pea, Jr., and Nestor N.
Pea, Registration of Land Titles and Deeds, 1988 ed., 162.
[13]
Rollo, 111.
[14]
CA Decision, 4; Rollo, 32.
[15]
Rollo, 117.
[16]
See Ligon v. Court of Appeals, 244 SCRA 693 [1995].
[17]
Rollo, 62-63.
[18]
Cruz v. Court of Appeals, 293 SCRA 239, 255-256 [1998].
[19]
Tolentino, Civil Code of the Philippines, Vol. V, 1992 ed.,
575 citing 5 Gutierrez 596. Republic of the Philippines
[20]
SUPREME COURT
Rollo, 125. Manila
[21]
Id., 66-67.
THIRD DIVISION

G.R. No. 82670 September 15, 1989

DOMETILA M. ANDRES, doing business under the name and
style "IRENE'S WEARING APPAREL," petitioner,
vs.
MANUFACTURERS HANOVER & TRUST CORPORATION and
COURT OF APPEALS, respondents.
Roque A. Tamayo for petitioner.
Romulo, Mabanta, Buenaventura, Sayoc & De los Angeles for
private respondent.
CORTES, J.:
Assailed in this petition for review on certiorari is the judgment of
the Court of Appeals, which, applying the doctrine of solutio
indebiti, reversed the decision of the Regional Trial Court, Branch
CV, Quezon City by deciding in favor of private respondent.
Petitioner, using the business name "Irene's Wearing Apparel,"
was engaged in the manufacture of ladies garments, children's
wear, men's apparel and linens for local and foreign buyers.
Among its foreign buyers was Facets Funwear, Inc. (hereinafter
referred to as FACETS) of the United States.
In the course of the business transaction between the two,
FACETS from time to time remitted certain amounts of money to
petitioner in payment for the items it had purchased. Sometime in
August 1980, FACETS instructed the First National State Bank of
New Jersey, Newark, New Jersey, U.S.A. (hereinafter referred to
as FNSB) to transfer $10,000.00 to petitioner via Philippine
National Bank, Sta. Cruz Branch, Manila (hereinafter referred to
as PNB).
Acting on said instruction, FNSB instructed private respondent
Manufacturers Hanover and Trust Corporation to effect the
above- mentioned transfer through its facilities and to charge the
amount to the account of FNSB with private respondent. Although
private respondent was able to send a telex to PNB to pay
petitioner $10,000.00 through the Pilipinas Bank, where petitioner
had an account, the payment was not effected immediately
because the payee designated in the telex was only "Wearing
Apparel." Upon query by PNB, private respondent sent PNB
another telex dated August 27, 1980 stating that the payment was
to be made to "Irene's Wearing Apparel." On August 28, 1980,
petitioner received the remittance of $10,000.00 through Demand
Draft No. 225654 of the PNB.
Meanwhile, on August 25, 1980, after learning about the delay in
the remittance of the money to petitioner, FACETS informed
FNSB about the situation. On September 8, 1980, unaware that
petitioner had already received the remittance, FACETS informed
private respondent about the delay and at the same time
amended its instruction by asking it to effect the payment through
the Philippine Commercial and Industrial Bank (hereinafter
referred to as PCIB) instead of PNB.
Accordingly, private respondent, which was also unaware that
petitioner had already received the remittance of $10,000.00 from
PNB instructed the PCIB to pay $10,000.00 to petitioner. Hence,
on September 11, 1980, petitioner received a second $10,000.00
remittance.
Private respondent debited the account of FNSB for the second
$10,000.00 remittance effected through PCIB. However, when
FNSB discovered that private respondent had made a duplication
of the remittance, it asked for a recredit of its account in the
amount of $10,000.00. Private respondent complied with the
request.
Private respondent asked petitioner for the return of the second
remittance of $10,000.00 but the latter refused to pay. On May 12,
1982 a complaint was filed with the Regional Trial Court, Branch
CV, Quezon City which was decided in favor of petitioner as
defendant. The trial court ruled that Art. 2154 of the New Civil
Code is not applicable to the case because the second
remittance was made not by mistake but by negligence and
petitioner was not unjustly enriched by virtue thereof [Record, p.
234]. On appeal, the Court of Appeals held that Art. 2154 is
applicable and reversed the RTC decision. The dispositive portion
of the Court of Appeals' decision reads as follows:
WHEREFORE, the appealed decision is hereby REVERSED
and SET ASIDE and another one entered in favor of plaintiff-
appellant and against defendant-appellee Domelita (sic) M.
Andres, doing business under the name and style "Irene's
Wearing Apparel" to reimburse and/or return to plaintiff-
appellant the amount of $10,000.00, its equivalent in Philippine
currency, with interests at the legal rate from the filing of the
complaint on May 12, 1982 until the whole amount is fully paid,
plus twenty percent (20%) of the amount due as attomey's
fees; and to pay the costs.
With costs against defendant-appellee.
SO ORDERED. [Rollo, pp. 29-30.]
Thereafter, this petition was filed. The sole issue in this case is
whether or not the private respondent has the right to recover the
second $10,000.00 remittance it had delivered to petitioner. The
resolution of this issue would hinge on the applicability of Art.
2154 of the New Civil Code which provides that:
Art. 2154. If something received when there is no right to
demand it, and it was unduly delivered through mistake, the
obligation to return it arises.
This provision is taken from Art. 1895 of the Spanish Civil Code
which provided that:
Art. 1895. If a thing is received when there was no right to
claim it and which, through an error, has been unduly
delivered, an obligation to restore it arises.
In Velez v. Balzarza, 73 Phil. 630 (1942), the Court, speaking
through Mr. Justice Bocobo explained the nature of this article
thus:
Article 1895 [now Article 2154] of the Civil Code
abovequoted, is therefore applicable. This legal provision,
which determines the quasi-contract of solution indebiti, is
one of the concrete manifestations of the ancient principle
that no one shall enrich himself unjustly at the expense of
another. In the Roman Law Digest the maxim was formulated
thus: "Jure naturae acquum est, neminem cum alterius
detrimento et injuria fieri locupletiorem." And the Partidas
declared: "Ninguno non deue enriquecerse tortizeramente
con dano de otro." Such axiom has grown through the
centuries in legislation, in the science of law and in court
decisions. The lawmaker has found it one of the helpful
guides in framing statutes and codes. Thus, it is unfolded in
many articles scattered in the Spanish Civil Code. (See for
example, articles, 360, 361, 464, 647, 648, 797, 1158, 1163,
1295, 1303, 1304, 1893 and 1895, Civil Code.) This time-
honored aphorism has also been adopted by jurists in their
study of the conflict of rights. It has been accepted by the
courts, which have not hesitated to apply it when the
exigencies of right and equity demanded its assertion. It is a
 part of that affluent reservoir of justice upon which judicial
discretion draws whenever the statutory laws are inadequate
because they do not speak or do so with a confused voice.
[at p. 632.]
For this article to apply the following requisites must concur: "(1)
that he who paid was not under obligation to do so; and, (2) that
payment was made by reason of an essential mistake of fact"
[City of Cebu v. Piccio, 110 Phil. 558, 563 (1960)].
It is undisputed that private respondent delivered the second
$10,000.00 remittance. However, petitioner contends that the
doctrine of solutio indebiti, does not apply because its requisites
are absent.
First, it is argued that petitioner had the right to demand and
therefore to retain the second $10,000.00 remittance. It is alleged
that even after the two $10,000.00 remittances are credited to
petitioner's receivables from FACETS, the latter allegedly still had
a balance of $49,324.00. Hence, it is argued that the last
$10,000.00 remittance being in payment of a pre-existing debt,
petitioner was not thereby unjustly enriched.
The contention is without merit.
The contract of petitioner, as regards the sale of garments and
other textile products, was with FACETS. It was the latter and not
private respondent which was indebted to petitioner. On the other
hand, the contract for the transmittal of dollars from the United
States to petitioner was entered into by private respondent with
FNSB. Petitioner, although named as the payee was not privy to
the contract of remittance of dollars. Neither was private
respondent a party to the contract of sale between petitioner and
FACETS. There being no contractual relation between them,
petitioner has no right to apply the second $10,000.00 remittance
delivered by mistake by private respondent to the outstanding
account of FACETS.
Petitioner next contends that the payment by respondent bank of
the second $10,000.00 remittance was not made by mistake but
was the result of negligence of its employees. In connection with
this the Court of Appeals made the following finding of facts:
The fact that Facets sent only one remittance of $10,000.00 is
not disputed. In the written interrogatories sent to the First
National State Bank of New Jersey through the Consulate
General of the Philippines in New York, Adelaide C. Schachel,
the investigation and reconciliation clerk in the said bank
testified that a request to remit a payment for Facet Funwear
Inc. was made in August, 1980. The total amount which the
First National State Bank of New Jersey actually requested the
plaintiff-appellant Manufacturers Hanover & Trust Corporation
to remit to Irene's Wearing Apparel was US $10,000.00. Only
one remittance was requested by First National State Bank of
New Jersey as per instruction of Facets Funwear (Exhibit "J",
pp. 4-5).
That there was a mistake in the second remittance of US
$10,000.00 is borne out by the fact that both remittances have
the same reference invoice number which is 263 80. (Exhibits
"A-1- Deposition of Mr. Stanley Panasow" and "A-2-Deposition
of Mr. Stanley Panasow").
Plaintiff-appellant made the second remittance on the wrong
assumption that defendant-appellee did not receive the first
remittance of US $10,000.00. [Rollo, pp. 26-27.]
It is evident that the claim of petitioner is anchored on the
appreciation of the attendant facts which petitioner would have
this Court review. The Court holds that the finding by the Court of
Appeals that the second $10,000.00 remittance was made by
mistake, being based on substantial evidence, is final and
conclusive. The rule regarding questions of fact being raised with
this Court in a petition for certiorari under Rule 45 of the Revised
Rules of Court has been stated in Remalante v. Tibe, G.R. No.
59514, February 25, 1988, 158 SCRA 138, thus:
The rule in this jurisdiction is that only questions of law may be
raised in a petition for certiorari under Rule 45 of the Revised
Rules of Court. "The jurisdiction of the Supreme Court in cases
brought to it from the Court of Appeals is limited to reviewing
and revising the errors of law imputed to it, its findings of fact
being conclusive" [Chan v. Court of Appeals, G.R. No. L-
27488, June 30, 1970, 33 SCRA 737, reiterating a long line of
decisions]. This Court has emphatically declared that "it is not
the function of the Supreme Court to analyze or weigh such
evidence all over again, its jurisdiction being limited to
reviewing errors of law that might have been committed by the
lower court" [Tiongco v. De la Merced, G.R. No. L-24426, July
25, 1974, 58 SCRA 89; Corona v. Court of Appeals, G.R. No.
L-62482, April 28, 1983, 121 SCRA 865; Baniqued v. Court of
Appeals, G. R. No. L-47531, February 20, 1984, 127 SCRA
596]. "Barring, therefore, a showing that the findings
complained of are totally devoid of support in the record, or
that they are so glaringly erroneous as to constitute serious
abuse of discretion, such findings must stand, for this Court is
not expected or required to examine or contrast the oral and
documentary evidence submitted by the parties" [Santa Ana,
Jr. v. Hernandez, G.R. No. L-16394, December 17, 1966, 18
SCRA 9731. [at pp. 144-145.]
Petitioner invokes the equitable principle that when one of two
innocent persons must suffer by the wrongful act of a third
person, the loss must be borne by the one whose negligence was
the proximate cause of the loss.
The rule is that principles of equity cannot be applied if there is a
provision of law specifically applicable to a case [Phil. Rabbit Bus
Lines, Inc. v. Arciaga, G.R. No. L-29701, March 16, 1987,148
SCRA 433; Zabat, Jr. v. Court of Appeals, G.R. No. L36958, July
10, 1986, 142 SCRA 587; Rural Bank of Paranaque, Inc. v.
Remolado, G.R. No. 62051, March 18, 1985, 135 SCRA 409;
Cruz v. Pahati, 98 Phil. 788 (1956)]. Hence, the Court in the case
of De Garcia v. Court of Appeals, G.R. No. L-20264, January 30,
1971, 37 SCRA 129, citing Aznar v. Yapdiangco, G.R. No. L-
18536, March 31, 1965, 13 SCRA 486, held:
... The common law principle that where one of two innocent
persons must suffer by a fraud perpetrated by another, the
law imposes the loss upon the party who, by his misplaced
confidence, has enabled the fraud to be committed, cannot
be applied in a case which is covered by an express
provision of the new Civil Code, specifically Article 559.
Between a common law principle and a statutory provision,
the latter must prevail in this jurisdiction. [at p. 135.]
Having shown that Art. 2154 of the Civil Code, which embodies
the doctrine of solutio indebiti, applies in the case at bar, the
Court must reject the common law principle invoked by petitioner.
Finally, in her attempt to defeat private respondent's claim,
petitioner makes much of the fact that from the time the second
$10,000.00 remittance was made, five hundred and ten days had
elapsed before private respondent demanded the return thereof.
Needless to say, private respondent instituted the complaint for
recovery of the second $10,000.00 remittance well within the six
years prescriptive period for actions based upon a quasi-contract
[Art. 1145 of the New Civil Code].

WHEREFORE, the petition is DENIED and the decision of the

Court of Appeals is hereby AFFIRMED.

SO ORDERED.

Fernan, C.J., Gutierrez, Jr. and Bidin, JJ., concur.

Feliciano, J., is on leave.

FIRST DIVISION

TITAN-IKEDA CONSTRUCTION G.R. No. 158768

& DEVELOPMENT
CORPORATION,
Petitioner, Present:
PUNO, C.J., Chairperson, Development Corporation.[5] The parties formalized their
SANDOVAL-GUTIERREZ,
-v e r s u s- CORONA, agreement in a construction contract[6] dated February 4, 1993.[7]
AZCUNA and
LEONARDO-DE
CASTRO, JJ. Upon the completion of MPT's structural works, respondent
PRIMETOWN PROPERTY
GROUP, INC., awarded the P130,000,000 contract for the tower's architectural
Respondent. Promulgated:
works[8] (project) to petitioner. Thus, on January 31, 1994, the
February 12, 2008
parties executed a supplemental agreement. [9] The salient

x---------------------------------------------- portions thereof were:

----x
1. the [project] shall cover the scope of
DECISION work of the detailed construction bid plans
and specifications and bid documents
CORONA, J.: dated 28 September 1993, attached and
forming an integral part hereof as Annex
A.

This petition for review on certiorari[1] seeks to set aside the 2. the contract price for the said works
shall be P130 million.
decision of the Court of Appeals (CA) in CA-G.R. CV No.
3. the payment terms shall be full
61353[2] and its resolution[3] denying reconsideration. swapping or full payment in condominium
units. The condominium units earmarked
for the [petitioner] are shown in the
In 1992, respondent Primetown Property Group, Inc. awarded the attached Annex B.

contract for the structural works [4] of its 32-storey Makati Prime 4. the [respondent] shall transfer and
surrender to [petitioner] the condominium
Tower (MPT) to petitioner Titan-Ikeda Construction and
 units abovestated in accordance with the
following schedule: On June 30, 1994, respondent executed a deed of

(a) 80% of units upon posting
and acceptance by [respondent] of
the performance bond [and]
(b) 20% or remaining balance
upon completion of the project as
provided in the construction
contract and simultaneous with the
posting by [petitioner] of the
reglementary guarantee bond.
sale[12] (covering 114 condominium units and 20 parking slots of
the MPT collectively valued by the parties at P112,416,716.88)
[13]
in favor of petitioner pursuant to the full-swapping payment
provision of the supplemental agreement.
Shortly thereafter, petitioner sold some of its units to third

5. the contract period shall be fifteen persons.[14]

(15) months reckoned from the release of
the condominium certificates of title
(CCTs) covering eighty percent (80%) of In September 1995, respondent engaged the services of
the units transferable to [petitioner] as
aforesaid[.] Integratech, Inc. (ITI), an engineering consultancy firm, to

evaluate the progress of the project.[15] In its September 7, 1995

Significantly, the supplemental agreement adopted those
report,[16] ITI informed respondent that petitioner, at that point, had
provisions of the construction contract which it did not specifically
discuss or provide for.[10] Among those carried over was the only accomplished 31.89% of the project (or was 11 months and

designation of GEMM Construction Corporation (GEMM) as the
project's construction manager.[11]
Petitioner started working on the project in February 1994.
six days behind schedule).[17]
Meanwhile, petitioner and respondent were discussing the
possibility of the latters take over of the projects supervision.

Despite ongoing negotiations, respondent did not obtain

petitioners consent in hiring ITI as the projects construction Engineers Antonio Co, general construction manager of
respondent, and Luzon Y. Tablante, project manager of petitioner,
manager. Neither did it inform petitioner of ITIs September 7,
signed the letter.
1995 report.

On October 12, 1995, petitioner sought to confirm respondent's

INTEGRATECHS (ITIS) REPORT
plan to take over the project.[18] Its letter stated:

The mutual agreement arrived at sometime in the In its September 7, 1995 report, ITI estimated that
last week of August 1995 for [respondent] to take
over the construction supervision of the balance petitioner should have accomplished 48.71% of the project as of
of the [project] from [petitioner's] [e]ngineering
staff and complete [the] same by December 31, the October 12, 1995 takeover date. [20]Petitioner repudiated this
1995 as promised by [petitioner's] engineer.
figure[21] but qualifiedly admitted that it did not finish the project.
The [petitioner's] accomplished works as of this
[22]
date of [t]ake over is of acceptable quality in Records showed that respondent did not merely take over the
materials and workmanship.
supervision of the project but took full control thereof. [23]
This mutual agreement on the take over
should not be misconstrued in any other way
except that the take over is part of the long Petitioner consequently conducted an inventory. [24] On the basis
range plan of [respondent] that [petitioner], in
the spirit of cooperation, agreed to hand over the thereof, petitioner demanded from respondent the payment of its
construction supervision to [respondent] as
requested. (emphasis supplied)[19] balance amounting to P1,779,744.85.[25]

On February 19, 1996, petitioner sent a second letter to

respondent demanding P2,023,876.25. This new figure included

the cost of materials (P244,331.40) petitioner advanced from 1994 was a deed of absolute sale because the conveyance of the

December 5, 1995 to January 26, 1996.[26] condominium units and parking slots was not subject to any

On November 22, 1996, petitioner demanded from respondent condition.[32] Thus, it ordered respondent to issue MPTs

the delivery of MPT's management certificate [27] and the keys to management certificate and to deliver the keys to the

the condominium units and the payment of its (respondent's) condominium units to petitioner.[33] Respondent did not appeal this

balance.[28] decision. Consequently, a writ of execution was issued upon its

finality.[34]
Because respondent ignored petitioner's demand, petitioner, on

December 9, 1996, filed a complaint for specific performance [29] in Undaunted by the finality of the HLURB decision,

the Housing and Land Use Regulatory Board (HLURB). respondent filed a complaint for collection of sum of

money[35] against petitioner in the Regional Trial Court (RTC) of

While the complaint for specific performance was pending in the
Makati City, Branch 58 on July 2, 1997. It prayed for the
HLURB, respondent sent a demand letter to petitioner asking it to
reimbursement of the value of the projects unfinished portion
reimburse the actual costs incurred in finishing the project
amounting to P66,677,000.[36]
[30]
(or P69,785,923.47). In view of the pendency of the HLURB

case, petitioner did not heed respondent's demands. During trial, the RTC found that because respondent modified the

MPT's architectural design, petitioner had to adjust the scope of

On April 29, 1997, the HLURB rendered a decision in favor of
work.[37] Moreover, respondent belatedly informed petitioner of
[31]
petitioner. It ruled that the instrument executed on June 30,
 of P2,023,867.25 with legal interest from
those modifications. It also failed to deliver the concrete mix and the date of demand until fully paid;

rebars according to schedule. For this reason, petitioner was not 2. Compensatory damages in the
amount of US$1,665,260 or its peso
responsible for the project's delay.[38] The trial court thus allowed equivalent at the current foreign exchange
rate representing lost rental income due
petitioner to set-off respondent's other outstanding liabilities with only as of July 1997 and the accrued lost
earnings from then on until the date of
respondents excess payment in the project. [39] It concluded that actual payment, with legal interest from
the date of demand until fully paid; and
respondent owed petitioner P2,023,876.25.[40] In addition,
3. Attorney's fees in the amount
because respondent refused to deliver the keys to the of P100,000 as acceptance fee, P1,000
appearance fee per hearing and 25% of
condominium units and the management certificate to petitioner, the total amount awarded to [petitioner].

the RTC found that petitioner lost rental income amounting to With costs against the [respondent].
SO ORDERED.[42]
US$1,665,260.[41] The dispositive portion of the RTC decision

stated: Respondent appealed the RTC decision to the CA.[43] The

WHEREFORE, PREMISES CONSIDERED, appellate court found that respondent fully performed its
judgment is hereby rendered dismissing
[respondent's] [c]omplaint for lack of merit. On the obligation when it executed the June 30, 1994 deed of absolute
other hand, finding preponderance of evidence to
sustain [petitioner's] counterclaim, judgment is sale in favor of petitioner.[44] Moreover, ITI's report clearly
hereby rendered in favor of [petitioner] ordering
[respondent] to pay the former: established that petitioner had completed only 48.71% of the

1. The unpaid balance of the project as of October 12, 1995, the takeover date. Not only did it
consideration for [petitioner's] services in
[the project] in the amount incur delay in the performance of its obligation but petitioner also
failed to finish the project. The CA ruled that respondent was evaluations are agreed upon by the parties and conducted by a

entitled to recover the value of the unfinished portion of the disinterested third party.[48]

project under the principle of unjust enrichment. [45] Thus:

WHEREFORE, the appealed decision We grant the petition.
is REVERSED and a new one entered
dismissing [petitioner's] counterclaims
of P2,023,867.25 representing unpaid balance
for [its] services in [the project]; US$1,665,260 as REVIEW OF CONFLICTING FACTUAL FINDINGS
accrued lost earnings, and attorney's fees.
[Petitioner] is hereby ordered to return to
[respondent] the amount of P66,677,000
representing the value of unfinished [portion of As a general rule, only questions of law may be raised in a
the project], plus legal interest thereon until fully
paid. Upon payment by [petitioner] of the petition for review on certiorari. Factual issues are entertained
aforementioned amount, [respondent] is hereby
ordered to deliver the keys and [m]anagement only in exceptional cases such as where the findings of fact of the
[c]ertificate of the [Makati Prime Tower] paid to
[petitioner] as consideration for the [project].[46] CA and the trial court are conflicting.[49]

Petitioner moved for reconsideration but it was denied. Hence, Here, a glaring contradiction exists between the factual findings of

this petition. the RTC and the CA. The trial court found that respondent

contributed to the project's delay because it belatedly

Petitioner contends that the CA erred in giving weight to ITI's
communicated the modifications and failed to deliver the
report because the project evaluation was commissioned only by
necessary materials on time. The CA, however, found that
respondent,[47] in disregard of industry practice. Project
petitioner incurred delay in the performance of its obligation. It
relied on ITI's report which stated that petitioner had
Thereafter, the parties entered into a second contract. They
accomplished only 48.71% of the project as of October 12, 1995.
agreed to extinguish the supplemental agreement as evidenced

by the October 12, 1995 letter-agreement which was

JANUARY 31, 1994 SUPPLEMENTAL AGREEMENT WAS
EXTINGUISHED duly acknowledged by their respective representatives.[52]

A contract is a meeting of the minds between two persons While the October 12, 1995 letter-agreement stated that

whereby one binds himself, with respect to the other, to give respondent was to take over merely the supervision of the

something or to render some service.[50] This case involved two project, it actually took over the whole project itself. In fact,

contracts entered into by the parties with regard to the project. respondent subsequently hired two contractors in petitioner's

stead.[53] Moreover, petitioner's project engineer at site only

The parties first entered into a contract for a piece of
monitored the progress of architectural works undertaken in its
work[51] when they executed the supplemental agreement.
condominium units.[54] Petitioner never objected to this
Petitioner as contractor bound itself to execute the project for
arrangement; hence, it voluntarily surrendered its participation in
respondent, the owner/developer, in consideration of a price
the project. Moreover, it judicially admitted in its answer that
certain (P130,000,000). The supplemental agreement was
respondent took over the entire project, not merely its
reciprocal in nature because the obligation of respondent to pay
supervision, pursuant to its (respondents) long-range plans. [55]
the entire contract price depended on the obligation of petitioner

to complete the project (and vice versa).

Because the parties agreed to extinguish the supplemental
agreement, they were no longer required to fully perform their
respective obligations. Petitioner was relieved of its obligation to
complete the project while respondent was freed of its obligation
to pay the entire contract price. However, respondent, by
executing the June 30, 1994 deed of absolute sale, was deemed
to have paid P112,416,716.88. Nevertheless, because petitioner
applied part of what it received to respondents outstanding
liabilities,[56] it admitted overpayment.
Because petitioner acknowledged that it had been overpaid, it
was obliged to return the excess to respondent. Embodying the
principle of solutio indebiti, Article 2154 of the Civil Code
provides:
Article 2154. If something is received when there
is no right to demand it and it was unduly
delivered through mistake, the obligation to
return it arises.
For the extra-contractual obligation of solutio indebiti to
arise, the following requisites must be proven:
1. the absence of a right to collect the
excess sums and
2. the payment was made by mistake.[57]
With regard to the first requisite, because the supplemental
agreement had been extinguished by the mutual agreement of
the parties, petitioner became entitled only to the cost of services
it actually rendered (i.e., that fraction of the project cost in
proportion to the percentage of its actual accomplishment in the
project). It was not entitled to the excess (or extent of
overpayment).
On the second requisite, Article 2163 of the Civil Code provides:
Article 2163. It is presumed that there was a
mistake in the payment if something which
had never been due or had already been
paid was delivered; but, he from whom the
return is claimed may prove that the delivery was
made out of liberality or for any other just
cause. (emphasis supplied)
 In this instance, respondent paid part of the contract price

under the assumption that petitioner would complete the project One who receives payment by mistake in good faith is, as

within the stipulated period. However, after the supplemental a general rule, only liable to return the thing delivered. [59] If he

agreement was extinguished, petitioner ceased working on the benefited therefrom, he is also liable for the impairment or loss of

project. Therefore, the compensation petitioner received in the thing delivered and its accessories and accessions. [60] If he

excess of the cost of its actual accomplishment as of October 12, sold the thing delivered, he should either deliver the proceeds of

1995 was never due. The condominium units and parking slots the sale or assign the action to collect to the other party.[61]

corresponding to the said excess were mistakenly delivered by

The situation is, however, complicated by the following facts:
respondent and were therefore not due to petitioner.
a) the basis of the valuation (P112,416,716.99) of the

Stated simply, respondent erroneously delivered excess units to condominium units and parking slots covered by the

petitioner and the latter, pursuant to Article 2154, was obliged to June 30, 1994 deed of sale is unknown;

the return them to respondent. [58]Article 2160 of the Civil Code

b) the percentage of petitioner's actual accomplishment
provides:
Article 2160. He who in good faith in the project has not been determined and
accepts an undue payment of a thing certain and
determinate shall only be responsible for
the impairment or loss of the same or its c) the records of this case do not show the actual
accessories and accessions insofar as he has
thereby been benefited. If he has alienated it, he number of condominium units and parking slots sold
shall return the price or assign the action to
collect the sum. by petitioners.
 Because this Court is not a trier of facts, the determination of the value of its actual accomplishment (i.e., the amount due to

of these matters should be remanded to the RTC for reception of it) as of October 12, 1995. If these properties include units and/or

further evidence. slots already sold to third persons, petitioner shall deliver the

proceeds of the sale thereof or assign the actions for collection to

The RTC must first determine the percentage of the project
respondent as required by Article 2160.
petitioner actually completed and its proportionate cost.[62] This will
DELAY IN THE COMPLETION OF THE PROJECT
be the amount due to petitioner. Thereafter, based on the

stipulated valuation in the June 30, 1994 deed of sale, the RTC
Mora or delay is the failure to perform the obligation in due time
shall determine how many condominium units and parking slots
because of dolo (malice) or culpa (negligence).[63] A debtor is
correspond to the amount due to petitioner. It will only be the
deemed to have violated his obligation to the creditor from the
management certificate and the keys to these units that petitioner
time the latter makes a demand. Once the creditor makes a
will be entitled to. The remaining units, having been mistakenly
demand, the debtor incurs mora or delay.[64]
delivered by respondent, will therefore be the subject of solutio

indebiti. The construction contract[65] provided a procedure for protesting

delay:
What exactly must petitioner give back to respondent? Article XIV
DELAYS AND ABANDONMENT
Under Article 2160 in relation to Article 2154, it should return to
15.1. If at any time during the effectivity of
respondent the condominium units and parking slots in excess this contract, [PETITIONER] shall incur
unreasonable delay or slippages of more
 than fifteen percent (15%) of the scheduled
work program, [RESPONDENT] should the sole reason that such move was part of its (respondent's)
notify [PETITIONER] in writing to accelerate
the work and reduce, if not erase, slippage. If long-term plan.
after the lapse of sixty (60) days from receipt of
such notice, [PETITIONER] fails to rectify the
delay or slippage, [RESPONDENT] shall have Respondent, on the other hand, relied on ITI's September 7, 1995
the right to terminate this contract except in
cases where the same was caused by force report. The construction contract named GEMM, not ITI, as
majeure. FORCE MAJEURE as contemplated
herein, and in determination of delay includes, construction manager.[67] Because petitioner did not consent to
but is not limited to, typhoon, flood, earthquake,
coup d'etat, rebellion, sedition, transport strike, the change of the designated construction manager, ITI's
stoppage of work, mass public action that
prevents workers from reporting for work, and September 7, 1995 report could not bind it.
such other causes beyond [PETITIONER'S]
control.[66](emphasis supplied)
In view of the foregoing, we hold that petitioner did not incur delay

xxx xxx xxx in the performance of its obligation.

RECOVERY OF ADDITIONAL COSTS RESULTING FROM
CHANGES
Respondent never sent petitioner a written demand asking it to

accelerate work on the project and reduce, if not eliminate,

The supplemental agreement was a contract for a stipulated
slippage. If delay had truly been the reason why respondent took
price.[68] In such contracts, the recovery of additional costs
over the project, it would have sent a written demand as required
(incurred due to changes in plans or specifications) is governed
by the construction contract. Moreover, according to the October
by Article 1724 of the Civil Code.
12, 1995 letter-agreement, respondent took over the project for
Article 1724. The contractor who undertakes to
build a structure or any other work for a
 stipulated price, in conformity with plans and
specifications agreed upon with the landowner,
can neither withdraw from the contract nor
demand an increase in the price on account of
higher cost of labor or materials, save when
there has been a change in plans and
specifications, provided:
1. such change has been authorized by the
proprietor in writing; and
2. the additional price to be paid to the
contractor has been determined in writing
by both parties.
[69]
In Powton Conglomerate, Inc. v. Agcolicol, we reiterated that a
claim for the cost of additional work arising from changes in the
scope of work can only be allowed upon the:
1. written authority from the developer/owner
ordering/allowing the changes in work; and
2. written agreement of parties with regard to
the increase in cost (or price) due to the
change in work or design modification. [70]
Furthermore:
Compliance with the two requisites of Article
1724, a specific provision governing
additional works, is a condition precedent of
the recovery. The absence of one or the other
bars the recovery of additional costs. Neither the
authority for the changes made nor the additional
price to be paid therefor may be proved by any
other evidence for purposes of recovery.
[71]
(emphasis supplied)
Petitioner submitted neither one. In addition, petitioners project
coordinator Estellita Garcia testified that respondent never
approved any change order.[72] Thus, under Article 1724 and
pursuant to our ruling in Powton Conglomerate, Inc., petitioner
cannot recover the cost it incurred in effecting the design
modifications. A contractor who fails to secure the owner or
developer's written authority to changes in the work or written
assent to the additional cost to be incurred cannot invoke the
principle of unjust enrichment.[73]
RECOVERY OF COMPENSATORY DAMAGES
Indemnification for damages comprehends not only the loss Since respondent did not repudiate petitioner's other claims

suffered (actual damages or damnum emergens) but also the stated in the inventory[77] in the RTC and CA, it is estopped from

claimant's lost profits (compensatory damages or lucrum questioning the validity thereof.[78]However, because some of

cessans). For compensatory damages to be awarded, it is petitioner's claims have been disallowed, we remand the records

necessary to prove the actual amount of the alleged loss by of this case to the RTC for the computation of respondent's

preponderance of evidence.[74] liability.[79]

The RTC awarded compensatory damages based on the rental WHEREFORE, the petition is hereby GRANTED.

pool rates submitted by petitioner[75] and on the premise that all

The March 15, 2002 decision and May 29, 2003 resolution of the
those units would have been leased had respondent only finished
Court of Appeals in CA-G.R. CV No. 61353 and the August 5,
the project by December 31, 1995. [76] However, other than bare
1998 decision of the Regional Trial Court, Branch 58, Makati City
assertions, petitioner submitted no proof that the rental pool was
in Civil Case No. 97-1501 are hereby SET ASIDE. New judgment
in fact able to lease out the units. We thus hold that the losses
is entered:
sustained by petitioner were merely speculative and there was no

basis for the award. 1. ordering petitioner Titan-Ikeda Construction and

Development Corporation to return to respondent

REMAND OF OTHER CLAIMS
Primetown Property Group, Inc. the condominium units

and parking slots corresponding to the payment made in

 excess of the proportionate (project) cost of its actual (b) the number of condominium units and parking

accomplishment as of October 12, 1995, subject to its slots sold by petitioner Titan-Ikeda

(petitioners) allowable claims as stated in the inventory Construction and Development

and Corporation to third persons;

2. dismissing petitioner Titan-Ikeda Construction and

2. the computation of petitioner Titan-Ikeda
Development Corporations claims for the cost of
Construction and Development Corporation's
additional work (or change order) and damages.
actual liability to respondent Primetown Property

The records of this case are remanded to the Regional Trial Court Group, Inc. or vice-versa, and the determination of

of Makati City, Branch 58 for: imposable interests and/or penalties, if any.

