Nazario Trillana vs.

Quezon College,
Inc.
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-5003 June 27, 1953

NAZARIO TRILLANA, administrator-appellee,

vs.
QUEZON COLLEGE, INC., claimant-appellant.

Singson, Barnes, Yap and Blanco for appellant.

Delgado, Flores & Macapagal for appellee.

PARAS, J.:

Damasa Crisostomo sent the following letter to the Board of Trustees of the Quezon College:

June 1, 1948

The BOARD OF TRUSTEES

Quezon College
Manila

Gentlemen:

Please enter my subscription to dalawang daan (200) shares of your capital stock with a
par value of P100 each. Enclosed you will find (Babayaran kong lahat pagkatapos na ako ay
makapag-pahuli ng isda) pesos as my initial payment and the balance payable in
accordance with law and the rules and regulations of the Quezon College. I hereby agree to
shoulder the expenses connected with said shares of stock. I further submit myself to all
lawful demands, decisions or directives of the Board of Trustees of the Quezon College and
all its duly constituted officers or authorities (ang nasa itaas ay binasa at ipinaliwanag sa
akin sa wikang tagalog na aking nalalaman).

Very respectfully,

(Sgd.) DAMASA CRISOSTOMO

Signature of subscriber

Nilagdaan sa aming harapan:

JOSE CRISOSTOMO
EDUARDO CRISOSTOMO

Damasa Crisostomo died on October 26, 1948. As no payment appears to have been made on the
subscription mentioned in the foregoing letter, the Quezon College, Inc. presented a claim
before the Court of First Instance of Bulacan in her testate proceeding, for the collection of the
sum of P20,000, representing the value of the subscription to the capital stock of the Quezon
College, Inc. This claim was opposed by the administrator of the estate, and the Court of First
Instance of Bulacan, after hearing issued an order dismissing the claim of the Quezon College,
Inc. on the ground that the subscription in question was neither registered in nor authorized by
the Securities and Exchange Commission. From this order the Quezon College, Inc. has
appealed.

It is not necessary for us to discuss at length appellant's various assignments of error relating to
the propriety of the ground relief upon by the trial court, since, as pointed out in the brief for the
administrator and appellee, there are other decisive considerations which, though not touched
by the lower court, amply sustained the appealed order.

It appears that the application sent by Damasa Crisostomo to the Quezon College, Inc. was
written on a general form indicating that an applicant will enclose an amount as initial payment
and will pay the balance in accordance with law and the regulations of the College. On the other
hand, in the letter actually sent by Damasa Crisostomo, the latter (who requested that her
subscription for 200 shares be entered) not only did not enclose any initial payment but stated
that "babayaran kong lahat pagkatapos na ako ay makapagpahuli ng isda." There is nothing in
the record to show that the Quezon College, Inc. accepted the term of payment suggested by
Damasa Crisostomo, or that if there was any acceptance the same came to her knowledge during
her lifetime. As the application of Damasa Crisostomo is obviously at variance with the terms
evidenced in the form letter issued by the Quezon College, Inc., there was absolute necessity on
the part of the College to express its agreement to Damasa's offer in order to bind the latter.
Conversely, said acceptance was essential, because it would be unfair to immediately obligate
the Quezon College, Inc. under Damasa's promise to pay the price of the subscription after she
had caused fish to be caught. In other words, the relation between Damasa Crisostomo and the
Quezon College, Inc. had only thus reached the preliminary stage whereby the latter offered its
stock for subscription on the terms stated in the form letter, and Damasa applied for
subscription fixing her own plan of payment, — a relation, in the absence as in the present case
of acceptance by the Quezon College, Inc. of the counter offer of Damasa Crisostomo, that had
not ripened into an enforceable contract.

Indeed, the need for express acceptance on the part of the Quezon College, Inc. becomes the
more imperative, in view of the proposal of Damasa Crisostomo to pay the value of the
subscription after she has harvested fish, a condition obviously dependent upon her sole will
and, therefore, facultative in nature, rendering the obligation void, under article 1115 of the old
Civil Code which provides as follows: "If the fulfillment of the condition should depend upon the
exclusive will of the debtor, the conditional obligation shall be void. If it should depend upon
chance, or upon the will of a third person, the obligation shall produce all its effects in
accordance with the provisions of this code." It cannot be argued that the condition solely is
void, because it would have served to create the obligation to pay, unlike a case, exemplified
by Osmeña vs. Rama (14 Phil., 99), wherein only the potestative condition was held void
because it referred merely to the fulfillment of an already existing indebtedness.

In the case of Taylor vs. Uy Tieng Piao, et al. (43 Phil., 873, 879), this Court already held that "a
condition, facultative as to the debtor, is obnoxious to the first sentence contained in article 1115
and renders the whole obligation void."

Wherefore, the appealed order is affirmed, and it is so ordered with costs against appellant.

Tuason, Padilla and Reyes, JJ., concur in the result.

Short Title
Nazario Trillana vs. Quezon College, Inc.
 G.R. Number
G.R. No. L-5003
Date of Promulgation
June 27, 1953
Nazario Trillana vs. Quezon College, Inc.

