Ong Yui vs.

Court of Appeals
(91 SCRA 223)
Facts:
On august 26, 1967, Ong Yiu was a fare paying passenger of respondent PAL from Mactan, Cebu
to Butuan City wherein he was scheduled to attend a trial. As a passenger, he checked in one
piece of luggae, blue maleta for which he was issued a claim ticket. Upon arrival at Butuan City,
petitioner claimed his luggage but it could not be found. PAL Butuan sent a message to PAL Cebu
which in turn sent a message to PAL Manila that same afternoon. PAL Manila advised PAL Cebu
that the luggage has been overcarried to Manila and that it would be forwarded to PAL Cebu that
same day. PAL Cebu then advised PAL Butuan that the luggage will be forwarded the following
day, on scheduled morning flight. This message was not received by PAL Butuan as all the
personnel had already gone for the day. Meanwhile, Ong Yiu was worried about the missing
luggage because it contained vital documents needed for the trial the next day so he wired PAL
Cebu demanding delivery of his luggage before noon that next day or he would hold PAL liable
for damages based on gross negligence. Early morning, petitioner went to the Butuan Airport to
inquire about the luggage but did not wait for the arrival of the morning flight at 10:00am. which
carried his luggage. A certain Dagorro, a driver of a colorum car, who also used to drive the
petitioner volunteered to take the luggage to the petitioner. He revelaed that the documents
were lost. Ong Yiu demanded from PAL Cebu actual and compensatory damages as an incident
of breach of contract of carriage.
Issue:
1. Whether or not PAL is guilty of only simple negligence and not gross negligence?
2. Whether the doctrine of limited liability doctrine applies in the instant case?
Held:
PAL had not acted in bad faith. It exercised due diligence in looking for petitioner’s luggage which
had been miscarried. Had petitioner waited or caused someone to wait at the airport for the
arrival of the morning flight which carried his luggage, he would have been able to retrieve his
luggage sooner. In the absence of a wrongful act or omission or fraud, the petitioner is not
entitled to moral damages. Neither is he entitled to exemplary damages absent any proof that
the defendant acted in a wanton, fraudulent, reckless manner.
The limited liability applies in this case. On the presumed negligence of PAL, its liability for the
loss however, is limited on the stipulation written on the back of the plane
Ticket which is P100 per baggage. The petitioner not having declared a greater value and not
having called the attention of PAL on its true value and paid the tariff therefore. The stipulation
is printed in reasonably and fairly big letters and is easily readable. Moreso, petitioner had been
a frequent passenger of PAL from Cebu to Butuan City and back and he being a lawyer and a
businessman, must be fully aware of these conditions.
Doctrinal case:
While it may be true that petitioner had not signed the plane ticket (Exh. "12"), he is nevertheless
bound by the provisions thereof. "Such provisions have been held to be a part of the contract of
carriage, and valid and binding upon the passenger regardless of the latter's lack of knowledge
or assent to the regulation". 5 It is what is known as a contract of "adhesion", in regards which it
has been said that contracts of adhesion wherein one party imposes a ready made form of
contract on the other, as the plane ticket in the case at bar, are contracts not entirely prohibited.
The one who adheres to the contract is in reality free to reject it entirely; if he adheres, he gives
his consent. 6 And as held in Randolph v. American Airlines, 103 Ohio App. 172, 144 N.E. 2d 878;
Rosenchein vs. Trans World Airlines, Inc., 349 S.W. 2d 483, "a contract limiting liability upon an
agreed valuation does not offend against the policy of the law forbidding one from contracting
against his own negligence.
Considering, therefore, that petitioner had failed to declare a higher value for his baggage, he
cannot be permitted a recovery in excess of P100.00.Besides, passengers are advised not to place
valuable items inside their baggage but "to avail of our V-cargo service " (Exh. "1"). I t is likewise
to be noted that there is nothing in the evidence to show the actual value of the goods allegedly
lost by petitioner.
Article 1305

A contract is a meeting of minds between two persons whereby one binds himself, with respect to the
other, to give something or to render some service.
Ong Yiu vs. Court of Appeals, 91 SCRA 223 , No. L-40597, June 29, 1979
G.R. No. L-40597 June 29, 1979
AGUSTINO B. ONG YIU, petitioner,
vs.
HONORABLE COURT OF APPEALS and PHILIPPINE AIR LINES, INC., respondents.

MELENCIO-HERRERA, J.:
In this Petition for Review by Certiorari, petitioner, a practicing lawyer and businessman, seeks a
reversal of the Decision of the Court of Appeals in CA-G.R. No. 45005-R, which reduced his claim
for damages for breach of contract of transportation.
The facts are as follows:
On August 26, 1967, petitioner was a fare paying passenger of respondent Philippine Air Lines,
Inc. (PAL), on board Flight No. 463-R, from Mactan Cebu, bound for Butuan City. He was
scheduled to attend the trial of Civil Case No. 1005 and Spec. Procs. No. 1125 in the Court of First
Instance, Branch II, thereat, set for hearing on August 28-31, 1967. As a passenger, he checked in
one piece of luggage, a blue "maleta" for which he was issued Claim Check No. 2106-R (Exh. "A").
The plane left Mactan Airport, Cebu, at about 1:00 o'clock P.M., and arrived at Bancasi airport,
Butuan City, at past 2:00 o'clock P.M., of the same day. Upon arrival, petitioner claimed his
luggage but it could not be found. According to petitioner, it was only after reacting indignantly
to the loss that the matter was attended to by the porter clerk, Maximo Gomez, which, however,
the latter denies, At about 3:00 o'clock P.M., PAL Butuan, sent a message to PAL, Cebu, inquiring
about the missing luggage, which message was, in turn relayed in full to the Mactan Airport
teletype operator at 3:45 P.M. (Exh. "2") that same afternoon. It must have been transmitted to
Manila immediately, for at 3:59 that same afternoon, PAL Manila wired PAL Cebu advising that
the luggage had been over carried to Manila aboard Flight No. 156 and that it would be forwarded
to Cebu on Flight No. 345 of the same day. Instructions were also given that the luggage be
immediately forwarded to Butuan City on the first available flight (Exh. "3"). At 5:00 P.M. of the
same afternoon, PAL Cebu sent a message to PAL Butuan that the luggage would be forwarded
on Fright No. 963 the following day, August 27, 196'(. However, this message was not received
by PAL Butuan as all the personnel had already left since there were no more incoming flights
that afternoon.
In the meantime, petitioner was worried about the missing luggage because it contained vital
documents needed for trial the next day. At 10:00 o'clock that evening, petitioner wired PAL Cebu
demanding the delivery of his baggage before noon the next day, otherwise, he would hold PAL
liable for damages, and stating that PAL's gross negligence had caused him undue inconvenience,
worry, anxiety and extreme embarrassment (Exh. "B"). This telegram was received by the Cebu
PAL supervisor but the latter felt no need to wire petitioner that his luggage had already been
forwarded on the assumption that by the time the message reached Butuan City, the luggage
would have arrived.