1. the reception of additional evidence to SO ORDERED.

determine
RENATO C. CORONA
(a) the percentage of the architectural work
Associate Justice
actually completed by petitioner Titan-
WE CONCUR:
Ikeda Construction and Development
REYNATO S. PUNO
Corporation as of October 12, 1995 on the Chief Justice
Chairperson
Makati Prime Tower and
 [5]
ANGELINA SANDOVAL-GUTIERREZ ADOLFO S. AZCUNA Rollo, pp. 55, 200, 255.
[6]
Associate Justice Associate Justice Exhibit A, records, pp. 474-488.
[7]
Id., p. 1.
[8]
Refers to all the finishing works including putting up partitions,
doors, windows and interior and exterior finishes.
[9]
TERESITA J. LEONARDO-DE CASTRO Exhibit B, records, pp. 490-492.
[10]
Associate Justice Exhibit B-2, id., p. 492. Paragraph 10 of the supplemental
agreement provided:

10. All other terms and conditions appearing in the construction

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, I certify
that the conclusions in the above decision had been reached in
[11]
consultation before the case was assigned to the writer of the
opinion of the Courts Division.
contract, not otherwise in conflict with the above terms,
shall remain in full force and binding upon the Parties
insofar as they may be applicable with the [project]
contemplated therein.
Exhibit A-1, id., p. 234. Art. I, par. 1.4. (Definition of Terms) of
the construction contract provided:

1.4. CONSTRUCTION MANAGER GEMM Construction and

Management
and its duly authorized representatives
REYNATO S. PUNO
Chief Justice See Exhibit A-10, id., p. 484. Art. XIX of the construction contract
provided:

[1]
Under Rule 45 of the Rules of Court.
[2]
Penned by Associate Justice Godardo A. Jacinto (retired) and
concurred in by Associate Justices Eloy R. Bello, Jr.
(retired) and Josefina Guevara-Salonga of the Fifth
Division of the Court of Appeals. Dated March 15,
2002. Rollo, pp. 10-18, 34-42, 81-89.
[3]
Dated May 29, 2003. Id., pp. 20-23, 91-94.
[4]
Refers to the foundation of the building, particularly the
concrete and steel works up to the topping of the last floor
without any finishing.
ARTICLE XIX
CONSTRUCTION MANAGER'S STATUS
19.1. The construction managers shall have general
management, inspection, monitoring and
administration of the [project]. They shall have the
authority to stop the [project] whenever such stoppage
may be necessary to ensure the proper execution of this
contract. The construction managers, in consultation with
[RESPONDENT] and ARCHITECT, shall decide on
 matters pertaining to architectural and engineering
designs, workmanship, materials and construction.
19.2. The construction managers shall interpret the terms and
conditions of this contract and shall mediate between and
recommend decide on all claims of [RESPONDENT] or
[PETITIONER] and shall resolve such other matters
relating to the execution and progress of the works.
[12]
Exhibit 8, id., pp. 506-509 and rollo, p. 23.
[13]
See Deed of Absolute Sale. Exhibit E, records, pp. 380-
383. This value exceeded 80% of the contract price. (The
amount paid was equivalent to 86% of the contract price.)
[14]
Exhibits 13-P, 13-Q, 13-R, 13-S, and 13-T, records, pp. 537-
541.
[15]
Rollo, p. 201.
[16]
Exhibit F, records, pp. 383-409.
[17]
Id., p. 384.
[18]
Id.
[19]
Exhibit C, id., p. 499.
Contra, Exhibit A-9, id., pp. 483-484. The construction contract
provided:
ARTICLE XVII
RESCISSION OF CONTRACT
17. It is understood that in case of failure on the part
of [PETITIONER] to complete
the [project] herein stipulated and agreed on, or if the
[project] to be done under this contract is abandoned by
[PETITIONER] or the latter fails to insure its completion
within the required time, including any extension thereof,
and in any of these cases, [RESPONDENT] shall have
the right to rescind this contract by giving notice
in writing to that effect to [PETITIONER] and its
bondsmen. [RESPONDENT] shall then take over the
[project] and proceed to complete the same on its own
account.
17.1. It is further agreed and understood that in case of
rescission, [RESPONDENT] shall ascertain and fix the
value of the [project] completed by [PETITIONER] such
usable materials on the [project] taken.
17.2. In the event that the total expenditures of [RESPONDENT]
supplying the scope of [PETITIONER'S] work to complete
the project, including all charges against the project prior
to rescission of the contract, and not in excess of the
contract price, then the difference between the said total
expenditures of [RESPONDENT] and the contract price
may be applied to settle claims, if any, with the conformity
of [PETITIONER] filed by workmen employed on the
project and by suppliers furnishing materials therefor. The
balance, if any should be paid, to the [PETITIONER] but
no amount in excess of the combined value of the unpaid
completed work and retained percentage at the time of
the rescission of this contract shall be paid. No claim for
prospective profits on the work done after rescission of
this contract shall be considered or allowed.
17.3. [PETITIONER] and its sureties shall likewise be liable to
[RESPONDENT] for any loss caused to [RESPONDENT]
in excess of the contract price. (emphasis supplied)
Rescission under article XVII of the construction contract never
took place. Respondent notified neither petitioner nor its
bondsmen that it was invoking its right to rescind under
the contract. On the contrary, it was petitioner who drafted
the October 12, 1995 letter-agreement. (The said letter
was printed on petitioners letterhead.) Thus, the
 succeeding paragraphs quoted above are inapplicable in n) Letter dated September 28, 1995 under B -
this case. #28 10,349.78
[20]
Exhibit F-1, id., p. 386. o) Letter dated October 12, 1995-- A, B, C,
[21]
TSN, December 19, 1997, pp. 67-68. D 7,668,131.76
[22]
Id., pp. 94-95 and records, pp. 95-96. SUB-TOTAL P26,220,756.97
[23]
Id. Petitioner did not protest the new arrangement. In fact, it
detailed a project engineer at site who monitored only the Others
progress of works in its condominium units. a) Labor adjustment for architectural
[24]
Exhibits 5-E and 5-F, id., pp. 502-503. 290,000 x 27 7,830,000.00
Petitioner's letter dated October 17, 1995 provided a detailed
account of the respondent's liabilities. That letter was duly VAT
acknowledged by respondent. a) VAT for e and f (above) - 1,834,569.46 x
0.07 128,419.86
Change Orders b) VAT for o (above) - 7,688.131.75 x
a) CO #1 P 7,496,125.80 0.07 536,769.22
b) CO #2 160,975.87 c) VAT for nos. 4, 11, 22 & 23 (under B letter
c) CO #3 167,191.15 Oct. 2, 1995) - 145,223.52 x 0.04 5,808.94
d) CO #4 311,799.71 d) VAT for architectural as of June to December 31,
e) Penthouse rework (structural) 1,228,781.08 1995
f) Equipment support for MOS precast Accomplished as of Dec. 31, 1995 100.00%
items 605,788.38 Less: accomplishment as of May 1, 1995 35.57
Accomplishment as of June to Dec. 1995 64.43%
Architectural Works VAT = 130,000,000 x 0.6643 x 0.04 3,350,360.00
g) Structural additive CO #1 41,400.00 e) VAT for 1 above I 1,507.52
h) Structural additive CO #2 276,177.00 f) VAT for A above: labor adjustment for
i) VAT for structural (42,077,577 x architectural 313,200.00
0.07) 2,945,430.39 g) Misc. additive (refer to attached)
j) VAT for architectural (May 31) 1,849,640.00 A. 2, 5, 7, 9, 10, 11, 13, 14, 16, 17, & B-25 648,211.78
k) [Respondent's] share in modular SUB-TOTAL P12,814,277.32
cabinets 2,694,400.00 Total change orders and other claims P39,035,033.29
l) Letter dated October 2, 1995 under A Nos. 1, 8,
12, 16 37,688.00 ADD: Balances from other projects:
m) Letter dated October 2,1 995 under B Nos. 4, 11, Balance from Citadel project P 196,379.44
12, 17, 18 Sunnette Tower expenses advanced by [petitioner] 418,413.61
19, 22 & 23 and VAT for modular cabinets 726,878.05
Balance due to [petitioner] from Citadel units sold by AMOUNT PAYABLE TO [PETITIONER] BY
[respondent] 240,785.82 [RESPONDENT] P2,023,867.25
CWT and document stamp [taxes] advanced by
[petitioner] 680,850.17 Records show that at the time petitioner was working on the
Balance due from 100% swapping MPT architectural (MPT) project, it was also working on respondent's
contract 894,902.15 Sunnette Tower and Citadel projects. It is unclear in
Balance from [petitioner] supplied concrete mix for [MPT] relation to which project this cost was incurred.
[27]
project 20,164.50 A management certificate attests to the fact that the
Balances from other projects 2,451,495.69 condominium corporation is at least 60% Filipino (or that
foreigners own not more than 40% of that corporation). It
LESS: Advances and payable to petitioner 18,065,212.90 is a condition precedent to the issuance of condominium
certificates of title.
[28]
AMOUNT DUE FROM RESPONDENT P23,421,316.08 Rollo, pp. 62-63.
[25] [29]
Demand letter dated October 26, 1997. Exhibits 6 and 7, Docketed as HLRB Case No. 9657. Petitioner prayed for the
records, pp. 500-504. The breakdown of the accounts is issuance of the management certificate and condominium
as follows: certificates of title and the delivery of keys to its respective
buyers. Records, pp. 48-53.
[30]
The remaining balance as of October 12, 1995 Exhibit G, id., pp. 410-412.
[31]
(refer to the attached) is P 5,499,233.82 Penned by housing and land use arbiter Emmanuel T.
Plus: Amount still payable to [petitioner] to Pontejos. Rollo, pp. 113-119.
[32]
SUBCONS (labor and materials) 16,244,635.38 Id., pp. 116-117.
[33]
Amount still needed as of October 20, 1995 P21,743,869.20 Id.
[34]
Records, pp. 518-519. It is not clear whether the said writ was
Less: Letter [dated] October 17, 1995 [amount due to implemented.
[35]
petitioner] (supra note 24) 23,422,316.08 Docketed as Civil Case No. 97-1501. Id., pp. 1-6 and rollo, p.
AMOUNT PAYABLE TO [PETITIONER] BY 12.
[36]
[RESPONDENT] P 1,677,446.85 ITI assessed the unfinished portion of the project at using the
formula:
Plus: Material deliveries from October 20 to 25, 1995 102,298.00 Contract price x (100% - projected % of work to be accomplished
R E V I S E D A M O U N T P 1,779,744.85 in MPT project)
[26]
Exhibit 7, id., p. 505. P130,000,000 x (100% - 48.71%)
[37]
Refer to paragraph 1 of the supplemental agreement.
[38]
Balance as of October 26, 1995 P1,779,744.85 Rollo, p. 97.
[39]
Add: Cost of materials delivered from December 6, 1995 See notes 24, 25 and 26. Respondent's liabilities did not only
to January 25, 1996 244,131.40 pertain to the MPT project (both structural and
 architectural works) but included those incurred in the following are the essential requisites of the action (action
Sunnette Tower and Citadel projects. in rem verso):
[40]
Rollo, p. 98.
[41]
Id., pp. 109-110. In a rental pool agreement, the owners of 1. enrichment by direct acquisition of plus value;
several condominium units agree to lease their respective 2. impoverishment of another;
units at stipulated rates and divide the rent (or their 3. correlation between enrichment and
earnings) proportionately according to the area of their impoverishment (i.e., a relation of cause and effect);
respective units. 4. absence of justifiable cause for either enrichment
or impoverishment; and
MPT rental pool's daily rates 5. lack of other remedy.

Rate No. of Units The principle of unjust enrichment is inapplicable in this instance
since petitioner received the condominium units and
Studio type US$ 75 parkings slots as advance payment for services it should
1-bedroom unit 115 have rendered pursuant to the supplemental agreement.
2-bedroom unit 135 There was therefore a justifiable cause for the delivery of
3-bedroom unit 180 excess properties.
[46]
Total Number of units 114 units Id., p. 17.
[47]
Id., pp. 67-70.
[48]
Lost rental income as of July 1997 US$1,665,260 Id.
[42] [49]
Penned by Judge Escolatico U. Cruz, Jr. of RTC Branch 58, Austria v. Gonzales, Jr., 465 Phil. 355, 364 (2004).
[50]
Makati City. Dated August 5, 1998. Id., pp. 95-112. CIVIL CODE, Art. 1305.
[43] [51]
CA rollo, pp. 50-87. Under Rule 41 of the Rules of Court. See CIVIL CODE, Art. 1713. The article provides:
[44]
Rollo, p. 15.
[45]
Id. Art. 1713. By the contract for a piece of work the contractor binds
See CIVIL CODE, Art. 22. The article provides: himself to execute a piece of work for the employer, in
consideration of a certain price or compensation. The
Article 22. Every person who through an act or performance by contractor may either employ only his labor or skill or also
another, or by any other means, acquires or comes into furnish the material.
[52]
possession of something at the expense of the latter Evidence G, records, p. 499.
[53]
without just or legal ground, shall return the same to him. TSN, December 19, 1997, pp. 94-97.
[54]
Id.
[55]
See also 1 Jose B.L. Reyes and Ricardo C. Puno, AN OUTLINE Records, pp. 95-96.
[56]
OF PHILIPPINE CIVIL LAW, 1957 ed., 42-43. The See notes 24, 25 and 26.
[57]
Velez v. Balzarza, 73 Phil. 630 (1942). See also City of Cebu v.
Judge Piccio, 110 Phil. 558 (1960). See also Andres v.
Manufacturer's Hanover Trust, G.R. No. 82670, 15
September 1989, 177 SCRA 618.
[58]
To compute the value of the unfinished portion of the project,
the formula below should be used:
Total project cost x (100% - % of project actually accomplished)
[59]
Refer to Article 2154.
[60]
Refer to Article 2160.
[61]
Id. See also Melencio S. Sta. Maria, Jr., OBLIGATIONS AND
CONTRACTS: TEXT AND CASES, 1st ed., p. 509.
[62]
In order to determine the proportionate cost of the petitioner's
actual accomplishment in the project, the formula below
must be used:
Total project cost x % of the project petitioner actually
P130,000,000 accomplished
(refer to paragraph 2 of the construction contract) (to be
determined by the RTC)
[63]
4 Jose B.L. Reyes and Ricardo C. Puno, AN OUTLINE OF
PHILIPPINE CIVIL LAW, 1957 ed., 28. See Philippine
Export and Foreign Loan Guarantee Corporation v. V.P.
Eusebio Construction, Inc., 478 Phil. 269, 290 (2004).
See CIVIL CODE, Art. 1169. The article provides:
Article 1169. Those obliged to deliver or to do something incur in
delay from the time the obligee judicially or extrajudicially
demands from them the fulfillment of their obligation.
However, demand by the creditor shall not be necessary in order
that delay may exist:
1) When the obligation or the law expressly declares;
or
2) When from the nature and the circumstances of the
obligation it appears that the designation of the time
when the thing is to be delivered or the service is to
rendered was a controlling motive for the
establishment of the obligation; or
3) When demand would be useless, as when the
obligor has rendered it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other
does not comply or is not ready to comply in a proper
manner with what is incumbent upon him. From the
moment one of the parties fulfills his obligation, delay by
the other begins.
[64]
Solid Homes v. Tan, G.R. Nos. 145156-57, 29 July 2005, 465
SCRA 137, 147-148.
[65]
Supra note 10. The supplementary agreement clearly stated
the construction contract, save those matters explicitly
discussed in the former, governed the project.
[66]
Exhibit A-7, records, p. 481.
[67]
Supra note 11.
[68]
Refer to paragraph 2 of the January 31, 1994 supplemental
agreement.
[69]
448 Phil. 643 (2003).
[70]
Id., pp. 652-653 citing Weldon Construction Corporation v.
Court of Appeals, G.R. No. L-35721, 12 October 1987,
154 SCRA 618, 632-634.
[71]
Id., p. 633.
See also San Diego v. Sayson, 112 Phil. 1073 (1961). We
explained the rationale of Article 1724.
That the requirement for a written authorization is not merely to
prohibit admission of oral testimony against the objection
 of the adverse party can be inferred from the fact that the
provision is not included among those specified in the
Statute of Frauds, Article 1403 of the Civil Code. As it
does not appear to have been intended as an extension
of the Statute of Frauds, it must have been adopted as a
substantive provision or a condition precedent to
recovery.
[72]
TSN, December 18, 1997, pp. 127-128. The records contain
neither a document allowing a change order or an
agreement as to increase in cost.
[73]
Powton Conglomerate, Inc. v. Agcolicol, supra note 69 at 655-
656.
[74]
Integrated Packing Corporation v. Court of Appeals, 388 Phil.
835, 846 (2000). See also Smith Kline Beckman
Corporation v. Court of Appeals, 456 Phil. 213, 225-226
(2003).
[75]
Supra note 41.
[76]
Rollo, p. 111.
[77]
Supra note 24.
[78]
Reyes and Puno, supra note 63 at 274. This case
involves estoppel by judgment. Estoppel by judgment
bars the parties from raising any question that should
have been put in issue and decided in previous
Republic of the Philippines
proceedings.
[79] SUPREME COURT
See Metro Manila Transit Corporation v. D.M. Consortium,
Manila
Inc., G.R. No. 147594, 7 March 2007, 517 SCRA 632,
642.
SECOND DIVISION

G.R. No. 170498 January 9, 2013

METROPOLITAN BANK & TRUST COMPANY, Petitioner,

vs.
ABSOLUTE MANAGEMENT CORPORATION, Respondent.
 DECISION
BRION, J.:
We resolve petitioner Metropolitan Bank & Trust Company's
(Metro bank's) petition for review on certiorari1 seeking the
reversal of the decision2 dated August 25, 2005 and the
resolution3 dated November 17, 2005 of the Court of Appeals
(CA) in CA-G.R. SP No. 86336. The assailed decision affirmed
the order4 dated May 7, 2004 of the Regional Trial Court (RTC) of
Quezon City, Branch 80. The RTC had denied the admission of
Metrobank's Fourth-Party Complaint5 against the Estate of Jose
L. Chua for being a money claim that falls under Section 5, Rule
86 of the Rules of Court; the claim should have been filed in the
pending judicial settlement of Chuas estate before the RTC of
Pasay City. The CA affirmed the RTCs order based on the same
ground.
Factual Antecedents
On October 5, 2000, Sherwood Holdings Corporation, Inc. (SHCI)
filed a complaint for sum of money against Absolute Management
Corporation (AMC). The complaint was docketed as Civil Case
No. Q-00-42105 and was assigned to the RTC of Quezon City,
Branch 80.6
SHCI alleged in its complaint that it made advance payments to
AMC for the purchase of 27,000 pieces of plywood and 16,500
plyboards in the sum of P12,277,500.00, covered by Metrobank
Check Nos. 1407668502, 140768507, 140768530, 140768531,
140768532, 140768533 and 140768534. These checks were all
crossed, and were all made payable to AMC. They were given to
Chua, AMCs General Manager, in 1998.7
Chua died in 1999, 8 and a special proceeding for the settlement
of his estate was commenced before the RTC of Pasay City. This
proceeding was pending at the time AMC filed its answer with
counterclaims and third-party complaint.9
SHCI made demands on AMC, after Chuas death, for allegedly
undelivered items worth P8,331,700.00. According to AMC, these
transactions could not be found in its records. Upon investigation,
AMC discovered that in 1998, Chua received from SHCI 18
Metrobank checks worth P31,807,500.00. These were all payable
to AMC and were crossed or "for payees account only." 10
In its answer with counterclaims and third-party complaint,11 AMC
averred that it had no knowledge of Chuas transactions with
SHCI and it did not receive any money from the latter. AMC also
asked the RTC to hold Metrobank liable for the subject checks in
case it is adjudged liable to SHCI.
Metrobank filed a motion for bill of particulars,12 seeking to clarify
certain ambiguous statements in AMCs answer. The RTC
granted the motion but AMC failed to submit the required bill of
particulars. Hence, Metrobank filed a motion to strike out the
third-party complaint.13
In the meantime, Metrobank filed a motion to dismiss14 against
AMC on the ground that the latter engaged in prohibited forum
shopping. According to Metrobank, AMCs claim against it is the
same claim that it raised against Chuas estate in Special
Proceedings No. 99-0023 before the RTC of Pasay City, Branch
112. The RTC subsequently denied this motion.15
The RTC of Quezon City opted to defer consideration16 of
Metrobanks motion to strike out third-party complaint 17and it
instead granted AMCs motion for leave to serve written
interrogatories on the third-party defendant.18 While Metrobank
filed its answer to the written interrogatories, AMC was again
directed by the RTC, in an order19 dated August 13, 2003, to
submit its bill of particulars. Instead, AMC filed a motion for
reconsideration20 which was denied in an order21 dated October
28, 2003. AMC still did not file its bill of particulars. The RTC, on
the other hand, did not act on Metrobanks motion to strike out
AMCs third-party complaint.22
In its answer23 dated December 1, 2003, Metrobank admitted that
it deposited the checks in question to the account of Ayala
Lumber and Hardware, a sole proprietorship Chua owned and
managed. The deposit was allegedly done with the knowledge
and consent of AMC. According to
Metrobank, Chua then gave the assurance that the arrangement
for the handling of the checks carried AMCs consent. Chua also
submitted documents showing his position and interest in AMC.
These documents, as well as AMCs admission in its answer that
it allowed Chua to manage AMC with a relative free hand, show
that it knew of Chuas arrangement with Metrobank. Further,
Chuas records show that the proceeds of the checks were
remitted to AMC which cannot therefore now claim that it did not
receive these proceeds.
Metrobank also raised the defense of estoppel. According to
Metrobank, AMC had knowledge of its arrangements with Chua
for several years. Despite this arrangement, AMC did not object
to nor did it call the attention of Metrobank about Chuas alleged
lack of authority to deposit the checks in Ayala Lumber and
Hardwares account. At this point, AMC is already estopped from
questioning Chuas authority to deposit these checks in Ayala
Lumber and Hardwares account.
Lastly, Metrobank asserted that AMC gave Chua unbridled control
in managing AMCs affairs. This measure of control amounted to
gross negligence that was the proximate cause of the loss that
AMC must now bear.
Subsequently, Metrobank filed a motion for leave to admit fourth-
party complaint24 against Chuas estate. It alleged that Chuas
estate should reimburse Metrobank in case it would be held liable
in the third-party complaint filed against it by AMC.
The RTCs Ruling
In an order25 dated May 7, 2004, the RTC denied Metrobanks
motion. It likewise denied Metrobanks motion for reconsideration
in an order26 dated July 7, 2004.
The RTC categorized Metrobanks allegation in the fourth-party
complaint as a "cobro de lo indebido"27 a kind of quasi-contract
that mandates recovery of what has been improperly paid. Quasi-
contracts fall within the concept of implied contracts that must be
included in the claims required to be filed with the judicial
settlement of the deceaseds estate under Section 5, Rule 86 of
the Rules of Court. As such claim, it should have been filed in
Special Proceedings No. 99-0023, not before the RTC as a
fourth-party complaint. The RTC, acting in the exercise of its
general jurisdiction, does not have the authority to adjudicate the
fourth-party complaint. As a trial court hearing an ordinary action,
it cannot resolve matters pertaining to special proceedings
because the latter is subject to specific rules.
Metrobank responded to the RTC ruling by filing a petition for
certiorari28 under Rule 65 before the CA.
The CAs Ruling
The CA affirmed the RTCs ruling that Metrobanks fourth-party
complaint should have been filed in Special Proceedings No. 99-
0023.29 According to the CA, the relief that Metrobank prayed for
was based on a quasi-contract and was a money claim
categorized as an implied contract that should be filed under
Section 5, Rule 86 of the Rules of Court.
Based on the statutory construction principle of lex specialis
derogat generali, the CA held that Section 5, Rule 86 of the Rules
of Court is a special provision that should prevail over the general
provisions of Section 11, Rule 6 of the Rules of Court. The latter
applies to money claims in ordinary actions while a money claim
against a person already deceased falls under the settlement of
his estate that is governed by the rules on special proceedings. If
at all, rules for ordinary actions only apply suppletorily to special
proceedings.
The Present Petition
In its present petition for review on certiorari,30 Metrobank asserts
that it should be allowed to file a fourth-party complaint against
Chuas estate in the proceedings before the RTC; its fourth-party
complaint was filed merely to enforce its right to be reimbursed by
Chuas estate in case Metrobank is held liable to AMC. Hence,
Section 11, Rule 6 of the Rules of Court should apply.
AMC, in its comment,31 maintains the line that the CA and the
RTC rulings should be followed, i.e., that Metrobanks claim is a
quasi-contract that should be filed as a claim under Section 5,
Rule 86 of the Rules of Court.
AMC also challenges the form of Metrobanks petition for failure
to comply with Section 4, Rule 45 of the Rules of Court. This
provision requires petitions filed before the Supreme Court to be
accompanied by "such material portions of the record as would
support the petition."
According to AMC, the petitions annexes are mostly Metrobanks
pleadings and court issuances. It did not append all relevant AMC
pleadings before the RTC and the CA. For this reason, the
petition should have been dismissed outright.
Issues
The parties arguments, properly joined, present to us the
following issues:
1) Whether the petition for review on certiorari filed by
Metrobank before the Supreme Court complies with
Section 4, Rule 45 of the Rules of Court; and
2) Whether Metrobanks fourth-party complaint against
Chuas estate should be allowed.
The Courts Ruling
The Present Petition Complies With Section 4, Rule 45 of the
Rules of Court
AMC posits that Metrobanks failure to append relevant AMC
pleadings submitted to the RTC and to the CA violated Section 4,
Rule 45 of the Rules of Court,32 and is a sufficient ground to
dismiss the petition under Section 5, Rule 45 of the Rules of
Court.33
We disagree with AMCs position.
In F.A.T. Kee Computer Systems, Inc. v. Online Networks
International, Inc.,34 Online Networks International, Inc. similarly
assailed F.A.T. Kee Computer Systems, Inc.s failure to attach the
transcript of stenographic notes (TSN) of the RTC proceedings,
and claimed this omission to be a violation of Section 4, Rule 45
of the Rules of Court that warranted the petitions dismissal. The
Court held that the defect was not fatal, as the TSN of the
proceedings before the RTC forms part of the records of the case.
Thus, there was no incurable omission that warranted the outright
dismissal of the petition.
The Court significantly pointed out in F.A.T. Kee that the
requirement in Section 4, Rule 45 of the Rules of Court is not
meant to be an absolute rule whose violation would automatically
lead to the petitions dismissal.35 The Rules of Court has not been
intended to be totally rigid. In fact, the Rules of Court provides
that the Supreme Court "may require or allow the filing of such
pleadings, briefs, memoranda or documents as it may deem
necessary within such periods and under such conditions as it
may consider appropriate";36 and "[i]f the petition is given due
course, the Supreme Court may require the elevation of the
complete record of the case or specified parts thereof within
fifteen (15) days from notice."37 These provisions are in keeping
with the overriding standard that procedural rules should be
liberally construed to promote their objective and to assist the
parties in obtaining a just, speedy and inexpensive determination
of every action or proceeding.38
Under this guiding principle, we do not see Metrobanks omission
to be a fatal one that should warrant the petitions outright
dismissal. To be sure, the omission to submit the adverse partys
pleadings in a petition before the Court is not a commendable
practice as it may lead to an unduly biased narration of facts and
arguments that masks the real issues before the Court. Such
skewed presentation could lead to the waste of the Courts time in
sifting through the maze of the parties narrations of facts and
arguments and is a danger the Rules of Court seeks to avoid.
Our examination of Metrobanks petition shows that it contains
AMCs opposition to its motion to admit fourth-party complaint
among its annexes. The rest of the pleadings have been
subsequently submitted as attachments in Metrobanks Reply. A
reading of these pleadings shows that their arguments are the
same as those stated in the orders of the trial court and the Court
of Appeals. Thus, even if Metrobanks petition did not contain
some of AMCs pleadings, the Court still had the benefit of a clear
narration of facts and arguments according to both parties
perspectives. In this broader view, the mischief that the Rules of
Court seeks to avoid has not really been present. If at all, the
omission is not a grievous one that the spirit of liberality cannot
address.
The Merits of the Main Issue
The main issue poses to us two essential points that must be
addressed. First, are quasi-contracts included in claims that
should be filed pursuant to Rule 86, Section 5 of the Rules of
Court? Second, if so, is Metrobanks claim against the Estate of
Jose Chua based on a quasi-contract?
Quasi-contracts are included in
claims that should be filed under Rule
86, Section 5 of the Rules of Court
In Maclan v. Garcia,39 Gabriel Maclan filed a civil case to recover
from Ruben Garcia the necessary expenses he spent as
possessor of a piece of land. Garcia acquired the land as an heir
of its previous owner. He set up the defense that this claim should
have been filed in the special proceedings to settle the estate of
his predecessor. Maclan, on the other hand, contended that his
claim arises from law and not from contract, express or implied.
Thus, it need not be filed in the settlement of the estate of
Garcias predecessor, as mandated by Section 5, Rule 87 of the
Rules of Court (now Section 5, Rule 86).
The Court held under these facts that a claim for necessary
expenses spent as previous possessor of the land is a kind of
quasi-contract. Citing Leung Ben v. OBrien,40 it explained that the
term "implied contracts," as used in our remedial law, originated
from the common law where obligations derived from quasi-
contracts and from law are both considered as implied contracts.
Thus, the term quasi-contract is included in the concept "implied
contracts" as used in the Rules of Court. Accordingly, liabilities of
the deceased arising from quasi-contracts should be filed as
claims in the settlement of his estate, as provided in Section 5,
Rule 86 of the Rules of Court.41
Metrobanks fourth-party complaint is
based on quasi-contract
Both the RTC and the CA described Metrobanks claim against
Chuas estate as one based on quasi-contract. A quasi-contract
involves a juridical relation that the law creates on the basis of
certain voluntary, unilateral and lawful acts of a person, to avoid
unjust enrichment.42 The Civil Code provides an enumeration of
quasi-contracts,43 but the list is not exhaustive and merely
provides examples.44
According to the CA, Metrobanks fourth-party complaint falls
under the quasi-contracts enunciated in Article 2154 of the Civil
Code.45 Article 2154 embodies the concept "solutio indebiti" which
arises when something is delivered through mistake to a person
who has no right to demand it. It obligates the latter to return what
has been received through mistake.46
Solutio indebiti, as defined in Article 2154 of the Civil Code, has
two indispensable requisites: first, that something has been
unduly delivered through mistake; and second, that something
was received when there was no right to demand it. 47
In its fourth-party complaint, Metrobank claims that Chuas estate
should reimburse it if it becomes liable on the checks that it
deposited to Ayala Lumber and Hardwares account upon Chuas
instructions.
This fulfills the requisites of solutio indebiti. First, Metrobank acted
in a manner akin to a mistake when it deposited the AMC checks
to Ayala Lumber and Hardwares account; because of Chuas
control over AMCs operations, Metrobank assumed that the
checks payable to AMC could be deposited to Ayala Lumber and
Hardwares account. Second, Ayala Lumber and Hardware had
no right to demand and receive the checks that were deposited to
its account; despite Chuas control over AMC and Ayala Lumber
and Hardware, the two entities are distinct, and checks
exclusively and expressly payable to one cannot be deposited in
the account of the other. This disjunct created an obligation on
the part of Ayala Lumber and Hardware, through its sole
proprietor, Chua, to return the amount of these checks to
Metrobank.
The Court notes, however, that its description of Metrobanks
fourth-party complaint as a claimclosely analogous to solutio
indebiti is only to determine the validity of the lower courts orders
denying it. It is not an adjudication determining the liability of
Chuas estate against Metrobank. The appropriate trial court
should still determine whether Metrobank has a lawful claim
against Chuas estate based on quasi-contract.1wphi1
Metrobanks fourth-party complaint,
as a contingent claim, falls within the
claims that should be filed under
Section 5, Rule 86 of the Rules of
Court
A distinctive character of Metrobanks fourth-party complaint is its
contingent nature the claim depends on the possibility that
Metrobank would be adjudged liable to AMC, a future event that
may or may not happen. This characteristic unmistakably marks
the complaint as a contingent one that must be included in the
claims falling under the terms of Section 5, Rule 86 of the Rules
of Court:
Sec. 5. Claims which must be filed under the notice. If not filed,
barred; exceptions. All claims for money against the decedent,
arising from contract, express or implied, whether the same be
due, not due, or contingent, all claims for funeral expenses and
expenses for the last sickness of the decedent, and judgment for
money against the decedent, must be filed within the time limited
in the notice. [italics ours]
Specific provisions of Section 5, Rule
86 of the Rules of Court prevail over
general provisions of Section 11, Rule
6 of the Rules of Court
Metrobank argues that Section 11, Rule 6 of the Rules of Court
should apply because it impleaded Chuas estate for
reimbursement in the same transaction upon which it has been
sued by AMC. On this point, the Court supports the conclusion of
the CA, to wit:
Notably, a comparison of the respective provisions of Section 11,
Rule 6 and Section 5, Rule 86 of the Rules of Court readily shows
that Section 11, Rule 6 applies to ordinary civil actions while
Section 5, Rule 86 specifically applies to money claims against
the estate. The specific provisions of Section 5, Rule 86 x x x
must therefore prevail over the general provisions of Section 11,
Rule 6.48
We read with approval the CAs use of the statutory construction
principle of lex specialis derogat generali, leading to the
conclusion that the specific provisions of Section 5, Rule 86 of the
Rules of Court should prevail over the general provisions of
Section 11, Rule 6 of the Rules of Court; the settlement of the
estate of deceased persons (where claims against the deceased
should be filed) is primarily governed by the rules on special
proceedings, while the rules provided for ordinary claims,
including Section 11, Rule 6 ofthe Rules of Court, merely apply
suppletorily.49
In sum, on all counts in the considerations material to the issues
posed, the resolution points to the affirmation of the assailed CA
decision and resolution. Metrobank's claim in its fourth-party
complaint against Chua's estate is based on quasi-contract. It is
also a contingent claim that depends on another event. Both
belong to the category of claims against a deceased person that
should be filed under Section 5, Rule 86 of the Rules of Comi
and, as such, should have been so filed in Special Proceedings
No. 99-0023.
WHEREFORE, premises considered, we hereby DENY the
petition for lack of merit. The decision of the Court of Appeals
dated August 25, 2005, holding that the Regional Trial Court of
Quezon City, Branch 80, did not commit grave abuse of discretion
in denying Metropolitan Bank & Trust Company's motion for leave
to admit fourth-party complaint Is
AFFIRMED. Costs against Metropolitan Bank & Trust Company.
SO ORDERED. case was assigned to the writer of the opinion of the Court's
Division.
ARTURO D. BRION
Associate Justice MARIA LOURDES P. A. SERENO
Chief Justice
WE CONCUR:

ANTONIO T. CARPIO
Associate Justice
Chairperson Footnotes

MARIANO C. DEL 1
Rollo, pp. 9-18.
JOSE PORTUGAL PEREZ
CASTILLO
Associate Justice
Associate Justice 2
Id. at 24-32. Penned by Associate Justice Fernanda
Lampas Peralta, and concurred in by Associate Justices
ESTELA M. PERLAS-BERNABE Ruben T. Reyes (now a retired member of this Court) and
Associate Justice Josefina Guevara-Salonga.

ATTE S TATI O N 3
Id. at34-35.

I attest that the conclusions in the above Decision had been 4

Id. at 121-123. Penned by Judge Agustin S. Dizon.
reached in consultation before the case was assigned to the
writer of the opinion of the Court's Division. 5
Id. at 110-113.

ANTONIO T. CARPIO 6
Id. at 25.
Associate Justice
Chairperson, Second Division 7
Id. at 232-233.