Virgilio R. Romero vs. Court of

Appeals, et al.
Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 107207 November 23, 1995

VIRGILIO R. ROMERO, petitioner,

vs.
HON. COURT OF APPEALS and ENRIQUETA CHUA VDA. DE
ONGSIONG,respondents.

VITUG, J.:

The parties pose this question: May the vendor demand the rescission of a contract for
the sale of a parcel of land for a cause traceable to his own failure to have the squatters
on the subject property evicted within the contractually-stipulated period?

Petitioner Virgilio R. Romero, a civil engineer, was engaged in the business of

production, manufacture and exportation of perlite filter aids, permalite insulation and
processed perlite ore. In 1988, petitioner and his foreign partners decided to put up a
central warehouse in Metro Manila on a land area of approximately 2,000 square
meters. The project was made known to several freelance real estate brokers.

A day or so after the announcement, Alfonso Flores and his wife, accompanied by a
broker, offered a parcel of land measuring 1,952 square meters. Located in Barangay
San Dionisio, Parañaque, Metro Manila, the lot was covered by TCT No. 361402 in the
name of private respondent Enriqueta Chua vda. de Ongsiong. Petitioner visited the
property and, except for the presence of squatters in the area, he found the place
suitable for a central warehouse.

Later, the Flores spouses called on petitioner with a proposal that should he advance the
amount of P50,000.00 which could be used in taking up an ejectment case against the
squatters, private respondent would agree to sell the property for only P800.00 per
square meter. Petitioner expressed his concurrence. On 09 June 1988, a contract,
denominated "Deed of Conditional Sale," was executed between petitioner and private
respondent. The simply-drawn contract read:

DEED OF CONDITIONAL SALE

KNOW ALL MEN BY THESE PRESENTS:

This Contract, made and executed in the Municipality of Makati,

Philippines this 9th day of June, 1988 by and between:

ENRIQUETA CHUA VDA. DE ONGSIONG, of legal age,

widow, Filipino and residing at 105 Simoun St., Quezon City,
Metro Manila, hereinafter referred to as the VENDOR;

-and-

VIRGILIO R. ROMERO, married to Severina L. Lat, of Legal

age, Filipino, and residing at 110 San Miguel St., Plainview
Subd., Mandaluyong Metro Manila, hereinafter referred to as
the VENDEE:

W I T N E S S E T H : That

WHEREAS, the VENDOR is the owner of One (1) parcel of land with a
total area of ONE THOUSAND NINE HUNDRED FIFTY TWO (1,952)
SQUARE METERS, more or less, located in Barrio San Dionisio,
Municipality of Parañaque, Province of Rizal, covered by TCT No. 361402
issued by the Registry of Deeds of Pasig and more particularly described as
follows:

xxx xxx xxx

WHEREAS, the VENDEE, for (sic) has offered to buy a parcel of land and
the VENDOR has accepted the offer, subject to the terms and conditions
hereinafter stipulated:

NOW, THEREFORE, for and in consideration of the sum of ONE

MILLION FIVE HUNDRED SIXTY ONE THOUSAND SIX HUNDRED
PESOS (P1,561,600.00) ONLY, Philippine Currency, payable by VENDEE
to in to (sic) manner set forth, the VENDOR agrees to sell to the VENDEE,
their heirs, successors, administrators, executors, assign, all her rights,
titles and interest in and to the property mentioned in the FIRST
WHEREAS CLAUSE, subject to the following terms and conditions:
 1. That the sum of FIFTY THOUSAND PESOS (P50,000.00)
ONLY Philippine Currency, is to be paid upon signing and
execution of this instrument.

2. The balance of the purchase price in the amount of ONE

MILLION FIVE HUNDRED ELEVEN THOUSAND SIX
HUNDRED PESOS (P1,511,600.00) ONLY shall be paid 45
days after the removal of all squatters from the above
described property.

3. Upon full payment of the overall purchase price as

aforesaid, VENDOR without necessity of demand shall
immediately sign, execute, acknowledged (sic) and deliver
the corresponding deed of absolute sale in favor of the
VENDEE free from all liens and encumbrances and all Real
Estate taxes are all paid and updated.

It is hereby agreed, covenanted and stipulated by and between the parties

hereto that if after 60 days from the date of the signing of this contract the
VENDOR shall not be able to remove the squatters from the property
being purchased, the downpayment made by the buyer shall be
returned/reimbursed by the VENDOR to the VENDEE.

That in the event that the VENDEE shall not be able to pay the VENDOR
the balance of the purchase price of ONE MILLION FIVE HUNDRED
ELEVEN THOUSAND SIX HUNDRED PESOS (P1,511,600.00) ONLY
after 45 days from written notification to the VENDEE of the removal of
the squatters from the property being purchased, the FIFTY THOUSAND
PESOS (P50,000.00) previously paid as downpayment shall be forfeited in
favor of the VENDOR.