Early in the morning of the next day, August 27, 1967, petitioner went to the Bancasi Airport to
inquire about his luggage. He did not wait, however, for the morning flight which arrived at 10:00
o'clock that morning. This flight carried the missing luggage. The porter clerk, Maximo Gomez,
paged petitioner, but the latter had already left. A certain Emilio Dagorro a driver of a "colorum"
car, who also used to drive for petitioner, volunteered to take the luggage to petitioner. As
Maximo Gomez knew Dagorro to be the same driver used by petitioner whenever the latter was
in Butuan City, Gomez took the luggage and placed it on the counter. Dagorro examined the lock,
pressed it, and it opened. After calling the attention of Maximo Gomez, the "maleta" was opened,
Gomez took a look at its contents, but did not touch them. Dagorro then delivered the "maleta"
to petitioner, with the information that the lock was open. Upon inspection, petitioner found
that a folder containing certain exhibits, transcripts and private documents in Civil Case No. 1005
and Sp. Procs. No. 1126 were missing, aside from two gift items for his parents-in-law. Petitioner
refused to accept the luggage. Dagorro returned it to the porter clerk, Maximo Gomez, who
sealed it and forwarded the same to PAL Cebu.
Meanwhile, petitioner asked for postponement of the hearing of Civil Case No. 1005 due to loss
of his documents, which was granted by the Court (Exhs. "C" and "C-1"). Petitioner returned to
Cebu City on August 28, 1967. In a letter dated August 29, 1967 addressed to PAL, Cebu,
petitioner called attention to his telegram (Exh. "D"), demanded that his luggage be produced
intact, and that he be compensated in the sum of P250,000,00 for actual and moral damages
within five days from receipt of the letter, otherwise, he would be left with no alternative but to
file suit (Exh. "D").
On August 31, 1967, Messrs. de Leon, Navarsi, and Agustin, all of PAL Cebu, went to petitioner's
office to deliver the "maleta". In the presence of Mr. Jose Yap and Atty. Manuel Maranga the
contents were listed and receipted for by petitioner (Exh. "E").
On September 5, 1967, petitioner sent a tracer letter to PAL Cebu inquiring about the results of
the investigation which Messrs. de Leon, Navarsi, and Agustin had promised to conduct to
pinpoint responsibility for the unauthorized opening of the "maleta" (Exh. "F").
The following day, September 6, 1967, PAL sent its reply hereinunder quoted verbatim:
Dear Atty. Ong Yiu:
This is with reference to your September 5, 1967, letter to Mr. Ricardo G. Paloma, Acting
Manager, Southern Philippines.
First of all, may we apologize for the delay in informing you of the result of our investigation since
we visited you in your office last August 31, 1967. Since there are stations other than Cebu which
are involved in your case, we have to communicate and await replies from them. We regret to
inform you that to date we have not found the supposedly lost folder of papers nor have we been
able to pinpoint the personnel who allegedly pilferred your baggage.
You must realize that no inventory was taken of the cargo upon loading them on any plane.
Consequently, we have no way of knowing the real contents of your baggage when same was
loaded.
We realized the inconvenience you encountered of this incident but we trust that you will give
us another opportunity to be of better service to you.
Very truly yours,
PHILIPPINE AIR LINES, INC.
(Sgd) JEREMIAS S. AGUSTIN
Branch Supervisor Cebu
(Exhibit G, Folder of Exhibits) 1
On September 13, 1967, petitioner filed a Complaint against PAL for damages for breach of
contract of transportation with the Court of First Instance of Cebu, Branch V, docketed as Civil
Case No. R-10188, which PAL traversed. After due trial, the lower Court found PAL to have acted
in bad faith and with malice and declared petitioner entitled to moral damages in the sum of
P80,000.00, exemplary damages of P30,000.00, attorney's fees of P5,000.00, and costs.
Both parties appealed to the Court of Appeals — petitioner in so far as he was awarded only the
sum of P80,000.00 as moral damages; and defendant because of the unfavorable judgment
rendered against it.
On August 22, 1974, the Court of Appeals,* finding that PAL was guilty only of simple negligence,
reversed the judgment of the trial Court granting petitioner moral and exemplary damages, but
ordered PAL to pay plaintiff the sum of P100.00, the baggage liability assumed by it under the
condition of carriage printed at the back of the ticket.
Hence, this Petition for Review by Certiorari, filed on May 2, 1975, with petitioner making the
following Assignments of Error:
I. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING RESPONDENT PAL GUILTY ONLY OF
SIMPLE NEGLIGENCE AND NOT BAD FAITH IN THE BREACH OF ITS CONTRACT OF
TRANSPORTATION WITH PETITIONER.
II. THE HONORABLE COURT OF APPEALS MISCONSTRUED THE EVIDENCE AND THE LAW WHEN IT
REVERSED THE DECISION OF THE LOWER COURT AWARDING TO PETITIONER MORAL DAMAGES
IN THE AMOUNT OF P80,000.00, EXEMPLARY DAMAGES OF P30,000.00, AND P5,000.00
REPRESENTING ATTORNEY'S FEES, AND ORDERED RESPONDENT PAL TO COMPENSATE PLAINTIFF
THE SUM OF P100.00 ONLY, CONTRARY TO THE EXPLICIT PROVISIONS OF ARTICLES 2220, 2229,
2232 AND 2234 OF THE CIVIL CODE OF THE PHILIPPINES.
On July 16, 1975, this Court gave due course to the Petition.
There is no dispute that PAL incurred in delay in the delivery of petitioner's luggage. The question
is the correctness of respondent Court's conclusion that there was no gross negligence on the
part of PAL and that it had not acted fraudulently or in bad faith as to entitle petitioner to an
award of moral and exemplary damages.
From the facts of the case, we agree with respondent Court that PAL had not acted in bad faith.
Bad faith means a breach of a known duty through some motive of interest or ill will. 2 It was the
duty of PAL to look for petitioner's luggage which had been miscarried. PAL exerted due diligence
in complying with such duty.
As aptly stated by the appellate Court:
We do not find any evidence of bad faith in this. On the contrary, We find that the defendant had
exerted diligent effort to locate plaintiff's baggage. The trial court saw evidence of bad faith
because PAL sent the telegraphic message to Mactan only at 3:00 o'clock that same afternoon,
despite plaintiff's indignation for the non-arrival of his baggage. The message was sent within less
than one hour after plaintiff's luggage could not be located. Efforts had to be exerted to locate
plaintiff's maleta. Then the Bancasi airport had to attend to other incoming passengers and to
the outgoing passengers. Certainly, no evidence of bad faith can be inferred from these facts.
Cebu office immediately wired Manila inquiring about the missing baggage of the plaintiff. At
3:59 P.M., Manila station agent at the domestic airport wired Cebu that the baggage was over
carried to Manila. And this message was received in Cebu one minute thereafter, or at 4:00 P.M.
The baggage was in fact sent back to Cebu City that same afternoon. His Honor stated that the
fact that the message was sent at 3:59 P.M. from Manila and completely relayed to Mactan at
4:00 P.M., or within one minute, made the message appear spurious. This is a forced reasoning.
A radio message of about 50 words can be completely transmitted in even less than one minute
depending upon atmospheric conditions. Even if the message was sent from Manila or other
distant places, the message can be received within a minute. that is a scientific fact which cannot
be questioned. 3
Neither was the failure of PAL Cebu to reply to petitioner's rush telegram indicative of bad faith,
The telegram (Exh. B) was dispatched by petitioner at around 10:00 P.M. of August 26, 1967. The
PAL supervisor at Mactan Airport was notified of it only in the morning of the following day. At
that time the luggage was already to be forwarded to Butuan City. There was no bad faith,
therefore, in the assumption made by said supervisor that the plane carrying the bag would arrive
at Butuan earlier than a reply telegram. Had petitioner waited or caused someone to wait at the
Bancasi airport for the arrival of the morning flight, he would have been able to retrieve his
luggage sooner.