C E RTI F I CATI O N 8
Id. at 233.

Pursuant to Section 13, Article VIII of the Constitution, and the 9

Id. at 11.
Division Chairperson's Attestation, I certify that the conclusions in
the above Decision had been reached in consultation before the 10
Id. at 233.
11 28
Id. at 147-156. Id. at 130-141.

12 29
Id. at 48-50. Supra notes 2 and 3.

13 30
Id. at 76-77. Supra note 1.

14 31
Id. at 51-60. Supra note 7.

15 32
Order dated May 23, 2001; id. at 68-70. Sec. 4. Contents of petition. The petition shall be filed
in eighteen (18) copies, with the original copy intended for
16
Order dated June 4, 2002; id. at 78. the court being indicated as such by the petitioner, and
shall (a) state the full name of the appealing party as the
17
Id. at 11. petitioner and the adverse party as respondent, without
impleading the lower courts or judges thereof either as
18 petitioners or respondents; (b) indicate the material dates
Id. at 72-75.
showing when notice of the judgment or final order or
19
resolution subject thereof was received, when a motion
Id. at 86-87. for new trial or reconsideration, if any, was filed and when
notice of the denial thereof was received; (c) set forth
20
Id. at 88-93. concisely a statement of the matters involved, and the
reasons or arguments relied on for the allowance of the
21
Id. at 94. petition; (d) be accompanied by a clearly legible duplicate
original, or a certified true copy of the judgment or final
22
Id. at 12. order or resolution certified by the clerk of court of the
court a quo and the requisite number of plain copies
23
Id. at 95-101. thereof, and such material portions of the record as would
support the petition; and (e) contain a sworn certification
24
Supra note 5. against forum shopping as provided in the last paragraph
of section 2, Rule 42. [italics ours]
25
Supra note 4. 33
Sec. 5. Dismissal or denial of petition. The failure of
26 the petitioner to comply with any of the foregoing
Rollo, pp. 128-129. requirements regarding the payment of the docket and
27
other lawful fees, deposit for costs, proof of service of the
Id. at 122.

petition, and the contents of and the documents which
should accompany the petition shall be sufficient ground
for the dismissal thereof. [italics ours]
34
G.R. No. 171238, February 2, 2011, 641 SCRA 390.
35
Id. at 401.
36
Section 7, Rule 45 of the Rules of Court provides:
"Pleadings and documents that may be required;
sanctions. For purposes of determining
whether the petition should be dismissed or
denied pursuant to section 5 of this Rule, or where
the petition is given due course under section 8
hereof, the Supreme Court may require or allow
the filing of such pleadings, briefs, memoranda or
documents as it may deem necessary within such
periods and under such conditions as it may
consider appropriate, and impose the
corresponding sanctions in case of non-filing or
unauthorized filing of such pleadings and
documents or noncompliance with the conditions
thereof." (italics ours)
37
Section 8, Rule 45 of the Rules of Court provides:
"Due course; elevation of records. If the petition is
given due course, the Supreme Court may require the
elevation of the complete record of the case or specified
parts thereof within fifteen (15) days from notice."
38
F.A.T. Kee Computer Systems, Inc. v. Online Networks
International, Inc., supra note 34, at 401-402.
39
97 Phil. 119 (1955).
40
38 Phil. 182, 189-194 (1918).
41
Maclan v. Garcia, supra note 39, at 123-124.
42
Cruz v. J.M. Tuason Company, Inc., 167 Phil. 261, 276-
277 (1977).
43
See CIVIL CODE, Articles 2144, 2154, 2164-2175.
44
Article 2143 of the Civil Code provides:
"The provisions for quasi-contracts in this Chapter
do not exclude other quasi-contracts which may
come within the purview of the preceding article."
The number of the quasi-contracts may be
indefinite as may be the number of lawful facts,
the generations of the said obligations; but the
Code, just as we shall see further on, in the
impracticableness of enumerating or including
them all in a methodical and orderly classification,
has concerned itself with two only namely, the
management of the affairs of other persons and
the recovery of things improperly paid without
attempting by this to exclude the others.
(Manresa, 2d ed., vol. 12, p. 549, as cited in
Leung Ben v. OBrien, supra note 40, at 195.)
45
Rollo, p. 30.
46
Andres v. Manufacturers Hanover & Trust Corporation,
G.R. No. 82670, September 15, 1989, 177 SCRA 618,
622, citing Velez v. Balzarza, 73 Phil. 630 (1942); and City
of Cebu v. Piccio, 110 Phil. 558, 563 (1960).

47
Philippine National Bank v. Court of Appeals, G.R. No.
97995, January 21, 1993, 217 SCRA 347, 355.

48
Rollo, p. 28.

49
Id. at 28-29.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 77648 August 7, 1989

CETUS DEVELOPMENT, INC., petitioner,
vs.
COURT OF APPEALS and ONG TENG, respondents.
G.R. No. 77647 August 7, 1989
CETUS DEVELOPMENT, INC., petitioner,
vs.
COURT OF APPEALS and EDERLINA NAVALTA, respondents.
G.R. No. 77649 August 7, 1989
CETUS DEVELOPMENT, INC., petitioner,
vs.
COURT OF APPEALS and JOSE LIWANAG, respondents.
G.R. No. 77650 August 7, 1989
CETUS DEVELOPMENT, INC., petitioner,
vs.
COURT OF APPEALS and LEANDRO CANLAS, respondents.
G.R. No. 77651 August 7, 1989
CETUS DEVELOPMENT, INC., petitioner,
vs.
COURT OF APPEALS and VICTORIA SUDARIO respondents.
G.R. No.77652 August 7, 1989
CETUS DEVELOPMENT, INC., petitioner,
vs.
COURT OF APPEALS and FLORA NAGBUYA respondents.
MEDIALDEA, J.:
This is a petition for review on certiorari of the decision dated
January 30, 1987 of the Court of Appeals in CA-GR Nos. SP-
07945-50 entitled, "Cetus Development, Inc., Petitioner vs. Hon.
Conrado T. Limcaoco, Presiding Judge, Regional Trial Court of
Manila, Branch Ederlina Navalta, et. al., respondents.
The following facts appear in the records:
The private respondents, Ederlina Navalta, Ong Teng, Jose
Liwanag, Leandro Canlas, Victoria Sudario, and Flora Nagbuya
were the lessees of the premises located at No. 512 Quezon
Boulevard, Quiapo, Manila, originally owned by the Susana
Realty. These individual verbal leases were on a month-to month
basis at the following rates: Ederlina Navalta at the rate of
P80.50; Ong Teng at the rate of P96.10; Jose Liwanag at the rate
of P40.35; Leandro Canlas at the rate of P80.55; Victoria Sudario
at the rate of P50.45 and Flora Nagbuya at the rate of P80.55.
The payments of the rentals were paid by the lessees to a
collector of the Susana Realty who went to the premises monthly.
Sometime in March, 1984, the Susana Realty sold the leased
premises to the petitioner, Cetus Development, Inc., a corporation
duly organized and existing under the laws of the Philippines.
From April to June, 1984, the private respondents continued to
pay their monthly rentals to a collector sent by the petitioner. In
the succeeding months of July, August and September 1984, the
respondents failed to pay their monthly individual rentals as no
collector came.
On October 9, 1984, the petitioner sent a letter to each of the
private respondents demanding that they vacate the subject
premises and to pay the back rentals for the months of July,
August and September, 1984, within fifteen (15) days from the
receipt thereof. Immediately upon the receipt of the said demand
letters on October 10, 1984, the private respondents paid their
respective arrearages in rent which were accepted by the
petitioner subject to the unilateral condition that the acceptance
was without prejudice to the filing of an ejectment suit.
Subsequent monthly rental payments were likewise accepted by
the petitioner under the same condition.
For failure of the private respondents to vacate the premises as
demanded in the letter dated October 9, 1984, the petitioner filed
with the Metropolitan Trial Court of Manila complaints for
ejectment against the manner, as follows: (1) 105972-CV, against
Ederlina Navalta (2) 105973-CV, against Jose Liwanag; (3)
105974-CV, against Flora Nagbuya; (4) 105975-CV, against
Leandro Canlas; (5) 105976-CV, against Victoria Sudario and (6)
105977-CV, against Ong Teng.
In their respective answers, the six (6) private respondents
interposed a common defense. They claimed that since the
occupancy of the premises they paid their monthly rental regularly
through a collector of the lessor; that their non-payment of the
rentals for the months of July, August and September, 1984, was
due to the failure of the petitioner (as the new owner) to send its
collector; that they were at a loss as to where they should pay
their rentals; that sometime later, one of the respondents called
the office of the petitioner to inquire as to where they would make
such payments and he was told that a collector would be sent to
receive the same; that no collector was ever sent by the
petitioner; and that instead they received a uniform demand letter
dated October 9, 1984.
The private respondents, thru counsel, later filed a motion for
consolidation of the six cases and as a result thereof, the said
cases were consolidated in the Metropolitan Trial Court of Manila,
Branch XII, presided over by Judge Eduardo S. Quintos, Jr. On
June 4, 1985, the trial court rendered its decision dismissing the
six cases, a pertinent portion of which reads, as follows:
The records of this case show that at the time of the filing of
this complaint, the rentals had all been paid. Hence, the
plaintiff cannot eject the defendants from the leased
premises, because at the time these cases were instituted,
there are no rentals in arrears.
The acceptance of the back rental by the plaintiff before the
filing of the complaint, as in these case, the alleged rental
arrearages were paid immediately after receipt of the
demand letter, removes its cause of action in an unlawful
detainer case, even if the acceptance was without prejudice.
x x x.
Furthermore, the court has observed that the account
involved which constitutes the rentals of the tenants are
relatively small to which the ejectment may not lie on
grounds of equity and for humanitarian reasons.
Defendants' counterclaim for litigation expenses has no legal
and factual basis for assessing the same against plaintiff.
WHEREFORE, judgment is hereby rendered dismissing
these cases, without pronouncement as to costs.
Defendants' counterclaim is likewise dismissed.
 SO ORDERED. (pp. 32-33, Rollo, G.R. No. 77647)
Not satisfied with the decision of the Metropolitan Trial Court, the
petitioner appealed to the Regional Trial Court of Manila and the
same was assigned to Branch IX thereof presided over by Judge
Conrado T. Limcaoco (now Associate Justice of the Court of
Appeals).lwph1.t In its decision dated November 19, 1985,
the Regional Trial Court dismissed the appeal for lack of merit.
In due time, a petition for review of the decision of the Regional
Trial Court was filed by the petitioner with the Court of Appeals.
Said petition was dismissed on January 30, 1987, for lack of
merit.
Aggrieved by the decision of the Court of Appeals, petitioner now
comes to Us in this petition, assigning the following errors:
ASSIGNMENT OF ERRORS
I follows: whether or not there exists a cause of action when the
RESPONDENT COURT OF APPEALS COMMITTED A GRAVE
ABUSE OF DISCRETION, AMOUNTING TO LACK OF
JURISDICTION, WHEN IT ERRED IN HOLDING THAT THE
CAUSE OF ACTION FOR UNLAWFUL DETAINER IN THESE
CASES DID NOT EXIST WHEN THE COMPLAINTS WERE
FILED BECAUSE PRIVATE RESPONDENTS TENDERED,
AND PETITIONER ACCEPTED, THE PAYMENT OF THE
THREE (3) MONTHS RENTAL IN ARREARS WITHIN THE
FIFTEEN (15) DAY PERIOD FROM PRIVATE RESPONDENTS'
RECEIPT OF PETITIONER'S DEMAND LETTERS TO VACATE
THE SUBJECT PREMISES AND TO PAY THE RENTALS IN
ARREARS.
II
RESPONDENT COURT OF APPEALS COMMITTED A
GRAVEABUSE OF DISCRETION, AMOUNTING TO LACK OF
JURISDICTION COMMITTED A GRAVE WHEN IT ERRED IN
AFFIRMING THE DISMISSAL OF THE COMPLAINTS IN
THESE CASES NOTWITHSTANDING THE EXISTENCE OF
VALID GROUNDS FOR THE JUDICIAL EJECTMENT OF
PRIVATE RESPONDENT.
III
RESPONDENT COURT OF APPEALS COMMITTED A GRAVE
ABUSE OF DISCRETION, AMOUNTING TO LACK OF
JURISDICTION, WHEN IT ERRED IN HOLDING THAT THESE
CASES ARE CLASSIC EXAMPLES TO CIRCUMVENT THE
RENT CONTROL LAW. (pp. 164-165, Rollo, G.R. No. 77647)
The Court of Appeals defined the basic issue in this case as
complaints for unlawful detainer were filed considering the fact
that upon demand by petitioner from private respondents for
payment of their back rentals, the latter immediately tendered
payment which was accepted by petitioner.
In holding that there was no cause of action, the respondent
Court relied on Section 2, Rule 70 of the Rules of Court, which
provides:
Sec. 2. Landlord to proceed against tenant only after demand.
No landlord or his legal representative or assign, shall be
such action against a tenant for failure to pay rent due or to
comply with the conditions of his lease, unless the tenant shall
have failed to pay such rent or comply with such conditions for
 a period of fifteen (15) days or five (5) days in case of building,
after demand therefor, made upon qqqm personally, or by
serving written notice of such demand upon the person found
on the premises, or by posting such notice on the premises if
no persons be found thereon.
It interpreted the said provision as follows:
.....the right to bring an action of ejectment or unlawful detainer
must be counted from the time the defendants failed to pay
rent after the demand therefor. It is not the failure per se to pay
rent as agreed in the contract, but the failure to pay the rent
after a demand therefor is made, that entitles the lessor to
bring an action for unlawful detainer. In other words, the
demand contemplated by the above-quoted provision is not a
demand to vacate, but a demand made by the landlord upon
his tenant for the latter to pay the rent due if the tenant fails to
comply with the said demand with the period provided, his
possession becomes unlawful and the landlord may then bring
the action for ejectment. (p. 28, , G.R. No. 77647)
We hold that the demand required and contemplated in Section 2,
aforequoted, is a jurisdictional requirement for the purpose of
bringing an unlawful detainer suit for failure to pay rent or comply
with the conditions of lease. It partakes of an extrajudicial remedy
that must be pursued before resorting for judicial action so much
so that when there is full compliance with the demand, there
arises no necessity for court action.
As to whether this demand is merely a demand to pay rent or
comply with the conditions of the lease or also a demand to
vacate, the answer can be gleaned from said Section 2. This
section presupposes the existence of a cause of action for
unlawful detainer as it speaks of "failure to pay rent due or comply
with the conditions of the lease." The existence of said cause of
action gives the lessor the right under Article 1659 of the New
Civil Code to ask for the rescission of the contract of lease and
indemnification for damages, or only the latter, allowing the
contract to remain in force. Accordingly, if the option chosen is for
specific performance, then the demand referred to is obviously to
pay rent or to comply with the conditions of the lease violated.
However, if rescission is the option chosen, the demand must be
for the lessee to pay rents or to comply with the conditions of the
lease and to vacate. Accordingly, the rule that has been followed
in our jurisprudence where rescission is clearly the option taken,
is that both demands to pay rent and to vacate are necessary to
make a lessee a deforciant in order that an ejectment suit may be
filed (Casilan et al. vs. Tomassi, L-16574, February 28,1964, 10
SCRA 261; Rickards vs. Gonzales, 109 Phil. 423, Dikit vs.
Icasiano, 89 Phil. 44).lwph1.t
Thus, for the purpose of bringing an ejectment suit, two requisites
must concur, namely: (1) there must be failure to pay rent or
comply with the conditions of the lease and (2) there must be
demand both to pay or to comply and vacate within the periods
specified in Section 2, Rule 70, namely 15 days in case of lands
and 5 days in case of buildings. The first requisite refers to the
existence of the cause of action for unlawful detainer while the
second refers to the jurisdictional requirement of demand in order
that said cause of action may be pursued.
It is very clear that in the case at bar, no cause of action for
ejectment has accrued. There was no failure yet on the part of
private respondents to pay rents for three consecutive months. As
the terms of the individual verbal leases which were on a month-
to-month basis were not alleged and proved, the general rule on
necessity of demand applies, to wit: there is default in the
fulfillment of an obligation when the creditor demands payment at
the maturity of the obligation or at anytime thereafter. This is
explicit in Article 1169, New Civil Code which provides that
"(t)hose obliged to deliver or to do something incur in delay from
the time the obligee judicially or extrajudicially demands from
them the fulfillment of their obligation." Petitioner has not shown
that its case falls on any of the following exceptions where
demand is not required: (a) when the obligation or the law so
declares; (b) when from the nature and circumstances of the
obligation it can be inferred that time is of the essence of the
contract; and (c) when demand would be useless, as when the
obligor has rendered it beyond his power to perform.
The demand required in Article 1169 of the Civil Code may be in
any form, provided that it can be proved. The proof of this
demand lies upon the creditor. Without such demand, oral or
written, the effects of default do not arise. This demand is
different from the demand required under Section 2, Rule 70,
which is merely a jurisdictional requirement before an existing
cause of action may be pursued.
The facts on record fail to show proof that petitioner demanded
the payment of the rentals when the obligation matured. Coupled
with the fact that no collector was sent as previously done in the
past, the private respondents cannot be held guilty of mora
solvendi or delay in the payment of rentals. Thus, when petitioner
first demanded the payment of the 3-month arrearages and
private respondents lost no time in making tender and payment,
which petitioner accepted, no cause of action for ejectment
accrued. Hence, its demand to vacate was premature as it was
an exercise of a non-existing right to rescind.
In contradistinction, where the right of rescission exists, payment
of the arrearages in rental after the demand to pay and to vacate
under Section 2, Rule 70 does not extinguish the cause of action
for ejectment as the lessor is not only entitled to recover the
unpaid rents but also to eject the lessee.
Petitioner correctly argues that acceptance of tendered payment
does not constitute a waiver of the cause of action for ejectment
especially when accepted with the written condition that it was
"without prejudice to the filing of an ejectment suit". Indeed, it is
illogical or ridiculous not to accept the tender of payment of
rentals merely to preserve the right to file an action for unlawful
detainer. However, this line of argument presupposes that a
cause of action for ejectment has already accrued, which is not
true in the instant case.
Petitioner likewise claims that its failure to send a collector to
collect the rentals cannot be considered a valid defense for the
reason that sending a collector is not one of the obligations of the
lessor under Article 1654. While it is true that a lessor is not
obligated to send a collector, it has been duly established that it
has been customary for private respondents to pay the rentals
through a collector. Besides Article 1257, New Civil Code
provides that where no agreement has been designated for the
payment of the rentals, the place of payment is at the domicile of
the defendants. Hence, it could not be said that they were in
default in the payment of their rentals as the delay in paying the
same was not imputable to them. Rather, it was attributable to
petitioner's omission or neglect to collect.
Petitioner also argues that neither is its refused to accept the
rentals a defense for non-payment as Article 1256 provides that
"[i]f the creditor to whom the tender of payment has been made
refuses without just cause to accept it, the debtor shall be
released from responsibility by the consignation of the thing due."
It bears emphasis that in this case there was no unjustified
refusal on the part of petitioner or non-acceptance without reason
that would constitute mora accipiendi and warrant consignation.
There was simply lack of demand for payment of the rentals.
In sum, We hold that respondent Court of Appeals did not commit
grave abuse of discretion amounting to lack of jurisdiction in its
conclusion affirming the trial court's decision dismissing
petitioner's complaint for lack of cause of action. We do not
agree, however, with the reasons relied upon.

ACCORDINGLY, the petition for review on certiorari is hereby

DENIED for lack of merit and the decision dated January 30,
1987 of respondent Court of Appeals is hereby AFFIRMED.

SO ORDERED.

Narvasa, Cruz, Gancayco and Gri;o-Aquino JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 133107 March 25, 1999

RIZAL COMMERCIAL BANKING CORPORATION, petitioner,
vs.
COURT OF APPEALS and FELIPE LUSTRE, respondents.
KAPUNAN, J.:
A simple telephone call and an ounce of good faith on the part of
petitioner could have prevented the present controversy.
On March 10, 1993, private respondent Atty. Felipe Lustre
purchased a Toyota Corolla from Toyota Shaw, Inc. for which he
made a down payment of P164,620.00, the balance of the
purchase price to be paid in 24 equal monthly installments.
Private respondent thus issued 24 postdated checks for the
amount of P14,976.00 each. The first was dated April 10, 1991;
subsequent checks were dated every 10th day of each
succeeding month.
To secure the balance, private respondent executed a promissory
note 1 and a contract of chattel mortgage 2 over the vehicle in
favor of Toyota Shaw, Inc. The contract of chattel mortgage, in
paragraph 11 thereof, provided for an acceleration clause stating
that should the mortgagor default in the payment of any
installment, the whole amount remaining unpaid shall become
due. In addition, the mortgagor shall be liable for 25% of the
principal due as liquidated damages.
On March 14, 1991, Toyota Shaw, Inc. assigned all its rights and
interests in the chattel mortgage to petitioner Rizal Commercial
Banking Corporation (RCBC).
All the checks dated April 10, 1991 to January 10, 1993 were
thereafter encashed and debited by RCBC from private
respondent's account, except for RCBC Check No. 279805
representing the payment for August 10, 1991, which was
unsigned. Previously, the amount represented by RCBC Check
No. 279805 was debited from private respondent's account but
was later recalled and re-credited, to him. Because of the recall,
the last two checks, dated February 10, 1993 and March 10,
1993, were no longer presented for payment. This was
purportedly in conformity with petitioner bank's procedure that
once a client's account was forwarded to its account
representative, all remaining checks outstanding as of the date
the account was forwarded were no longer presented for patent.
On the theory that respondent defaulted in his payments, the
check representing the payment for August 10, 1991 being
unsigned, petitioner, in a letter dated January 21, 1993,
demanded from private respondent the payment of the balance of
the debt, including liquidated damages. The latter refused,
prompting petitioner to file an action for replevin and damages
before the Pasay City Regional Trial Court (RTC). Private
respondent, in his Answer, interposed a counterclaim for
damages.
After trial, the. RTC 3 rendered a decision disposing of the case
as follows:
WHEREFORE, in view of the foregoing, judgment is hereby,
rendered as follows:
I. The complaint; for lack of cause of action, is hereby
DISMISSED and plaintiff RCBC is hereby ordered,
 A. To accept the payment equivalent to the three checks
amounting to a total of P44,938.00, without interest.
B. To release/cancel the mortgage on the car . . . upon
payment of the amount of P44,938.00, without interest.
C. To pay the cost of suit.
II. On The Counterclaim.
A. Plaintiff RCBC to pay Atty. Lustre the amount of
P200,000.00 as moral damages.
B. RCBC to pay P100,000.00 as exemplary damages.
C. RCBC to pay Atty. Obispo P50,000.00 as Attorney's
fees. Atty. Lustre is not entitled to any fee for lawyering for
himself.
All awards for damages are subject to payment of fees
to be assessed by the Clerk of Court, RTC, Pasay City.
SO ORDERED.
On appeal by petitioner, the Court of Appeals affirmed the
decision of the RTC, thus:
We . . . concur with the trial court's ruling that the Chattel
Mortgage contract being a contract of adhesion that is, one
wherein a party, usually a corporation, prepares the
stipulations in the contract, while the other party merely affixes
his signature or his "adhesion" thereto . . . is to be strictly
construed against appellant bank which prepared the form
Contract . . . Hence . . . paragraph 11 of the Chattel Mortgage
contract [containing the acceleration clause] should be
construed to cover only deliberate and advertent failure on the
part of the mortgagor to pay an amortization as it became due
in line with the consistent holding of the Supreme Court
construing obscurities and ambiguities in the restrictive sense
against the drafter thereof . . . in the light of Article 1377 of the
Civil Code.
In the case at bench, plaintiff-appellant's imputation of default
to defendant-appellee rested solely on the fact that the 5th
check issued by appellee . . . was recalled for lack of
signature. However, the check was recalled only after the
amount covered thereby had been deducted from defendant-
appellee's account, as shown by the testimony of plaintiff's
own witness Francisco Bulatao who was in charge of the
preparation of the list and trial balances of bank customers . . .
. The "default" was therefore not a case of failure to pay, the
check being sufficiently funded, and which amount was in fact
already debited [sic] from appellee's account by the appellant
bank which subsequently re-credited the amount to defendant-
appelle's account for lack of signature. All these actions RCBC
did on its own without notifying defendant until sixteen (16)
months later when it wrote its demand letter dated January 21,
1993.
Clearly, appellant bank was remiss in the performance, of its
functions for it could have easily called the defendant's
attention to the lack of signature on the check and sent the
check to or summoned, the latter to affix his signature. It is
also to be noted that the demand letter contains no
explanation as to how defendant-appellee incurred arrearages
in the amount of P66,255.70, which is why defendant-appellee
made a protest notation thereon.
 Notably, all the other checks issued by the appellee dated
subsequent to August 10, 1991 and dated earlier than the
demand letter, were duly encashed. This fact should have
already prompted the appellant bank to review its action
relative to the unsigned check. . . . 4
We take exception to the application by both the trial and
appellate courts of Article 1377 of the Civil Code, which states:
The interpretation of obscure words or stipulations in a
contract shall not favor the party who caused the obscurity.
It bears stressing that a contract of adhesion is just as binding as
ordinary contracts. 5 It is true that we have, on occasion, struck
down such contracts as void when the weaker party is imposed
upon in dealing with the dominant bargaining party and is
reduced to the alternative of taking it or leaving it, completely
deprived of the opportunity to bargain on equal
footing. 6 Nevertheless, contracts of adhesion are not invalid per
se; 7 they are not entirely prohibited. 8 The one who adheres to
the contract is in reality free to reject it entirely; if he adheres, he
gives his consent. 9
While ambiguities in a contract of adhesion are to be construed
against the party that prepared the same, 10 this rule applies only
if the stipulations in such contract are obscure or ambiguous. If
the terms thereof are clear and leave no doubt upon the intention
of the contracting parties, the literal meaning of its stipulations
shall control. 11 In the latter case, there would be no need for
construction. 12
Here, the terms of paragraph 11 of the Chattel Mortgage
Contract 13 are clear. Said paragraph states:
11. In case the MORTGAGOR fails to pay any of the
installments, or to pay the interest that may be due as
provided in the said promissory note, the whole amount
remaining unpaid therein shall immediately become due and
payable and the mortgage on the property (ies) herein-above
described may be foreclosed by the MORTGAGEE, or the
MORTGAGEE may take any other legal action to enforce
collection of the obligation hereby secured, and in either case
the MORTGAGOR further agrees to pay the MORTGAGEE
an additional sum of 25% of the principal due and unpaid, as
liquidated damages, which said sum shall become part
thereof. The MORTGAGOR hereby waives reimbursement of
the amount heretofore paid by him/it to the MORTGAGEE.
The above terms leave no room for construction. All that is
required is the application thereof.
Petitioner claims that private respondent's check representing the
fifth installment was "not encashed," 14 such that the installment
for August 1991 was not paid. By virtue of paragraph 11 above,
petitioner submits that it "was justified in treating the entire
balance of the obligation as due and
demandable." 15 Despite demand by petitioner, however, private
respondent refused to pay the balance of the debt. Petitioner, in
sum imputes delay on the part of private respondent.
We do not subscribe to petitioner's theory.
Art. 170 of the Civil Code states that those who in the
performance of their obligations are guilty of delay are liable for
damages. The delay in the performance of the obligation,
however, must be either malicious or negligent. 16Thus, assuming
that private respondent was guilty of delay in the payment of the
value of unsigned check, private respondent cannot be held liable
for damages. There is no imputation, much less evidence, that
private respondent acted with malice or negligence in failing to
sign the check. Indeed, we agree with the Court of Appeals
finding that such omission was mere "in advertence" on the part
of private respondent. Toyota salesperson Jorge Geronimo
testified that he even verified whether private respondent had
signed all the checks and in fact returned three or four unsigned
checks to him for signing:
Atty. Obispo:
After these receipts were issued, what else did you do about the
transaction?
A: During our transaction with Atty. Lustre, I found out when he
issued to me the 24 checks, I found out 3 to 4 checks are
unsigned and I asked him to signed these checks.
Atty. Obispo:
What did you do?
A: I asked him to sign the checks. After signing the checks, I
reviewed again all the documents, after I reviewed all the
documents and found out that all are completed and the down
payments was completed, we realed to him the car. 17
Even when the checks were delivered to petitioner, it did not
object to the unsigned check. In view of the lack of malice or
negligence on the part of private respondent, petitioner's blind
and mechanical invocation of paragraph 11 of the contract of
chattel mortgage was unwarranted.
Petitioner's conduct, in the light of the circumstances of this case,
can only be described as mercenary. Petitioner had already
debited the value of the unsigned check from private respondent's
account only to re-credit it much later to him. Thereafter, petitioner
encashed checks subsequently dated, then abruptly refused to
encash the last two. More than a year after the date of the
unsigned check, petitioner, claiming delay and invoking
paragraph 11, demanded from private respondent payment of the
value of said check and that of the last two checks, including
liquidated damages. As pointed out by the trial court, this whole
controversy could have been avoided if only petitioner bothered
to call up private respondent and ask him to sign the check. Good
faith not only in compliance with its contractual obligations, 18 but
also in observance of the standard in human relations, for every
person "to act with justice, give everyone his due, and observe
honesty and good faith." 19 behooved the bank to do so.
Failing thus, petitioner is liable for damages caused to private
respondent. 20 These include moral damages for the mental
anguish, serious anxiety, besmirched reputation, wounded
feelings and social humiliation suffered by the latter. 21The trial
court found that private respondent was:
[a] client who has shared transactions for over twenty years
with a bank . . ..The shabby treatment given the defendant is
unpardonable since he was put to shame and
embarrassment after the case was filed in Court. He is a
lawyer in his own right, married to another member of the
bar. He sired children who are all professionals in their
chosen field. He is known to the community of golfers with
whom he gravitates. Surely the filing of the case made
defendant feel so bad and bothered.
To deter others from emulating petitioner's callous example, we
affirm the award of exemplary damages. 22 As exemplary
damages are warranted, so are attorney's fees. 23
We, however, find excessive the amount of damages awarded by
the trial court in favor of private respondent with respect to his
counterclaims and, accordingly, reduce the same as follows:
(a) Moral damages from P200,000.00 to P100,000.00
(b) Exemplary damages from P100,000.00 to P75,000.00
(c) Attorney's fees from P50,000.00 to P 30,000.00
WHEREFORE, subject to these modifications, the decision of the
Court of Appeals is AFFIRMED.
SO ORDERED.
Davide, Jr., C.J., Melo and Pardo, JJ., concur.
Footnotes
1 Exhibit "A."
2 Exhibit "B."
3 Branch 108, presided by Judge Priscilla Mijares.
4 Rollo, pp. 6-8.
5 Art's. 1305, 1308, Civil Code. Serra vs. Court of
Appeals, 229 SCRA 60 (1994).
6 Phil., Commercial International Bank vs. Court Bank vs.
Court of Appeals, 255 SCRA 299 (1996).
7 Philippine Airlines, Inc. vs. Court of Appeals, 255 SCRA
48 (1996); Telengtan Brothers & Sons, Inc. vs. Court of
Appeals, 236 SCRA 617 (1994).
8 Telengtan Brothers & Sons, Inc. vs. Court of
Appeals, supra, Philippine American General Insurance
Co., Inc. vs. Sweet Lines, Inc, 212 SCRA 194 (1992); Pan
American World Airways vs. Rapadas, 209 SCRA 67
(1992); Saludo, Jr. vs. Court of Appeals, 207 SCRA 498
(1992).
9 Serra vs. Court of Appeals, supra; Philippine American
General Insurance Co., Inc. vs. Sweet Lines, Inc., supra;
Saludo, Jr. vs. Court of Appeals, supra.
10 Angeles vs. Calasanz, 135 SCRA 323 (1985).
11 Art. 1370, Civil Code. Salvatierra vs. Court of Appeals,
261 SCRA 45 (1996); Abella vs. Court of Appeals 257
SCRA 482 (1996); Syquia vs. Court of Appeals, 217
SCRA 624 (1993); Luffhansa German Airlines vs. Court of
Appeals, 208 SCRA 708 (1992); Papa vs. Alonzo, 198
SCRA 564 (1991).
12 Leveriza vs. Intermediate Appellate Court, 157 SCRA
283 (1988).
13 Exhibit "B."
14 Rollo, p. 12.
15 Id., at 13.
16 IV Tolentino, Commentaries and Jurisprudence on the
Civil Code of the Philippines, 1991 ed., p.113.

17 TSN March 10, 1994, pp. 15-16.

18 Art. 1159, Civil Code.

19 Art. 19, Civil Code.

20 Art. 19 in relation to Article 21, id.

21 Art. 2217, id.

22 Art. 2229, id.

23 Art. 2208 (1), id.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION
G.R. No. 108129 September 23, 1999 On June 27, 1986, petitioner Aerospace Industries, Inc.
(Aerospace) purchased five hundred (500) metric tons of sulfuric
AEROSPACE CHEMICAL INDUSTRIES, INC., petitioner, acid from private respondent Philippine Phosphate Fertilizer
vs. Corporation (Philphos). The contract 3 was in letter-form as
COURT OF APPEALS, PHILIPPINE PHOSPHATE FERTILIZER, follows:
CORP., respondents.
27 June 1986

AEROSPACE INDUSTRIES INC.

QUISUMBING, J.:
203 E. Fernandez St.
1
This petition for review assails the Decision dated August 19,
1992, of the Court of Appeals, which set aside the judgment of San Juan, Metro Manila
the Regional Trial Court of Pasig, Branch 151. The case stemmed
from a complaint filed by the buyer (herein petitioner) against the Attention: Mr. Melecio Hernandez
seller (private respondent) for alleged breach of contract.
Although petitioner prevailed in the trial court, the appellate court Manager
reversed and instead found petitioner guilty of delay and therefore
liable for damages, as follows:
Subject : Sulfuric Acid Shipment
WHEREFORE, the Decision of the court a quo is SET ASIDE
Gentlemen:
and a new one rendered, dismissing the complaint with costs
against the plaintiff (herein petitioner) and, on the
counterclaim, ordering the plaintiff Aerospace Chemical This is to confirm our agreement to supply your Sulfuric
Industries, Inc. to pay the defendant, Philippine Phosphate Acid requirement under the following terms and conditions:
Fertilizer Corporation the sum of P324,516.63 representing the
balance of the maintenance cost and tank rental charges A. Commodity : Sulfuric Acid in Bulk
incurred by the defendant for the failure of the plaintiff to haul
the rest of the rest of the sulfuric acid on the designated date. B. Concentration : 98-99% H2SO4

Costs against plaintiff-appellee. 2 C. Quantity : 500 MT-100 MT Ex-Basay

As gleaned from the records, the following are the antecedents: 400 MT Ex-Sangi
D. Price : US$ 50.00/MT-FOB Cotcot, Signed: Herman J. Rustia

Basay, Negros Or. Sr. Manager, Materials & Logistics

US$ 54.00/MT-FOB Sangi, Cebu CONFORME:

E. Payment : Cash in Philippine currency AEROSPACE INDUSTRIES, INC.

payable to Philippine Phosphate Signed: Mr. Melecio Hernandez

Fertilizer Corp. (MAKATI) at Manager

PCIB selling rate at the time of Initially set beginning July 1986, the agreement provided that the
buyer shall pay its purchases in equivalent Philippine currency
payment at least five (5) days prior value, five days prior to the shipment date. Petitioner as buyer
committed to secure the means of transport to pick-up the
to shipment date. purchases from private respondent's loadports. Per agreement,
one hundred metric tons (100 MT) of sulfuric acid should be taken
from Basay, Negros Oriental storage tank, while the remaining
F. Shipping Conditions
four hundred metric tons (400 MT) should be retrieved from
Sangi, Cebu.
1. Laycan : July
On August 6, 1986, private respondent sent an advisory letter 4 to
2. Load port : Cotcot, Basay, Negros Or. And Atlas petitioner to withdraw the sulfuric acid purchased at Basay
Pier, Sangi, Cebu because private respondent had been incurring incremental
expense of two thousand (P2,000.00) pesos for each day of delay
xxx xxx xxx in shipment.