Expenses for the registration such as registration fees, documentary

stamp, transfer fee, assurances and such other fees and expenses as may
be necessary to transfer the title to the name of the VENDEE shall be for
the account of the VENDEE while capital gains tax shall be paid by the
VENDOR.

IN WITNESS WHEREOF, the parties hereunto signed those (sic) presents

in the City of Makati MM, Philippines on this 9th day of June, 1988.

(Sgd.) (Sgd.)

VIRGILIO R. ROMERO ENRIQUETA CHUA VDA.

DE ONGSIONG

Vendee Vendor

SIGNED IN THE PRESENCE OF:

(Sgd.) (Sgd.)
 Rowena C. Ongsiong Jack M. Cruz 1

Alfonso Flores, in behalf of private respondent, forthwith received and

acknowledged a check for P50,000.00 2from petitioner. 3

Pursuant to the agreement, private respondent filed a complaint for ejectment (Civil
Case No. 7579) against Melchor Musa and 29 other squatter families with the
Metropolitan Trial Court of Parañaque. A few months later, or on 21 February 1989,
judgment was rendered ordering the defendants to vacate the premises. The decision
was handed down beyond the 60-day period (expiring 09 August 1988) stipulated in the
contract. The writ of execution of the judgment was issued, still later, on 30 March 1989.

In a letter, dated 07 April 1989, private respondent sought to return the P50,000.00 she
received from petitioner since, she said, she could not "get rid of the squatters" on the
lot. Atty. Sergio A.F. Apostol, counsel for petitioner, in his reply of 17 April 1989, refused
the tender and stated:.

Our client believes that with the exercise of reasonable diligence

considering the favorable decision rendered by the Court and the writ of
execution issued pursuant thereto, it is now possible to eject the squatters
from the premises of the subject property, for which reason, he proposes
that he shall take it upon himself to eject the squatters, provided, that
expenses which shall be incurred by reason thereof shall be chargeable to
the purchase price of the land. 4

Meanwhile, the Presidential Commission for the Urban Poor ("PCUD"), through its
Regional Director for Luzon, Farley O. Viloria, asked the Metropolitan Trial Court of
Parañaque for a grace period of 45 days from 21 April 1989 within which to relocate and
transfer the squatter families. Acting favorably on the request, the court suspended the
enforcement of the writ of execution accordingly.

On 08 June 1989, Atty. Apostol reminded private respondent on the expiry of the 45-
day grace period and his client's willingness to "underwrite the expenses for the
execution of the judgment and ejectment of the occupants." 5

In his letter of 19 June 1989, Atty. Joaquin Yuseco, Jr., counsel for private respondent,
advised Atty. Apostol that the Deed of Conditional Sale had been
rendered null and void by virtue of his client's failure to evict the squatters from the
premises within the agreed 60-day period. He added that private respondent had
"decided to retain the property." 6

On 23 June 1989, Atty. Apostol wrote back to explain:

The contract of sale between the parties was perfected from the very
moment that there was a meeting of the minds of the parties upon the
subject lot and the price in the amount of P1,561,600.00. Moreover, the
contract had already been partially fulfilled and executed upon receipt of
the downpayment of your client. Ms. Ongsiong is precluded from rejecting
its binding effects relying upon her inability to eject the squatters from the
premises of subject property during the agreed period. Suffice it to state
that, the provision of the Deed of Conditional Sale do not grant her the
 option or prerogative to rescind the contract and to retain the property
should she fail to comply with the obligation she has assumed under the
contract. In fact, a perusal of the terms and conditions of the contract
clearly shows that the right to rescind the contract and to demand the
return/reimbursement of the downpayment is granted to our client for his
protection.

Instead, however, of availing himself of the power to rescind the contract

and demand the return, reimbursement of the downpayment, our client
had opted to take it upon himself to eject the squatters from the premises.
Precisely, we refer you to our letters addressed to your client dated April
17, 1989 and June 8, 1989.

Moreover, it is basic under the law on contracts that the power to rescind
is given to the injured party. Undoubtedly, under the circumstances, our
client is the injured party.

Furthermore, your client has not complied with her obligation under their
contract in good faith. It is undeniable that Ms. Ongsiong deliberately
refused to exert efforts to eject the squatters from the premises of the
subject property and her decision to retain the property was brought about
by the sudden increase in the value of realties in the surrounding areas.

Please consider this letter as a tender of payment to your client and a

demand to execute the absolute Deed of Sale. 7

A few days later (or on 27 June 1989), private respondent, prompted by petitioner's
continued refusal to accept the return of the P50,000.00 advance payment, filed with
the Regional Trial Court of Makati, Branch 133, Civil Case No. 89-4394 for rescission of
the deed of "conditional" sale, plus damages, and for the consignation of P50,000.00
cash.

Meanwhile, on 25 August 1989, the Metropolitan Trial Court issued an alias writ of
execution in Civil Case No. 7579 on motion of private respondent but the squatters
apparently still stayed on.