In the absence of a wrongful act or omission or of fraud or bad faith, petitioner is not entitled to
moral damages.
Art. 2217. Moral damages include physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury.
Though incapable of pecuniary computation, moral damages may be recovered if they are the
proximate result of the defendant's wrongful act of omission.
Art. 2220. Willful injury to property may be a legal ground for awarding moral damages if the
court should find that, under the circumstances, such damages are justly due. The same rule
applies to breaches of contract where the defendant acted fraudulently or in bad faith.
Petitioner is neither entitled to exemplary damages. In contracts, as provided for in Article 2232
of the Civil Code, exemplary damages can be granted if the defendant acted in a wanton,
fraudulent, reckless, oppressive, or malevolent manner, which has not been proven in this case.
Petitioner further contends that respondent Court committed grave error when it limited PAL's
carriage liability to the amount of P100.00 as stipulated at the back of the ticket. In this
connection, respondent Court opined:
As a general proposition, the plaintiff's maleta having been pilfered while in the custody of the
defendant, it is presumed that the defendant had been negligent. The liability, however, of PAL
for the loss, in accordance with the stipulation written on the back of the ticket, Exhibit 12, is
limited to P100.00 per baggage, plaintiff not having declared a greater value, and not having
called the attention of the defendant on its true value and paid the tariff therefor. The validity of
this stipulation is not questioned by the plaintiff. They are printed in reasonably and fairly big
letters, and are easily readable. Moreover, plaintiff had been a frequent passenger of PAL from
Cebu to Butuan City and back, and he, being a lawyer and businessman, must be fully aware of
these conditions. 4
We agree with the foregoing finding. The pertinent Condition of Carriage printed at the back of
the plane ticket reads:
8. BAGGAGE LIABILITY ... The total liability of the Carrier for lost or damaged baggage of the
passenger is LIMITED TO P100.00 for each ticket unless a passenger declares a higher valuation
in excess of P100.00, but not in excess, however, of a total valuation of P1,000.00 and additional
charges are paid pursuant to Carrier's tariffs.
There is no dispute that petitioner did not declare any higher value for his luggage, much less did
he pay any additional transportation charge.
But petitioner argues that there is nothing in the evidence to show that he had actually entered
into a contract with PAL limiting the latter's liability for loss or delay of the baggage of its
passengers, and that Article 1750* of the Civil Code has not been complied with.
While it may be true that petitioner had not signed the plane ticket (Exh. "12"), he is nevertheless
bound by the provisions thereof. "Such provisions have been held to be a part of the contract of
carriage, and valid and binding upon the passenger regardless of the latter's lack of knowledge
or assent to the regulation". 5 It is what is known as a contract of "adhesion", in regards which it
has been said that contracts of adhesion wherein one party imposes a ready made form of
contract on the other, as the plane ticket in the case at bar, are contracts not entirely prohibited.
The one who adheres to the contract is in reality free to reject it entirely; if he adheres, he gives
his consent. 6 And as held in Randolph v. American Airlines, 103 Ohio App. 172, 144 N.E. 2d 878;
Rosenchein vs. Trans World Airlines, Inc., 349 S.W. 2d 483, "a contract limiting liability upon an
agreed valuation does not offend against the policy of the law forbidding one from contracting
against his own negligence.
Considering, therefore, that petitioner had failed to declare a higher value for his baggage, he
cannot be permitted a recovery in excess of P100.00.Besides, passengers are advised not to place
valuable items inside their baggage but "to avail of our V-cargo service " (Exh. "1"). I t is likewise
to be noted that there is nothing in the evidence to show the actual value of the goods allegedly
lost by petitioner.
There is another matter involved, raised as an error by PAL — the fact that on October 24, 1974
or two months after the promulgation of the Decision of the appellate Court, petitioner's widow
filed a Motion for Substitution claiming that petitioner died on January 6, 1974 and that she only
came to know of the adverse Decision on October 23, 1974 when petitioner's law partner
informed her that he received copy of the Decision on August 28, 1974. Attached to her Motion
was an Affidavit of petitioner's law partner reciting facts constitutive of excusable negligence.
The appellate Court noting that all pleadings had been signed by petitioner himself allowed the
widow "to take such steps as she or counsel may deem necessary." She then filed a Motion for
Reconsideration over the opposition of PAL which alleged that the Court of Appeals Decision,
promulgated on August 22, 1974, had already become final and executory since no appeal had
been interposed therefrom within the reglementary period.
Under the circumstances, considering the demise of petitioner himself, who acted as his own
counsel, it is best that technicality yields to the interests of substantial justice. Besides, in the 'last
analysis, no serious prejudice has been caused respondent PAL.
In fine, we hold that the conclusions drawn by respondent Court from the evidence on record
are not erroneous.
WHEREFORE, for lack of merit, the instant Petition is hereby denied, and the judgment sought to
be reviewed hereby affirmed in toto.
No costs.
SO ORDERED.
Teehankee, (Chairman), Makasiar, Fernandez, Guerrero and De Castro, JJ., concur.
Cui vs Arellano University 2 SCRA 205, May 30, 1961
Ponente: J. Concepcion
FACTS
Emeritio Cui was granted scholarship by the defendant university on scholarship merit as a
student of the College of Law. Stipulated in the contract for the scholarship grant is the following:
“In consideration of the scholarship granted to me by the University, I hereby waive my right to
transfer to another school without having refunded to the University (defendant) the equivalent
of my scholarship cash.”
On his last semester on the University, Cui transferred to Abad Santos University where his uncle,
the previous dean and legal adviser of Arellano University, was now the dean of the College of
Law of Abad Santos University.
Before taking the bar, Cui petitioned the defendant university for the release of his TOR. The
university refused until Cui refunded the scholarship granted to him totaling the amount of Php
1,033.87, which he did under protest.
Thereafter, he filed for recovery plus damages. The Court of First Instance of Manila ruled in favor
or Arellano University. Hence, this petition for review.
ISSUE
Whether or not the stipulation on waiver of right to transfer without having refunded the
scholarship is void.
HELD
Yes. The stipulation contravenes both moral and public policy. Scholarship grants are not for
propaganda purposes but are awards for merits.
Doctrinal case:
Article 1306
The contracting parties may establish such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, morals, good customs, public
order, or public policy.
'In determining a public policy of the state, courts are limited to a consideration of the
Constitution, the judicial decisions, the statutes, and the practice of government officers.' It might
take more than a government bureau or office to lay down or establish a public policy, as alleged
in your communication, but courts consider the practices of government officials as one of the
four factors in determining a public policy of the state. It has been consistently held in America
that under the principles relating to the doctrine of public policy, as applied to the law of
contracts, courts of justice will not recognize or uphold a transaction which its object, operation,
or tendency is calculated to be prejudicial to the public welfare, to sound morality or to civic
honesty (Ritter vs. Mutual Life Ins. Co., 169 U.S. 139; Heding vs. Gallaghere 64 L.R.A. 811; Veazy
vs. Allen, 173 N.Y. 359). If Arellano University understood clearly the real essence of scholarships
and the motives which prompted this office to issue Memorandum No. 38, s. 1949, it should have
not entered into a contract of waiver with Cui on September 10, 1951, which is a direct violation
of our Memorandum and an open challenge to the authority of the Director of Private Schools
because the contract was repugnant to sound morality and civic honesty. And finally, in Gabriel
vs. Monte de Piedad, Off. Gazette Supp. Dec. 6, 1941, p. 67 we read: 'In order to declare a
contract void as against public policy, a court must find that the contract as to consideration or
the thing to be done, contravenes some established interest of society, or is inconsistent with
sound policy and good moralsor tends clearly to undermine the security of individual rights. The
policy enunciated in Memorandum No. 38, s. 1949 is sound policy. Scholarship are awarded in
recognition of merit not to keep outstanding students in school to bolster its prestige. In the
understanding of that university scholarships award is a business scheme designed to increase
the business potential of an education institution. Thus conceived it is not only inconsistent with
sound policy but also good morals.