11. Other terms and Conditions: To be mutually agreed On October 3, 1986, petitioner paid five hundred fifty-three
upon. thousand, two hundred eighty (P553,280.00) pesos for 500 MT of
sulfuric acid.
Very truly yours,
On November 19, 1986, petitioner chartered M/T Sultan
Philippine Phosphate Fertilizer Corp. Kayumanggi, owned by Ace Bulk Head Services. The vessel was
assigned to carry the agreed volumes of freight from designated
loading areas. M/T Kayumanggi withdrew only 70.009 MT of
sulfuric acid from Basay because said vessel heavily tilted on its
port side. Consequently, the master of the ship stopped further
loading. Thereafter, the vessel underwent repairs.
In a demand letter 5 dated December 12, 1986, private
respondent asked petitioner to retrieve the remaining sulfuric acid
in Basay tanks so that said tanks could be emptied on or before
December 15, 1986. Private respondent said that it would charge
petitioner the storage and consequential costs for the Basay
tanks, including all other incremental expenses due to loading
delay, if petitioner failed to comply.
On December 18, 1986, M/T Sultan Kayumanggi docked at
Sangi, Cebu, but withdrew only 157.51 MT of sulfuric acid. Again,
the vessel tilted. Further loading was aborted. Two survey reports
conducted by the Societe Generale de Surveillance (SGS) Far
East Limited, dated December 17, 1986 and January 2, 1987,
attested to these occurrences.
Later, on a date not specified in the record, M/T Sultan
Kayumanggi sank with a total of 227.51 MT of sulfuric acid on
board.1wphi1.nt
Petitioner chartered another vessel, M/T Don Victor, with a
capacity of approximately 500 MT. 6 On January 26 and March
20, 1987, Melecio Hernandez, acting for the petitioner, addressed
letters to private respondent, concerning additional orders of
sulfuric acid to replace its sunken purchases, which letters are
hereunder excerpted:
January 26, 1987
xxx xxx xxx
We recently charter another vessel M/T DON VICTOR who
will be authorized by us to lift the balance approximately
272.49 MT.
We request your goodselves to grant us for another
Purchase Order with quantity of 227.51 MT and we are
willing to pay the additional order at the prevailing market
price, provided the lifting of the total 500 MT be
centered/confined to only one safe berth which is Atlas Pier,
Sangi, Cebu. 7
March 20, 1987
This refers to the remaining balance of the above product
quantity which were not loaded to the authorized cargo
vessel, M/T Sultan Kayumanggi at your load port Sangi,
Toledo City.
Please be advised that we will be getting the above product
quantity within the month of April 1987 and we are arranging
for a 500 MT Sulfuric Acid inclusive of which the remaining
balance: 272.49 MT an additional product quantity thereof of
227.51 MT. 8
Petitioner's letter 9 dated May 15, 1987, reiterated the same
request to private respondent.
On January 25, 1988, petitioner's counsel, Atty. Pedro T. Santos,
Jr., sent a demand letter 10 to private respondent for the delivery
of the 272.49 MT of sulfuric acid paid by his client, or the return of
the purchase price of three hundred seven thousand five hundred
thirty (P307,530.00) pesos. Private respondent in reply, 11 on
March 8, 1988, instructed petitioner to lift the remaining 30 MT of
sulfuric acid from Basay, or pay maintenance and storage
expenses commencing August 1, 1986.
On July 6, 1988, petitioner wrote another letter, insisting on
picking up its purchases consisting of 272.49 MT and an
additional of 227.51 MT of sulfuric acid. According to petitioner it
had paid the chartered vessel for the full capacity of 500 MT,
stating that:
With regard to our balance of sulfuric acid product at your
shore tank/plant for 272.49 metric ton that was left by M/T
Sultana Kayumanggi due to her sinking, we request for an
additional quantity of 227.51 metric ton of sulfuric acid, 98%
concentration.
The additional quantity is requested in order to complete the
shipment, as the chartered vessel schedule to lift the high
grade sulfuric acid product is contracted for her full
capacity/load which is 500 metric tons more or less.
We are willing to pay the additional quantity 227.51 metric
tons high grade sulfuric acid in the prevailing price of the said
product. 12
xxx xxx xxx
By telephone, petitioner requested private respondent's Shipping
Manager, Gil Belen, to get its additional order of 227.51 MT of
sulfuric acid at Isabel, Leyte. 13 Belen relayed the information to
his associate, Herman Rustia, the Senior Manager for Imports
and International Sales of private respondent. In a letter dated
July 22, 1988, Rustia replied:
Subject: Sulfuric Acid Ex-Isabel
Gentlemen:
Confirming earlier telcon with our Mr. G.B. Belen, we regret
to inform you that we cannot accommodate your request to
lift Sulfuric Acid ex-Isabel due to Pyrite limitation and
delayed arrival of imported Sulfuric Acid from Japan. 14
On July 25, 1988, petitioner's counsel wrote to private respondent
another demand letter for the delivery of the purchases
remaining, or suffer tedious legal action his client would
commence.
On May 4, 1989, petitioner filed a complaint for specific
performance and/or damages before the Regional Trial Court of
Pasig, Branch 151. Private respondent filed its answer with
counterclaim, stating that it was the petitioner who was remiss in
the performance of its obligation in arranging the shipping
requirements of its purchases and, as a consequence, should pay
damages as computed below:
Advanced Payment by Aerospace (Oct. 3, 1986) P553,280.00
Less Shipments
70.009 MT sulfuric acid P72,830.36
151.51 MT sulfuric acid 176,966.27 (249,796.63)
Balance P303,483.37
 Less Charges
Basay Maintenance Expense
from Aug. 15 to Dec. 15, 1986
(P2,000.00/day x 122 days) P244,000.00
Sangi Tank Rental
from Aug. 15, 1986 to Aug. 15, 1987
(P32,000.00/mo. x 12 mos.) 384,000.00
(628,000.00)
Receivable/Counterclaim (P324,516.63)
===========
Trial ensued and after due proceedings, judgment was rendered
by the trial court in petitioner's favor, disposing as follows:
WHEREFORE, judgment is hereby rendered in favor of
plaintiff and against defendant, directing the latter to pay
the former the following sums:
1. P306,060.77 representing the value of the
undelivered 272.49 metric tons of sulfuric acid
plaintiff paid to defendant;
2. P91,818.23 representing unrealized profits,
both items with 12% interest per annum from May
4, 1989, when the complaint was filed until fully
paid;
3. P30,000.00 as exemplary damages; and
4. P30,000.00 as attorney's fees and litigation
expenses, both last items also with 12%
interest per annum from date hereof until fully
paid.
Defendant's counterclaims are hereby dismissed for lack
of merit.
Costs against defendant. 15
In finding for the petitioner, the trial court held that the petitioner
was absolved in its obligation to pick-up the remaining sulfuric
acid because its failure was due to force majeure. According to
the trial court, it was private respondent who committed a breach
of contract when it failed to accommodate the additional order of
the petitioner, to replace those that sank in the sea, thus:
To begin with, even if we assume that it is incumbent
upon the plaintiff to "lift" the sulfuric acid it ordered from
defendant, the fact that force majeure intervened when
the vessel which was previouly (sic) listing, but which the
parties, including a representative of the defendant, did
not mind, sunk, has the effect of absolving plaintiff from
"lifting" the sulfuric acid at the designated load port. But
even assuming the plaintiff cannot be held entirely
blameless, the allegation that plaintiff agreed to a
 payment of a 2,000-peso incremental expenses per day
to defendant for delayed "lifting has not been proven." . . .
Also, if it were true that plaintiff is indebted to defendant,
why did defendant accept a second additional order after
the transaction in litigation? Why also, did defendant not
send plaintiff statements of account until after 3 years?
All these convince the Court that indeed, defendant must
return what plaintiff has paid it for the goods which the
latter did not actually receive. 16
On appeal by private respondent, the Court of Appeals reversed
the decision of the trial court, as follows:
Based on the facts of this case as hereinabove set forth, it
is clear that the plaintiff had the obligation to withdraw the
full amount of 500 MT of sulfuric acid from the defendant's
loadport at Basay and Sangi on or before August 15,
1986. As early as August 6, 1986 it had been accordingly
warned by the defendant that any delay in the hauling of
the commodity would mean expenses on the part of the
defendant amounting to P2,000.00 a day. The plaintiff
sent its vessel, the "M/T Sultan Kayumanggi", only on
November 19, 1987. The vessel, however; was not
capable of loading the entire 500 MT and in fact, with its
load of only 227.519 MT, it sank.
Contrary to the position of the trial court, the sinking of the
"M/T Sultan Kayumanggi" did not absolve the plaintiff from
its obligation to lift the rest of the 272.481 MT of sulfuric
acid at the agreed time. It was the plaintiff's duty to
charter another vessel for the purpose. It did contract for
the services of a new vessel, the "M/T Don Victor", but did
not want to lift the balance of 272.481 MT only but insisted
that its additional order of 227.51 MT be also given by the
defendant to complete 500 MT. apparently so that the
vessel may be availed of in its full capacity.
xxx xxx xxx
We find no basis for the decision of the trial court to make
the defendant liable to the plaintiff not only for the cost of
the sulfuric acid, which the plaintiff itself failed to haul, but
also for unrealized profits as well as exemplary damages
and attorney's fees. 17
Respondent Court of Appeals found the petitioner guilty of delay
and negligence in the performance of its obligation. It dismissed
the complaint of petitioner and ordered it to pay damages
representing the counterclaim of private respondent.
The motion for reconsideration filed by petitioner was denied by
respondent court in its Resolution dated December 21, 1992, for
lack of merit.
Petitioner now comes before us, assigning the following errors:
I.
RESPONDENT COURT OF APPEALS ERRED IN NOT
HOLDING PRIVATE RESPONDENT TO HAVE COMMITTED A
BREACH OF CONTRACT WHEN IT IS NOT DISPUTED THAT
PETITIONER PAID IN FULL THE VALUE OF 500 MT OF
SULFURIC ACID TO PRIVATE RESPONDENT BUT THE
LATTER WAS ABLE TO DELIVER TO PETITIONER ONLY
227.51 M.T.
 II.
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN
HOLDING PETITIONER LIABLE FOR DAMAGES TO PRIVATE
RESPONDENT ON THE BASIS OF A XEROX COPY OF AN
ALLEGED AGREEMENT TO HOLD PETITIONER LIABLE FOR
DAMAGES FOR THE DELAY WHEN PRIVATE RESPONDENT
FAILED TO PRODUCE THE ORIGINAL IN CONTRAVENTION
OF THE RULES ON EVIDENCE.
III.
RESPONDENT COURT OF APPEALS ERRED IN FAILING TO
CONSIDER THE UNDISPUTED FACTS THAT PETITIONER'S
PAYMENT FOR THE GOODS WAS RECEIVED BY PRIVATE
RESPONDENT WITHOUT ANY QUALIFICATION AND THAT
PRIVATE RESPONDENT ENTERED INTO ANOTHER
CONTRACT TO SUPPLY PETITIONER 227.519 MT OF
SULFURIC ACID IN ADDITION TO THE UNDELIVERED
BALANCE AS PROOF THAT ANY DELAY OF PETITIONER WAS
DEEMED WAIVED BY SAID ACTS OF RESPONDENT.
IV.
RESPONDENT COURT OF APPEALS ERRED IN NOT
CONSIDERING THE LAW THAT WHEN THE SALE INVOLVES
FUNGIBLE GOODS AS IN THIS CASE THE EXPENSES FOR
STORAGE AND MAINTENANCE ARE FOR THE ACCOUNT OF
THE SELLER (ARTICLE 1504 CIVIL CODE).
V.
RESPONDENT COURT OF APPEALS ERRED IN FAILING TO
RENDER JUDGMENT FOR PETITIONER AFFIRMING THE
DECISION OF THE TRIAL COURT.
From the assigned errors, we synthesize the pertinent issues
raised by the petitioner as follows:
1. Did the respondent court err in holding that the petitioner
committed breach of contract, considering that:
a) the petitioner allegedly paid the full value of its
purchases, yet received only a portion of said
purchases?
b) petitioner and private respondent allegedly had
also agreed for the purchase and supply of an
additional 227.519 MT of sulfuric acid, hence prior
delay, if any, had been waived?
2. Did the respondent court err in awarding damages to
private respondent?
3. Should expenses for the storage and preservation of the
purchased fungible goods, namely sulfuric acid, be on
seller's account pursuant to Article 1504 of the Civil Code?
To resolve these issues, petitioner urges us to review factual
findings of respondent court and its conclusion that the petitioner
was guilty of delay in the performance of its obligation. According
to petitioner, that conclusion is contrary to the factual evidence. It
adds that respondent court disregarded the rule that findings of
the trial court are given weight, with the highest degree of
respect. Claiming that respondent court's findings conflict with
those of the trial court, petitioner prays that the trial court's
findings be upheld over those of the appellate court.
Petitioner argues that it paid the purchase price of sulfuric acid,
five (5) days prior to the withdrawal thereof, or on October 3,
1986, hence, it had complied with the primary condition set in the
sales contract. Petitioner claims its failure to pick-up the
remaining purchases on time was due to a storm,
a force majeure, which sank the vessel. It thus claims exemption
from liability to pay damages. Petitioner also contends that it was
actually the private respondent's shipping officer, who advised
petitioner to buy the additional 227.51 MT of sulfuric acid, so as to
fully utilize the capacity of the vessel it chartered. Petitioner
insists that when its ship was ready to pick-up the remaining
balance of 272.49 MT of sulfuric acid, private respondent could
not comply with the contract commitment due to "pyrite limitation."
While we agree with petitioner that when the findings of the Court
of Appeals are contrary to those of the trial court, 18 this Court
may review those findings, we find the appellate court's
conclusion that petitioner violated the subject contract amply
supported by preponderant evidence. Petitioner's claim was
predicated merely on the allegations of its employee, Melecio
Hernandez, that the storm or force majeure caused the
petitioner's delay and failure to lift the cargo of sulfuric acid at the
designated loadports. In contrast, the appellate court discounted
Hernandez' assertions. For on record, the storm was not the
proximate cause of petitioner's failure to transport its purchases
on time. The survey report submitted by a third party surveyor,
SGS Far East Limited, revealed that the vessel, which was
unstable, was incapable of carrying the full load of sulfuric acid.
Note that there was a premature termination of loading in Basay,
Negros Oriental. The vessel had to undergo several repairs
before continuing its voyage to pick-up the balance of cargo at
Sangi, Cebu. Despite repairs, the vessel still failed to carry the
whole lot of 500 MT of sulfuric acid due to ship defects like listing
to one side. Its unfortunate sinking was not due to force majeure.
It sunk because it was, based on SGS survey report, unstable
and unseaworthy.
Witness surveyor Eugenio Rabe's incident report, dated
December 13, 1986 in Basay, Negros Oriental, elucidated this
point:
Loading was started at 1500hrs. November 19. At 1600Hrs.
November 20, loading operation was temporarily stopped by
the vessel's master due to ships stability was heavily tilted to
port side, ship's had tried to transfer the loaded acid to
stbdside but failed to do so, due to their auxiliary pump on
board does not work out for acid.
xxx xxx xxx
Note. Attending surveyor arrived BMC Basay on November 22,
due to delayed advice of said vessel Declared quantity loaded
onboard based on data's provided by PHILPHOS
representative.
On November 26, two representative of shipping company
arrived Basay to assist the situation, at 1300Hrs repairing
and/or welding of tank number 5 started at 1000Hrs November
27, repairing and/or welding was suspended due to the
explosion of tank no. 5. Explosion ripped about two feet of the
double bottom tank.
19
November 27 up to date no progress of said vessel.
While at Sangi, Cebu, the vessel's condition (listing) did not
improve as the survey report therein noted:
 Declared quantity loaded on board was based on shore tank
withdrawal due to ship's incomplete tank calibration table.
Barge displacement cannot be applied due to ship was listing
to Stboard side which has been loaded with rocks to control
her stability. 20
These two vital pieces of information were totally ignored by trial
court. The appellate court correctly took these into account,
significantly. As to the weather condition in Basay, the appellate
court accepted surveyor Rabe's testimony, thus:
Q. Now, Mr. Witness, what was the weather condition then at
Basay, Negros Oriental during the loading operation of
sulfuric acid on board the Sultana Kayumanggi?
A. Fair, sir. 21
Since the third party surveyor was neither petitioner's nor private
respondent's employee, his professional report should carry more
weight than that of Melecio Hernandez, an employee of petitioner.
Petitioner, as the buyer, was obligated under the contract to
undertake the shipping requirements of the cargo from the private
respondent's loadports to the petitioner's designated warehouse.
It was petitioner which chartered M/T Sultan Kayumanggi. The
vessel was petitioner's agent. When it failed to comply with the
necessary loading conditions of sulfuric acid, it was incumbent
upon petitioner to immediately replace M/T Sultan Kayumanggi
with another seaworthy vessel. However, despite repeated
demands, petitioner did not comply seasonably.
Additionally, petitioner claims that private respondent's employee,
Gil Belen, had recommended to petitioner to fully utilize the
vessel, hence petitioner's request for additional order to complete
the vessel's 500 MT capacity. This claim has no probative
pertinence nor solid basis. A party who asserts that a contract of
sale has been changed or modified has the burden of proving the
change or modification by clear and convincing
evidence. 22 Repeated requests and additional orders were
contained in petitioner's letters to private respondent. In contrast,
Belen's alleged action was only verbal; it was not substantiated at
all during the trial. Note that, using the vessel to full capacity
could redound to petitioner's advantage, not the other party's. If
additional orders were at the instance of private respondent, the
same must be properly proved together with its relevance to the
question of delay. Settled is the principle in law that proof of
verbal agreements offered to vary the terms of written
agreements is inadmissible, under the parol evidence
rule. 23 Belen's purported recommendation could not be taken at
face value and, obviously, cannot excuse petitioner's default.
Respondent court found petitioner's default unjustified, and on
this conclusion we agree:
It is not true that the defendant was not in a position to deliver
the 272.481 MT which was the balance of the original 500 MT
purchased by the plaintiff. The whole lot of 500 MT was ready
for lifting as early as August 15, 1986. What the defendant
could not sell to the plaintiff was the additional 227.51 MT
which said plaintiff was ordering, for the reason that the
defendant was short of the supply needed. The defendant,
however, had no obligation to agree to this additional order
and may not be faulted for its inability to meet the said
additional requirements of the plaintiff. And the defendant's
incapacity to agree to the delivery of another 227.51 MT is not
a legal justification for the plaintiffs refusal to lift the remaining
272.481.
It is clear from the plaintiff's letters to the defendant that it
wanted to send the "M/T Don Victor" only if the defendant
 would confirm that it was ready to deliver 500 MT. Because the
defendant could not sell another 227.51 MT to the plaintiff, the
latter did not send a new vessel to pick up the balance of the
500 MT originally contracted for by the parties. This, inspite the
representations made by the defendant for the hauling thereof
as scheduled and its reminders that any expenses for the
delay would be for the account of the plaintiff. 24
We are therefore constrained to declare that the respondent court
did not err when it absolved private respondent from any breach
of contract.
Our next inquiry is whether damages have been properly
awarded against petitioner for its unjustified delay in the
performance of its obligation under the contract. Where there has
been breach of contract by the buyer, the seller has a right of
action for damages. Following this rule, a cause of action of the
seller for damages may arise where the buyer refuses to remove
the goods, such that buyer has to remove them. 25 Article 1170 of
the Civil Code provides:
Those who in the performance of their obligations are guilty of
fraud, negligence, or delay and those who in any manner
contravene the tenor thereof, are liable for damages.
Delay begins from the time the obligee judicially or extrajudicially
demands from the obligor the performance of the
obligation. 26 Art. 1169 states:
Art. 1169. Those obliged to deliver or to do something incur in
delay from the time the obligee judicially or extrajudicially
demands from them the fulfillment of their obligation.
In order that the debtor may be in default, it is necessary that the
following requisites be present: (1) that the obligation be
demandable and already liquidated; (2) that the debtor delays
performance; and (3) that the creditor requires the performance
judicially or extrajudicially. 27
In the present case, private respondent required petitioner to ship
out or lift the sulfuric acid as agreed, otherwise petitioner would
be charged for the consequential damages owing to any delay. As
stated in private respondent's letter to petitioner, dated December
12, 1986:
Subject: M/T "KAYUMANGGI"
Gentlemen:
This is to reiterate our telephone advice and our letter HJR-
8612-031 dated 2 December 1986 regarding your sulfuric acid
vessel, M/T "KAYUMANGGI".
As we have, in various instances, advised you, our Basay
wharf will have to be vacated 15th December 1986 as we are
expecting the arrival of our chartered vessel purportedly to
haul our equipments and all other remaining assets in Basay.
This includes our sulfuric acid tanks. We regret, therefore, that
if these tanks are not emptied on or before the 15th of
December, we either have to charge you for the tanks waiting
time at Basay and its consequential costs (i.e. chartering of
another vessel for its second pick-up at
Basay, handling, etc.) as well as all other incremental costs on
account of the protracted loading delay. 28 (Emphasis supplied)
Indeed the above demand, which was unheeded, justifies the
finding of delay. But when did such delay begin? The above letter
constitutes private respondent's extrajudicial demand for the
petitioner to fulfill its obligation, and its dateline is significant.
Given its date, however, we cannot sustain the finding of the
respondent court that petitioner's delay started on August 6, 1986.
The Court of Appeals had relied on private respondent's earlier
letter to petitioner of that date for computing the commencement
of delay. But as averred by petitioner, said letter of August 6th is
not a categorical demand. What it showed was a mere statement
of fact, that "[F]for your information any delay in Sulfuric Acid
withdrawal shall cost us incremental expenses of P2,000.00 per
day." Noteworthy, private respondent accepted the full payment
by petitioner for purchases on October 3, 1986, without
qualification, long after the August 6th letter. In contrast to the
August 6th letter, that of December 12th was a categorical
demand.
Records reveal that a tanker ship had to pick-up sulfuric acid in
Basay, then proceed to get the remaining stocks in Sangi, Cebu.
A period of three days appears to us reasonable for a vessel to
travel between Basay and Sangi. Logically, the computation of
damages arising from the shipping delay would then have to be
from December 15, 1986, given said reasonable period after the
December 12th letter. More important, private respondent was
forced to vacate Basay wharf only on December 15th. Its Basay
expenses incurred before December 15, 1986, were necessary
and regular business expenses for which the petitioner should not
be obliged to pay.
Note that private respondent extended its lease agreement for
Sangi, Cebu storage tank until August 31, 1987, solely for
petitioner's sulfuric acid. It stands to reason that petitioner should
reimburse private respondent's rental expenses of P32,000
monthly, commencing December 15, 1986, up to August 31,
1987, the period of the extended lease. Note further that there is
nothing on record refuting the amount of expenses abovecited.
Private respondent presented in court two supporting
documents: first, the lease agreement pertaining to the
equipment, and second a letter dated June 15, 1987, sent by
Atlas Fertilizer Corporation to private respondent representing the
rental charges incurred. Private respondent is entitled to recover
the payment for these charges. It should be reimbursed the
amount of two hundred seventy two thousand
(P272,000.00) 29 pesos, corresponding to the total amount of
rentals from December 15, 1986 to August 31, 1987 of the Sangi,
Cebu storage tank.
Finally, we note also that petitioner tries to exempt itself from
paying rental expenses and other damages by arguing that
expenses for the preservation of fungible goods must be
assumed by the seller. Rental expenses of storing sulfuric acid
should be at private respondent's account until ownership is
transferred, according to petitioner. However, the general rule that
before delivery, the risk of loss is borne by the seller who is still
the owner, is not applicable in this case because petitioner had
incurred delay in the performance of its obligation. Article 1504 of
the Civil Code clearly states:
Unless otherwise agreed, the goods remain at the seller's risk
until the ownership therein is transferred to the buyer, but
when the ownership therein is transferred to the buyer the
goods are at the buyer's risk whether actual delivery has been
made or not, except that:
xxx xxx xxx
(2) Where actual delivery has been delayed through the fault
of either the buyer or seller the goods are at the risk of the
party at fault. (emphasis supplied)
On this score, we quote with approval the findings of the
appellate court, thus:
. . . The defendant [herein private respondent] was not remiss
in reminding the plaintiff that it would have to bear the said
expenses for failure to lift the commodity for an unreasonable
length of time.
But even assuming that the plaintiff did not consent to be so
bound, the provisions of Civil Code come in to make it liable
for the damages sought by the defendant.
Art. 1170 of the Civil Code provides:
Those who in the performance of their obligations are
guilty of fraud, negligence, or delay and those who in any
manner contravene the tenor thereof, are liable for
damages.
Certainly, the plaintiff [herein petitioner] was guilty of
negligence and delay in the performance of its obligation to lift
the sulfuric acid on August 15, 1986 and had contravened the
tenor of its letter-contract with the defendant. 30
As pointed out earlier, petitioner is guilty of delay, after private
respondent made the necessary extrajudicial demand by
requiring petitioner to lift the cargo at its designated loadports.
When petitioner failed to comply with its obligations under the
contract it became liable for its shortcomings. Petitioner is
indubitably liable for proven damages.
Considering, however, that petitioner made an advance payment
for the unlifted sulfuric acid in the amount of three hundred three
thousand, four hundred eighty three pesos and thirty seven
centavos (P303,483.37), it is proper to set-off this amount against
the rental expenses initially paid by private respondent. It is worth
noting that the adjustment and allowance of private respondent's
counterclaim or set-off in the present action, rather than by
another independent action, is encouraged by the law. Such
practice serves to avoid circuitry of action, multiplicity of suits,
inconvenience, expense, and unwarranted consumption of the
court's time. 31 The trend of judicial decisions is toward a liberal
extension of the right to avail of counterclaims or set-offs. 32 The
rules on counterclaims are designed to achieve the disposition of
a whole controversy involving the conflicting claims of interested
parties at one time and in one action, provided all parties can be
brought before the court and the matter decided without
prejudicing the right of any party. 33 Set-off in this case is proper
and reasonable. It involves deducting P272,000.00 (rentals) from
P303,483.37 (advance payment), which will leave the amount of
P31,483.37 refundable to petitioner.
WHEREFORE, the petition is hereby DENIED. The assailed
decision of the Court of Appeals in CA G.R. CV No. 33802 is
AFFIRMED, with MODIFICATION that the amount of damages
awarded in favor of private respondent is REDUCED to Two
hundred seventy two thousand pesos (P272,000.00). It is also
ORDERED that said amount of damages be OFFSET against
petitioner's advance payment of Three hundred three thousand
four hundred eighty three pesos and thirty-seven centavos
(P303,483.37) representing the price of the 272.481 MT of
sulfuric acid not lifted. Lastly, it is ORDERED that the excess
amount of thirty one thousand, four hundred eighty three pesos
and thirty seven centavos (P31,483.37) be RETURNED soonest
by private respondent to herein petitioner.1wphi1.nt
Costs against the petitioner.
SO ORDERED.
Bellosillo, Mendoza and Buena, JJ., concur. 14 Id. at 46.

Footnotes 15 Rollo, p. 51.

1 Rollo, pp. 36-45, Penned by Justice Associate Justice 16 Id. at 52-53.

Salome A. Montoya, concurred in by Justices Jose C.
Campos and Serafin V.C. Guingona, of the Special Fifth
Division of the Court of Appeals.
2 Rollo p. 44.
3 Records, pp. 5-6.
4 Id. at 136.
5 Id. at 137.
6 TSN, September 1, 1989, pp. 28-29.
7 Records, pp. 47-48. Emphasis ours.
17 Id. at 41-42.
18 Mijares vs. CA, 271 SCRA 558, 566
(1997), citing Cuizon vs. Court of Appeals, 260 SCRA
645, (1996); Floro vs. Llenado, 244 SCRA 713 (1995).
19 Records, p. 21.
20 Id. at 23.
21 TSN, December 20, 1989, p. 6.
22 77 Corpus Juris Secundum, Sales, Section 86,
Evidence, p. 773.

8 Id. at 49. 23 Gerales vs. Court of Appeals, 218 SCRA 638, 648-649
(1993); citing Continental Airlines Inc. vs. Santiago. 172
9 Id. at 50. SCRA 490 (1989).

10 Id. at 41. 24 Rollo, p. 42.

11 Id. at 138. 25 78 Corpus Juris Secundum, Sales, Action for

Damages, Section 462, Right of Action, p. 112.
12 Id. at 40.
26 SSS vs. Moonwalk Development and Housing
13 Id. at 65, Affidavit of Gil B. Belen. Corporation, 221 SCRA 119, 127 (1993).
27 Id. at 128.

28 Records, p. 137.

29 P32,000 x 8.5 months.

30 Rollo, pp. 43-44.

31 Development Bank of the Philippines vs. Court of

Appeals, 249 SCRA 331, 341 (1995).