Back to Civil Case No. 89-4394, on 26 June 1990, the Regional Trial Court of
Makati 8rendered decision holding that private respondent had no right to rescind the
contract since it was she who "violated her obligation to eject the squatters from the
subject property" and that petitioner, being the injured party, was the party who could,
under Article 1191 of the Civil Code, rescind the agreement. The court ruled that the
provisions in the contract relating to (a) the return/reimbursement of the P50,000.00 if
the vendor were to fail in her obligation to free the property from squatters within the
stipulated period or (b), upon the other hand, the sum's forfeiture by the vendor if the
vendee were to fail in paying the agreed purchase price, amounted to "penalty clauses".
The court added:

This Court is not convinced of the ground relied upon by the plaintiff in
seeking the rescission, namely: (1) he (sic) is afraid of the squatters; and
(2) she has spent so much to eject them from the premises (p. 6, tsn, ses.
Jan. 3, 1990). Militating against her profession of good faith is plaintiffs
 conduct which is not in accord with the rules of fair play and justice.
Notably, she caused the issuance of an alias writ of execution on August
25, 1989 (Exh. 6) in the ejectment suit which was almost two months after
she filed the complaint before this Court on June 27, 1989. If she were
really afraid of the squatters, then she should not have pursued the
issuance of an alias writ of execution. Besides, she did not even report to
the police the alleged phone threats from the squatters. To the mind of the
Court, the so-called squatter factor is simply factuitous (sic). 9

The lower court, accordingly, dismissed the complaint and ordered, instead,
private respondent to eject or cause the ejectment of the squatters from the
property and to execute the absolute deed of conveyance upon payment of the full
purchase price by petitioner.

Private respondent appealed to the Court of Appeals. On 29 May 1992, the appellate
court rendered its decision. 10 It opined that the contract entered into by the parties was
subject to a resolutory condition, i.e., the ejectment of the squatters from the land, the
non-occurrence of which resulted in the failure of the object of the contract; that private
respondent substantially complied with her obligation to evict the squatters; that it was
petitioner who was not ready to pay the purchase price and fulfill his part of the
contract, and that the provision requiring a mandatory return/reimbursement of the
P50,000.00 in case private respondent would fail to eject the squatters within the 60-
day period was not a penal clause. Thus, it concluded.

WHEREFORE, the decision appealed from is REVERSED and SET

ASIDE, and a new one entered declaring the contract of conditional sale
dated June 9, 1988 cancelled and ordering the defendant-appellee to
accept the return of the downpayment in the amount of P50,000.00 which
was deposited in the court below. No pronouncement as to costs. 11

Failing to obtain a reconsideration, petitioner filed this petition for review

on certiorari raising issues that, in fine, center on the nature of the contract adverted to
and the P50,000.00 remittance made by petitioner.

A perfected contract of sale may either be absolute or conditional 12depending on

whether the agreement is devoid of, or subject to, any condition imposed on
the passing of title of the thing to be conveyed or on the obligation of a party thereto.
When ownership is retained until the fulfillment of a positive condition the breach of the
condition will simply prevent the duty to convey title from acquiring an obligatory
force. If the condition is imposed on an obligation of a party which is not complied with,
the other party may either refuse to proceed or waive said condition (Art. 1545, Civil
Code). Where, of course, the condition is imposed upon the perfection of the contract
itself, the failure of such condition would prevent the juridical relation itself from
coming into existence. 13

In determining the real character of the contract, the title given to it by the parties is not
as much significant as its substance. For example, a deed of sale, although denominated
as a deed of conditional sale, may be treated as absolute in nature, if title to the property
sold is not reserved in the vendor or if the vendor is not granted the right to unilaterally
rescind the contract predicated
on the fulfillment or non-fulfillment, as the case may be, of the prescribed condition. 14
The term "condition" in the context of a perfected contract of sale pertains, in reality, to
the compliance by one party of an undertaking the fulfillment of which would beckon, in
turn, the demandability of the reciprocal prestation of the other party. The reciprocal
obligations referred to would normally be, in the case of vendee, the payment of the
agreed purchase price and, in the case of the vendor, the fulfillment of certain express
warranties (which, in the case at bench is the timely eviction of the squatters on the
property).

It would be futile to challenge the agreement here in question as not being a duly
perfected contract. A sale is at once perfected when a person (the seller) obligates
himself, for a price certain, to deliver and to transfer ownership of a specified thing or
right to another (the buyer) over which the latter agrees. 15

The object of the sale, in the case before us, was specifically identified to be a 1,952-
square meter lot in San Dionisio, Parañaque, Rizal, covered by Transfer Certificate of
Title No. 361402 of the Registry of Deeds for Pasig and therein technically described.
The purchase price was fixed at P1,561,600.00, of which P50,000.00 was to be paid
upon the execution of the document of sale and the balance of P1,511,600.00 payable
"45 days after the removal of all squatters from the above described property."

From the moment the contract is perfected, the parties are bound not only to the
fulfillment of what has been expressly stipulated but also to all the consequences which,
according to their nature, may be in keeping with good faith, usage and law. Under the
agreement, private respondent is obligated to evict the squatters on the property. The
ejectment of the squatters is a condition the operative act of which sets into motion the
period of compliance by petitioner of his own obligation, i.e., to pay the balance of the
purchase price. Private respondent's failure "to remove the squatters from the property"
within the stipulated period gives petitioner the right to either refuse to proceed with the
agreement or waive that condition in consonance with Article 1545 of the Civil
Code. 16 This option clearly belongs to petitioner and not to private respondent.