G.R. No. L-15127 May 30, 1961
EMETERIO CUI, plaintiff-appellant,
vs.
ARELLANO UNIVERSITY, defendant-appellee.
G.A.S. Sipin, Jr., for plaintiff-appellant.
E. Voltaire Garcia for defendant-appellee.
CONCEPCION, J.:
Appeal by plaintiff Emeterio Cui from a decision of the Court of First Instance of Manila, absolving
defendant Arellano University from plaintiff's complaint, with costs against the plaintiff, and
dismissing defendant's counter claim, for insufficiency of proof thereon.
In the language of the decision appealed from:
The essential facts of this case are short and undisputed. As established by the agreement of facts
Exhibits X and by the respective oral and documentary evidence introduced by the parties, it
appears conclusive that plaintiff, before the school year 1948-1949 took up preparatory law
course in the defendant University. After finishing his preparatory law course plaintiff enrolled in
the College of Law of the defendant from the school year 1948-1949. Plaintiff finished his law
studies in the defendant university up to and including the first semester of the fourth year.
During all the school years in which plaintiff was studying law in defendant law college, Francisco
R. Capistrano, brother of the mother of plaintiff, was the dean of the College of Law and legal
counsel of the defendant university. Plaintiff enrolled for the last semester of his law studies in
the defendant university but failed to pay his tuition fees because his uncle Dean Francisco R.
Capistrano having severed his connection with defendant and having accepted the deanship and
chancellorship of the College of Law of Abad Santos University, plaintiff left the defendant's law
college and enrolled for the last semester of his fourth year law in the college of law of the Abad
Santos University graduating from the college of law of the latter university. Plaintiff, during all
the time he was studying law in defendant university was awarded scholarship grants, for
scholastic merit, so that his semestral tuition fees were returned to him after the ends of
semester and when his scholarship grants were awarded to him. The whole amount of tuition
fees paid by plaintiff to defendant and refunded to him by the latter from the first semester up
to and including the first semester of his last year in the college of law or the fourth year, is in
total P1,033.87. After graduating in law from Abad Santos University he applied to take the bar
examination. To secure permission to take the bar he needed the transcripts of his records in
defendant Arellano University. Plaintiff petitioned the latter to issue to him the needed
transcripts. The defendant refused until after he had paid back the P1,033 87 which defendant
refunded to him as above stated. As he could not take the bar examination without those
transcripts, plaintiff paid to defendant the said sum under protest. This is the sum which plaintiff
seeks to recover from defendant in this case.
Before defendant awarded to plaintiff the scholarship grants as above stated, he was made to
sign the following contract covenant and agreement:
"In consideration of the scholarship granted to me by the University, I hereby waive my right to
transfer to another school without having refunded to the University (defendant) the equivalent
of my scholarship cash.

(Sgd.) Emeterio Cui".

It is admitted that, on August 16, 1949, the Director of Private Schools issued Memorandum No.
38, series of 1949, on the subject of "Scholarship," addressed to "All heads of private schools,
colleges and universities," reading:
1. School catalogs and prospectuses submitted to this, Bureau show that some schools offer full
or partial scholarships to deserving students — for excellence in scholarship or for leadership in
extra-curricular activities. Such inducements to poor but gifted students should be encouraged.
But to stipulate the condition that such scholarships are good only if the students concerned
continue in the same school nullifies the principle of merit in the award of these scholarships.
2. When students are given full or partial scholarships, it is understood that such scholarships are
merited and earned. The amount in tuition and other fees corresponding to these scholarships
should not be subsequently charged to the recipient students when they decide to quit school or
to transfer to another institution. Scholarships should not be offered merely to attract and keep
students in a school.
3. Several complaints have actually been received from students who have enjoyed scholarships,
full or partial, to the effect that they could not transfer to other schools since their credentials
would not be released unless they would pay the fees corresponding to the period of the
scholarships. Where the Bureau believes that the right of the student to transfer is being denied
on this ground, it reserves the right to authorize such transfer.
that defendant herein received a copy of this memorandum; that plaintiff asked the Bureau of
Private Schools to pass upon the issue on his right to secure the transcript of his record in
defendant University, without being required to refund the sum of P1,033.87; that the Bureau of
Private Schools upheld the position taken by the plaintiff and so advised the defendant; and that,
this notwithstanding, the latter refused to issue said transcript of records, unless said refund
were made, and even recommended to said Bureau that it issue a written order directing the
defendant to release said transcript of record, "so that the case may be presented to the court
for judicial action." As above stated, plaintiff was, accordingly, constrained to pay, and did pay
under protest, said sum of P1,033.87, in order that he could take the bar examination in 1953.
Subsequently, he brought this action for the recovery of said amount, aside from P2,000 as moral
damages, P500 as exemplary damages, P2,000 as attorney's fees, and P500 as expenses of
litigation.
In its answer, defendant reiterated the stand it took, vis-a-vis the Bureau of Private Schools,
namely, that the provisions of its contract with plaintiff are valid and binding and that the
memorandum above-referred to is null and void. It, likewise, set up a counterclaim for
P10,000.00 as damages, and P3,000 as attorney's fees.
The issue in this case is whether the above quoted provision of the contract between plaintiff
and the defendant, whereby the former waived his right to transfer to another school without
refunding to the latter the equivalent of his scholarships in cash, is valid or not. The lower court
resolved this question in the affirmative, upon the ground that the aforementioned
memorandum of the Director of Private Schools is not a law; that the provisions thereof are
advisory, not mandatory in nature; and that, although the contractual provision "may be
unethical, yet it was more unethical for plaintiff to quit studying with the defendant without good
reasons and simply because he wanted to follow the example of his uncle." Moreover, defendant
maintains in its brief that the aforementioned memorandum of the Director of Private Schools is
null and void because said officer had no authority to issue it, and because it had been neither
approved by the corresponding department head nor published in the official gazette.
We do not deem it necessary or advisable to consider as the lower court did, the question
whether plaintiff had sufficient reasons or not to transfer from defendant University to the Abad
Santos University. The nature of the issue before us, and its far reaching effects, transcend
personal equations and demand a determination of the case from a high impersonal plane.