32 Id., citing 20 Am. Jur. 2d, Counterclaim, 237-238.

33 Id., citing Kuenzel vs. Universal Carloading and

Distributing Co., Inc. (1939) 29 F. Supp. 407.
 Republic of the Philippines Ernesto V. Santos and Santos Ventura Hocorma Foundation, Inc.
SUPREME COURT (SVHFI) were the plaintiff and defendant, respectively, in several
Manila civil cases filed in different courts in the Philippines. On October
26, 1990, the parties executed a Compromise Agreement4 which
FIRST DIVISION amicably ended all their pending litigations. The pertinent portions
of the Agreement read as follows:
G.R. No. 153004 November 5, 2004
1. Defendant Foundation shall pay Plaintiff Santos P14.5
SANTOS VENTURA HOCORMA FOUNDATION, Million in the following manner:
INC., petitioner,
vs. a. P1.5 Million immediately upon the execution of this
ERNESTO V. SANTOS and RIVERLAND, INC., respondents. agreement;

b. The balance of P13 Million shall be paid, whether in

DECISION
QUISUMBING, J.:
Subject of the present petition for review on certiorari is the
Decision,1 dated January 30, 2002, as well as the April 12, 2002,
Resolution2 of the Court of Appeals in CA-G.R. CV No. 55122.
The appellate court reversed the Decision,3 dated October 4,
1996, of the Regional Trial Court of Makati City, Branch 148, in
Civil Case No. 95-811, and likewise denied petitioner's Motion for
Reconsideration.
The facts of this case are undisputed.
one lump sum or in installments, at the discretion of the
Foundation, within a period of not more than two (2) years
from the execution of this agreement; provided, however,
that in the event that the Foundation does not pay the
whole or any part of such balance, the same shall be paid
with the corresponding portion of the land or real
properties subject of the aforesaid cases and previously
covered by the notices of lis pendens, under such terms
and conditions as to area, valuation, and location mutually
acceptable to both parties; but in no case shall the
payment of such balance be later than two (2) years from
the date of this agreement; otherwise, payment of any
unpaid portion shall only be in the form of land aforesaid;
2. Immediately upon the execution of this agreement (and [the]
receipt of the P1.5 Million), plaintiff Santos shall cause the
dismissal with prejudice of Civil Cases Nos. 88-743, 1413OR,
TC-1024, 45366 and 18166 and voluntarily withdraw the
appeals in Civil Cases Nos. 4968 (C.A.-G.R. No. 26598) and
88-45366 (C.A.-G.R. No. 24304) respectively and for the
immediate lifting of the aforesaid various notices of lis pendens
 on the real properties aforementioned (by signing herein
attached corresponding documents, for such lifting); provided,
however, that in the event that defendant Foundation shall sell
or dispose of any of the lands previously subject of lis
pendens, the proceeds of any such sale, or any part thereof as
may be required, shall be partially devoted to the payment of
the Foundation's obligations under this agreement as may still
be subsisting and payable at the time of any such sale or
sales;
...
5. Failure of compliance of any of the foregoing terms and
conditions by either or both parties to this agreement shall ipso
facto and ipso jure automatically entitle the aggrieved party to
a writ of execution for the enforcement of this agreement.
[Emphasis supplied]5
In compliance with the Compromise Agreement, respondent
Santos moved for the dismissal of the aforesaid civil cases. He
also caused the lifting of the notices of lis pendens on the real
properties involved. For its part, petitioner SVHFI, paid P1.5
million to respondent Santos, leaving a balance of P13 million.
Subsequently, petitioner SVHFI sold to Development Exchange
Livelihood Corporation two real properties, which were previously
subjects of lis pendens. Discovering the disposition made by the
petitioner, respondent Santos sent a letter to the petitioner
demanding the payment of the remaining P13 million, which was
ignored by the latter. Meanwhile, on September 30, 1991, the
Regional Trial Court of Makati City, Branch 62, issued a
Decision6approving the compromise agreement.
On October 28, 1992, respondent Santos sent another letter to
petitioner inquiring when it would pay the balance of P13 million.
There was no response from petitioner. Consequently,
respondent Santos applied with the Regional Trial Court of Makati
City, Branch 62, for the issuance of a writ of execution of its
compromise judgment dated September 30, 1991. The RTC
granted the writ. Thus, on March 10, 1993, the Sheriff levied on
the real properties of petitioner, which were formerly subjects of
the lis pendens. Petitioner, however, filed numerous motions to
block the enforcement of the said writ. The challenge of the
execution of the aforesaid compromise judgment even reached
the Supreme Court. All these efforts, however, were futile.
On November 22, 1994, petitioner's real properties located in
Mabalacat, Pampanga were auctioned. In the said auction,
Riverland, Inc. was the highest bidder for P12 million and it was
issued a Certificate of Sale covering the real properties subject of
the auction sale. Subsequently, another auction sale was held on
February 8, 1995, for the sale of real properties of petitioner in
Bacolod City. Again, Riverland, Inc. was the highest bidder. The
Certificates of Sale issued for both properties provided for the
right of redemption within one year from the date of registration of
the said properties.
On June 2, 1995, Santos and Riverland Inc. filed a Complaint for
Declaratory Relief and Damages7 alleging that there was delay on
the part of petitioner in paying the balance of P13 million. They
further alleged that under the Compromise Agreement, the
obligation became due on October 26, 1992, but payment of the
remaining P12 million was effected only on November 22, 1994.
Thus, respondents prayed that petitioner be ordered to pay legal
interest on the obligation, penalty, attorney's fees and costs of
litigation. Furthermore, they prayed that the aforesaid sales be
declared final and not subject to legal redemption.
In its Answer,8 petitioner countered that respondents have no
cause of action against it since it had fully paid its obligation to
the latter. It further claimed that the alleged delay in the payment
of the balance was due to its valid exercise of its rights to protect
its interests as provided under the Rules. Petitioner
counterclaimed for attorney's fees and exemplary damages.
On October 4, 1996, the trial court rendered a
Decision9 dismissing herein respondents' complaint and ordering
them to pay attorney's fees and exemplary damages to petitioner.
Respondents then appealed to the Court of Appeals. The
appellate court reversed the ruling of the trial court:
WHEREFORE, finding merit in the appeal, the appealed
Decision is hereby REVERSED and judgment is hereby
rendered ordering appellee SVHFI to pay appellants Santos
and Riverland, Inc.: (1) legal interest on the principal amount
of P13 million at the rate of 12% per annum from the date of
demand on October 28, 1992 up to the date of actual payment
of the whole obligation; and (2) P20,000 as attorney's fees and
costs of suit.
SO ORDERED.
Hence this petition for review on certiorari where petitioner
assigns the following issues:
I entitled to legal interest.
WHETHER OR NOT THE COURT OF APPEALS
COMMITTED REVERSIBLE ERROR WHEN IT
AWARDED LEGAL INTEREST IN FAVOR OF THE
RESPONDENTS, MR. SANTOS AND RIVERLAND, INC.,
NOTWITHSTANDING THE FACT THAT NEITHER IN
THE COMPROMISE AGREEMENT NOR IN THE
COMPROMISE JUDGEMENT OF HON. JUDGE
DIOKNO PROVIDES FOR PAYMENT OF INTEREST TO
THE RESPONDENT
II
WHETHER OF NOT THE COURT OF APPEALS ERRED
IN AWARDING LEGAL IN[T]EREST IN FAVOR OF THE
RESPONDENTS, MR. SANTOS AND RIVERLAND, INC.,
NOTWITHSTANDING THE FACT THAT THE
OBLIGATION OF THE PETITIONER TO RESPONDENT
SANTOS TO PAY A SUM OF MONEY HAD BEEN
CONVERTED TO AN OBLIGATION TO PAY IN KIND
DELIVERY OF REAL PROPERTIES OWNED BY THE
PETITIONER WHICH HAD BEEN FULLY
PERFORMED
III
WHETHER OR NOT RESPONDENTS ARE BARRED
FROM DEMANDING PAYMENT OF INTEREST BY
REASON OF THE WAIVER PROVISION IN THE
COMPROMISE AGREEMENT, WHICH BECAME THE
LAW AMONG THE PARTIES10
The only issue to be resolved is whether the respondents are
Petitioner SVHFI alleges that where a compromise agreement or
compromise judgment does not provide for the payment of
interest, the legal interest by way of penalty on account of fault or
delay shall not be due and payable, considering that the
obligation or loan, on which the payment of legal interest could be
based, has been superseded by the compromise
agreement.11 Furthermore, the petitioner argues that the
respondents are barred by res judicata from seeking legal interest
on account of the waiver clause in the duly approved compromise
agreement.12 Article 4 of the compromise agreement provides:
Plaintiff Santos waives and renounces any and all other
claims that he and his family may have on the defendant
Foundation arising from and in connection with the aforesaid
civil cases, and defendant Foundation, on the other hand,
also waives and renounces any and all claims that it may
have against plaintiff Santos in connection with such
cases.13 [Emphasis supplied.]
Lastly, petitioner alleges that since the compromise agreement
did not provide for a period within which the obligation will
become due and demandable, it is incumbent upon respondent
Santos to ask for judicial intervention for purposes of fixing the
period. It is only when a fixed period exists that the legal interests
can be computed.
Respondents profer that their right to damages is based on delay
in the payment of the obligation provided in the Compromise
Agreement. The Compromise Agreement provides that payment
must be made within the two-year period from its execution. This
was approved by the trial court and became the law governing
their contract. Respondents posit that petitioner's failure to
comply entitles them to damages, by way of interest.14
The petition lacks merit.
A compromise is a contract whereby the parties, by making
reciprocal concessions, avoid a litigation or put an end to one
already commenced.15 It is an agreement between two or more
persons, who, for preventing or putting an end to a lawsuit, adjust
their difficulties by mutual consent in the manner which they
agree on, and which everyone of them prefers in the hope of
gaining, balanced by the danger of losing.16
The general rule is that a compromise has upon the parties the
effect and authority of res judicata, with respect to the matter
definitely stated therein, or which by implication from its terms
should be deemed to have been included therein. 17 This holds
true even if the agreement has not been judicially approved.18
In the case at bar, the Compromise Agreement was entered into
by the parties on October 26, 1990.19 It was judicially approved on
September 30, 1991.20 Applying existing jurisprudence, the
compromise agreement as a consensual contract became
binding between the parties upon its execution and not upon its
court approval. From the time a compromise is validly entered
into, it becomes the source of the rights and obligations of the
parties thereto. The purpose of the compromise is precisely to
replace and terminate controverted claims.21
In accordance with the compromise agreement, the respondents
asked for the dismissal of the pending civil cases. The petitioner,
on the other hand, paid the initial P1.5 million upon the execution
of the agreement. This act of the petitioner showed that it
acknowledges that the agreement was immediately executory
and enforceable upon its execution.
As to the remaining P13 million, the terms and conditions of the
compromise agreement are clear and unambiguous. It provides:
...
 b. The balance of P13 Million shall be paid, whether in one
lump sum or in installments, at the discretion of the
Foundation, within a period of not more than two (2) years
from the execution of this agreement22[Emphasis supplied.]
...
The two-year period must be counted from October 26, 1990, the
date of execution of the compromise agreement, and not on the
judicial approval of the compromise agreement on September 30,
1991. When respondents wrote a demand letter to petitioner on
October 28, 1992, the obligation was already due and
demandable. When the petitioner failed to pay its due obligation
after the demand was made, it incurred delay.
Article 1169 of the New Civil Code provides:
Those obliged to deliver or to do something incur in delay
from the time the obligee judicially or extrajudicially demands
from them the fulfillment of their obligation. [Emphasis
supplied]
Delay as used in this article is synonymous to default or mora
which means delay in the fulfillment of obligations. It is the non-
fulfillment of the obligation with respect to time.23
In order for the debtor to be in default, it is necessary that the
following requisites be present: (1) that the obligation be
demandable and already liquidated; (2) that the debtor delays
performance; and (3) that the creditor requires the performance
judicially or extrajudicially.24
In the case at bar, the obligation was already due and
demandable after the lapse of the two-year period from the
execution of the contract. The two-year period ended on October
26, 1992. When the respondents gave a demand letter on
October 28, 1992, to the petitioner, the obligation was already
due and demandable. Furthermore, the obligation is liquidated
because the debtor knows precisely how much he is to pay and
when he is to pay it.
The second requisite is also present. Petitioner delayed in the
performance. It was able to fully settle its outstanding balance
only on February 8, 1995, which is more than two years after the
extra-judicial demand. Moreover, it filed several motions and
elevated adverse resolutions to the appellate court to hinder the
execution of a final and executory judgment, and further delay the
fulfillment of its obligation.
Third, the demand letter sent to the petitioner on October 28,
1992, was in accordance with an extra-judicial demand
contemplated by law.
Verily, the petitioner is liable for damages for the delay in the
performance of its obligation. This is provided for in Article
117025 of the New Civil Code.
When the debtor knows the amount and period when he is to pay,
interest as damages is generally allowed as a matter of
right.26 The complaining party has been deprived of funds to
which he is entitled by virtue of their compromise agreement. The
goal of compensation requires that the complainant be
compensated for the loss of use of those funds. This
compensation is in the form of interest.27 In the absence of
agreement, the legal rate of interest shall prevail.28 The legal
interest for loan as forbearance of money is 12% per annum 29 to
be computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Article 1169 of the
Civil Code.30
 9
WHEREFORE, the petition is DENIED for lack of merit. The Id. at 151-156.
Decision dated January 30, 2002 of the Court of Appeals and its
April 12, 2002 Resolution in CA-G.R. CV No. 55122 are 10
Rollo, p. 218.
AFFIRMED. Costs against petitioner.
11
Id. at 219-220.
SO ORDERED.
12
Id. at 221.
Davide, Jr. C.J. (Chairman), Ynares-Santiago and Carpio,
JJ., concur. 13
Records, pp. 39-40.
Azcuna, J., on leave.
14
Rollo, p. 149.

15
New Civil Code, Art. 2028.

Footnotes 16
Cebu International Finance Corp. v. Court of Appeals,
G.R. No. 123031, 12 October 1999, 316 SCRA 488, 498-
1
Rollo, pp. 39-45. Penned by Associate Justice Hilarion L. 499 citing David v. Court of Appeals, G.R. No. 97240, 16
Aquino, with Associate Justices Edgardo P. Cruz, and October 1992, 214 SCRA 644, 650.
Amelita G. Tolentino concurring.
17
Del Rosario v. Madayag, G.R. No. 118531, 28 August
2
Id. at 46. 1995, 247 SCRA 767, 771.
3
Id. at 77-82. 18
Mayuga v. Court of Appeals, No. L-46953, 28
September 1987, 154 SCRA 309, 320.
4
Records, pp. 118-123.
19
Records, pp. 118-123.
5
Id. at 38-40.
20
Id. at 36-40.
6
Id. at 36-40.
21
Landoil Resources Corporation v. Tensuan, No. L-
7
Id. at 1-11. 77733, 20 December 1988, 168 SCRA 569, 578.

8 22
Id. at 23-35. Records, pp. 38-39.
23
IV Arturo M. Tolentino, Civil Code of the Philippines, 101
(1987 ed.).

24
Id. at 102.

25
Art. 1170. Those who in the performance of their
obligations are guilty of fraud, negligence, or delay and
those who in any manner contravene the tenor thereof,
are liable for damages.