We share the opinion of the appellate court that the undertaking required of private
respondent does not constitute a "potestative condition dependent solely on his will"
that might, otherwise, be void in accordance with Article 1182 of the Civil Code 17 but a
"mixed" condition "dependent not on the will of the vendor alone but also of third
persons like the squatters and government agencies and personnel concerned." 18 We
must hasten to add, however, that where the so-called "potestative condition" is
imposed not on the birth of the obligation but on its fulfillment, only the obligation is
avoided, leaving unaffected the obligation itself. 19

In contracts of sale particularly, Article 1545 of the Civil Code, aforementioned, allows
the obligee to choose between proceeding with the agreement or waiving the
performance of the condition. It is this provision which is the pertinent rule in the case
at bench. Here, evidently, petitioner has waived the performance of the condition
imposed on private respondent to free the property from squatters. 20

In any case, private respondent's action for rescission is not warranted. She is not the
injured party. 21 The right of resolution of a party to an obligation under Article 1191 of
the Civil Code is predicated on a breach of faith by the other party that violates the
reciprocity between them. 22 It is private respondent who has failed in her obligation
under the contract. Petitioner did not breach the agreement. He has agreed, in fact, to
shoulder the expenses of the execution of the judgment in the ejectment case and to
make arrangements with the sheriff to effect such execution. In his letter of 23 June
1989, counsel for petitioner has tendered payment and demanded forthwith the
execution of the deed of absolute sale. Parenthetically, this offer to pay, having been
made prior to the demand for rescission, assuming for the sake of argument that such a
demand is proper under Article 1592 23 of the Civil Code, would likewise suffice to defeat
private respondent's prerogative to rescind thereunder.

There is no need to still belabor the question of whether the P50,000.00 advance
payment is reimbursable to petitioner or forfeitable by private respondent, since, on the
basis of our foregoing conclusions, the matter has ceased to be an issue. Suffice it to say
that petitioner having opted to proceed with the sale, neither may petitioner demand its
reimbursement from private respondent nor may private respondent subject it to
forfeiture.

WHEREFORE, the questioned decision of the Court of Appeals is hereby REVERSED

AND SET ASIDE, and another is entered ordering petitioner to pay private respondent
the balance of the purchase price and the latter to execute the deed of absolute sale in
favor of petitioner. No costs.

SO ORDERED.

Feliciano, Romero, Melo and Panganiban, JJ., concur.

Footnotes

1 Records, pp. 60-61.

2 Exh. 9.

3 Exh. 2.

4 Records, p. 116.

5 Exh. 8-B.

6 Exh. D.

7 Records, pp. 74-75.

8 Presided by Judge Buenaventura J. Guerrero.

9 Records, p. 205.

10 Penned by Associate Justice Fermin A. Martin, Jr. and concurred in by Associate

Justices Emeterio C. Cui and Cezar D. Francisco.

11 Rollo, p. 46.

12 Art. 1458, second paragraph, Civil Code of the Philippines.

13 See Ang Yu Asuncion, et al., vs. Court of Appeals, 238 SCRA 602.
14 Ibid., Vol. V, p. 3 citing Dignos v. Court of Appeals, No. L-59266, February 29, 1988,
158 SCRA 375.

15 Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds
upon the thing which is the object of the contract and upon the price.

From that moment, the parties may reciprocally demand performance, subject to the
provisions of the law governing the form of contracts.

16 Art. 1545. Where the obligation of either party to a contract of sale is subject to any
condition which is not performed, such party may refuse to proceed with the contract or
he may waive performance of the condition. If the other party has promised that the
condition should happen or be performed, such first mentioned party may also treat the
nonperformance of the condition as a breach of warranty.

Where the ownership in the thing has not passed, the buyer may treat the fulfillment by
the seller of his obligation to deliver the same as described and as warranted expressly
or by implication in the contract of sale as a condition of the obligation of the buyer to
perform his promise to accept and pay for the thing.

17 Art. 1182. When the fulfillment of the condition depends upon the sole will of the
debtor, the conditional obligation shall be void. If it depends upon chance or upon the
will of a third person, the obligation shall take effect in conformity with the provisions of
this Code.

18 Decision, p. 17.

19 See Osmeña vs. Rama, 14 Phil. 99.

20 See: Intestate Estate of the Late Ricardo P. Presbitero, Sr. v. Court of Appeals, 217
SCRA 372.

21 In Boysaw v. Interphil. Promotions, Inc. (148 SCRA 635, 643), the Court has said:
"The power to rescind is given to the injured party. 'Where the plaintiff is the party who
did not perform the undertaking which he was bound by the terms of the agreement to
perform, he is not entitled to insist upon the performance of the contract by the
defendant, or recover damages by reason of his own breach.'"