Neither do we deem it essential to pass upon the validity of said Memorandum No. 38, for,
regardless of the same, we are of the opinion that the stipulation in question is contrary to public
policy and, hence, null and void. The aforesaid memorandum merely incorporates a sound
principle of public policy. As the Director of Private Schools correctly pointed, out in his letter,
Exhibit B, to the defendant,
There is one more point that merits refutation and that is whether or not the contract entered
into between Cui and Arellano University on September 10, 1951 was void as against public
policy. In the case of Zeigel vs. Illinois Trust and Savings Bank, 245 Ill. 180, 19 Ann. Case 127, the
court said: 'In determining a public policy of the state, courts are limited to a consideration of the
Constitution, the judicial decisions, the statutes, and the practice of government officers.' It might
take more than a government bureau or office to lay down or establish a public policy, as alleged
in your communication, but courts consider the practices of government officials as one of the
four factors in determining a public policy of the state. It has been consistently held in America
that under the principles relating to the doctrine of public policy, as applied to the law of
contracts, courts of justice will not recognize or uphold a transaction which its object, operation,
or tendency is calculated to be prejudicial to the public welfare, to sound morality or to civic
honesty (Ritter vs. Mutual Life Ins. Co., 169 U.S. 139; Heding vs. Gallaghere 64 L.R.A. 811; Veazy
vs. Allen, 173 N.Y. 359). If Arellano University understood clearly the real essence of scholarships
and the motives which prompted this office to issue Memorandum No. 38, s. 1949, it should have
not entered into a contract of waiver with Cui on September 10, 1951, which is a direct violation
of our Memorandum and an open challenge to the authority of the Director of Private Schools
because the contract was repugnant to sound morality and civic honesty. And finally, in Gabriel
vs. Monte de Piedad, Off. Gazette Supp. Dec. 6, 1941, p. 67 we read: 'In order to declare a
contract void as against public policy, a court must find that the contract as to consideration or
the thing to be done, contravenes some established interest of society, or is inconsistent with
sound policy and good moralsor tends clearly to undermine the security of individual rights. The
policy enunciated in Memorandum No. 38, s. 1949 is sound policy. Scholarship are awarded in
recognition of merit not to keep outstanding students in school to bolster its prestige. In the
understanding of that university scholarships award is a business scheme designed to increase
the business potential of an education institution. Thus conceived it is not only inconsistent with
sound policy but also good morals. But what is morals? Manresa has this definition. It is good
customs; those generally accepted principles of morality which have received some kind of social
and practical confirmation. The practice of awarding scholarships to attract students and keep
them in school is not good customs nor has it received some kind of social and practical
confirmation except in some private institutions as in Arellano University. The University of the
Philippines which implements Section 5 of Article XIV of the Constitution with reference to the
giving of free scholarships to gifted children, does not require scholars to reimburse the
corresponding value of the scholarships if they transfer to other schools. So also with the leading
colleges and universities of the United States after which our educational practices or policies are
patterned. In these institutions scholarships are granted not to attract and to keep brilliant
students in school for their propaganda mine but to reward merit or help gifted students in whom
society has an established interest or a first lien. (Emphasis supplied.)
WHEREFORE, the decision appealed from is hereby reversed and another one shall be entered
sentencing the defendant to pay to the plaintiff the sum of P1,033.87, with interest thereon at
the legal rate from September 1, 1954, date of the institution of this case, as well as the costs,
and dismissing defendant's counterclaim. It is so ordered.
Case Digest:
G.R. No. L-1299 November 16, 1903
VICENTE PEREZ, plaintiff-appellee,
vs.
EUGENIO POMAR, Agent of the Compañia General de Tabacos, defendant-appellant.
Francisco Dominguez for appellant.
Ledesma, Sumulong and Quintos for appellee.
TORRES, J.:
Facts:
On December 8, 1901 Vicente Perez came to an agreement with Eugenio Pomar as an English
interpreter which is not a free service. Perez ask for the payment for the service that he made to
Pomar but the later did not do his part to pay Perez for the service that made to him.
Issues: Should Pomar need to pay the interpretation made by Perez?
Ruling:
Yes, he should pay the service of Pomar because it is not a gratuitous one and it is under the
innominate contract of facio ut des which is I do that you give.
Doctrinal Case:
Article 1307
Innominate contract shall be regulated by the stipulations of the parties, by the provisions of the
Titles I and II of this Book, by the rules governing the most analogous nominate contracts, and by
the customs of the place.
It does not appear that any written contract was entered into between the parties for the
employment of the plaintiff as interpreter, or that any other innominate contract was entered
into; but whether the plaintiff's services were solicited or whether they were offered to the
defendant for his assistance, inasmuch as these services were accepted and made use of by the
latter, we must consider that there was a tacit and mutual consent as to the rendition of the
services. This gives rise to the obligation upon the person benefited by the services to make
compensation therefor, since the bilateral obligation to render services as interpreter, on the
one hand, and on the other to pay for the services rendered, is thereby incurred. (Arts. 1088,
1089, and 1262 of the Civil Code). The supreme court of Spain in its decision of February 12, 1889,
holds, among other things, "that not only is there an express and tacit consent which produces
real contract but there is also a presumptive consent which is the basis of quasi contracts, this
giving rise to the multiple juridical relations which result in obligations for the delivery of a thing
or the rendition of a service."
Notwithstanding the denial of that defendant, it is unquestionable that it was with his consent
that the plaintiff rendered him services as interpreter, thus aiding him at a time when, owing to
the existence of an insurrection in the province, the most disturbed conditions prevailed. It
follows, hence, that there was consent on the part of both in the rendition of such services as
interpreter. Such service not being contrary to law or to good custom, it was a perfectly licit
object of contract, and such a contract must necessarily have existed between the parties, as
alleged by the plaintiff. (Art. 1271, Civil Code.)
The consideration for the contract is also evident, it being clear that a mutual benefit was
derived in consequence of the service rendered. It is to be supposed that the defendant
accepted these services and that the plaintiff in turn rendered them with the expectation that
the benefit would be reciprocal. This shows the concurrence of the three elements necessary
under article 1261 of the Civil Code to constitute a contract of lease of service, or other
innominate contract, from which an obligation has arisen and whose fulfillment is now
demanded.
G.R. No. L-1299 November 16, 1903
VICENTE PEREZ, plaintiff-appellee,
vs.
EUGENIO POMAR, Agent of the Compañia General de Tabacos, defendant-appellant.
Francisco Dominguez for appellant.
Ledesma, Sumulong and Quintos for appellee.

TORRES, J.:
In a decision dated February 9, 1903, the judge of the Sixth Judicial District, deciding a case
brought by the plaintiff against the defendant for the recovery of wages due and unpaid, gave
judgment against the latter for the sum of $600 and the costs of suit, less the sum of $50,
Mexican.