26
II J. Cesar S. Sangco, Philippine Law on Torts and
Damages 1085 (1993 ed.).

27
Ibid.

28
Quiros v. Tan-Guinlay, No. 1904, 3 March 1906, 5 Phil
675, 680.

29
Central Bank Circular No. 416, July 29, 1974.

30
Eastern Assurance and Surety Corporation v. Court of
Appeals, G.R. No. 127135, 18 January 2000, 322 SCRA
73, 78.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 96505 July 1, 1993
LEGASPI OIL CO., INC., petitioner,
vs.
THE COURT OF APPEALS and BERNARD
OSERAOS, respondent.
Duran, Lanuzo & Associates for petitioner.
Leovigildo Mijares III for private respondent.
MELO, J.:
The petition for review on certiorari before us seeks to set aside
the decision dated March 23, 1990 of the Court of Appeals in CA-
G.R. CV No. 05828, penned by the Honorable Justice Abelardo
Dayrit with whom Justices Javellana and Kalalo concurred, which
dismissed petitioner's complaint for damages (p. 48, Rollo).
Petitioner does not dispute the facts of the case, as found by
respondent Court of Appeals. The findings of the respondent
Court are thus adopted, to wit:
From the evidence presented by the plaintiff-appellee [now
petitioner Legaspi Oil Company, Inc.], it appears that
defendant-appellant [now private respondent Bernard
Oseraos] acting through his authorized agents, had several
transactions with appellee Legaspi Oil Co. for the sale of
copra to the latter. The price at which appellant sells the
copra varies from time to time, depending on the prevailing
market price when the contract is entered into. One of his
authorized agents, Jose Llover, had previous transactions
with appellee for the sale and delivery of copra. The records
show that he concluded a sale for 70 tons of copra at P95.00
per 100 kilos on May 27, 1975 (Exhibit G-5) and another sale
for 30 tons of P102.00 per 100 kilos on September 23, 1975
(Exhibit G-3). Subsequently, on November 6, 1975, another
designated agent signed a contract in behalf of appellant for
the sale of 100 tons of copra at P79.00 per 100 kilos with the
delivery terms of 25 days effective December 15, 1975
(Exhibit G-2). At this point, it must be noted that the price of
copra had been fluctuating (going up and down), indicating
its unsteady position in the market.
On February 16, 1976, appellant's agent Jose Llover signed
contract No. 3804 for the sale of 100 tons of copra at P82.00
per 100 kilos with delivery terms of 20 days effective March
8, 1976 (Exhibit G, for the plaintiff). As compared to
appellant's transaction on November 6, 1975, the current
price agreed upon is slightly higher than the last contract. In
all these contracts though, the selling price had always been
stated as "total price" rather than per 100 kilos. However, the
parties had understood the same to be per 100 kilos in their
previous transactions.
After the period to deliver had lapsed, appellant sold only
46,334 kilos of copra thus leaving a balance of 53,666 kilos
as per running account card (Exhibit "F"). Accordingly,
demands were made upon appellant to deliver the balance
with a final warning embodied in a letter dated October 6,
1976, that failure to deliver will mean cancellation of the
contract, the balance to be purchased at open market and
the price differential to be charged against appellant. On
October 22, 1976, since there was still no compliance,
appellee exercised its option under the contract and
 purchased the undelivered balance from the open market at
the prevailing price of P168.00 per 100 kilos, or a price
differential of P86.00 per 100 kilos, a net loss of P46,152.76
chargeable against appellant.
(pp. 43-44, Rollo)
On November 3, 1976, petitioner filed a complaint against private
respondent for breach of a contract and for damages.
After trial, the then Court of First Instance (now Regional Trial
Court) of Albay in Civil Case No. 5529 rendered a decision
holding herein private respondent (then defendant) Oseraos liable
for damages in the amount of P48,152.76, attorney's fees
(P2,000), and litigation costs.
Oseraos appealed to respondent Court which thereafter rendered
a reversal decision on March 23, 1990, ordering the dismissal of
the complaint.
Hence, the instant petition for review on certiorari.
The sole issued posed by the petition is whether or not private
respondent Oseraos is liable for damages arising from fraud or
bad faith in deliberately breaching the contract of sale entered
into by the parties.
After a review of the case, we believe and thus hold, that private
respondent is guilty of fraud in the performance of his obligation
under the sales contract whereunder he bound himself to deliver
to petitioner 100 metric tons of copra within twenty (20) days from
March 8, 1976. However within the delivery period, Oseraos
delivered only 46,334 kilograms of copra to petitioner, leaving an
undelivered balance of 53,666 kilograms. Petitioner made
repeated demands upon private respondent to comply with his
contractual undertaking to deliver the balance of 53,666
kilograms but private respondent elected to ignore the same. In a
letter dated October 6, 1976, petitioner made a final demand with
a warning that, should private respondent fail to complete delivery
of the balance of 53,666 kilograms of copra, petitioner would
purchase the balance at the open market and charge the price
differential to private respondent. Still private respondent failed to
fulfill his contractual obligation to deliver the remaining 53,666
kilograms of copra. On October 22, 1976, since there was still no
compliance by private respondent, petitioner exercised its right
under the contract and purchased 53,666 kilograms of copra, the
undelivered balance, at the open market at the then prevailing
price of P168.00 per 100 kilograms, a price differential of P86.00
per 100 kilograms or a total price differential of P46,152.76.
Under the foregoing undisputed circumstances, the actuality of
private respondent's fraud cannot be gainsaid. In general, fraud
may be defined as the voluntary execution of a wrongful act, or a
wilfull omission, knowing and intending the effects which naturally
and necessarily arise from such act or omission; the fraud
referred to in Article 1170 of the Civil Code of the Philippines is
the deliberate and intentional evasion of the normal fulfillment of
obligation; it is distinguished from negligence by the presence of
deliberate intent, which is lacking in the latter (Tolentino's Civil
Code of the Philippines, Vol. IV, p. 110). The conduct of private
respondent clearly manifests his deliberate fraudulent intent to
evade his contractual obligation for the price of copra had in the
meantime more than doubled from P82.00 to P168 per 100
kilograms. Under Article 1170 of the Civil Code of the Philippines,
those who in the performance of their obligation are guilty of
fraud, negligence, or delay, and those who in any manner
contravene the tenor thereof, are liable for damages. Pursuant to
said article, private respondent is liable for damages.
The next point of inquiry, therefore, is the amount of damages
which private respondent is liable to pay petitioner. As
aforementioned, on account of private respondent's deliberate
breach of his contractual obligation, petitioner was compelled to
buy the balance of 53,666 kilos of copra in the open market at the
then prevailing price of P168 per 100 kilograms thereby paying
P46,152.76 more than he would have paid had private
respondent completed delivery of the copra as agreed upon.
Thus, private respondent is liable to pay respondent the amount
of P46,152.76 as damages. In case of fraud, bad faith, malice, or
wanton attitude, the guilty party is liable for all damages which
may be reasonably attributed to the non performance of the
obligation (Magat vs. Medialdea, 121 SCRA 418 [1983]). Article
1101 of the old Civil Code, later to be reproduced as Article 1170
of our present Civil Code, was the basis of our decision in an old
case, Acme Films, Inc. vs. Theaters Supply Corporation, (63 Phil,
657 [1936]), wherein we held:
It is not denied that the plaintiff company failed to supply the
defendant with the cinematographic films which were the
subject matter of the contracts entered into on March 20,
1934 (Exhibits 1 and 2), and two films under the contract of
March 24, 1934 (Exhibit 3), one of said films being a serial
entitled "Whispering Shadow". Guillermo Garcia Bosque
testified that because the plaintiff company had failed to
supply said films, the defendants had to resort to the
Universal Pictures Corporation and ask for films to replace
those which said plaintiff had failed to supply under the
contract, having had to pay therefor five per cent more than
for those films contracted with said plaintiff Acme Films, Inc.,
and that the total cost thereof, including the printing of
programs, posters paraded through the streets with bands of
music to announce the showing of the films which the plaintiff
company failed to supply, amount to from P400 to P550. The
plaintiff company did not submit evidence to rebut the
testimony of said witness and the fact that the estimate of the
expenses is approximate does not make said estimate
inadmissible. It was incumbent upon the plaintiff company to
submit evidence in rebuttal, or at least ascertain the amount
of the different items in cross-examination. There being no
evidence to the contrary, it is logical to admit that the
defendant company spent at least the sum of P400.
Inasmuch as the plaintiff company had failed to comply with
a part of its booking contract, and as the defendant company
had suffered damages as a result thereof, the former is liable
to indemnify the damages caused to the latter, in accordance
with the provisions of Article 1101 of the Civil Code.
(at page 663.)
WHEREFORE, the instant petition is hereby GRANTED. The
decision of the respondent Court of Appeals in CA-G.R. CV No.
05828 is ANNULLED and SET ASIDE and the decision of the trial
court in Civil Case No. 5529 REINSTATED, with costs against
private respondent.
SO ORDERED.
Feliciano, Bidin, Davide, Jr. and Romero, JJ., concur
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-4811 July 31, 1953
CHARLES F. WOODHOUSE, plaintiff-appellant,
vs.
FORTUNATO F. HALILI, defendant-appellant.
Taada, Pelaez & Teehankee for defendant and appellant.
Gibbs, Gibbs, Chuidian & Quasha for plaintiff and appellant.
LABRADOR, J.:
On November 29, 1947, the plaintiff entered on a written
agreement, Exhibit A, with the defendant, the most important
provisions of which are (1) that they shall organize a partnership
for the bottling and distribution of Mision soft drinks, plaintiff to act
as industrial partner or manager, and the defendant as a
capitalist, furnishing the capital necessary therefor; (2) that the
defendant was to decide matters of general policy regarding the
business, while the plaintiff was to attend to the operation and
development of the bottling plant; (3) that the plaintiff was to
secure the Mission Soft Drinks franchise for and in behalf of the
proposed partnership; and (4) that the plaintiff was to receive 30
per cent of the net profits of the business. The above agreement
was arrived at after various conferences and consultations by and
between them, with the assistance of their respective attorneys.
Prior to entering into this agreement, plaintiff had informed the
Mission Dry Corporation of Los Angeles, California, U.S.A.,
manufacturers of the bases and ingridients of the beverages
bearing its name, that he had interested a prominent financier
(defendant herein) in the business, who was willing to invest half
a million dollars in the bottling and distribution of the said
beverages, and requested, in order that he may close the deal
with him, that the right to bottle and distribute be granted him for a
limited time under the condition that it will finally be transferred to
the corporation (Exhibit H). Pursuant for this request, plaintiff was
given "a thirty-days" option on exclusive bottling and distribution
rights for the Philippines" (Exhibit J). Formal negotiations between
plaintiff and defendant began at a meeting on November 27,
1947, at the Manila Hotel, with their lawyers attending. Before this
meeting plaintiff's lawyer had prepared the draft of the agreement,
Exhibit II or OO, but this was not satisfactory because a
partnership, instead of a corporation, was desired. Defendant's
lawyer prepared after the meeting his own draft, Exhibit HH. This
last draft appears to be the main basis of the agreement, Exhibit
A.
The contract was finally signed by plaintiff on December 3, 1947.
Plaintiff did not like to go to the United States without the
agreement being not first signed. On that day plaintiff and
defendant went to the United States, and on December 10, 1947,
a franchise agreement (Exhibit V) was entered into the Mission
Dry Corporation and Fortunato F. Halili and/or Charles F.
Woodhouse, granted defendant the exclusive right, license, and
authority to produce, bottle, distribute, and sell Mision beverages
in the Philippines. The plaintiff and the defendant thereafter
returned to the Philippines. Plaintiff reported for duty in January,
1948, but operations were not begun until the first week of
February, 1948. In January plaintiff was given as advance, on
account of profits, the sum of P2,000, besides the use of a car; in
February, 1948, also P2,000, and in March only P1,000. The car
was withdrawn from plaintiff on March 9, 1948.
When the bottling plant was already on operation, plaintiff
demanded of defendant that the partnership papers be executed.
At first defendant executed himself, saying there was no hurry.
Then he promised to do so after the sales of the product had
been increased to P50,000. As nothing definite was forthcoming,
after this condition was attained, and as defendant refused to give
further allowances to plaintiff, the latter caused his attorneys to
take up the matter with the defendant with a view to a possible
settlement. as none could be arrived at, the present action was
instituted.
In his complaint plaintiff asks for the execution of the contract of
partnership, an accounting of the profits, and a share thereof of
30 per cent, as well as damages in the amount of P200,000. In
his answer defendant alleges by way of defense (1) that
defendant's consent to the agreement, Exhibit A, was secured by
the representation of plaintiff that he was the owner, or was about
to become owner of an exclusive bottling franchise, which
representation was false, and plaintiff did not secure the
franchise, but was given to defendant himself; (2) that defendant
did not fail to carry out his undertakings, but that it was plaintiff
who failed; (3) that plaintiff agreed to contribute the exclusive
franchise to the partnership, but plaintiff failed to do so. He also
presented a counter-claim for P200,000 as damages. On these
issues the parties went to trial, and thereafter the Court of First
Instance rendered judgment ordering defendant to render an
accounting of the profits of the bottling and distribution business,
subject of the action, and to pay plaintiff 15 percent thereof. it
held that the execution of the contract of partnership could not be
enforced upon the parties, but it also held that the defense of
fraud was not proved. Against this judgment both parties have
appealed.
The most important question of fact to be determined is whether
defendant had falsely represented that he had an exclusive
franchise to bottle Mission beverages, and whether this false
representation or fraud, if it existed, annuls the agreement to form
the partnership. The trial court found that it is improbable that
defendant was never shown the letter, Exhibit J, granting plaintiff
had; that the drafts of the contract prior to the final one can not be
considered for the purpose of determining the issue, as they are
presumed to have been already integrated into the final
agreement; that fraud is never presumed and must be proved;
that the parties were represented by attorneys, and that if any
party thereto got the worse part of the bargain, this fact alone
would not invalidate the agreement. On this appeal the
defendant, as appellant, insists that plaintiff did represent to the
defendant that he had an exclusive franchise, when as a matter
of fact, at the time of its execution, he no longer had it as the
same had expired, and that, therefore, the consent of the
defendant to the contract was vitiated by fraud and it is,
consequently, null and void.
Our study of the record and a consideration of all the surrounding
circumstances lead us to believe that defendant's contention is
not without merit. Plaintiff's attorney, Mr. Laurea, testified that
Woodhouse presented himself as being the exclusive grantee of
a franchise, thus:
A. I don't recall any discussion about that matter. I took along
with me the file of the office with regards to this matter. I notice
from the first draft of the document which I prepared which
calls for the organization of a corporation, that the manager,
that is, Mr. Woodhouse, is represented as being the exclusive
grantee of a franchise from the Mission Dry Corporation. . . .
(t.s.n., p.518)
As a matter of fact, the first draft that Mr. Laurea prepared, which
was made before the Manila Hotel conference on November
27th, expressly states that plaintiff had the exclusive franchise.
Thus, the first paragraph states:
Whereas, the manager is the exclusive grantee of a franchise
from the Mission Dry Corporation San Francisco, California,
for the bottling of Mission products and their sale to the public
throughout the Philippines; . . . .
 3. The manager, upon the organization of the said corporation,
shall forthwith transfer to the said corporation his exclusive
right to bottle Mission products and to sell them throughout the
Philippines. . . . .
(Exhibit II; emphasis ours)
The trial court did not consider this draft on the principle of
integration of jural acts. We find that the principle invoked is
inapplicable, since the purpose of considering the prior draft is not
to vary, alter, or modify the agreement, but to discover the intent
of the parties thereto and the circumstances surrounding the
execution of the contract. The issue of fact is: Did plaintiff
represent to defendant that he had an exclusive franchise?
Certainly, his acts or statements prior to the agreement are
essential and relevant to the determination of said issue. The act
or statement of the plaintiff was not sought to be introduced to
change or alter the terms of the agreement, but to prove how he
induced the defendant to enter into it to prove the
representations or inducements, or fraud, with which or by which
he secured the other party's consent thereto. These are expressly
excluded from the parol evidence rule. (Bough and Bough vs.
Cantiveros and Hanopol, 40 Phil., 209; port Banga Lumber
Co. vs. Export & Import Lumber Co., 26 Phil., 602; III Moran
221,1952 rev. ed.) Fraud and false representation are an incident
to the creation of a jural act, not to its integration, and are not
governed by the rules on integration. Were parties prohibited from
proving said representations or inducements, on the ground that
the agreement had already been entered into, it would be
impossible to prove misrepresentation or fraud. Furthermore, the
parol evidence rule expressly allows the evidence to be
introduced when the validity of an instrument is put in issue by the
pleadings (section 22, par. (a), Rule 123, Rules of Court),as in
this case.
That plaintiff did make the representation can also be easily
gleaned from his own letters and his own testimony. In his letter to
Mission Dry Corporation, Exhibit H, he said:.
. . . He told me to come back to him when I was able to
speak with authority so that we could come to terms as far as
he and I were concerned. That is the reason why the cable
was sent. Without this authority, I am in a poor bargaining
position. . .
I would propose that you grant me the exclusive bottling and
distributing rights for a limited period of time, during which I
may consummate my plants. . . .
By virtue of this letter the option on exclusive bottling was given to
the plaintiff on October 14, 1947. (See Exhibit J.) If this option for
an exclusive franchise was intended by plaintiff as an instrument
with which to bargain with defendant and close the deal with him,
he must have used his said option for the above-indicated
purpose, especially as it appears that he was able to secure,
through its use, what he wanted.
Plaintiff's own version of the preliminary conversation he had with
defendant is to the effect that when plaintiff called on the latter,
the latter answered, "Well, come back to me when you have the
authority to operate. I am definitely interested in the bottling
business." (t. s. n., pp. 60-61.) When after the elections of 1949
plaintiff went to see the defendant (and at that time he had
already the option), he must have exultantly told defendant that
he had the authority already. It is improbable and incredible for
him to have disclosed the fact that he had only an option to the
exclusive franchise, which was to last thirty days only, and still
more improbable for him to have disclosed that, at the time of the
signing of the formal agreement, his option had already expired.
Had he done so, he would have destroyed all his bargaining
power and authority, and in all probability lost the deal itself.
The trial court reasoned, and the plaintiff on this appeal argues,
that plaintiff only undertook in the agreement "to secure the
Mission Dry franchise for and in behalf of the proposed
partnership." The existence of this provision in the final
agreement does not militate against plaintiff having represented
that he had the exclusive franchise; it rather strengthens belief
that he did actually make the representation. How could plaintiff
assure defendant that he would get the franchise for the latter if
he had not actually obtained it for himself? Defendant would not
have gone into the business unless the franchise was raised in
his name, or at least in the name of the partnership. Plaintiff
assured defendant he could get the franchise. Thus, in the draft
prepared by defendant's attorney, Exhibit HH, the above provision
is inserted, with the difference that instead of securing the
franchise for the defendant, plaintiff was to secure it for the
partnership. To show that the insertion of the above provision
does not eliminate the probability of plaintiff representing himself
as the exclusive grantee of the franchise, the final agreement
contains in its third paragraph the following:
. . . and the manager is ready and willing to allow the
capitalists to use the exclusive franchise . . .
and in paragraph 11 it also expressly states:
1. In the event of the dissolution or termination of the
partnership, . . . the franchise from Mission Dry Corporation
shall be reassigned to the manager.
These statements confirm the conclusion that defendant believed,
or was made to believe, that plaintiff was the grantee of an
exclusive franchise. Thus it is that it was also agreed upon that
the franchise was to be transferred to the name of the
partnership, and that, upon its dissolution or termination, the
same shall be reassigned to the plaintiff.
Again, the immediate reaction of defendant, when in California he
learned that plaintiff did not have the exclusive franchise, was to
reduce, as he himself testified, plaintiff's participation in the net
profits to one half of that agreed upon. He could not have had
such a feeling had not plaintiff actually made him believe that he
(plaintiff) was the exclusive grantee of the franchise.
The learned trial judge reasons in his decision that the assistance
of counsel in the making of the contract made fraud improbable.
Not necessarily, because the alleged representation took place
before the conferences were had, in other words, plaintiff had
already represented to defendant, and the latter had already
believed in, the existence of plaintiff's exclusive franchise before
the formal negotiations, and they were assisted by their lawyers
only when said formal negotiations actually took place.
Furthermore, plaintiff's attorney testified that plaintiff had said that
he had the exclusive franchise; and defendant's lawyer testified
that plaintiff explained to him, upon being asked for the franchise,
that he had left the papers evidencing it.(t.s.n., p. 266.)
We conclude from all the foregoing that plaintiff did actually
represent to defendant that he was the holder of the exclusive
franchise. The defendant was made to believe, and he actually
believed, that plaintiff had the exclusive franchise. Defendant
would not perhaps have gone to California and incurred expenses
for the trip, unless he believed that plaintiff did have that exclusive
privilege, and that the latter would be able to get the same from
the Mission Dry Corporation itself. Plaintiff knew what defendant
believed about his (plaintiff's) exclusive franchise, as he induced
him to that belief, and he may not be allowed to deny that
defendant was induced by that belief. (IX Wigmore, sec. 2423;
Sec. 65, Rule 123, Rules of Court.)
We now come to the legal aspect of the false representation.
Does it amount to a fraud that would vitiate the contract? It must
be noted that fraud is manifested in illimitable number of degrees
or gradations, from the innocent praises of a salesman about the
excellence of his wares to those malicious machinations and
representations that the law punishes as a crime. In
consequence, article 1270 of the Spanish Civil Code
distinguishes two kinds of (civil) fraud, the causal fraud, which
may be a ground for the annulment of a contract, and the
incidental deceit, which only renders the party who employs it
liable for damages. This Court had held that in order that fraud
may vitiate consent, it must be the causal (dolo causante), not
merely the incidental (dolo causante), inducement to the making
of the contract. (Article 1270, Spanish Civil Code; Hill vs. Veloso,
31 Phil. 160.) The record abounds with circumstances indicative
that the fact that the principal consideration, the main cause that
induced defendant to enter into the partnership agreement with
plaintiff, was the ability of plaintiff to get the exclusive franchise to
bottle and distribute for the defendant or for the partnership. The
original draft prepared by defendant's counsel was to the effect
that plaintiff obligated himself to secure a franchise for the
defendant. Correction appears in this same original draft, but the
change is made not as to the said obligation but as to the
grantee. In the corrected draft the word "capitalist"(grantee) is
changed to "partnership." The contract in its final form retains the
substituted term "partnership." The defendant was, therefore, led
to the belief that plaintiff had the exclusive franchise, but that the
same was to be secured for or transferred to the partnership. The
plaintiff no longer had the exclusive franchise, or the option
thereto, at the time the contract was perfected. But while he had
already lost his option thereto (when the contract was entered
into), the principal obligation that he assumed or undertook was
to secure said franchise for the partnership, as the bottler and
distributor for the Mission Dry Corporation. We declare, therefore,
that if he was guilty of a false representation, this was not the
causal consideration, or the principal inducement, that led plaintiff
to enter into the partnership agreement.
But, on the other hand, this supposed ownership of an exclusive
franchise was actually the consideration or price plaintiff gave in
exchange for the share of 30 percent granted him in the net
profits of the partnership business. Defendant agreed to give
plaintiff 30 per cent share in the net profits because he was
transferring his exclusive franchise to the partnership. Thus, in the
draft prepared by plaintiff's lawyer, Exhibit II, the following
provision exists:
3. That the MANAGER, upon the organization of the said
corporation, shall forthwith transfer to the said
corporation his exclusive right to bottle Mission products and
to sell them throughout the Philippines. As a consideration
for such transfer, the CAPITALIST shall transfer to the
Manager fully paid non assessable shares of the said
corporation . . . twenty-five per centum of the capital stock of
the said corporation. (Par. 3, Exhibit II; emphasis ours.)
Plaintiff had never been a bottler or a chemist; he never had
experience in the production or distribution of beverages. As a
matter of fact, when the bottling plant being built, all that he
suggested was about the toilet facilities for the laborers.
We conclude from the above that while the representation that
plaintiff had the exclusive franchise did not vitiate defendant's
consent to the contract, it was used by plaintiff to get from
defendant a share of 30 per cent of the net profits; in other words,
by pretending that he had the exclusive franchise and promising
to transfer it to defendant, he obtained the consent of the latter to
give him (plaintiff) a big slice in the net profits. This is the dolo
incidente defined in article 1270 of the Spanish Civil Code,
because it was used to get the other party's consent to a big
share in the profits, an incidental matter in the agreement.
El dolo incidental no es el que puede producirse en el
cumplimiento del contrato sino que significa aqui, el que
concurriendoen el consentimiento, o precediendolo, no influyo
para arrancar porsi solo el consentimiento ni en la totalidad de
la obligacion, sinoen algun extremo o accidente de esta,
dando lugar tan solo a una accion para reclamar
indemnizacion de perjuicios. (8 Manresa 602.)
Having arrived at the conclusion that the agreement may not be
declared null and void, the question that next comes before us is,
May the agreement be carried out or executed? We find no merit
in the claim of plaintiff that the partnership was already a fait
accompli from the time of the operation of the plant, as it is
evident from the very language of the agreement that the parties
intended that the execution of the agreement to form a
partnership was to be carried out at a later date. They expressly
agreed that they shall form a partnership. (Par. No. 1, Exhibit A.)
As a matter of fact, from the time that the franchise from the
Mission Dry Corporation was obtained in California, plaintiff
himself had been demanding that defendant comply with the
agreement. And plaintiff's present action seeks the enforcement
of this agreement. Plaintiff's claim, therefore, is both inconsistent
with their intention and incompatible with his own conduct and
suit.
As the trial court correctly concluded, the defendant may not be
compelled against his will to carry out the agreement nor execute
the partnership papers. Under the Spanish Civil Code, the
defendant has an obligation to do, not to give. The law recognizes
the individual's freedom or liberty to do an act he has promised to
do, or not to do it, as he pleases. It falls within what Spanish
commentators call a very personal act (acto personalismo), of
which courts may not compel compliance, as it is considered an
act of violence to do so.
Efectos de las obligaciones consistentes en hechos
personalismo.Tratamos de la ejecucion de las obligaciones
de hacer en el solocaso de su incumplimiento por parte del
deudor, ya sean los hechos personalisimos, ya se hallen en la
facultad de un tercero; porque el complimiento espontaneo de
las mismas esta regido por los preceptos relativos al pago, y
en nada les afectan las disposiciones del art. 1.098.
Esto supuesto, la primera dificultad del asunto consiste en
resolver si el deudor puede ser precisado a realizar el hecho y
porque medios.
Se tiene por corriente entre los autores, y se traslada
generalmente sin observacion el principio romano nemo
potest precise cogi ad factum. Nadie puede ser obligado
violentamente a haceruna cosa. Los que perciben la
posibilidad de la destruccion deeste principio, aaden que,
aun cuando se pudiera obligar al deudor, no deberia hacerse,
porque esto constituiria una violencia, y noes la violenciamodo
propio de cumplir las obligaciones (Bigot, Rolland, etc.). El
maestro Antonio Gomez opinaba lo mismo cuandodecia que
obligar por la violencia seria infrigir la libertad eimponer una
especie de esclavitud.
xxx xxx xxx
En efecto; las obligaciones contractuales no se acomodan
biencon el empleo de la fuerza fisica, no ya precisamente
porque seconstituya de este modo una especie de esclavitud,
 segun el dichode Antonio Gomez, sino porque se supone que
el acreedor tuvo encuenta el caracter personalisimo del hecho
ofrecido, y calculo sobre laposibilidad de que por alguna razon
no se realizase. Repugna,ademas, a la conciencia social el
empleo de la fuerza publica, mediante coaccion sobre las
personas, en las relaciones puramente particulares; porque la
evolucion de las ideas ha ido poniendo masde relieve cada dia
el respeto a la personalidad humana, y nose admite bien la
violencia sobre el individuo la cual tiene caracter visiblemente
penal, sino por motivos que interesen a la colectividad de
ciudadanos. Es, pues, posible y licita esta violencia cuando
setrata de las obligaciones que hemos llamado ex lege, que
afectanal orden social y a la entidad de Estado, y aparecen
impuestas sinconsideracion a las conveniencias particulares, y
sin que por estemotivo puedan tampoco ser modificadas; pero
no debe serlo cuandola obligacion reviste un interes
puramente particular, como sucedeen las contractuales, y
cuando, por consecuencia, paraceria salirseel Estado de su
esfera propia, entrado a dirimir, con apoyo dela fuerza
colectiva, las diferencias producidas entre los ciudadanos. (19
Scaevola 428, 431-432.)
The last question for us to decide is that of damages,damages
that plaintiff is entitled to receive because of defendant's refusal
to form the partnership, and damages that defendant is also
entitled to collect because of the falsity of plaintiff's
representation. (Article 1101, Spanish Civil Code.) Under article
1106 of the Spanish Civil Code the measure of damages is the
actual loss suffered and the profits reasonably expected to be
received, embraced in the terms dao emergente and lucro
cesante. Plaintiff is entitled under the terms of the agreement to
30 per cent of the net profits of the business. Against this amount
of damages, we must set off the damage defendant suffered by
plaintiff's misrepresentation that he had obtained a very high
percentage of share in the profits. We can do no better than
follow the appraisal that the parties themselves had adopted.
When defendant learned in Los Angeles that plaintiff did not have
the exclusive franchise which he pretended he had and which he
had agreed to transfer to the partnership, his spontaneous
reaction was to reduce plaintiff's share form 30 per cent to 15 per
cent only, to which reduction defendant appears to have readily
given his assent. It was under this understanding, which amounts
to a virtual modification of the contract, that the bottling plant was
established and plaintiff worked as Manager for the first three
months. If the contract may not be considered modified as to
plaintiff's share in the profits, by the decision of defendant to
reduce the same to one-half and the assent thereto of plaintiff,
then we may consider the said amount as a fair estimate of the
damages plaintiff is entitled to under the principle enunciated in
the case of Varadero de Manila vs. Insular Lumber Co., 46 Phil.
176. Defendant's decision to reduce plaintiff's share and plaintiff's
consent thereto amount to an admission on the part of each of
the reasonableness of this amount as plaintiff's share. This same
amount was fixed by the trial court. The agreement contains the
stipulation that upon the termination of the partnership, defendant
was to convey the franchise back to plaintiff (Par. 11, Exhibit A).
The judgment of the trial court does not fix the period within which
these damages shall be paid to plaintiff. In view of paragraph 11
of Exhibit A, we declare that plaintiff's share of 15 per cent of the
net profits shall continue to be paid while defendant uses the
franchise from the Mission Dry Corporation.
With the modification above indicated, the judgment appealed
from is hereby affirmed. Without costs.
Paras, C.J., Pablo, Bengzon, Tuason, Montemayor, Reyes, Jugo
and Bautista Angelo, JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 108253 February 23, 1994
LYDIA L. GERALDEZ, petitioner,
vs.
HON. COURT OF APPEALS and KENSTAR TRAVEL
CORPORATION, respondents.
Natividad T. Perez for petitioner.
Bito, Lozada, Ortega & Castillo for private respondent.
REGALADO, J.:
Our tourism industry is not only big business; it is a revenue
support of the nation's economy. It has become a matter of public
interest as to call for its promotion and regulation on a cabinet
level. We have special laws and policies for visiting tourists, but
such protective concern has not been equally extended to Filipino
tourists going abroad. Thus, with the limited judicial relief
available within the ambit of present laws, our tourists often prefer
who fail to deliver on their undertakings. This case illustrates the
recourse of one such tourist who refused to forget.
An action for damages by reason of contractual breach was filed
by petitioner Lydia L. Geraldez against private respondent
Kenstar Travel Corporation, docketed as Civil Case No. Q-90-
4649 of the Regional Trial Court of Quezon City, Branch
80. 1 After the parties failed to arrive at an amicable settlement,
trial on the merits ensued.
Culling from the records thereof, we find that sometime in
October, 1989, Petitioner came to know about private respondent
from numerous advertisements in newspapers of general
circulation regarding tours in Europe. She then contacted private
respondent by phone and the latter sent its representative,
Alberto Vito Cruz, who gave her the brochure for the tour and
later discussed its highlights. The European tours offered were
classified into four, and petitioner chose the classification
denominated as "VOLARE 3" covering a 22-day tour of Europe
for $2,990.00. She paid the total equivalent amount of
P190,000.00 charged by private respondent for her and her
sister, Dolores.
Petitioner claimed that, during the tour, she was very uneasy and
disappointed when it turned out that, contrary to what was stated
in the brochure, there was no European tour manager for their
group of tourists, the hotels in which she and the group were
bullited were not first-class, the UGC Leather Factory which was
specifically added as a highlight of the tour was not visited, and
the Filipino lady tour guide by private respondent was a first timer,
that is, she was performing her duties and responsibilities as such
for the first time. 2
In said action before the Regional Trial Court of Quezon City,
petitioner likewise moved for the issuance of a writ of preliminary
attachment against private respondent on the ground that it
committed fraud in contracting an obligation, as contemplated in
Section 1(d), Rule 57 of the Rules of Court, to which no
opposition by the latter appears on the record. This was granted
by the court a quo 3 but the preliminary attachment was
subsequently lifted upon the filing by private respondent of a
counterbond amounting to P990,000.00. 4
During the pendency of said civil case for damages, petitioner
also filed other complaints before the Department of Tourism in
DOT Case No. 90-121 and the Securities and Exchange
Commission in PED Case No. 90-3738, 5wherein, according to
petitioner, herein private respondent was meted out a fine of
P10,000.00 by the Commission and P5,000.00 by the
Department, 6 which facts are not disputed by private respondent
in its comment on the present petition.
On July 9, 1991, the court a quo rendered its decision 7 ordering
private respondent to pay petitioner P500.000.00 as moral
damages, P200,000.00 as nominal damages, P300,000.00 as
exemplary damages, P50,000.00 as and for attorney's fees, and
the costs of the suit. 8 On appeal, respondent court 9 deleted the
award for moral and exemplary damages, and reduced the
awards for nominal damages and attorney's fees to P30,000.00
and P10,000.00, respectively. 10
Hence, the instant petition from which, after sifting through the
blades of contentions alternately thrust and parried in the
exchanges of the parties, the pivotal issue that emerges is
whether or not private respondent acted in bad faith or with gross
negligence in discharging its obligations under the contract.
Both the respondent court and the court a quo agree that private
respondent failed to comply faithfully with its commitments under
the Volare 3 tour program, more particularly in not providing the
members of the tour group with a European tour manger whose
duty, inter alia, was to explain the points of interest of and
familiarize the tour group with the places they would visit in
Europe, and in assigning instead a first timer Filipino tour guide,
in the person of Rowena Zapanta, 11 to perform that role which
definitely requires experience and knowledge of such places. It is
likewise undisputed that while the group was able to pay a visit to
the site of the UGC Leather Factory, they were brought there at a
very late hour such that the factory was already closed and they
were unable to make purchases at supposedly discounted
prices. 12 As to the first-class hotels, however, while the court a
quo found that the hotels were not fist-class, respondent court
believed otherwise, or that, at least, there was substantial
compliance with such a representation.
While clearly there was therefore a violation of the rights of
petitioner under the aforementioned circumstances, respondent
court, contrary to the findings of the trial court, ruled that no
malice or bad faith could be imputed to private respondent, hence
there is no justification for the award of moral and exemplary
damages. Furthermore, it held that while petitioner is entitled to
nominal damages, the amount awarded by the trial court was
unconscionable since petitioner did not suffer actual or
substantial damage from the breach of contract, 13 hence its
reduction of such award as hereinbefore stated.
After thorough and painstaking scrutiny of the case records of
both the trial and appellate courts, we are satisfactorily
convinced, and so hold, that private respondent did commit
fraudulent misrepresentations amounting to bad faith, to the
prejudice of petitioner and the members of the tour group.
By providing the Volare 3 tourist group, of which petitioner was a
member, with an inexperienced and a first timer tour escort,
private respondent manifested its indifference to the convenience,
satisfaction and peace of mind of its clients during the trip,
despite its express commitment to provide such facilities under
the Volare 3 Tour Program which had the grandiose slogan "Let
your heart sing. 14
Evidently, an inexperienced tour escort, who admittedly had not
even theretofore been to Europe, 15 cannot effectively acquaint
the tourists with the interesting areas in the cities and places
included in the program, or to promptly render necessary
assistance, especially where the latter are complete strangers
thereto, like witnesses Luz Sui Haw and her husband who went to
Europe for their honeymoon. 16
We agree with petitioner that the selection of Zapanta as the
group's tour guide was deliberate and conscious choice on the
part of private respondent in order to afford her an on-the-job
training and equip her with the proper opportunities so as to later
qualify her as an "experienced" tour guide and eventually be an
asset of respondent corporation. 17 Unfortunately, this resulted in
a virtual project experimentation with petitioner and the members
of the tour as the unwitting participants.
We are, therefore, one with respondent court in faulting private
respondent's choice of Zapanta as a qualified tour guide for the
Volare 3 tour package. It brooks no argument that to be true to its
undertakings, private respondent should have selected an
experienced European tour guide, or it could have allowed
Zapanta to go merely as an understudy under the guidance,
control and supervision of an experienced and competent
European or Filipino tour guide, 18 who could give her the desired
training.
Moreover, a tour guide is supposed to attend to the routinary
needs of the tourists, not only when the latter ask for assistance
but at the moment such need becomes apparent. In other words,
the tour guide, especially by reason of her experience in previous
tours, must be able to anticipate the possible needs and problems
of the tourists instead of waiting for them to bring it to her
attention. While this is stating the obvious, it is her duty to see to
it that basic personal necessities such as soap, towels and other
daily amenities are provided by the hotels. It is also expected of
her to see to it that the tourists are provided with sanitary
surroundings and to actively arrange for medical attention in case
of accidents, as what befell petitioner's sister and wherein the
siblings had to practically fend for themselves since, after merely
calling for an ambulance, Zapanta left with the other tour
participants. 19
Zapanta fell far short of the performance expected by the tour
group, her testimony in open court being revelatory of her
inexperience even on the basic function of a tour guide, to wit:
Q Now, are you aware that there were times that the tourists
under the "Volare 3" were not provided with soap and towels?
A They did not tell me that but I was able to ask them later on
but then nobody is complaining. 20 . . . .
The inability of the group to visit the leather factory is likewise
reflective of the neglect and ineptness of Zapanta in attentively
following the itinerary of the day. This incompetence must
necessarily be traced to the lack of due diligence on the part of
private respondent in the selection of its employees. It is true that
among the thirty-two destinations, which included twenty-three
cities and special visits to nine tourist spots, this was the only
place that was not visited. 21 It must be noted, however, that the
visit to the UGC Leather Factory was one of the highlights 22 of
the Volare 3 program which even had to be specifically inserted in
the itinerary, hence it was incumbent upon the organizers of the
tour to take special efforts to ensure the same. Besides, petitioner
did expect much from the visit to that factory since it was
represented by private respondent that quality leather goods
could be bought there at lower prices. 23
Private respondent represents Zapanta's act of making daily
overseas calls to Manila as an exercise of prudence and diligence
on the latter's part as a tour guide. 24 It further claims that these
calls were needed so that it could monitor the progress of the tour
and respond to any problem immediately. 25 We are not
persuaded. The truth of the matter is that Zapanta, as an
inexperienced trainee-on-the-job, was required to make these
calls to private respondent for the latter to gauge her ability in
coping with her first assignment and to provide instructions to
her. 26
Clearly, therefore, private respondent's choice of Zapanta as the
tour guide is a manifest disregard of its specific assurances to the
tour group, resulting in agitation and anxiety on their part, and
which deliberate omission is contrary to the elementary rules of
good faith and fair play. It is extremely doubtful if any group of
Filipino tourists would knowingly agree to be used in effect as
guinea pigs in an employees' training program of a travel agency,
to be conducted in unfamiliar European countries with their
diverse cultures, lifestyles and languages.
On the matter of the European tour manager, private
respondent's advertisement in its tour contract declares and
represents as follows:
FILIPINO TOUR ESCORT!
He will accompany you throughout Europe. He speaks your
language, shares your culture and feels your excitement.
He won't be alone because you will also be accompanied by
a...
EUROPEAN TOUR MANAGER!
You get the best of both worlds. Having done so may tours in
the past with people like you, he knows your sentiments, too.
So knowledgeable about Europe, there is hardly a question he
can't answer. 27
Private respondent contends that the term "European Tour
Manager" does not refer to an individual but to an organization,
allegedly the Kuoni Travel of Switzerland which supposedly
prepared the itinerary for its "Volare Europe Tour," negotiated with
all the hotels in Europe, selected tourist spots and historical
places to visit, and appointed experienced local tour guides for
the tour group. 28
We regret this unseemly quibbling which perforce cannot be
allowed to pass judicial muster.
A cursory reading of said advertisement will readily reveal the
express representation that the contemplated European tour
manager is a natural person, and not a juridical one as private
respondent asserts. A corporate entity could not possibly
accompany the members of the tour group to places in Europe;
neither can it answer questions from the tourists during the tour.
Of course, it is absurd that if a tourist would want to know how he
could possibly go to the nearest store or supermarket, he would
still have to call Kuoni Travel of Switzerland.
Furthermore, both lower courts observed, and we uphold their
observations, that indeed private respondent had the obligation to
provide the tour group not only with a European tour manger, but
also with local European tour guides. The latter, parenthetically,
were likewise never made available. 29 Zapanta claims that she
was accompanied by a European local tour guide in most of the
major cities in Europe. We entertain serious doubts on, and
accordingly reject, this pretension for she could not even
remember the name of said European tour guide. 30 If such a
guide really existed, it is incredible why she could not even
identify the former when she testified a year later, despite the
length of their sojourn and the duration of their association.
As to why the word "he" was used in the aforequoted
advertisement, private respondent maintains that the pronoun
"he" also includes the word "it," as where it is used as a
"nominative case form in general statements (as in statutes) to
include females, fictitious persons (as corporations)." 31 We are
constrained to reject this submission as patently strained and
untenable. As already demonstrated, it is incredible that the word
"he" was used by private respondent to denote an artificial or
corporate being. From its advertisement, it is beyond cavil that
the import of the word "he" is a natural and not a juridical person.
There is no need for further interpretation when the wordings are
clear. The meaning that will determine the legal effect of a
contract is that which is arrived at by objective standards; one is
bound, not by what he subjectively intends, but by what he leads
others reasonably to think he intends. 32
In an obvious but hopeless attempt to arrive at a possible
justification, private respondent further contends that it explained
the concept of a European tour manager to its clients at the pre-
departure briefing, which petitioner did not attend. 33 Significantly,
however, private respondent failed to present even one member
of the tour group to substantiate its claim. It is a basic rule of
evidence that a party must prove his own affirmative
allegations. 34 Besides, if it was really its intention to provide a
juridical European tour manager, it could not have kept on
promising its tourists during the tour that a European tour
manager would come, 35 supposedly to join and assist them.
Veering to another line of defense, private respondent seeks
sanctuary in the delimitation of its responsibility as printed on the
face of its brochure on the Volare 3 program, to wit:
RESPONSIBILITIES: KENSTAR TRAVEL CORPORATION,
YOUR TRAVEL AGENT, THEIR EMPLOYEES OR SUB-
AGENTS SHALL BE RESPONSIBLE ONLY FOR BOOKING
AND MAKING ARRANGEMENTS AS YOUR
AGENTS. Kenstar Travel Corporation, your travel Agent, their
employees or sub-agents assume no responsibility or liability
arising out of or in connection with the services or lack of
services, of any train, vessel, other conveyance or station
whatsoever in the performance of their duty to the passengers
or guests, neither will they be responsible for any act, error or
omission, or of any damages, injury, loss, accident, delay or
irregularity which may be occasioned by reason (of) or any
defect in . . . lodging place or any facilities . . . . (Emphasis by
private respondent.) 36
While, generally, the terms of a contract result from the mutual
formulation thereof by the parties thereto, it is of common
knowledge that there are certain contracts almost all the
provisions of which have been drafted by only one party, usually a
corporation. Such contracts are called contracts of adhesion,
because the only participation of the party is the affixing of his
signature or his "adhesion" thereto. 37 In situations like these,
when a party imposes upon another a ready-made form of
contract, 38 and the other is reduced to the alternative of taking it
or leaving it, giving no room for negotiation and depriving the
latter of the opportunity to bargain on equal footing, a contract of
adhesion results. While it is true that an adhesion contract is not
necessarily void, it must nevertheless be construed strictly
against the one who drafted the same. 39 This is especially true
where the stipulations are printed in fine letters and are hardly
legible as is the case of the tour contract 40 involved in the present
controversy.
Yet, even assuming arguendo that the contractual limitation
aforequoted is enforceable, private respondent still cannot be
exculpated for the reason that responsibility arising from
fraudulent acts, as in the instant case, cannot be stipulated
against by reason of public policy. Consequently, for the foregoing
reasons, private respondent cannot rely on its defense of
"substantial compliance" with the contract.
Private respondent submits likewise that the tour was satisfactory,
considering that only petitioner, out of eighteen participants in the
Volare 3 Tour Program, actually complained. 41 We cannot accept
this argument. Section 28, Rule 130 of the Rules of Court
declares that the rights of a party cannot be prejudiced by an act,
declaration, or omission of another, a statutory adaptation of the
first branch of the hornbook rule of res inter alios acta 42 which we
do not have to belabor here.
Besides, it is a commonly known fact that there are tourists who,
although the tour was far from what the tour operator undertook
under the contract, choose to remain silent and forego recourse
to a suit just to avoid the expenses, hassle and rancor of
litigation, and not because the tour was in accord with was
promised. One does not relish adding to the bitter memory of a
misadventure the unpleasantness of another extended
confrontation. Furthermore, contrary to private respondent's
assertion, not only petitioner but two other members of the tour
group, Luz Sui Haw and Ercilla Ampil, confirmed petitioner's
complaints when they testified as witnesses for her as plaintiff in
the court below. 43
Private respondent likewise committed a grave misrepresentation
when it assured in its Volare 3 tour package that the hotels it had
chosen would provide the tourists complete amenities and were
conveniently located along the way for the daily itineraries. 44 It
turned out that some of the hotels were not sufficiently equipped
with even the basic facilities and were at a distance from the
cities covered by the projected tour. Petitioner testified on her
disgust with the conditions and locations of the hotels, thus:
Q And that these bathrooms ha(ve) bath tub(s) and hot and
cold shower(s)?
A Not all, sir.
Q Did they also provide soap and towels?
A Not all, sir, some (had) no toilet paper. 45
Q Which one?
A The 2 stars, the 3 stars and some 4 stars (sic) hotels.
Q What I am saying . . .
A You are asking a question? I am answering you. 2 stars, 3
stars and some 4 stars (sic) hotels, no soap, toilet paper and
(the) bowl
stinks. . . .
xxx xxx xxx
Q And that except for the fact that some of these four star
hotels were outside the city they provided you with the
comfort?
 A Not all, sir.
Q Can you mention some which did not provide you that
comfort?
A For example, if Ramada Hotel Venezia is in Quezon City, our
hotel is in Meycauayan. And if Florence or Ferenze is in
manila, our hotel is in Muntinlupa. 46
xxx xxx xxx
A One more hotel, sir, in Barcelona, Hotel Saint Jacques is
also outside the city. Suppose Barcelona is in Quezon City, our
hotel is in Marilao. We looked for this hotel inside the city of
Barcelona for three (3) hours. We wasted our time looking for
almost all the hotels and places where to eat. That is the kind
of tour that you have. 47
Luz Sui Haw, who availed of the Volare 3 tour package with her
husband for their honeymoon, shared the sentiments of petitioner
and testified as follows:
Q . . . Will you kindly tell us why the hotels where you stayed
are not considered first class hotels?
A Because the hotels where we went, sir, (are) far from the
City and the materials used are not first class and at times
there were no towels and soap. And the two (2) hotels in
Nevers and Florence the conditions (are) very worse (sic). 48
Q Considering that you are honeymooners together with your
husband, what (were) your feelings when you found out that
the condition were not fulfilled by the defendant?
A I would like to be very honest. I got sick when I reached
Florence and half of my body got itch (sic). I think for a
honeymooner I would like to emphasize that we should enjoy
that day of our life and it seems my feet kept on itching
because of the condition of the hotel. And I was so dissatisfied
because the European Tour Manager was not around there
(were) beautiful promises. They kept on telling us that a
European Tour Manager will come over; until our Paris tour
was ended there was no European tour manager. 49
xxx xxx xxx
Q You will file an action against the defendant because there
was a disruption of your happiness, in your honeymoon, is that
correct?
A That is one of my causes of (sic) coming up here. Secondly, i
was very dissatisfied (with) the condition. Thirdly, that Volare
89 it says it will let your heart sing. That is not true. There was
no European tour (manager) and the highlights of the tour
(were) very poor. The hotels were worse (sic) hotels. 50
Q All the conditions of the hotels as you . . .
A Not all but as stated in the brochure that it is first class hotel.
The first class hotels state that all things are beautiful and it is
neat and clean with complete amenities and I encountered the
Luxembourg hotel which is quite very dilapidated because of
the flooring when you step on the side "kumikiring" and the
cabinets (are) antiques and as honeymooners we don't want
to be disturbed or seen. 51
xxx xxx xxx
Q None of these are first class hotels?
A Yes, sir.
Q So, for example Ramada Hotel Venezia which according to
Miss Geraldez is first class hotel is not first class hotel?
A Yes, sir.
Q You share the opinion of Miss Geraldez?
A Yes, sir.
Q The same is true with Grand Hotel Palatino which is not a
first class hotel?
A Yes, sir.
Q And Hotel Delta Florence is not first class hotel?
A That is how I got my itch, sir. Seven (7) days of itch.
Q How about Hotel Saint-Jacquez, Paris?
A It is far from the city. It is not first class hotel.
Q So with Hotel Le Prieure Du Coeur de Jesus neither a first
class hotel?
A Yes, sir.
Q Hotel De Nevers is not a first class hotel?
A Yes, sir.
Q Hotel Roc Blanc Andorra is not a first class hotel?
A Yes, sir.
Q Saint Just Hotel, Barcelona is not a first class hotel?
A Yes, sir.
Q Hotel Pullman Nice neither is not a first class hotel?
A Yes, sir.
Q Hotel Prinz Eugen and Austrotel are not first class hotels?
A Yes, sir. 52
Private respondent cannot escape responsibility by seeking
refuge under the listing of first-class hotels in publications like the
"Official Hotel and Resort Guide" and Worldwide Hotel
Guide." 53 Kuoni Travel, its tour operator, 54 which prepared the
hotel listings, is a European-based travel agency 55 and, as such,
could have easily verified the matter of first-class
accommodations. Nor can it logically claim that the first-class
hotels in Europe may not necessarily be the first-class hotels here
in the Philippines. 56 It is reasonable for petitioner to assume that
the promised first-class hotels are equivalent to what are
considered first-class hotels in Manila. Even
assuming arguendo that there is indeed a difference in
classifications, it cannot be gainsaid that a first-class hotel could
at the very least provide basic necessities and sanitary
accommodations. We are accordingly not at all impressed by
private respondent's attempts to trivialize the complaints thereon
by petitioner and her companions.
In a last ditch effort to justify its choice of the hotels, private
respondent contends that it merely provided such "first class"
hotels which are commensurate to the tourists budget, or which
were, under the given circumstances, the "best for their money." It
postulated that it could not have offered better hostelry when the
consideration paid for hotel accommodations by the tour
participants was only so much, 57 and the tour price of $2,990.00
covers a European tour for 22 days inclusive of lower room rates
and meals. 58 this is implausible, self-serving and borders on
sophistry.
The fact that the tourists were to pay a supposedly lower amount,
such that private respondent allegedly retained hardly enough as
reasonable profit, 59 does not justify a substandard form of service
in return. It was private respondent, in the first place, which fixed
the charges for the package tour and determined the services
that could be availed of corresponding to such price. Hence, it
cannot now be heard to complain that it only made a putative
marginal profit out of the transaction. if it could not provide the
tour participants with first-class lodgings on the basis of the
amount that they paid, it could and should have instead increased
the price to enable it to arrange for the promised first-class
accommodations.
On the foregoing considerations, respondent court erred in
deleting the award for moral and exemplary damages. Moral
damages may be awarded in breaches of contract where the
obligor acted fraudulently or in bad faith. 60 From the facts earlier
narrated, private respondent can be faulted with fraud in the
inducement, which is employed by a party to a contract in
securing the consent of the other.
This fraud or dolo which is present or employed at the time of
birth or perfection of a contract may either
be dolocausante or dolo incidente. The first, or causal fraud
referred to in Article 1338, are those deceptions or
misrepresentations of a serious character employed by one party
and without which the other party would not have entered into the
contract. Dolo incidente, or incidental fraud which is referred to in
Article 1344, are those which are not serious in character and
without which the other party would still have entered into the
contract. 61 Dolo causante determines or is the essential cause of
the consent, while dolo incidente refers only to some particular or
accident of the
obligations. 62 The effects of dolo causante are the nullity of the
contract and the indemnification of damages, 63 and dolo
incidente also obliges the person employing it to pay damages. 64
In either case, whether private respondent has committed dolo
causante or dolo incidente by making misrepresentations in its
contracts with petitioner and other members of the tour group,
which deceptions became patent in the light of after-events when,
contrary to its representations, it employed an inexperienced tour
guide, housed the tourist group in substandard hotels, and
reneged on its promise of a European tour manager and the visit
to the leather factory, it is indubitably liable for damages to
petitioner.
In the belief that an experienced tour escort and a European tour
manager would accompany them, with the concomitant
reassuring and comforting thought of having security and
assistance readily at hand, petitioner was induced to join the
Volare 3 tourists, instead of travelling alone 65 She likewise
suffered serious anxiety and distress when the group was unable
to visit the leather factory and when she did not receive first-class
accommodations in their lodgings which were misrepresented as
first-class hotels. These, to our mind, justify the award for moral
damages, which are in the category of an award designed to to pay petitioner Lydia L. Geraldez the sums of P100,000.00 by
compensate the claimant for that injury which she had suffered, way of moral damages, P50,000.00 as exemplary damages, and
and not as a penalty on the wrongdoer, 66 we believe that an P20,000.00 as and for attorney's fees, with costs against private
award of P100,000.00 is sufficient and reasonable. respondent. The award for nominal damages is hereby deleted.

When moral damages are awarded, especially for fraudulent Padilla, Nocon and Puno, JJ., concur. Narvasa, C.J., took no
conduct, exemplary damages may also be decreed. Exemplary part.
damages are imposed by way of example or correction for the
public good, in addition to moral, temperate, liquidated or #Footnotes
compensatory damages. According to the code Commission,
exemplary damages are required by public policy, for wanton acts 1 Original Record, 1.
must be suppressed. 67 An award, therefore, of P50,000.00 is
called for to deter travel agencies from resorting to
2 Ibid., 90.
advertisements and enticements with the intention of realizing
considerable profit at the expense of the public, without ensuring
compliance with their express commitments. While, under the 3 Ibid., 124.
present state of the law, extraordinary diligence is not required in
travel or tour contracts, such as that in the case at bar, the travel 4 Ibid., 152.
agency acting as tour operator must nevertheless be held to strict
accounting for contracted services, considering the public interest 5 Exhibits 6-CC-1, 6-DD-1, Folder of Exhibits for
in tourism, whether in the local or in the international scene. Defendant Kenstar Travel Corporation.
Consequently, we have to likewise reject the theory of private
respondent that the promise it made in the tour brochure may be 6 Rollo, 27.
regarded only as "commendatory trade talk." 68
7 Original record, 256; per Judge Benigno T.
With regard to the honorarium for counsel as an item of damages, Dayaw.
since we are awarding moral and exemplary damages, 69 and
considering the legal importance of the instant litigation and the 8 Ibid., 271.
efforts of counsel evident from the records of three levels of the
judicial hierarchy, we favorably consider the amount of 9 Justice Regina G. Ordoez-Benitez as ponente,
P20,000.00 therefor. with Justices Gloria C. Paras and Eduardo G.
Montenegro concurring.
WHEREFORE, premises considered, the decision of respondent
Court of Appeals is hereby SET ASIDE, and another one 10 Rollo, CA-G.R. CV No, 34961, Decision, 10.
rendered, ordering private respondent Kenstar Travel Corporation
11 Ibid., 5; Original Record, 264.
12 Ibid., 6.
13 Ibid., 8-10.
14 Original Record, 183, Exhibit 8.
15 TSN, December 14, 1990, 27.
16 TSN, November 15, 1990, 15.
17 Petition, 10; Rollo, 20.
18 Rollo, CA-G.R. CV No. 34961, Decision, 7.
19 TSN, December 14, 1990, 31.
20 Ibid., id., 29.
21 Memorandum for Private Respondent,
31; Rollo, 132.
22 Original record, 183, Exhibit 8.
23 Ibid., 25.
24 Memorandum for Private Respondent,
20; Rollo, 121.
25 Id., 19; ibid., 120.
26 TSN, December 14, 1990, 31.
27 Supra., Fn. 22.
28 Memorandum for Private Respondent, 21-
24; Rollo, 122-125.
29 Rollo, CA-G.R. CV No. 34961, Decision, 5.
30 TSN, December 14, 1990, 28.
31 Memorandum for Private Respondent,
25; Rollo, 126.
32 U.S.-Bach vs. Friden Calculating Mach. Co.,
C.C.A. Ohio 155 F. 2d 361, 365.
33 Memorandum for Private Respondent,
23; Rollo, 124.
34 Section 1, Rule 131, Rules of Court.
35 TSN, November 15, 1990, 16.
36 Original Record, 183, Exhibit 8-A;
Memorandum for Private Respondent, 11; Rollo,
112.
37 BPI Credit Corp. vs. Court of Appeals, et al.,
G.R. No. 96755, December 4, 1991, 204 SCRA
601.
38 Ong Yiu vs. Court of Appeals, et al., L-40597,
June 29, 1979, 91 SCRA 223.
39 Saludo, Jr. vs. Court of Appeals, et al., G.R. 53 Memorandum for Private Respondents,
No. 95536, March 23, 1992, 207 SCRA 498; see 27; Rollo, 128.
also Art. 1377, Civil Code.
54 TSN, March 22, 1991, 22.
40 Original Record, 183, Exhibit 8-A.
55 Supra., Fn. 53.
41 Memorandum for Private Respondent,
18; Rollo, 119. 56 See TSN, December 14, 1990, 22.

42 This specific facet of the rule more fully 57 Memorandum for Private Respondent,
states: Res inter alios acta aliis neque nole potest. 17; Rollo, 118.

43 TSN, November 15, 1990, 10-27; 37-52. 58 Id., 28-31; ibid., 129-132.

44 Original Record, 183, Exhibit A. 59 Ibid., 29; id., 130.

45 TSN, October 12, 1990, 20. 60 Articled 2220, Civil Code.

46 Ibid., id., 21-22. 61 Jurado, Comments and Jurisprudence on

Obligations and Contracts, 1987 ed., 438.
47 Ibid., id., 22-23.
62 Tolentino, Commentaries and Jurisprudence
48 Ibid., November 15, 1990, 10. on the Civil Code of the Philippines, Vol. IV, 1986
ed., 509.
49 Ibid., id., 16-17.
63 Op. cit., 510.
50 Ibid., id., 19-20
64 Article 1344, Civil Code.
51 Ibid., id., 25-26.
65 TSN, October 12, 1990, 14.
52 Ibid., id., 26-27.
66 Simex International (Manila), Inc. vs. Court of
Appeals, et al., G.R. No. 88013, March 19, 1990,
183 SCRA 360.