22 Deiparine, Jr. v. Court of Appeals, 221 SCRA 503, 513 citing Universal Food
Corporation v. Court of Appeals, 33 SCRA 1.

23 See Ocampo v. Court of Appeals, supra. Art. 1592 states: "In the sale of immovable
property, even though it may have been stipulated that upon failure to pay the price at
the time agreed upon the rescission of the contract shall of right take place, the vendee
may pay, even after the expiration of the period, as long as no demand for rescission of
the contract has been made upon him either judicially or by a notarial act. After the
demand, the court may not grant him a new term."
Philippine Amusement Enterprises,
Inc. vs. Soledad Natividad, et al.
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-21876 September 29, 1967

PHILIPPINE AMUSEMENT ENTERPRISES, INC., plaintiff-appellant,

vs.
SOLEDAD NATIVIDAD and MARIANO NATIVIDAD, defendants-appellees.

Disini and Arnobit for plaintiff-appellant.

Isidoro Crisostomo for defendants-appellees.

CASTRO, J.:

This is an appeal from the decision of the Court of First Instance of Davao dated May 31,
1962, rescinding, in favor of the defendants, the lease agreement entered into by the
plaintiff Philippine Amusement Enterprises, Inc. and the defendant Soledad Natividad
relative to an automatic phonograph, ordering the latter to restore the phonograph to
the former, denying the plaintiff's claim for liquidated and exemplary damages,
attorney's fees and costs of suit, and dismissing the defendants' counterclaim. The
plaintiff took the appeal to the Court of Appeals which, however, certified it to this Court
because the questions involved are of law.

On January 6, 1961 the plaintiff, a domestic corporation with main office in Quezon City
and a branch office in Davao City, entered into a contract with the defendant Soledad
Natividad, owner of the Irene's Refreshment Parlor in Davao City, whereby the former
leased to the latter an automatic phonograph (Seeburg Selectomatic 100-R), more
popularly known as "jukebox". The pertinent provisions of the contract are as follows:

2. The OPERATOR1 agrees to supply and replace parts that may have been
damaged as a result of ordinary wear and tear without any cost to the
PROPRIETOR;2

xxx xxx xxx

5. The PROPRIETOR shall pay to the OPERATOR, by way of rental for the use of
the aforesaid automatic phonograph, an amount equal to 75% of the Gross
Receipts for the period of one week, but in no case shall the amount be less than
P50.00 a week;
 xxx xxx xxx

9. The PROPRIETOR agrees that during the term of this agreement, the
OPERATOR shall have the exclusive right to maintain an automatic phonograph
in the premises, and the PROPRIETOR shall not permit anyone to install or
maintain any phonograph or any other devices for the reproduction or the
transmission of music in any part of the premises;

xxx xxx xxx

11. It is mutually agreed that the duration of this agreement shall be for the
period of three (3) years from the date hereof and shall renew itself automatically
for a like period under the same terms and conditions, unless either of the parties
hereto gives to the other written notice of his intention to cancel this agreement
by registered mail within thirty (30) days before the expiration of this agreement
or any renewal thereof.

12. In the event that the PROPRIETOR shall fail to comply with any of the terms
and conditions of this contract, the OPERATOR, at any time during the existence
of the agreement, shall be entitled as a matter of right to immediately repossess,
and the PROPRIETOR binds himself to voluntarily surrender the said
phonograph; and hereby expressly grants permission to representatives of the
OPERATOR any time for such purposes thereby waiving any action for trespass
or damages.

xxx xxx xxx

15. In the event of a breach of this agreement by the PROPRIETOR, the parties
hereto agree that the OPERATOR shall be entitled to recover as liquidated
damages and not as a penalty or forfeiture, a sum equal to P50.00 per week for
each week remaining of the unexpired term of this agreement; AND IN THE
EVENT OF JUDICIAL PROCEEDINGS TO ENFORCE ANY OF THE
PROVISIONS OF THIS CONTRACT, the OPERATOR shall be entitled to
attorney's fees of not less than P200.00, costs of the action, premiums for bonds,
and other expenses and damages which OPERATOR may suffer or incur by
reason thereof, as well as to the immediate issuance of preliminary writ of
mandatory injunction.

On July 17, 1961, Mariano Natividad, husband of the defendant Soledad Natividad,
wrote the following letter to the plaintiff's branch office in Davao City:

For two (2) weeks ago, I had advised your representative here in Davao to get
back your jukebox, but until today said representative did not mind us.

So upon receipt of this letter, you are hereby again advised to get the said
Jukebox and failure on your part to get it, we shall not be responsible anymore
for the said Jukebox.

On July 27, 1961 Mariano Natividad wrote another letter to the plaintiff, this time
addressed to its main office in Quezon City, informing it of his letter of July 17 and of the
reasons for requesting the return of the jukebox to the company. This letter reads as
follows:

Please may you hear our revelations or relations prior to the advice we had made
to your company regarding our slight difference from your agent, stationed here
in Davao City.

1. We requested your agent that the said Jukebox should be inspected once
in a while there are times when the said Jukebox stock up and the coins
which will be dropped will just be confiscated due to the selected record
which will not give our selected music.