On August 27, 1902, Don Vicente Perez filed in the Court of First Instance of Laguna a complaint,
which was amended on the 17th of January of this year, asking that the court determine the
amount due the plaintiff, at the customary rate of compensation for interpreting in these Islands,
for services rendered in the Tabacalera Company, and that, in view of the circumstances of the
case, judgment be rendered in his favor for such sum. The complaint also asked that the
defendant be condemned to the payment of damages in the sum of $3,200, gold, together with
the costs of suit. In this complaint it was alleged that Don Eugenio Pomar, as general agent of the
Compañia General de Tabacos in the said province, verbally requested the plaintiff on the 8th of
December, 1901, to act as interpreter between himself and the military authorities; that after
the date mentioned the plaintiff continued to render such services up to and including May 31,
1902; that he had accompanied the defendant, Pomar, during that time at conferences between
the latter and the colonel commanding the local garrison, and with various officers and doctors
residing in the capital, and at conferences with Captain Lemen in the town of Pilar, and with the
major in command at the town of Pagsanjan, concerning the shipment of goods from Manila, and
with respect to Pagsanjan to this city; that the plaintiff during this period held himself in readiness
to render services whenever required; that on this account his private business, and especially a
soap factory established in the capital, was entirely abandoned; that to the end that such services
might be punctually rendered, the agent, Pomar, assured him that the Tabacalera Company
always generously repaid services rendered it, and that he therefore did not trouble himself
about his inability to devote the necessary amount of time to his business, the defendant going
so far as to make him flattering promises of employment with the company, which he did not
accept; that these statements were made in the absence of witnesses and that therefore his only
proof as to the same was Mr. Pomar's word as a gentleman; that the employees of the company
did not understand English, and by reason of the plaintiff's mediation between the agent, and
the military authorities large profits were obtained, as would appear from the account and
letterpress books of the agency corresponding to those dates. In the amended complaint it was
added that the defendant, on behalf of the company, offered to renumerate the plaintiff for the
services rendered in the most advantageous manner in which such services are compensated, in
view of the circumstances under which they were requested; and that the plaintiff, by rendering
the company such services, was obliged to abandon his own business, the manufacture of soap,
and thereby suffered damages in the sum of $3,200, United States currency.
The defendant, on the 25th of September, 1902, filed an answer asking for the dismissal of the
complaint, with costs to the plaintiff. In his answer the defendant denied the allegation in the
first paragraph of the complaint, stating that it was wholly untrue that the company, and the
defendant as its agent, had solicited the services of the plaintiff as interpreter before the military
authorities for the period stated, or for any other period, or that the plaintiff had accompanied
Pomar at the conferences mentioned, concerning shipments from Manila and exports from some
of the towns of the province to this capital. He stated that he especially denied paragraphs 2 of
the complaint, as it was absolutely untrue that the plaintiff had been at the disposal of the
defendant for the purpose of rendering such services; that he therefore had not been obliged to
abandon his occupation or his soap factory, and that the statement that an offer of employment
with the company had been made to him was false. The defendant also denied that through the
mediation of the plaintiff the company and himself had obtained large profits. The statements in
paragraphs 6, 7, 8, and 9 of the complaint were also denied. The defendant stated that, on
account of the friendly relations which sprang up between the plaintiff and himself, the former
borrowed from him from time to time money amounting to $175 for the purposes of his business,
and that he had also delivered to the plaintiff 36 arrobas of oil worth $106, and three packages
of resin for use in coloring his soap; that the plaintiff accompanied the defendant to Pagsanjan,
Pilar, and other towns when the latter made business trips to them for the purpose of extending
his business and mercantile relations therein; that on these excursions, as well as on private and
official visits which he had to make, the plaintiff occasionally accompanied him through motives
of friendship, and especially because of the free transportation given him, and not on behalf of
the company of which he was never interpreter and for which he rendered no services; that the
plaintiff in these conferences acted as interpreter of his own free will, without being requested
to do so by the defendant and without any offer of payment or compensation; that therefore
there existed no legal relation whatever between the company and the plaintiff, and that the
defendant, when accepting the spontaneous, voluntary and officious services of the plaintiff, did
so in his private capacity and not as agent of the company, and that it was for this reason that he
refused to enter into negotiations with the plaintiff, he being in no way indebted to the latter.
The defendant concluded by saying that he answered in his individual capacity.
A complaint having been filed against the Compañia General de Tabacos and Don Eugenio Pomar,
its agent in the Province of Laguna, the latter, having been duly summoned, replied to the
complaint, which was subsequently amended, and stated that he made such reply in his
individual capacity and not as agent of the company, with which the plaintiff had had no legal
relations. The suit was instituted between the plaintiff and Pomar, who, as such, accepted the
issue and entered into the controversy without objection, opposed the claim of the plaintiff, and
concluded by asking that the complaint be dismissed, with the costs to the plaintiff. Under these
circumstances and construing the statutes liberally, we think it proper to decide the case pending
between both parties in accordance with law and the strict principles of justice.
From the oral testimony introduced at the trial, it appears that the plaintiff, Perez, did on various
occasions render Don Eugenio Pomar services as interpreter of English; and that he obtained
passes and accompanied the defendant upon his journeys to some of the towns in the Province
of Laguna. It does not appear from the evidence, however, that the plaintiff was constantly at
the disposal of the defendant during the period of six months, or that he rendered services as
such interpreter continuously and daily during that period of time.
It does not appear that any written contract was entered into between the parties for the
employment of the plaintiff as interpreter, or that any other innominate contract was entered
into; but whether the plaintiff's services were solicited or whether they were offered to the
defendant for his assistance, inasmuch as these services were accepted and made use of by the
latter, we must consider that there was a tacit and mutual consent as to the rendition of the
services. This gives rise to the obligation upon the person benefited by the services to make
compensation therefor, since the bilateral obligation to render services as interpreter, on the one
hand, and on the other to pay for the services rendered, is thereby incurred. (Arts. 1088, 1089,
and 1262 of the Civil Code). The supreme court of Spain in its decision of February 12, 1889,
holds, among other things, "that not only is there an express and tacit consent which produces
real contract but there is also a presumptive consent which is the basis of quasi contracts, this
giving rise to the multiple juridical relations which result in obligations for the delivery of a thing
or the rendition of a service."
Notwithstanding the denial of that defendant, it is unquestionable that it was with his consent
that the plaintiff rendered him services as interpreter, thus aiding him at a time when, owing to
the existence of an insurrection in the province, the most disturbed conditions prevailed. It
follows, hence, that there was consent on the part of both in the rendition of such services as
interpreter. Such service not being contrary to law or to good custom, it was a perfectly licit
object of contract, and such a contract must necessarily have existed between the parties, as
alleged by the plaintiff. (Art. 1271, Civil Code.)
The consideration for the contract is also evident, it being clear that a mutual benefit was derived
in consequence of the service rendered. It is to be supposed that the defendant accepted these
services and that the plaintiff in turn rendered them with the expectation that the benefit would
be reciprocal. This shows the concurrence of the three elements necessary under article 1261 of
the Civil Code to constitute a contract of lease of service, or other innominate contract, from
which an obligation has arisen and whose fulfillment is now demanded.
Article 1254 of the Civil Code provides that a contract exists the moment that one or more
persons consent to be bound, with respect to another or others, to deliver some thing or to
render some service. Article 1255 provides that the contracting parties may establish such
covenants, terms, and conditions as they deem convenient, provided they are not contrary to
law, morals or public policy. Whether the service was solicited or offered, the fact remains that
Perez rendered to Pomar services as interpreter. As it does not appear that he did this
gratuitously, the duty is imposed upon the defendant, having accepted the benefit of the service,
to pay a just compensation therefor, by virtue of the innominate contract of facio ut des implicitly
established.
The obligations arising from this contract are reciprocal, and, apart from the general provisions
with respect to contracts and obligations, the special provisions concerning contracts for lease of
services are applicable by analogy.