67 De Guzman vs. National Labor Relations

Commission, et al., G.R. No. 90856, July 23,
1992, 211 SCRA 723.

68 Memorandum for Private Respondent,

33; Rollo, 134.

69 Article 2208(1), Civil Code.

 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 141968 February 12, 2001
THE INTERNATIONAL CORPORATE BANK (now UNION
BANK OF THE PHILIPPINES), petitioner,
vs.
SPS. FRANCIS S. GUECO and MA. LUZ E.
GUECO, respondents.
KAPUNAN, J.:
The respondent Gueco Spouses obtained a loan from petitioner
International Corporate Bank (now Union Bank of the Philippines)
to purchase a car - a Nissan Sentra 1600 4DR, 1989 Model. In
consideration thereof, the Spouses executed promissory notes
which were payable in monthly installments and chattel mortgage
over the car to serve as security for the notes.1wphi1.nt
The Spouses defaulted in payment of installments. Consequently,
the Bank filed on August 7, 1995 a civil action docketed as Civil
Case No. 658-95 for "Sum of Money with Prayer for a Writ of
Replevin"1 before the Metropolitan Trial Court of Pasay City,
Branch 45.2 On August 25, 1995, Dr. Francis Gueco was served
summons and was fetched by the sheriff and representative of
the bank for a meeting in the bank premises. Desi Tomas, the
Bank's Assistant Vice President demanded payment of the
amount of P184,000.00 which represents the unpaid balance for
the car loan. After some negotiations and computation, the
amount was lowered to P154,000.00, However, as a result of the
non-payment of the reduced amount on that date, the car was
detained inside the bank's compound.
On August 28, 1995, Dr. Gueco went to the bank and talked with
its Administrative Support, Auto Loans/Credit Card Collection
Head, Jefferson Rivera. The negotiations resulted in the further
reduction of the outstanding loan to P150,000.00.
On August 29, 1995, Dr. Gueco delivered a manager's check in
amount of P150,000.00 but the car was not released because of
his refusal to sign the Joint Motion to Dismiss. It is the contention
of the Gueco spouses and their counsel that Dr. Gueco need not
sign the motion for joint dismissal considering that they had not
yet filed their Answer. Petitioner, however, insisted that the joint
motion to dismiss is standard operating procedure in their bank to
effect a compromise and to preclude future filing of claims,
counterclaims or suits for damages.
After several demand letters and meetings with bank
representatives, the respondents Gueco spouses initiated a civil
action for damages before the Metropolitan Trial Court of Quezon
City, Branch 33. The Metropolitan Trial Court dismissed the
complaint for lack of merit.3
On appeal to the Regional Trial Court, Branch 227 of Quezon
City, the decision of the Metropolitan Trial Court was reversed. In
its decision, the RTC held that there was a meeting of the minds
between the parties as to the reduction of the amount of
indebtedness and the release of the car but said agreement did
not include the signing of the joint motion to dismiss as a
condition sine qua non for the effectivity of the compromise. The
court further ordered the bank:
 1. to return immediately the subject car to the appellants in
good working condition; Appellee may deposit the Manager's
check - the proceeds of which have long been under the
control of the issuing bank in favor of the appellee since its
issuance, whereas the funds have long been paid by
appellants to .secure said Manager's Check, over which
appellants have no control;
2. to pay the appellants the sum of P50,000.00 as moral
damages; P25,000.00 as exemplary damages, and
P25,000.00 as attorney's fees, and
3. to pay the cost of suit.
In other respect, the decision of the Metropolitan Trial Court
Branch 33 is hereby AFFIRMED.4
The case was elevated to the Court of Appeals, which on
February 17, 2000, issued the assailed decision, the decretal
portion of which reads:
WHEREFORE, premises considered, the petition for review on
certiorari is hereby DENIED and the Decision of the Regional
Trial Court of Quezon City, Branch 227, in Civil Case No. Q-
97-31176, for lack of any reversible error, is AFFIRMED in
toto. Costs against petitioner.
SO ORDERED.5
The Court of Appeals essentially relied on the respect accorded
to the finality of the findings of facts by the lower court and on the
latter's finding of the existence of fraud which constitutes the
basis for the award of damages.
The petitioner comes to this Court by way of petition for review
on certiorari under Rule 45 of the Rules of Court, raising the
following assigned errors:
I
THE COURT OF APPEALS ERRED IN HOLDING THAT
THERE WAS NO AGREEMENT WITH RESPECT TO THE
EXECUTION OF THE JOINT MOTION TO DISMISS AS A
CONDITION FOR THE COMPROMISE AGREEMENT.
II
THE COURT OF APPEALS ERRED IN GRANTING MORAL
AND EXEMPLARY DAMAGES AND ATTORNEY'S FEES IN
FAVOR OF THE RESPONDENTS.
III
THE COURT OF APPEALS ERRED IN HOLDING THAT THE
PETITIONER RETURN THE SUBJECT CAR TO THE
RESPONDENTS, WITHOUT MAKING ANY PROVISION FOR
THE ISSUANCE OF THE NEW MANAGER'S/CASHIER'S
CHECK BY THE RESPONDENTS IN FAVOR OF THE
PETITIONER IN LIEU OF THE ORIGINAL CASHIER'S
CHECK THAT ALREADY BECAME STALE.6
As to the first issue, we find for the respondents. The issue as to
what constitutes the terms of the oral compromise or any
subsequent novation is a question of fact that was resolved by
the Regional Trial Court and the Court of Appeals in favor of
respondents. It is well settled that the findings of fact of the lower
court, especially when affirmed by the Court of Appeals, are
binding upon this Court.7 While there are exceptions to this
rule,8 the present case does not fall under anyone of them, the
petitioner's claim to the contrary, notwithstanding.
Being an affirmative allegation, petitioner has the burden of
evidence to prove his claim that the oral compromise entered into
by the parties on August 28, 1995 included the stipulation that the
parties would jointly file a motion to dismiss. This petitioner failed
to do. Notably, even the Metropolitan Trial Court, while ruling in
favor of the petitioner and thereby dismissing the complaint, did
not make a factual finding that the compromise agreement
included the condition of the signing of a joint motion to dismiss.
The Court of Appeals made the factual findings in this wise:
In support of its claim, petitioner presented the testimony of
Mr. Jefferson Rivera who related that respondent Dr. Gueco
was aware that the signing of the draft of the Joint Motion to
Dismiss was one of the conditions set by the bank for the
acceptance of the reduced amount of indebtedness and the
release of the car. (TSN, October 23, 1996, pp. 17-21, Rollo,
pp. 18, 5). Respondents, however, maintained that no such
condition was ever discussed during their meeting of August
28, 1995 (Rollo, p. 32).
The trial court, whose factual findings are entitled to respect
since it has the 'opportunity to directly observe the witnesses
and to determine by their demeanor on the stand the
probative value of their testimonies' (People vs. Yadao, et al.
216 SCRA 1, 7 [1992]), failed to make a categorical finding
on the issue. In dismissing the claim of damages of the
respondents, it merely observed that respondents are not
entitled to indemnity since it was their unjustified reluctance
to sign of the Joint Motion to Dismiss that delayed the
release of the car. The trial court opined, thus:
'As regards the third issue, plaintiffs' claim for
damages is unavailing. First, the plaintiffs could have
avoided the renting of another car and could have
avoided this litigation had he signed the Joint Motion
to Dismiss. While it is true that herein defendant can
unilaterally dismiss the case for collection of sum of
money with replevin, it is equally true that there is
nothing wrong for the plaintiff to affix his signature in
the Joint Motion to Dismiss, for after all, the dismissal
of the case against him is for his own good and
benefit. In fact, the signing of the Joint Motion to
Dismiss gives the plaintiff three (3) advantages. First,
he will recover his car. Second, he will pay his
obligation to the bank on its reduced amount of
P150,000.00 instead of its original claim of
P184,985.09. And third, the case against him will be
dismissed. Plaintiffs, likewise, are not entitled to the
award of moral damages and exemplary damages as
there is no showing that the defendant bank acted
fraudulently or in bad faith.' (Rollo, p. 15)
The Court has noted, however, that the trial court, in its
findings of facts, clearly indicated that the agreement of
the parties on August 28, 1995 was merely for the
lowering of the price, hence -
'xxx On August 28, 1995, bank representative
Jefferson Rivera and plaintiff entered into an oral
compromise agreement, whereby the original claim of
the bank of P184,985.09 was reduced to
P150,000.00 and that upon payment of which,
plaintiff was informed that the subject motor vehicle
would be released to him.' (Rollo, p. 12)
The lower court, on the other hand, expressly made a finding
that petitioner failed to include the aforesaid signing of the
Joint Motion to Dismiss as part of the agreement. In
dismissing petitioner's claim, the lower court declared, thus:
'If it is true, as the appellees allege, that the signing of
the joint motion was a condition sine qua non for the
reduction of the appellants' obligation, it is only
reasonable and logical to assume that the joint
motion should have been shown to Dr. Gueco in the
August 28, 1995 meeting. Why Dr. Gueco was not
given a copy of the joint motion that day of August 28,
1995, for his family or legal counsel to see to be
brought signed, together with the P150,000.00 in
manager's check form to be submitted on the
following day on August 29, 1995? (sic) [I]s a
question whereby the answer up to now eludes this
Court's comprehension. The appellees would like this
Court to believe that Dr Gueco was informed by Mr.
Rivera Rivera of the bank requirement of signing the
joint motion on August 28, 1995 but he did not bother
to show a copy thereof to his family or legal counsel
that day August 28, 1995. This part of the theory of
appellee is too complicated for any simple oral
agreement. The idea of a Joint Motion to Dismiss
being signed as a condition to the pushing through a
deal surfaced only on August 29, 1995.
'This Court is not convinced by the appellees'
posturing. Such claim rests on too slender a frame,
being inconsistent with human experience.
Considering the effect of the signing of the Joint
Motion to Dismiss on the appellants' substantive
right, it is more in accord with human experience to
expect Dr. Gueco, upon being shown the Joint Motion
to Dismiss, to refuse to pay the Manager's Check and
for the bank to refuse to accept the manager's check.
The only logical explanation for this inaction is that
Dr. Gueco was not shown the Joint Motion to Dismiss
in the meeting of August 28, 1995, bolstering his
claim that its signing was never put into consideration
in reaching a compromise.' xxx.9
We see no reason to reverse.
Anent the issue of award of damages, we find the claim of
petitioner meritorious. In finding the petitioner liable for damages,
both .the Regional Trial Court and the Court of Appeals ruled that
there was fraud on the part of the petitioner. The CA thus
declared:
The lower court's finding of fraud which became the basis of
the award of damages was likewise sufficiently proven. Fraud
under Article 1170 of the Civil Code of the Philippines, as
amended is the 'deliberate and intentional evasion of the
normal fulfillment of obligation' When petitioner refused to
release the car despite respondent's tender of payment in the
form of a manager's check, the former intentionally evaded its
obligation and thereby became liable for moral and exemplary
damages, as well as attorney's fees.10
We disagree.
Fraud has been defined as the deliberate intention to cause
damage or prejudice. It is the voluntary execution of a wrongful
act, or a willful omission, knowing and intending the effects which
naturally and necessarily arise from such act or omission; the
fraud referred to in Article 1170 of the Civil Code is the deliberate
and intentional evasion of the normal fulfillment of obligation.11 We
fail to see how the act of the petitioner bank in requiring the
respondent to sign the joint motion to dismiss could constitute as
fraud. True, petitioner may have been remiss in informing Dr.
Gueco that the signing of a joint motion to dismiss is a standard
operating procedure of petitioner bank. However, this can not in
anyway have prejudiced Dr. Gueco. The motion to dismiss was in
fact also for the benefit of Dr. Gueco, as the case filed by
petitioner against it before the lower court would be dismissed
with prejudice. The whole point of the parties entering into the
compromise agreement was in order that Dr. Gueco would pay
his outstanding account and in return petitioner would return the
car and drop the case for money and replevin before the
Metropolitan Trial Court. The joint motion to dismiss was but a
natural consequence of the compromise agreement and simply
stated that Dr. Gueco had fully settled his obligation, hence, the
dismissal of the case. Petitioner's act of requiring Dr. Gueco to
sign the joint motion to dismiss can not be said to be a deliberate
attempt on the part of petitioner to renege on the compromise
agreement of the parties. It should, likewise, be noted that in
cases of breach of contract, moral damages may only be
awarded when the breach was attended by fraud or bad
faith.12 The law presumes good faith. Dr. Gueco failed to present
an iota of evidence to overcome this presumption. In fact, the act
of petitioner bank in lowering the debt of Dr. Gueco from
P184,000.00 to P150,000.00 is indicative of its good faith and
sincere desire to settle the case. If respondent did suffer any
damage, as a result of the withholding of his car by petitioner, he
has only himself to blame. Necessarily, the claim for exemplary
damages must fait. In no way, may the conduct of petitioner be
characterized as "wanton, fraudulent, reckless, oppressive or
malevolent."13
We, likewise, find for the petitioner with respect to the third
assigned error. In the meeting of August 29, 1995, respondent Dr.
Gueco delivered a manager's check representing the reduced
amount of P150,000.00. Said check was given to Mr. Rivera, a
representative of respondent bank. However, since Dr. Gueco
refused to sign the joint motion to dismiss, he was made to
execute a statement to the effect that he was withholding the
payment of the check.14 Subsequently, in a letter addressed to
Ms. Desi Tomas, vice president of the bank, dated September 4,
1995, Dr. Gueco instructed the bank to disregard the 'hold order"
letter and demanded the immediate release of his car,15 to which
the former replied that the condition of signing the joint motion to
dismiss must be satisfied and that they had kept the check which
could be claimed by Dr. Gueco anytime.16 While there is
controversy as to whether the document evidencing the order to
hold payment of the check was formally offered as evidence by
petitioners,17it appears from the pleadings that said check has not
been encashed.
The decision of the Regional Trial Court, which was affirmed in
toto by the Court of Appeals, orders the petitioner:
1. to return immediately the subject car to the appellants in
good working condition. Appellee may deposit the Manager's
Check - the proceeds of which have long been under the
control of the issuing bank in favor of the appellee since its
issuance, whereas the funds have long been paid by
appellants to secure said Manager's Check over which
appellants have no control.18
Respondents would make us hold that petitioner should return the
car or its value and that the latter, because of its own negligence,
should suffer the loss occasioned by the fact that the check had
become stale.19 It is their position that delivery of the manager's
check produced the effect of payment20 and, thus, petitioner was
negligent in opting not to deposit or use said check. Rudimentary
sense of justice and fair play would not countenance respondents'
position.
A stale check is one which has not been presented for payment
within a reasonable time after its issue. It is valueless and,
therefore, should not be paid. Under the negotiable instruments
law, an instrument not payable on demand must be presented for
payment on the day it falls due. When the instrument is payable
on demand, presentment must be made within a reasonable time
after its issue. In the case of a bill of exchange, presentment is
sufficient if made within a reasonable time after the last
negotiation thereof.21
A check must be presented for payment within a reasonable time
after its issue,22 and in determining what is a "reasonable time,"
regard is to be had to the nature of the instrument, the usage of
trade or business with respect to such instruments, and the facts
of the particular case.23 The test is whether the payee employed
such diligence as a prudent man exercises in his own
affairs.24 This is because the nature and theory behind the use of
a check points to its immediate use and payability. In a case, a
check payable on demand which was long overdue by about two
and a half (2-1/2) years was considered a stale check.25 Failure of
a payee to encash a check for more than ten (10) years
undoubtedly resulted in the check becoming stale. 26 Thus, even a
delay of one (1) week27 or two (2) days,28 under the specific
circumstances of the cited cases constituted unreasonable time
as a matter of law.
In the case at bar, however, the check involved is not an ordinary
bill of exchange but a manager's check. A manager's check is one
drawn by the bank's manager upon the bank itself. It is similar to
a cashier's check both as to effect and use. A cashier's check is a
check of the bank's cashier on his own or another check. In
effect, it is a bill of exchange drawn by the cashier of a bank upon
the bank itself, and accepted in advance by the act of its
issuance.29 It is really the bank's own check and may be treated
as a promissory note with the bank as a maker.30The check
becomes the primary obligation of the bank which issues it and
constitutes its written promise to pay upon demand. The mere
issuance of it is considered an acceptance thereof. If treated as
promissory note, the drawer would be the maker and in which
case the holder need not prove presentment for payment or
present the bill to the drawee for acceptance.31
Even assuming that presentment is needed, failure to present for
payment within a reasonable time will result to the discharge of
the drawer only to the extent of the loss caused by the
delay.32 Failure to present on time, thus, does not totally wipe out
all liability. In fact, the legal situation amounts to an
acknowledgment of liability in the sum stated in the check. In this
case, the Gueco spouses have not alleged, much less shown that
they or the bank which issued the manager's check has suffered
damage or loss caused by the delay or non-presentment.
Definitely, the original obligation to pay certainly has not been
erased.
It has been held that, if the check had become stale, it becomes
imperative that the circumstances that caused its non-
presentment be determined.33 In the case at bar, there is no doubt
that the petitioner bank held on the check and refused to encash
the same because of the controversy surrounding the signing of
the joint motion to dismiss. We see no bad faith or negligence in
this position taken by the Bank.1wphi1.nt
WHEREFORE, premises considered, the petition for review is
given due course. The decision of the Court of Appeals affirming
the decision of the Regional Trial Court is SET ASIDE.
Respondents are further ordered to pay the original obligation
amounting to P150,000.00 to the petitioner upon surrender or
cancellation of the manager's check in the latter's possession,
afterwhich, petitioner is to return the subject motor vehicle in good
working condition.
 13
SO ORDERED. Articles 2229 and 2232 of the NEW CIVIL CODE.

14
Davide, Jr., Puno, Pardo, and Ynares-Santiago, JJ., concur. Rollo, p. 28.

15
Ibid.
Footnotes
16
Id, at 28, 30.
1
Rollo, p. 26.
17
Id, at 112.
2
This case was eventually dismissed for failure or lack of
interest to prosecute (Annex 16), Id., at 158. 18
Id., at 29.
3
Rollo, p. 30. 19
The check was issued sometime in August 1995. By
current banking practice, a check becomes stale after
4
Id., at 29. more than six (6) months. (Pacheco v. Court of Appeals,
et al., G.R. No.126670, December 2, 1999).
5
Id., at 35.
20
Citing New Pacific Timber and Supply Co., Inc. v.
6
Id., at 11. Severis, 101 SCRA 686 (1980); see also Tan v. Court
of Appeals, 239 SCRA 310 (1994); Tibajio, Jr. v. Court of
7
Amigo, et al. v. Teves, 96 Phil. 252 (1954). Appeals, 223 SCRA 163 (1993).

21
8
Ramos v. Pepsi Cola, 195 289 (1967). Section 71, Act No. 231, Negotiable Instruments Law
(NIL).
9
Rollo, pp.31-33. 22
Section 186, NIL.
10
Id., at 34 23
Section 193, NIL.
11
Legaspi Oil Co., Inc. vs. CA, 224 SCRA 213, 216 24
(1993). Jeff Bras. Stones v. McCullough (1934) 188 Ark. 1108,
69 S.W. (2d) 863.
12
Article 2220 of the NEW CIVIL CODE.
25
Montinola v. Philippine National Bank, 88 Phil. 178
(1951).

26
Papa v. A.U. Valencia and Co., Inc., 289 SCRA 643
(1998).

27
Parker v. Grav., 188 Ark., 68 S.W. (2) 1023.

28
National Plumbing Supple Co. v. Stevenson, 213 Ill.
App. 49.

29
Anderson v. Bank of Tupelo, 135 Miss. 351, 100 So.
179; Republic of the Philippines v. PNB, 3 SCRA 851, 856
(1961).

30
Section 130, NIL.

31
Ist National Bank v. Comm. Ins. Co.,113 Pac. 815.

32
Section. 186, NIL.

33
Crystal v. Court of Appeals, 71 SCRA 443 (1976).
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-12219 March 15, 1918
AMADO PICART, plaintiff-appellant,
vs.
FRANK SMITH, JR., defendant-appellee.
Alejo Mabanag for appellant.
G. E. Campbell for appellee.
STREET, J.:
In this action the plaintiff, Amado Picart, seeks to recover of the
defendant, Frank Smith, jr., the sum of P31,000, as damages
alleged to have been caused by an automobile driven by the
defendant. From a judgment of the Court of First Instance of the
Province of La Union absolving the defendant from liability the
plaintiff has appealed.
The occurrence which gave rise to the institution of this action
took place on December 12, 1912, on the Carlatan Bridge, at San
Fernando, La Union. It appears that upon the occasion in
question the plaintiff was riding on his pony over said bridge.
Before he had gotten half way across, the defendant approached
from the opposite direction in an automobile, going at the rate of
about ten or twelve miles per hour. As the defendant neared the
bridge he saw a horseman on it and blew his horn to give warning
of his approach. He continued his course and after he had taken
the bridge he gave two more successive blasts, as it appeared to
him that the man on horseback before him was not observing the
rule of the road.
The plaintiff, it appears, saw the automobile coming and heard
the warning signals. However, being perturbed by the novelty of
the apparition or the rapidity of the approach, he pulled the pony
closely up against the railing on the right side of the bridge
instead of going to the left. He says that the reason he did this
was that he thought he did not have sufficient time to get over to
the other side. The bridge is shown to have a length of about 75
meters and a width of 4.80 meters. As the automobile
approached, the defendant guided it toward his left, that being the
proper side of the road for the machine. In so doing the defendant
assumed that the horseman would move to the other side. The
pony had not as yet exhibited fright, and the rider had made no
sign for the automobile to stop. Seeing that the pony was
apparently quiet, the defendant, instead of veering to the right
while yet some distance away or slowing down, continued to
approach directly toward the horse without diminution of speed.
When he had gotten quite near, there being then no possibility of
the horse getting across to the other side, the defendant quickly
turned his car sufficiently to the right to escape hitting the horse
alongside of the railing where it as then standing; but in so doing
the automobile passed in such close proximity to the animal that it
became frightened and turned its body across the bridge with its
head toward the railing. In so doing, it as struck on the hock of the
left hind leg by the flange of the car and the limb was broken. The
horse fell and its rider was thrown off with some violence. From
the evidence adduced in the case we believe that when the
accident occurred the free space where the pony stood between
the automobile and the railing of the bridge was probably less
than one and one half meters. As a result of its injuries the horse
died. The plaintiff received contusions which caused temporary
unconsciousness and required medical attention for several days.
The question presented for decision is whether or not the
defendant in maneuvering his car in the manner above described
was guilty of negligence such as gives rise to a civil obligation to
repair the damage done; and we are of the opinion that he is so
liable. As the defendant started across the bridge, he had the
right to assume that the horse and the rider would pass over to
the proper side; but as he moved toward the center of the bridge
it was demonstrated to his eyes that this would not be done; and
he must in a moment have perceived that it was too late for the
horse to cross with safety in front of the moving vehicle. In the
nature of things this change of situation occurred while the
automobile was yet some distance away; and from this moment it
was not longer within the power of the plaintiff to escape being
run down by going to a place of greater safety. The control of the
situation had then passed entirely to the defendant; and it was his
duty either to bring his car to an immediate stop or, seeing that
there were no other persons on the bridge, to take the other side
and pass sufficiently far away from the horse to avoid the danger
of collision. Instead of doing this, the defendant ran straight on
until he was almost upon the horse. He was, we think, deceived
into doing this by the fact that the horse had not yet exhibited
fright. But in view of the known nature of horses, there was an
appreciable risk that, if the animal in question was unacquainted
with automobiles, he might get exited and jump under the
conditions which here confronted him. When the defendant
exposed the horse and rider to this danger he was, in our opinion,
negligent in the eye of the law.
The test by which to determine the existence of negligence in a
particular case may be stated as follows: Did the defendant in
doing the alleged negligent act use that person would have used
in the same situation? If not, then he is guilty of negligence. The
law here in effect adopts the standard supposed to be supplied by
the imaginary conduct of the discreet paterfamilias of the Roman
law. The existence of negligence in a given case is not
determined by reference to the personal judgment of the actor in
the situation before him. The law considers what would be
reckless, blameworthy, or negligent in the man of ordinary
intelligence and prudence and determines liability by that.
The question as to what would constitute the conduct of a prudent
man in a given situation must of course be always determined in
the light of human experience and in view of the facts involved in
the particular case. Abstract speculations cannot here be of much
value but this much can be profitably said: Reasonable men
govern their conduct by the circumstances which are before them
or known to them. They are not, and are not supposed to be,
omniscient of the future. Hence they can be expected to take care
only when there is something before them to suggest or warn of
danger. Could a prudent man, in the case under consideration,
foresee harm as a result of the course actually pursued? If so, it
was the duty of the actor to take precautions to guard against that
harm. Reasonable foresight of harm, followed by ignoring of the
suggestion born of this prevision, is always necessary before
negligence can be held to exist. Stated in these terms, the proper
criterion for determining the existence of negligence in a given
case is this: Conduct is said to be negligent when a prudent man
in the position of the tortfeasor would have foreseen that an effect
harmful to another was sufficiently probable to warrant his
foregoing conduct or guarding against its consequences.
Applying this test to the conduct of the defendant in the present
case we think that negligence is clearly established. A prudent
man, placed in the position of the defendant, would in our opinion,
have recognized that the course which he was pursuing was
fraught with risk, and would therefore have foreseen harm to the
horse and the rider as reasonable consequence of that course.
Under these circumstances the law imposed on the defendant the
duty to guard against the threatened harm.
It goes without saying that the plaintiff himself was not free from
fault, for he was guilty of antecedent negligence in planting
himself on the wrong side of the road. But as we have already
stated, the defendant was also negligent; and in such case the
problem always is to discover which agent is immediately and
directly responsible. It will be noted that the negligent acts of the
two parties were not contemporaneous, since the negligence of
the defendant succeeded the negligence of the plaintiff by an
appreciable interval. Under these circumstances the law is that
the person who has the last fair chance to avoid the impending
harm and fails to do so is chargeable with the consequences,
without reference to the prior negligence of the other party.
The decision in the case of Rkes vs. Atlantic, Gulf and Pacific Co.
(7 Phil. Rep., 359) should perhaps be mentioned in this
connection. This Court there held that while contributory
negligence on the part of the person injured did not constitute a
bar to recovery, it could be received in evidence to reduce the
damages which would otherwise have been assessed wholly
against the other party. The defendant company had there
employed the plaintiff, as a laborer, to assist in transporting iron
rails from a barge in Manila harbor to the company's yards
located not far away. The rails were conveyed upon cars which
were hauled along a narrow track. At certain spot near the water's
edge the track gave way by reason of the combined effect of the
weight of the car and the insecurity of the road bed. The car was
in consequence upset; the rails slid off; and the plaintiff's leg was
caught and broken. It appeared in evidence that the accident was
due to the effects of the typhoon which had dislodged one of the
supports of the track. The court found that the defendant
company was negligent in having failed to repair the bed of the
track and also that the plaintiff was, at the moment of the
accident, guilty of contributory negligence in walking at the side of
the car instead of being in front or behind. It was held that while
the defendant was liable to the plaintiff by reason of its
negligence in having failed to keep the track in proper repair
nevertheless the amount of the damages should be reduced on
account of the contributory negligence in the plaintiff. As will be
seen the defendant's negligence in that case consisted in an
omission only. The liability of the company arose from its
responsibility for the dangerous condition of its track. In a case
like the one now before us, where the defendant was actually
present and operating the automobile which caused the damage,
we do not feel constrained to attempt to weigh the negligence of
the respective parties in order to apportion the damage according
to the degree of their relative fault. It is enough to say that the
negligence of the defendant was in this case the immediate and
determining cause of the accident and that the antecedent
negligence of the plaintiff was a more remote factor in the case.
A point of minor importance in the case is indicated in the special
defense pleaded in the defendant's answer, to the effect that the
subject matter of the action had been previously adjudicated in
the court of a justice of the peace. In this connection it appears
that soon after the accident in question occurred, the plaintiff
caused criminal proceedings to be instituted before a justice of
the peace charging the defendant with the infliction of serious
injuries (lesiones graves). At the preliminary investigation the
defendant was discharged by the magistrate and the proceedings
were dismissed. Conceding that the acquittal of the defendant at
the trial upon the merits in a criminal prosecution for the offense
mentioned would be res adjudicata upon the question of his civil
liability arising from negligence -- a point upon which it is
unnecessary to express an opinion -- the action of the justice of
the peace in dismissing the criminal proceeding upon the
preliminary hearing can have no effect. (See U. S. vs. Banzuela
and Banzuela, 31 Phil. Rep., 564.)
From what has been said it results that the judgment of the lower
court must be reversed, and judgment is her rendered that the
plaintiff recover of the defendant the sum of two hundred pesos condition and not the proximate cause of the injury and will not
(P200), with costs of other instances. The sum here awarded is preclude a recovery. (Note especially Aiken vs. Metcalf [1917],
estimated to include the value of the horse, medical expenses of 102 Atl., 330.)
the plaintiff, the loss or damage occasioned to articles of his
apparel, and lawful interest on the whole to the date of this
recovery. The other damages claimed by the plaintiff are remote
or otherwise of such character as not to be recoverable. So
ordered.

Arellano, C.J., Torres, Carson, Araullo, Avancea, and Fisher,

JJ., concur.
Johnson, J., reserves his vote.

Separate Opinions

MALCOLM, J., concurring:

After mature deliberation, I have finally decided to concur with the

judgment in this case. I do so because of my understanding of the
"last clear chance" rule of the law of negligence as particularly
applied to automobile accidents. This rule cannot be invoked
where the negligence of the plaintiff is concurrent with that of the
defendant. Again, if a traveler when he reaches the point of
collision is in a situation to extricate himself and avoid injury, his
negligence at that point will prevent a recovery. But Justice Street
finds as a fact that the negligent act of the interval of time, and
that at the moment the plaintiff had no opportunity to avoid the
accident. Consequently, the "last clear chance" rule is applicable.
In other words, when a traveler has reached a point where he
cannot extricate himself and vigilance on his part will not avert the
injury, his negligence in reaching that position becomes the
 EN BANC
[G.R. No. L-27454. April 30, 1970.]
ROSENDO O. CHAVES, Plaintiff-Appellant, v. FRUCTUOSO
GONZALES, Defendant-Appellee.
Chaves, Elio, Chaves & Associates, for Plaintiff-Appellant.
Sulpicio E. Platon, for Defendant-Appellee.
SYLLABUS
1. CIVIL LAW; CONTRACTS; BREACH OF CONTRACT FOR
NON-PERFORMANCE; FIXING OF PERIOD BEFORE FILING
OF COMPLAINT FOR NON-PERFORMANCE, ACADEMIC.
Where the time for compliance had expired and there was breach
of contract by non-performance, it was academic for the plaintiff
to have first petitioned the court to fix a period for the
performance of the contract before filing his complaint.
2. ID.; ID.; ID.; DEFENDANT CANNOT INVOKE ARTICLE 1197
OF THE CIVIL CODE OF THE PHILIPPINES. Where the
defendant virtually admitted non-performance of the contract by
returning the typewriter that he was obliged to repair in a non-
working condition, with essential parts missing, Article 1197 of the
Civil Code of the Philippines cannot be invoked. The fixing of a
period would thus be a mere formality and would serve no
purpose than to delay.
3. ID.; ID.; ID.; DAMAGES RECOVERABLE; CASE AT BAR.
Where the defendant-appellee contravened the tenor of his
obligation because he not only did not repair the typewriter but
returned it "in shambles, he is liable for the cost of the labor or
service expended in the repair of the typewriter, which is in the
amount of P58.75, because the obligation or contract was to
repair it. In addition, he is likewise liable under Art. 1170 of the
Code, for the cost of the missing parts, in the amount of P31.10,
for in his obligation to repair the typewriter he was bound, but
failed or neglected, to return it in the same condition it was when
he received it.
4. ID.; ID.; ID.; CLAIMS FOR DAMAGES OR ATTORNEYS FEES
NOT RECOVERABLE; NOT ALLEGED OR PROVED IN
INSTANT CASE. Claims for damages and attorneys fees must
be pleaded, and the existence of the actual basis thereof must be
proved. As no findings of fact were made on the claims for
damages and attorneys fees, there is no factual basis upon
which to make an award therefor.
5. REMEDIAL LAW; APPEALS; APPEAL FROM COURT OF
FIRST INSTANCE TO SUPREME COURT; ONLY QUESTIONS
OF LAW REVIEWABLE. Where the appellant directly appeals
from the decision of the trial court to the Supreme Court on
questions of law, he is bound by the judgment of the court a quo
on its findings of fact.
DECISION
REYES, J.B.L., J.:
This is a direct appeal by the party who prevailed in a suit for
breach of oral contract and recovery of damages but was
unsatisfied with the decision rendered by the Court of First
Instance of Manila, in its Civil Case No. 65138, because it
awarded him only P31.10 out of his total claim of P690 00 for
actual, temperate and moral damages and attorneys fees.
The appealed judgment, which is brief, is hereunder quoted in
full:jgc:chanrobles.com.ph
"In the early part of July, 1963, the plaintiff delivered to the
defendant, who is a typewriter repairer, a portable typewriter for
routine cleaning and servicing. The defendant was not able to
finish the job after some time despite repeated reminders made
by the plaintiff. The defendant merely gave assurances, but failed
to comply with the same. In October, 1963, the defendant asked
from the plaintiff the sum of P6.00 for the purchase of spare parts,
which amount the plaintiff gave to the defendant. On October 26,
1963, after getting exasperated with the delay of the repair of the
typewriter, the plaintiff went to the house of the defendant and
asked for the return of the typewriter. The defendant delivered the
typewriter in a wrapped package. On reaching home, the plaintiff
examined the typewriter returned to him by the defendant and
found out that the same was in shambles, with the interior cover
and some parts and screws missing. On October 29, 1963. the
plaintiff sent a letter to the defendant formally demanding the
return of the missing parts, the interior cover and the sum of
P6.00 (Exhibit D). The following day, the defendant returned to
the plaintiff some of the missing parts, the interior cover and the
P6.00.
"On August 29, 1964, the plaintiff had his typewriter repaired by
Freixas Business Machines, and the repair job cost him a total of
P89.85, including labor and materials (Exhibit C).
"On August 23, 1965, the plaintiff commenced this action before
the City Court of Manila, demanding from the defendant the
payment of P90.00 as actual and compensatory damages,
P100.00 for temperate damages, P500.00 for moral damages,
and P500.00 as attorneys fees.
"In his answer as well as in his testimony given before this court,
the defendant made no denials of the facts narrated above,
except the claim of the plaintiff that the typewriter was delivered to
the defendant through a certain Julio Bocalin, which the
defendant denied allegedly because the typewriter was delivered
to him personally by the plaintiff.
"The repair done on the typewriter by Freixas Business Machines
with the total cost of P89.85 should not, however, be fully
chargeable against the defendant. The repair invoice, Exhibit C,
shows that the missing parts had a total value of only P31.10.
"WHEREFORE, judgment is hereby rendered ordering the
defendant to pay the plaintiff the sum of P31.10, and the costs of
suit.
"SO ORDERED."cralaw virtua1aw library
The error of the court a quo, according to the plaintiff-appellant,
Rosendo O. Chaves, is that it awarded only the value of the
missing parts of the typewriter, instead of the whole cost of labor
and materials that went into the repair of the machine, as
provided for in Article 1167 of the Civil Code, reading as
follows:jgc:chanrobles.com.ph
"ART. 1167. If a person obliged to do something fails to do it, the
same shall be executed at his cost.
This same rule shall be observed if he does it in contravention of
the tenor of the obligation. Furthermore it may be decreed that
what has been poorly done he undone."cralaw virtua1aw library
On the other hand, the position of the defendant-appellee,
Fructuoso Gonzales, is that he is not liable at all, not even for the
sum of P31.10, because his contract with plaintiff-appellant did
not contain a period, so that plaintiff-appellant should have first
filed a petition for the court to fix the period, under Article 1197 of
the Civil Code, within which the defendant appellee was to
comply with the contract before said defendant-appellee could be
held liable for breach of contract.
Because the plaintiff appealed directly to the Supreme Court and
the appellee did not interpose any appeal, the facts, as found by
the trial court, are now conclusive and non-reviewable. 1
The appealed judgment states that the "plaintiff delivered to the
defendant . . . a portable typewriter for routine cleaning and
servicing" ; that the defendant was not able to finish the job after
some time despite repeated reminders made by the plaintiff" ; that
the "defendant merely gave assurances, but failed to comply with
the same" ; and that "after getting exasperated with the delay of
the repair of the typewriter", the plaintiff went to the house of the
defendant and asked for its return, which was done. The
inferences derivable from these findings of fact are that the
appellant and the appellee had a perfected contract for cleaning
and servicing a typewriter; that they intended that the defendant
was to finish it at some future time although such time was not
specified; and that such time had passed without the work having
been accomplished, far the defendant returned the typewriter
cannibalized and unrepaired, which in itself is a breach of his
obligation, without demanding that he should be given more time
to finish the job, or compensation for the work he had already
done. The time for compliance having evidently expired, and
there being a breach of contract by non-performance, it was
academic for the plaintiff to have first petitioned the court to fix a
period for the performance of the contract before filing his
complaint in this case. Defendant cannot invoke Article 1197 of
the Civil Code for he virtually admitted non-performance by
returning the typewriter that he was obliged to repair in a non-
working condition, with essential parts missing. The fixing of a
period would thus be a mere formality and would serve no
purpose than to delay (cf. Tiglao. Et. Al. V. Manila Railroad Co. 98
Phil. 18l).
It is clear that the defendant-appellee contravened the tenor of his
obligation because he not only did not repair the typewriter but
returned it "in shambles", according to the appealed decision. For
such contravention, as appellant contends, he is liable under
Article 1167 of the Civil Code. jam quot, for the cost of executing
the obligation in a proper manner. The cost of the execution of the
obligation in this case should be the cost of the labor or service
expended in the repair of the typewriter, which is in the amount of
P58.75. because the obligation or contract was to repair it.
In addition, the defendant-appellee is likewise liable, under Article
1170 of the Code, for the cost of the missing parts, in the amount
of P31.10, for in his obligation to repair the typewriter he was
bound, but failed or neglected, to return it in the same condition it
was when he received it.
Appellants claims for moral and temperate damages and
attorneys fees were, however, correctly rejected by the trial court,
for these were not alleged in his complaint (Record on Appeal,
pages 1-5). Claims for damages and attorneys fees must be
pleaded, and the existence of the actual basis thereof must be
proved. 2 The appealed judgment thus made no findings on these
claims, nor on the fraud or malice charged to the appellee. As no
findings of fact were made on the claims for damages and
attorneys fees, there is no factual basis upon which to make an
award therefor. Appellant is bound by such judgment of the court,
a quo, by reason of his having resorted directly to the Supreme
Court on questions of law.
IN VIEW OF THE FOREGOING REASONS, the appealed
judgment is hereby modified, by ordering the defendant-appellee
to pay, as he is hereby ordered to pay, the plaintiff-appellant the
sum of P89.85, with interest at the legal rate from the filing of the
complaint. Costs in all instances against appellee Fructuoso
Gonzales.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Castro, Fernando,

Teehankee and Villamor, JJ., concur.