2. About a year ago, we asked your agent here in Davao City if we could
buy your Jukebox. He replied, "yes" and he will inform the Manila office.
From that time, we made always an inquiry if said matter was already
referred to. But we were surprised why until last May we did not hear any
word from your agent. So we decided to order one from the United States.

3. On July 3rd, we advised personally your agent that the said Jukebox
should be taken from our establishment. He answered us that he will
report the matter to your Central Office. From July 3rd until July 16th, we
had not met your agent. On the following day, July 17th, we met your
agent because he accounted the income of the said Jukebox and we again
told him that the Jukebox should be taken. He replied that he could not act
because there is no letter from us for the Manila office advising the return
of the said Jukebox. So we made a discussion why he did not tell us if our
letter was necessary; so we wrote a letter on July 17th. At that time when
he received our letter, he requested for an extension of one (1) week for he
would forward our letter to Manila. But according to my wife, your agent
told her that he forwarded our letter last July 22nd. On July 24th, we
finally decided to return the said Jukebox and even have ready laborers to
help us load the Jukebox on your pick-up. Your agent, Mr. Gonzales,
remarked angrily that he would not accept the said Jukebox but will just
deposit it in our establishment until the Manila office will act on it.
According to him, your agent, Mr. Gonzales, we could not remove the said
Jukebox from the place because there was a contract. Later on, Mr.
Gonzales calmly requested us again to have an additional extension of one
(1) more week. In this situation we were very embarrassed because there
were many customers and other persons present during our discussions.
Right on that day, we transferred your Jukebox inside our airconditioned
room without any business because Mr. Gonzales told us that the said
Jukebox should be deposited only in our establishment. Your agent, Mr.
Gonzales, is a good agent on the other world but not in this world where
we are living. Beginning July 24th until the time you will get the Jukebox,
we are going to collect a monthly rental of Fifty Pesos (P50.00) for the
space occupying the Jukebox.

In its reply of August 4, 1961 the plaintiff stated that —

the stocking up of coins is quite normal in any coin-operated phonograph, as well

as failure to get the desired selection. It has been the policy of our company,
 however, to give top priority to the complaints of our customers. It is not clear
from your letter whether our Branch Manager for Davao City has been remiss in
his duties. We are willing to give the benefit of the doubt by concluding that he
might have failed to respond to your calls in time and I assure you that
immediate instructions will be issued from this office directing him to give
personal attention to any service that you might wish in connection with the said
Jukebox.

It as well denied knowledge of the defendants' desire to buy a jukebox and deplored the
fact that the defendants ordered one from the United States without first sending the
request to buy directly to it since the plaintiff was anyway willing to sell a jukebox to any
interested person. Calling attention to paragraph 9 of the lease contract which gave it
the exclusive right to maintain an automatic phonograph in the defendants' premises,
the plaintiff asked the defendants to re-install its jukebox and remove the other one
which the defendants had installed in their premises.

On August 4 and October 16, 1961, the plaintiff, through counsel, wrote the defendant
spouses, demanding anew compliance with the lease contract and the payment of
damages, and warning them that it would file the corresponding action in court if they
did not comply with its demand. As the defendants refused the demand, the plaintiff
brought action in the Court of First Instance of Davao on November 21, 1961, praying for
the return to it of the automatic phonograph, subject of the contract of lease and the
payment of P5,850 as liquidated damages, P5,000 as exemplary damages, P500 as
attorney's fees and P400 as expenses of litigation.

Upon the parties' stipulation of facts, their pleadings and the documentary evidence
submitted by them as annexes to the stipulation of facts and pleadings, the lower court
rendered the decision hereinbefore adverted to.

The plaintiff imputes four errors to the lower court, the vital one being the court's
holding that the facts fully warrant a rescission of the contract of lease in favor of the
defendants by reason of the plaintiff's failure to perform its obligation to render the
automatic phonograph suitable for the purpose for which it was intended.

It is our view that the decision of the lower court should be reversed on three grounds.

First. The power to rescind obligations is implied in reciprocal ones in case one of the
obligors should not comply with what is incumbent upon him. So the Civil Code
provides.3 But it is equally settled that, in the absence of a stipulation to the contrary,
this power must be invoked judicially; it cannot be exercised solely on a party's own
judgment that the other has committed a breach of the obligation. 4 Hence, as there is
nothing in the contract of lease empowering the defendants to rescind it without resort
to the courts, the defendants' action in unilaterally terminating the contract is
unjustified. As this Court said in Escueta v. Pando:5

The defendant could not, by himself alone and without judicial intervention,
resolve or annul the agreement. Under article 1124 [now art. 1191] of the Civil
Code, the right to resolve reciprocal obligations, in case one of the obligors shall
fail to comply with that which is incumbent upon him, is deemed to be implied.
But that right must be invoked judicially for the same article also provides: "The
 court shall decree the resolution demanded, unless there should be grounds
which justify the allowance of a term for the performance of the obligation."