In this special contract, as determined by article 1544 of the Civil Code, one of the parties
undertakes to render the other a service for a price certain. The tacit agreement and consent of
both parties with respect to the service rendered by the plaintiff, and the reciprocal benefits
accruing to each, are the best evidence of the fact that there was an implied contract sufficient
to create a legal bond, from which arose enforceable rights and obligations of a bilateral
character.lawphi1.net
In contracts the will of the contracting parties is law, this being a legal doctrine based upon the
provisions of articles 1254, 1258, 1262, 1278, 1281, 1282, and 1289 of the Civil Code. If it is a fact
sufficiently proven that the defendant, Pomar, on various occasions consented to accept an
interpreter's services, rendered in his behalf and not gratuitously, it is but just that he should pay
a reasonable remuneration therefor, because it is a well-known principle of law that no one
should be permitted to enrich himself to the damage of another.
With respect to the value of the services rendered on different occasions, the most important of
which was the first, as it does not appear that any salary was fixed upon by the parties at the
time the services were accepted, it devolves upon the court to determine, upon the evidence
presented, the value of such services, taking into consideration the few occasions on which they
were rendered. The fact that no fixed or determined consideration for the rendition of the
services was agreed upon does not necessarily involve a violation of the provisions of article 1544
of the Civil Code, because at the time of the agreement this consideration was capable of being
made certain. The discretionary power of the court, conferred upon it by the law, is also
supported by the decisions of the supreme court of Spain, among which may be cited that of
October 18, 1899, which holds as follows: "That as stated in the article of the Code cited, which
follows the provisions of law 1, title 8, of the fifth partida, the contract for lease of services is one
in which one of the parties undertakes to make some thing or to render some service to the other
for a certain price, the existence of such a price being understood, as this court has held not only
when the price has been expressly agreed upon but also when it may be determined by the
custom and frequent use of the place in which such services were rendered."
No exception was taken to the judgment below by the plaintiff on account of the rejection of his
claim for damages. The decision upon this point is, furthermore, correct.
Upon the supposition that the recovery of the plaintiff should not exceed 200 Mexican pesos,
owing to the inconsiderable number of times he acted as interpreter, it is evident that the
contract thus implicitly entered into was not required to be in writing and that therefore it does
not fall within article 1280 of the Civil Code; nor is it included within the provisions of section 335
of the Code of Civil Procedure, as this innominate contract is not covered by that section. The
contract of lease of services is not included in any of the cases expressly designated by that
section of the procedural law, as affirmed by the appellant. The interpretation of the other
articles of the Code alleged to have been infringed has also been stated fully in this opinion.
For the reasons stated, we are of the opinion that judgment should be rendered against Don
Eugenio Pomar for the payment to the plaintiff of the sum of 200 Mexican pesos, from which will
be deducted the sum of 50 pesos is made as to the costs of this instance. The judgment below is
accordingly affirmed in so far as it agrees with this opinion, and reversed in so far as it may be in
conflict therewith. Judgment will be entered accordingly twenty days after this decision is filed.
Arellano, C.J., Willard, and Mapa, JJ., concur.
Mindanao Portland Cement Corporation vs. Mc Donough Construction Company of Florida
G.R. No. L-23390 April 24,1967
FACTS
a.) Mindanao Portland Cement Corporation & respondent Mc Donough Construction Company
of Florida USA executed a contract for the construction by the respondent for the petitioner of a
dry portland cement plan at Iligan city. Inevitably there are changes in the construction plans
and so the respondent failed to deliver the said obligation to construct the cement plant. The
petitioner hereby claimed for the damages incurred in such delay and the respondent counter
demanded for the amount of P403,700 as the cost of extra work. MPCC considered the dispute
and invited the construction company to arbitrate invoking the arbitration clause of their
contract. After two invitations, Mindanao Portland Cement Corporation filed an action in the CFI-
Manila to compel the respondent to arbitrate where it received a favourable order for submission
for arbitration. Not satisfied with the ruling of the CFI-Manila, respondent Mc Donough
Construction Company of Florida USA appealed the decision of the CFI to the Supreme Court
raising the questions of law,
ISSUE
Whether or not disputes arises between parties should be subjected to arbitration.
HELD
Yes, since there obtain a written provision for arbitration as well as failure on respondent’s part
to comply therewith, the court quo rightly ordered the parties to proceed to arbitration in
accordance with the terms of the agreement (sec. 6, R.A. 876). respondent’s arguments touching
upon the merits of the dispute are improperly raised herein. They should be addressed to the
arbitrators. This proceeding is merely a summary remedy to enforce the agreement to arbitrate.
The duty of the court in this case is not to resolve the merits of parties claims but only to
determine if they should proceed to arbitration or not. Frivolous/patently baseless claim should
not be ordered to arbitration, defense exist against a claim, does not make it frivolous or baseless.
Dotrinal Case:
Article 1309
The determination of the performance may be left to a third person, whose decision shall not be
binding until it has been made known to both contracting parties. (n)
The provision of the contract on "Arbitration of Disagreements" (par. 39) says:
In the event of disagreement between the Owner and the Contractor in respect of the rights or
obligations of either of the parties hereunder except the interpretation of the plans and
specifications and questions concerning the sufficiency of materials, the time, sequence and
method of performing the work, which questions are to be finally determined by the Engineer,
they shall submit the matter to arbitration, the Owner choosing one arbitrator, the Contractor
one, and the two so chosen shall select a third. The decision of such arbitrators or a majority of
them shall be made in writing to both parties and when so made shall be binding upon the parties
thereto.
G.R. No. L-23390 April 24, 1967
MINDANAO PORTLAND CEMENT CORPORATION, petitioner-appellee,
vs.
McDONOUGH CONSTRUCTION COMPANY OF FLORIDA, respondent-appellant.
Gonzalo W. Gonzalez for respondent-appellant.
Alberto B. Villaraza for petitioner-appellee.
BENGZON, J.P. J.:
On February 13, 1961, petitioner Mindanao Portland Cement Corporation and respondent
McDonough Construction Company of Florida, U.S.A., executed a contract1 for the construction
by the respondent for the petitioner of a dry portland, cement plant at Iligan City. In a separate
contract, Turnbull, Inc. — the "engineer" referred to in the construction contract — was engaged
to design and manage the construction of the plant, supervise the construction, schedule
deliveries and the construction work as well as check and certify ill contractors' progress and
fiscal requests for payment.
Alterations in the plans and specifications were subsequently made during the progress of the
construction as set forth in Addenda 2 to 8 thereto. Due to this and to other causes deemed
sufficient by Turnbull, Inc., extensions of time for the termination of the project, initially agreed
to be finished on December 17, 1961, were granted.2
Respondent finally completed the project on October 22, 1962, except as to delivery of certain
spare parts for replacements and installations of floodlamps; and on November 14, 1962, these
latter items were complied with. As to the Addenda in the plans and specifications, Addenda 2,
3 and 7 were not signed by petitioner although the same were forwarded to it, after having been
signed by respondent; these are still in its possession. Addenda 4, 5 and 6 were signed by
petitioner and respondent.3
Differences later arose. Petitioner claimed from respondent damages in the amount of more than
P2,000,000 allegedly occasioned by the delay in the project's completion. Respondent in turn
asked for more than P450,000 from petitioner for alleged losses due to cost of extra work and
overhead as of April 1962. A conference was held on about May 29, 1962 between petitioner and
Turnbull, Inc., on one hand, and respondent on the other, to settle the differences
aforementioned, but no satisfactory results were reached.1äwphï1.ñët
Petitioner sent respondent, on August 8, 1962, and again on September 24,1962, written
invitations to arbitrate, invoking a provision in their contract regarding arbitration of disputes.