Barredo, J., did not take part.

 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-15645 January 31, 1964
PAZ P. ARRIETA and VITALIADO ARRIETA, plaintiffs-
appellees,
vs.
NATIONAL RICE AND CORN CORPORATION, defendant-
appellant,
MANILA UNDERWRITERS INSURANCE CO., INC., defendant-
appellee.
Teehankee and Carreon for plaintiffs-appellees.
The Government Corporate Counsel for defendant-appellant.
Isidro A. Vera for defendant-appellee.
REGALA, J.:
This is an appeal of the defendant-appellant NARIC from the
decision of the trial court dated February 20, 1958, awarding to
the plaintiffs-appellees the amount of $286,000.00 as damages
for breach of contract and dismissing the counterclaim and third
party complaint of the defendant-appellant NARIC.
In accordance with Section 13 of Republic Act No. 3452, "the
National Rice and Corn Administration (NARIC) is hereby
abolished and all its assets, liabilities, functions, powers which
are not inconsistent with the provisions of this Act, and all
personnel are transferred "to the Rice and Corn Administration
(RCA).
All references, therefore, to the NARIC in this decision must
accordingly be adjusted and read as RCA pursuant to the
aforementioned law.
On May 19, 1952, plaintiff-appellee participated in the public
bidding called by the NARIC for the supply of 20,000 metric tons
of Burmese rice. As her bid of $203.00 per metric ton was the
lowest, she was awarded the contract for the same. Accordingly,
on July 1, 1952, plaintiff-appellee Paz P. Arrieta and the appellant
corporation entered into a Contract of Sale of Rice, under the
terms of which the former obligated herself to deliver to the latter
20,000 metric tons of Burmess Rice at $203.00 per metric ton,
CIF Manila. In turn, the defendant corporation committed itself to
pay for the imported rice "by means of an irrevocable, confirmed
and assignable letter of credit in U.S. currency in favor of the
plaintiff-appellee and/or supplier in Burma, immediately." Despite
the commitment to pay immediately "by means of an irrevocable,
confirmed and assignable Letter of Credit," however, it was only
on July 30, 1952, or a full month from the execution of the
contract, that the defendant corporation, thru its general manager,
took the first to open a letter of credit by forwarding to the
Philippine National Bank its Application for Commercial Letter
Credit. The application was accompanied by a transmittal letter,
the relevant paragraphs of which read:
In view of the fact that we do not have sufficient deposit with
your institution with which to cover the amount required to be
deposited as a condition for the opening of letters of credit, we
will appreciate it if this application could be considered special
case.
We understand that our supplier, Mrs. Paz P. Arrieta, has a
deadline to meet which is August 4, 1952, and in order to
comply therewith, it is imperative that the L/C be opened prior
 to that date. We would therefore request your full cooperation
on this matter.
On the same day, July 30, 1952, Mrs. Paz P. Arrieta thru counsel,
advised the appellant corporation of the extreme necessity for the
immediate opening of the letter credit since she had by then
made a tender to her supplier in Rangoon, Burma, "equivalent to
5% of the F.O.B. price of 20,000 tons at $180.70 and in
compliance with the regulations in Rangoon this 5% will be
confiscated if the required letter of credit is not received by them
before August 4, 1952."
On August 4, 1952, the Philippine National Bank informed the
appellant corporation that its application, "for a letter of credit for
$3,614,000.00 in favor of Thiri Setkya has been approved by the
Board of Directors with the condition that marginal cash deposit
be paid and that drafts are to be paid upon presentment." (Exh. J-
pl.; Exh. 10-def., p. 19, Folder of Exhibits). Furthermore, the Bank
represented that it "will hold your application in abeyance pending
compliance with the above stated requirement."
As it turned out, however, the appellant corporation not in any
financial position to meet the condition. As matter of fact, in a
letter dated August 2, 1952, the NARIC bluntly confessed to the
appellee its dilemma: "In this connection, please be advised that
our application for opening of the letter of credit has been
presented to the bank since July 30th but the latter requires that
we first deposit 50% of the value of the letter amounting to
aproximately $3,614,000.00 which we are not in a position to
meet." (Emphasis supplied. Exh. 9-Def.; Exh. 1-Pe., p. 18, Folder
of Exhibits)
Consequently, the credit instrument applied for was opened only
on September 8, 1952 "in favor of Thiri Setkya, Rangoon, Burma,
and/or assignee for $3,614,000.00," (which is more than two
months from the execution of the contract) the party named by
the appellee as beneficiary of the letter of credit.
1wph1.t
As a result of the delay, the allocation of appellee's supplier in
Rangoon was cancelled and the 5% deposit, amounting to
524,000 kyats or approximately P200,000.00 was forfeited. In this
connection, it must be made of record that although the Burmese
authorities had set August 4, 1952, as the deadline for the
remittance of the required letter of credit, the cancellation of the
allocation and the confiscation of the 5% deposit were not
effected until August 20, 1952, or, a full half month after the
expiration of the deadline. And yet, even with the 15-day grace,
appellant corporation was unable to make good its commitment to
open the disputed letter of credit.
The appellee endeavored, but failed, to restore the cancelled
Burmese rice allocation. When the futility of reinstating the same
became apparent, she offered to substitute Thailand rice instead
to the defendant NARIC, communicating at the same time that
the offer was "a solution which should be beneficial to the NARIC
and to us at the same time." (Exh. X-Pe., Exh. 25Def., p. 38,
Folder of Exhibits). This offer for substitution, however, was
rejected by the appellant in a resolution dated November 15,
1952.
On the foregoing, the appellee sent a letter to the appellant,
demanding compensation for the damages caused her in the sum
of $286,000.00, U.S. currency, representing unrealized profit. The
demand having been rejected she instituted this case now on
appeal.
At the instance of the NARIC, a counterclaim was filed and the
Manila Underwriters Insurance Company was brought to the suit
as a third party defendant to hold it liable on the performance
bond it executed in favor of the plaintiff-appellee.
We find for the appellee.
It is clear upon the records that the sole and principal reason for
the cancellation of the allocation contracted by the appellee
herein in Rangoon, Burma, was the failure of the letter of credit to
be opened with the contemplated period. This failure must,
therefore, be taken as the immediate cause for the consequent
damage which resulted. As it is then, the disposition of this case
depends on a determination of who was responsible for such
failure. Stated differently, the issue is whether appellant's failure
to open immediately the letter of credit in dispute amounted to a
breach of the contract of July 1, 1952 for which it may be held
liable in damages.
Appellant corporation disclaims responsibility for the delay in the
opening of the letter of credit. On the contrary, it insists that the
fault lies with the appellee. Appellant contends that the disputed
negotiable instrument was not promptly secured because the
appellee , failed to seasonably furnish data necessary and
required for opening the same, namely, "(1) the amount of the
letter of credit, (2) the person, company or corporation in whose
favor it is to be opened, and (3) the place and bank where it may
be negotiated." Appellant would have this Court believe,
therefore, that had these informations been forthwith furnished it,
there would have been no delay in securing the instrument.
Appellant's explanation has neither force nor merit. In the first
place, the explanation reaches into an area of the proceedings
into which We are not at liberty to encroach. The explanation
refers to a question of fact. Nothing in the record suggests any
arbitrary or abusive conduct on the part of the trial judge in the
formulation of the ruling. His conclusion on the matter is
sufficiently borne out by the evidence presented. We are denied,
therefore, the prerogative to disturb that finding, consonant to the
time-honored tradition of this Tribunal to hold trial judges better
situated to make conclusions on questions of fact. For the record,
We quote hereunder the lower court's ruling on the point:
The defense that the delay, if any in opening the letter of credit
was due to the failure of plaintiff to name the supplier, the
amount and the bank is not tenable. Plaintiff stated in Court
that these facts were known to defendant even before the
contract was executed because these facts were necessarily
revealed to the defendant before she could qualify as a bidder.
She stated too that she had given the necessary data
immediately after the execution of Exh. "A" (the contract of
July 1, 1952) to Mr. GABRIEL BELMONTE, General Manager
of the NARIC, both orally and in writing and that she also
pressed for the opening of the letter of credit on these
occasions. These statements have not been controverted and
defendant NARIC, notwithstanding its previous intention to do
so, failed to present Mr. Belmonte to testify or refute this. ...
Secondly, from the correspondence and communications which
form part of the record of this case, it is clear that what singularly
delayed the opening of the stipulated letter of credit and which, in
turn, caused the cancellation of the allocation in Burma, was the
inability of the appellant corporation to meet the condition
importation by the Bank for granting the same. We do not think
the appellant corporation can refute the fact that had it been able
to put up the 50% marginal cash deposit demanded by the bank,
then the letter of credit would have been approved, opened and
released as early as August 4, 1952. The letter of the Philippine
National Bank to the NARIC was plain and explicit that as of the
said date, appellant's "application for a letter of credit ... has been
approved by the Board of Directors with the condition that 50%
marginal cash deposit be paid and that drafts are to be paid upon
presentment." (Emphasis supplied)
The liability of the appellant, however, stems not alone from this
failure or inability to satisfy the requirements of the bank. Its
culpability arises from its willful and deliberate assumption of
contractual obligations even as it was well aware of its financial
incapacity to undertake the prestation. We base this judgment
upon the letter which accompanied the application filed by the
appellant with the bank, a part of which letter was quoted earlier
in this decision. In the said accompanying correspondence,
appellant admitted and owned that it did "not have sufficient
deposit with your institution (the PNB) with which to cover the
amount required to be deposited as a condition for the opening of
letters of credit. ... .
A number of logical inferences may be drawn from the
aforementioned admission. First, that the appellant knew the
bank requirements for opening letters of credit; second, that
appellant also knew it could not meet those requirement. When,
therefore, despite this awareness that was financially incompetent
to open a letter of credit immediately, appellant agreed in
paragraph 8 of the contract to pay immediately "by means of an
irrevocable, confirm and assignable letter of credit," it must be
similarly held to have bound itself to answer for all and every
consequences that would result from the representation. aptly
observed by the trial court:
... Having called for bids for the importation of rice involving
millions, $4,260,000.00 to be exact, it should have a certained
its ability and capacity to comply with the inevitably
requirements in cash to pay for such importation. Having
announced the bid, it must be deemed to have impliedly
assured suppliers of its capacity and facility to finance the
importation within the required period, especially since it had
imposed the supplier the 90-day period within which the
shipment of the rice must be brought into the Philippines.
Having entered in the contract, it should have taken steps
immediately to arrange for the letter of credit for the large
amount involved and inquired into the possibility of its
issuance.
In relation to the aforequoted observation of the trial court, We
would like to make reference also to Article 11 of the Civil Code
which provides:
Those who in the performance of their obligation are guilty of
fraud, negligence, or delay, and those who in any manner
contravene the tenor thereof, are liable in damages.
Under this provision, not only debtors guilty of fraud, negligence
or default in the performance of obligations a decreed liable; in
general, every debtor who fails in performance of his obligations
is bound to indemnify for the losses and damages caused thereby
(De la Cruz Seminary of Manila, 18 Phil. 330; Municipality of
Moncada v. Cajuigan, 21 Phil. 184; De la Cavada v. Diaz, 37 Phil.
982; Maluenda & Co. v. Enriquez, 46 Phil. 916; Pasumil v. Chong,
49 Phil. 1003; Pando v. Gimenez, 54 Phil. 459; Acme Films v.
Theaters Supply, 63 Phil. 657). The phrase "any manner
contravene the tenor" of the obligation includes any illicit act
which impairs the strict and faithful fulfillment of the obligation or
every kind or defective performance. (IV Tolentino, Civil Code of
the Philippines, citing authorities, p. 103.)
The NARIC would also have this Court hold that the subsequent
offer to substitute Thailand rice for the originally contracted
Burmese rice amounted to a waiver by the appellee of whatever
rights she might have derived from the breach of the contract. We
disagree. Waivers are not presumed, but must be clearly and
convincingly shown, either by express stipulation or acts
admitting no other reasonable explanation. (Ramirez v. Court of
Appeals, 52 O.G. 779.) In the case at bar, no such intent to waive
has been established.
We have carefully examined and studied the oral and
documentary evidence presented in this case and upon which the
lower court based its award. Under the contract, the NARIC
bound itself to buy 20,000 metric tons of Burmese rice at
"$203.00 U.S. Dollars per metric ton, all net shipped weight, and
all in U.S. currency, C.I.F. Manila ..." On the other hand,
documentary and other evidence establish with equal certainty
that the plaintiff-appellee was able to secure the contracted
commodity at the cost price of $180.70 per metric ton from her
supplier in Burma. Considering freights, insurance and charges
incident to its shipment here and the forfeiture of the 5% deposit,
the award granted by the lower court is fair and equitable. For a
clearer view of the equity of the damages awarded, We reproduce
below the testimony of the appellee, adequately supported by the
evidence and record:
Q. Will you please tell the court, how much is the damage you
suffered?
A. Because the selling price of my rice is $203.00 per metric
ton, and the cost price of my rice is $180.00 We had to pay
also $6.25 for shipping and about $164 for insurance. So
adding the cost of the rice, the freight, the insurance, the total
would be about $187.99 that would be $15.01 gross profit per
metric ton, multiply by 20,000 equals $300,200, that is my
supposed profit if I went through the contract.
The above testimony of the plaintiff was a general approximation
of the actual figures involved in the transaction. A precise and
more exact demonstration of the equity of the award herein is
provided by Exhibit HH of the plaintiff and Exhibit 34 of the
defendant, hereunder quoted so far as germane.
It is equally of record now that as shown in her request dated
July 29, 1959, and other communications subsequent thereto
for the opening by your corporation of the required letter of
credit, Mrs. Arrieta was supposed to pay her supplier in Burma
at the rate of One Hundred Eighty Dollars and Seventy Cents
($180.70) in U.S. Currency, per ton plus Eight Dollars ($8.00)
in the same currency per ton for shipping and other handling
expenses, so that she is already assured of a net profit of
Fourteen Dollars and Thirty Cents ($14.30), U.S., Currency,
per ton or a total of Two Hundred and Eighty Six Thousand
Dollars ($286,000.00), U.S. Currency, in the aforesaid
transaction. ...
Lastly, herein appellant filed a counterclaim asserting that it has
suffered, likewise by way of unrealized profit damages in the total
sum of $406,000.00 from the failure of the projected contract to
materialize. This counterclaim was supported by a cost study
made and submitted by the appellant itself and wherein it was
illustrated how indeed had the importation pushed thru, NARIC
would have realized in profit the amount asserted in the
counterclaim. And yet, the said amount of P406,000.00 was
realizable by appellant despite a number of expenses which the
appellee under the contract, did not have to incur. Thus, under
the cost study submitted by the appellant, banking and unloading
charges were to be shouldered by it, including an Import License
Fee of 2% and superintendence fee of $0.25 per metric ton. If the
NARIC stood to profit over P400 000.00 from the disputed
transaction inspite of the extra expenditures from which the
herein appellee was exempt, we are convicted of the fairness of
the judgment presently under appeal.
In the premises, however, a minor modification must be effected
in the dispositive portion of the decision appeal from insofar as it
expresses the amount of damages in U.S. currency and not in
Philippine Peso. Republic Act 529 specifically requires the
discharge of obligations only "in any coin or currency which at the
time of payment is legal tender for public and private debts." In
view of that law, therefore, the award should be converted into company, in the light of this judgment, is relieved of any liability
and expressed in Philippine Peso. under this suit. No pronouncement as to costs.

This brings us to a consideration of what rate of exchange should Bengzon, C.J., Padilla, Concepcion, Paredes, Dizon and
apply in the conversion here decreed. Should it be at the time of Makalintal, JJ., concur.
the breach, at the time the obligation was incurred or at the rate Barrera, J., took no part.
of exchange prevailing on the promulgation of this decision. Reyes, J.B.L., J., reserves his vote.

In the case of Engel v. Velasco & Co., 47 Phil. 115, We ruled that
in an action for recovery of damages for breach of contract, even
if the obligation assumed by the defendant was to pay the plaintiff
a sum of money expressed in American currency, the indemnity to
be allowed should be expressed in Philippine currency at the rate
of exchange at the time of the judgment rather than at the rate of
exchange prevailing on the date of defendant's breach. This
ruling, however, can neither be applied nor extended to the case
at bar for the same was laid down when there was no law against
stipulating foreign currencies in Philippine contracts. But now we
have Republic Act No. 529 which expressly declares such
stipulations as contrary to public policy, void and of no effect. And,
as We already pronounced in the case of Eastboard Navigation,
Ltd. v. Juan Ysmael & Co., Inc., G.R. No. L-9090, September 10,
1957, if there is any agreement to pay an obligation in a currency
other than Philippine legal tender, the same is null and void as
contrary to public policy (Republic Act 529), and the most that
could be demanded is to pay said obligation in Philippine
currency "to be measured in the prevailing rate of exchange at
the time the obligation was incurred (Sec. 1, idem)."

UPON ALL THE FOREGOING, the decision appealed from is

hereby affirmed, with the sole modification that the award should
be converted into the Philippine peso at the rate of exchange
prevailing at the time the obligation was incurred or on July 1,
1952 when the contract was executed. The appellee insurance
 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 117190 January 2, 1997
JACINTO TANGUILIG doing business under the name and
style J.M.T. ENGINEERING AND GENERAL
MERCHANDISING, petitioner,
vs.
COURT OF APPEALS and VICENTE HERCE JR., respondents.
BELLOSILLO, J.:
This case involves the proper interpretation of the contract
entered into between the parties.
Sometime in April 1987 petitioner Jacinto M. Tanguilig doing
business under the name and style J.M.T. Engineering and
General Merchandising proposed to respondent Vicente Herce Jr.
to construct a windmill system for him. After some negotiations
they agreed on the construction of the windmill for a consideration
of P60,000.00 with a one-year guaranty from the date of
completion and acceptance by respondent Herce Jr. of the
project. Pursuant to the agreement respondent paid petitioner a
down payment of P30,000.00 and an installment payment of
P15,000.00, leaving a balance of P15,000.00.
On 14 March 1988, due to the refusal and failure of respondent to
pay the balance, petitioner filed a complaint to collect the amount.
In his Answer before the trial court respondent denied the claim
saying that he had already paid this amount to the San Pedro
General Merchandising Inc. (SPGMI) which constructed the deep
well to which the windmill system was to be connected. According
to respondent, since the deep well formed part of the system the
payment he tendered to SPGMI should be credited to his account
by petitioner. Moreover, assuming that he owed petitioner a
balance of P15,000.00, this should be offset by the defects in the
windmill system which caused the structure to collapse after a
strong wind hit their place. 1
Petitioner denied that the construction of a deep well was
included in the agreement to build the windmill system, for the
contract price of P60,000.00 was solely for the windmill assembly
and its installation, exclusive of other incidental materials needed
for the project. He also disowned any obligation to repair or
reconstruct the system and insisted that he delivered it in good
and working condition to respondent who accepted the same
without protest. Besides, its collapse was attributable to a
typhoon, a force majeure, which relieved him of any liability.
In finding for plaintiff, the trial court held that the construction of
the deep well was not part of the windmill project as evidenced
clearly by the letter proposals submitted by petitioner to
respondent. 2 It noted that "[i]f the intention of the parties is to include
the construction of the deep well in the project, the same should be
stated in the proposals. In the absence of such an agreement, it
could be safely concluded that the construction of the deep well is
not a part of the project undertaken by the plaintiff." 3 With respect to
the repair of the windmill, the trial court found that "there is no clear
and convincing proof that the windmill system fell down due to the
defect of the construction." 4
The Court of Appeals reversed the trial court. It ruled that the
construction of the deep well was included in the agreement of
the parties because the term "deep well" was mentioned in both
proposals. It also gave credence to the testimony of respondent's
witness Guillermo Pili, the proprietor of SPGMI which installed the
deep well, that petitioner Tanguilig told him that the cost of
constructing the deep well would be deducted from the contract
price of P60,000.00. Upon these premises the appellate court
concluded that respondent's payment of P15,000.00 to SPGMI
should be applied to his remaining balance with petitioner thus
effectively extinguishing his contractual obligation. However, it
rejected petitioner's claim of force majeure and ordered the latter
to reconstruct the windmill in accordance with the stipulated one-
year guaranty.
His motion for reconsideration having been denied by the Court of
Appeals, petitioner now seeks relief from this Court. He raises
two issues: firstly, whether the agreement to construct the
windmill system included the installation of a deep well
and, secondly, whether petitioner is under obligation to
reconstruct the windmill after it collapsed.
We reverse the appellate court on the first issue but sustain it on
the second.
The preponderance of evidence supports the finding of the trial
court that the installation of a deep well was not included in the
proposals of petitioner to construct a windmill system for
respondent. There were in fact two (2) proposals: one dated 19
May 1987 which pegged the contract price at P87,000.00 (Exh.
"1"). This was rejected by respondent. The other was submitted
three days later, i.e., on 22 May 1987 which contained more
specifications but proposed a lower contract price of P60,000.00
(Exh. "A"). The latter proposal was accepted by respondent and
the construction immediately followed. The pertinent portions of
the first letter-proposal (Exh. "1") are reproduced hereunder
In connection with your Windmill System and Installation, we
would like to quote to you as follows:
One (1) Set Windmill suitable for 2 inches diameter
deepwell, 2 HP, capacity, 14 feet in diameter, with 20
pieces blade, Tower 40 feet high, including mechanism
which is not advisable to operate during extra-intensity
wind. Excluding cylinder pump.
UNIT CONTRACT PRICE P87,000.00
The second letter-proposal (Exh. "A") provides as follows:
In connection with your Windmill system, Supply of Labor
Materials and Installation, operated water pump, we would like
to quote to you as
follows
One (1) set Windmill assembly for 2 inches or 3
inches deep-well pump, 6 Stroke, 14 feet diameter, 1-lot
blade materials, 40 feet Tower complete with standard
appurtenances up to Cylinder pump, shafting U.S.
adjustable International Metal.
One (1) lot Angle bar, G.I. pipe, Reducer Coupling,
Elbow Gate valve, cross Tee coupling.
One (1) lot Float valve.
One (1) lot Concreting materials foundation.
 F. O. B. Laguna
Contract Price P60,000.00
Notably, nowhere in either proposal is the installation of a deep
well mentioned, even remotely. Neither is there an itemization or
description of the materials to be used in constructing the deep
well. There is absolutely no mention in the two (2) documents that
a deep well pump is a component of the proposed windmill
system. The contract prices fixed in both proposals cover only the
features specifically described therein and no other. While the
words "deep well" and "deep well pump" are mentioned in both,
these do not indicate that a deep well is part of the windmill
system. They merely describe the type of deep well pump for
which the proposed windmill would be suitable. As correctly
pointed out by petitioner, the words "deep well" preceded by the
prepositions "for" and "suitable for" were meant only to convey
the idea that the proposed windmill would be appropriate for a
deep well pump with a diameter of 2 to 3 inches. For if the real
intent of petitioner was to include a deep well in the agreement to
construct a windmill, he would have used instead the
conjunctions "and" or "with." Since the terms of the instruments
are clear and leave no doubt as to their meaning they should not
be disturbed.
Moreover, it is a cardinal rule in the interpretation of contracts that
the intention of the parties shall be accorded primordial
consideration 5 and, in case
of doubt, their contemporaneous and subsequent acts shall be
principally considered. 6 An examination of such contemporaneous
and subsequent acts of respondent as well as the attendant
circumstances does not persuade us to uphold him.
Respondent insists that petitioner verbally agreed that the
contract price of P60,000.00 covered the installation of a deep
well pump. He contends that since petitioner did not have the
capacity to install the pump the latter agreed to have a third party
do the work the cost of which was to be deducted from the
contract price. To prove his point, he presented Guillermo Pili of
SPGMI who declared that petitioner Tanguilig approached him
with a letter from respondent Herce Jr. asking him to build a deep
well pump as "part of the price/contract which Engineer (Herce)
had with Mr. Tanguilig." 7
We are disinclined to accept the version of respondent. The claim
of Pili that Herce Jr. wrote him a letter is unsubstantiated. The
alleged letter was never presented in court by private respondent
for reasons known only to him. But granting that this written
communication existed, it could not have simply contained a
request for Pili to install a deep well; it would have also mentioned
the party who would pay for the undertaking. It strains credulity
that respondent would keep silent on this matter and leave it all to
petitioner Tanguilig to verbally convey to Pili that the deep well
was part of the windmill construction and that its payment would
come from the contract price of P60,000.00.
We find it also unusual that Pili would readily consent to build a
deep well the payment for which would come supposedly from
the windmill contract price on the mere representation of
petitioner, whom he had never met before, without a written
commitment at least from the former. For if indeed the deep well
were part of the windmill project, the contract for its installation
would have been strictly a matter between petitioner and Pili
himself with the former assuming the obligation to pay the price.
That it was respondent Herce Jr. himself who paid for the deep
well by handing over to Pili the amount of P15,000.00 clearly
indicates that the contract for the deep well was not part of the
windmill project but a separate agreement between respondent
and Pili. Besides, if the price of P60,000.00 included the deep
well, the obligation of respondent was to pay the entire amount to
petitioner without prejudice to any action that Guillermo Pili or
SPGMI may take, if any, against the latter. Significantly, when
asked why he tendered payment directly to Pili and not to
petitioner, respondent explained, rather lamely, that he did it
"because he has (sic) the money, so (he) just paid the money in
his possession." 8
Can respondent claim that Pili accepted his payment on behalf of
petitioner? No. While the law is clear that "payment shall be made
to the person in whose favor the obligation has been constituted,
or his successor in interest, or any person authorized to receive
it," 9 it does not appear from the record that Pili and/or SPGMI was so
authorized.
Respondent cannot claim the benefit of the law concerning
"payments made by a third person." 10 The Civil Code provisions do
not apply in the instant case because no creditor-debtor relationship
between petitioner and Guillermo Pili and/or SPGMI has been
established regarding the construction of the deep well. Specifically,
witness Pili did not testify that he entered into a contract with
petitioner for the construction of respondent's deep well. If SPGMI
was really commissioned by petitioner to construct the deep well, an
agreement particularly to this effect should have been entered into.
The contemporaneous and subsequent acts of the parties
concerned effectively belie respondent's assertions. These
circumstances only show that the construction of the well by
SPGMI was for the sole account of respondent and that
petitioner merely supervised the installation of the well because
the windmill was to be connected to it. There is no legal nor
factual basis by which this Court can impose upon petitioner an
obligation he did not expressly assume nor ratify.
The second issue is not a novel one. In a long line of
cases 11 this Court has consistently held that in order for a party to
claim exemption from liability by reason of fortuitous event under
Art. 1174 of the Civil Code the event should be the sole and
proximate cause of the loss or destruction of the object of the
contract. In Nakpil vs. Court of Appeals,12 four (4) requisites must
concur: (a) the cause of the breach of the obligation must be
independent of the will of the debtor; (b) the event must be either
unforeseeable or unavoidable; (c) the event must be such as to
render it impossible for the debtor to fulfill his obligation in a normal
manner; and, (d) the debtor must be free from any participation in
or aggravation of the injury to the creditor.
Petitioner failed to show that the collapse of the windmill was
due solely to a fortuitous event. Interestingly, the evidence does
not disclose that there was actually a typhoon on the day the
windmill collapsed. Petitioner merely stated that there was a
"strong wind." But a strong wind in this case cannot be fortuitous
unforeseeable nor unavoidable. On the contrary, a strong
wind should be present in places where windmills are
constructed, otherwise the windmills will not turn.
The appellate court correctly observed that "given the newly-
constructed windmill system, the same would not have
collapsed had there been no inherent defect in it which could
only be attributable to the appellee." 13 It emphasized that
respondent had in his favor the presumption that "things have
happened according to the ordinary course of nature and the
ordinary habits of life." 14 This presumption has not been rebutted by
petitioner.
Finally, petitioner's argument that private respondent was
already in default in the payment of his outstanding balance of
P15,000.00 and hence should bear his own loss, is untenable.
In reciprocal obligations, neither party incurs in delay if the other
does not comply or is not ready to comply in a proper manner
with what is incumbent upon him. 15 When the windmill failed to
function properly it became incumbent upon petitioner to institute
 the proper repairs in accordance with the guaranty stated in the
contract. Thus, respondent cannot be said to have incurred in
delay; instead, it is petitioner who should bear the expenses for the
reconstruction of the windmill. Article 1167 of the Civil Code is
explicit on this point that if a person obliged to do something fails to
do it, the same shall be executed at his cost.
WHEREFORE, the appealed decision is MODIFIED.
Respondent VICENTE HERCE JR. is directed to pay petitioner
JACINTO M. TANGUILIG the balance of P15,000.00 with
interest at the legal rate from the date of the filing of the
complaint. In return, petitioner is ordered to "reconstruct subject
defective windmill system, in accordance with the one-year
guaranty" 16 and to complete the same within three (3) months from
the finality of this decision.
SO ORDERED.
Padilla, Vitug, Kapunan and Hermosisima, Jr., JJ., concur.
Footnotes
1 TSN, 20 December 1988, pp. 10-12.
2 Exh. "A" and Exh. "1."
3 Rollo, p. 36.
4 Id., p. 37.
5 Kasilag v. Rodriguez, 69 Phil. 217 (1939).
6 Art. 1371, New Civil Code; GSIS v. Court of
Appeals, G.R. No. 52478, 30 October 1986, 145
SCRA 311; Serrano v. Court of Appeals, No. L-
46357, 9 October 1985, 139 SCRA 179.
7 TSN, 13 April 1989, pp. 18-19.
8 TSN, 13 April 1989, p. 22.
9 Art. 1240, New Civil Code.
10 Arts. 1236 and 1237, New Civil Code.
11 Nakpil v. Court of Appeals, Nos. L-47851, L-
47863, L-47896, 3 October 1986, 144 SCRA 596;
National Power Corporation v. Court of Appeals,
G.R. Nos. L-47379 and 47481, 16 May 1988, 161
SCRA 334; National Power Corporation v. Court
of Appeals, G.R. Nos. 103442-45, 21 May 1993,
222 SCRA 415.
12 See Note 11.
13 Rollo, p. 44.
14 Sec. 3, par. (y), Rule 131, Revised Rules of
Evidence.
15 Art. 1169, last par., New Civil Code.
16 See CA Decision, p. 7; Rollo, p. 27.