Instead of answering said invitations, respondent, on November 14, 1962, with Turnbull, Inc.'s
approval, submitted to petitioner for payment its final statement of work accomplished, asking
for P403,700 as unpaid balance of the consideration of the contract.
Petitioner, on January 29, 1963, filed the present action in the Court of First Instance of Manila
to compel respondent to arbitrate with it concerning alleged disputes arising from their contract.
It averred inter alia that deletions and additions to the plans and specifications were agreed upon
during the progress of the construction; that disagreement arose between them as to the cost of
the additional or extra work done, and respondent's deviation from some agreed specifications;
that petitioner claims having overpaid respondent by P33,810.81; that petitioner further claims
to have suffered damages due to respondent's delay in finishing the project; that respondent, on
the other hand, still claims an unpaid balance of about P403,700; that these matters fall under
the general arbitration clause of their contract; and that respondent has failed to proceed to
arbitration despite several requests therefor.
Respondent filed, on February 23, 1963, its answer. It denied the alleged existence of
disagreement between the parties. And as special defense, it alleged that its claim for P403,700
was not disputed and that the respective claims for damages should be resolved by Turnbull, Inc.,
pursuant to the exception in the arbitration clause of the construction contract.
After stipulation of facts and submission of documentary evidence, the court, on May 13, 1964,
rendered its decision finding that dispute or disagreement obtained between the parties with
respect to their rights and obligations under their contract and that the same should be
submitted to arbitration pursuant to par. 39 of said contract — the arbitration clause — and to
Republic Act 876 — the Arbitration Law. And thus it ordered petitioner and respondent to
proceed to arbitration in accordance with the terms of their contract.
Not satisfied with the ruling, respondent appealed therefrom to Us to raise the purely legal
question of whether under these facts respondent is duty-bound to submit to arbitration.
The provision of the contract on "Arbitration of Disagreements" (par. 39) says:
39. In the event of disagreement between the Owner and the Contractor in respect of the rights
or obligations of either of the parties hereunder except the interpretation of the plans and
specifications and questions concerning the sufficiency of materials, the time, sequence and
method of performing the work, which questions are to be finally determined by the Engineer,
they shall submit the matter to arbitration, the Owner choosing one arbitrator, the Contractor
one, and the two so chosen shall select a third. The decision of such arbitrators or a majority of
them shall be made in writing to both parties and when so made shall be binding upon the parties
thereto. (Emphasis supplied).
Respondent, herein appellant, contends first, that there is no showing of disagreement; and
second, that if there is, the same falls under the exception, to be resolved by the engineer.
As to the first point, the fact of disagreement has been determined by the court below upon the
stipulation of facts and documentary evidence submitted. In this appeal involving pure questions
of law, the above finding should not be disturbed. Furthermore, the existence of disagreement
is plainly shown in the record. Respondent admits the existence of petitioner's claim but denies
its merit.4 It likewise admits that petitioner has refused to pay its claim for the unpaid balance of
the price of the contract.5 Paragraph 8 of the stipulation of facts shows the dispute of the parties
regarding their mutual claims and that said dispute remained unsettled:
8. That on or about May 29, 1962, a conference was held between petitioner and Turnbill, Inc.,
on the one hand, and respondent, on the other, to settle their differences involving the claim for
damages of petitioner in the amount of more than P2,000,000, occasioned by the delay in the
completion of the project, and the claim of respondent for losses due to the cost of extra plant
and overhead in the amount of more than P450,000, — as of April, 1962, but no satisfactory
results were reached; (Emphasis supplied).
Regarding the second point, the parties agreed by way of exception that disagreements with
respect to the following matters shall be finally resolved by the engineer, instead of being
submitted to arbitration: (1) The interpretation of plans and specifications; (2) sufficiency of
materials; and (3) the time, sequence and method of performing the work.
The disputes involved here, on the other hand, are on (1) the proper computation of the total
contract price,6including the cost of additional or extra work;7 and (2) the liability for alleged
delay in completing the project and for alleged losses due to change in the plans and
specifications.
Now from the contract itself We can determine the scope of the exceptions aforementioned.
Thus, pars. 19 to 22 of its General Conditions deal with the subject "Interpretation of Plans and
Specifications". And thereunder, the engineer is empowered to correct all discrepancies, errors
or omissions in the plans and specifications; to explain all doubts that may arise thereon; and
to furnish further plans and specifications as may be required. No mention is made therein as to
the cost of the project; this matter is covered by the engineering contract, under which Turnbull,
Inc.'s function is limited to making estimates of costs only.
"Sufficiency of materials" and "method of performing the work" — under the second and third
exceptions above-mentioned — are treated in pars. 2 to 6 of the General Conditions under the
heading "QUALITY OF WORKS AND MATERIALS". Turnbull, Inc., is therein empowered to
determine the land fitness of the several kinds of work and materials furnished and to reject or
condemn many of them which, in its opinions, does not fully conform to the terms of the
contract. In the present case, the dispute is not as to the quality of the materials or of the kind of
work done.
"Time" and "Sequence of Work" are covered by pars. 9 to 17 of the General Conditions under the
heading "SCHEDULING." Neither would the disputes fall under these exceptions. Turnbull, Inc.'s
power here is to schedule the deliveries and construction work and expedite the same so that
the project can be finished on time. It is also authorized, under par. 15, to determine whether
any eventuality is sufficient enough to warrant in extension of time and if so, to determine the
period of such extension. The delay envisioned here is one that occurs during the progress of the
work which disturbs the pre-scheduling plan, thus necessitating an extension of the over-all
deadline precisely to prevent respondent from going beyond the same. Turnbull, Inc.'s function
goes no further than to calculate and fix the period of extension. But the delay petitioner alleged
is different; it is delay beyond the last date of extension fixed by Turnbull, Inc. Clearly, the
question of liability therefor, is not embraced in the exception.
To none of the exceptions then do the disagreements in question belong, the rule of arbitration
therefore applies. The parties in fact also stipulated in their contract, under "EXTRA WORK", that
the cost of extra work to be paid shall be subject to negotiations. 8 This negates the proposition
that Turnbull, Inc.'s cost estimates appearing in Addenda 2, 3 and 7 are final and conclusive.
The reason, moreover, for the exceptions — interpretation of plans and specifications; sufficiency
of materials; sequence, time and method of performing the work — is the need to decide these
matters immediately, since the progress of the work would await their determination. The same
is not true as to matters relating to the liability for delay in the project's completion; these are
questions that the engineer does not have to resolve before the project can go on. Consequently,
We view that it is not included in the exceptions, as indeed the related provisions of their
agreement indicate.
Since there obtains herein a written provision for arbitration as well as failure on respondent's
part to comply therewith, the court a quo rightly ordered the parties to proceed to arbitration in
accordance with the terms of their agreement (Sec. 6, Republic Act 876). Respondent's
arguments touching upon the merits of the dispute are improperly raised herein. They should be
addressed to the arbitrators. This proceeding is merely a summary remedy to enforce the
agreement to arbitrate. The duty of the court in this case is not to resolve the merits of the
parties' claims but only to determine if they should proceed to arbitration or not. And although
it has been ruled that a frivolous or patently baseless claim should not be ordered to arbitration,
it is also recognized that the mere fact that a defense exists against a claim does not make it
frivolous or baseless.9
Wherefore, the judgment appealed from, ordering the parties to proceed to arbitration
according to the terms of their agreement, is hereby affirmed, with costs against appellant. So
ordered.