Second. Rescission will be ordered only where the breach complained of is substantial as
to defeat the object of the parties in entering into the agreement. It will not be granted
where the breach is slight or casual. 6The defendants asked the plaintiff to retrieve its
phonograph, claiming that there were times when the coins dropped into the slot would
get stuck, resulting in its failure to play the desired music. But apart from this bare
statement, there is nothing in the evidence which shows the frequency with which the
jukebox failed to function properly. The expression "there are times" connotes
occasional failure of the phonograph to operate, not frequent enough to render it
unsuitable and unserviceable. As a matter of fact, there is not even a claim that, as a
result of unsatisfactory performance thereof, the income therefrom dropped to such a
level that the defendants could not even pay the plaintiff its guaranteed share of P50 a
week. On the contrary, the evidence (Stipulation of Facts, Annexes J, K, L, M, N, and O)
shows that, during the period complained of, the operation of the jukebox was quite
profitable to both parties.7

Third. We believe that the defendants actually bought a jukebox only in 1961 after they
had signed the lease contract in question, although they might have expressed a desire
to buy one the year before, for otherwise they would not have entered into a three-year
lease. But certainly their decision to buy a jukebox and operate it themselves was made
long before they ever complained in July, 1961 of any defect in the rented jukebox. To be
sure, it is not shown when the rented phonograph supposedly developed trouble;
presumably it was early in July, 1961, since the defendants' first letter of complaint was
written on July 17. But if, as defendants admit, they began operating their own jukebox
"sometime in July, 1961" (presumably on July 24, 1961 when they removed the rented
jukebox from where it was installed), then the defendants' pretense that they decided to
buy their own jukebox only after the rented one had failed to function properly becomes
highly improbable. The jukebox which they ordered from the United States could not
have arrived in so short a time as to enable them to operate it on July 24.

We are rather inclined to believe that the decision to buy a jukebox was made because
the defendants found it more profitable to operate one themselves. Their letter of July
17, 1961, in which they demanded the removal of the rented jukebox from their
premises, with the warning that they would not be "responsible anymore" for it, and
their other letter of July 27 of like tenor, betray the haste with which they wanted to get
out of their contractual obligations to the plaintiff. We note that they did not even ask
the plaintiff to service the rented jukebox; they asked the plaintiff to remove the jukebox
or they would charge rental for the use of the space occupied by it. The conviction
cannot be avoided that the jukebox which the defendants had ordered from the United
States had arrived and the latter thereafter conjured up a reason for operating it without
being charged with violation of the lease contract. The defendants' pretenses cannot
excuse their culpable violation of the lease contract; their conduct fully justifies the
award of liquidated damages to the plaintiff.

ACCORDINGLY, the judgment a quo is reversed, and the contract of lease between the
plaintiff and the defendant Soledad Natividad is hereby rescinded in favor of the
plaintiff. The defendants are ordered to return to the plaintiff the automatic phonograph
subject of the contract, and to pay the plaintiff liquidated damages in the total amount of
P5,850, plus 6 per cent interest from the date of the filing of the complaint until the
amount shall have been fully paid, and attorney's fees in the amount of P200. Costs
against the defendants.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Angeles and
Fernando, J.J., concur.
Bengzon, J.P., J., took no part.

Footnotes
1
Philippine Amusement Enterprises, Inc.
2
Soledad Natividad.
3
Civ. Code art. 1191; Abaya v. Standard-Vacuum Oil Co., G.R. L-9511, Aug. 30,
1957; Hodges v. Granada, 59 Phil. 429 (1934).
4
Judicial permission to rescind an obligation is not necessary if there is a special
provision in the contract granting the power of cancellation to a party. E.g.,
Froilan v. Pan Oriental Shipping Co., G.R. L-11897, Oct. 31, 1964; De la Rama
Steamship Co. v. Tan, G.R. L-8784, May 21, 1956, citing Hanlon v. Hausermann,
40 Phil. 796 (1920); Taylor v. Uy Tiong Pao 43 Phil. 873 (1922).
5
76 Phil. 256 (1946).
6
See, e.g., Song Fo & Co. v. Hawaiian-Philippine Co., 47 Phil. 821 (1925).
7
See Record on Appeal, pp. 22, 57-61.
 Sps. Lino Francisco & Guia
Francisco vs. DEAC Construction,
Inc., et al.
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 171312 February 4, 2008

SPS. LINO FRANCISCO & GUIA FRANCISCO, petitioners,

vs.
DEAC CONSTRUCTION, INC. and GEOMAR A. DADULA, respondents.

DECISION

TINGA, J.:

The Spouses Lino and Guia Francisco (Spouses Francisco) assail the Decision 1 of the
Court of Appeals dated 28 July 2005, rendered in favor of respondents DEAC
Construction, Inc. (DEAC) and Geomar Dadula (Dadula), upholding the latter's
monetary claims against the Spouses Francisco. The appellate court's decision reversed
and set aside the Decision2 of the Regional Trial Court of Manila, Branch 28, dated 2
February 1998 which ordered the partial rescission of the 13 September 1994
Construction Contract between the parties and awarded moral and exemplary damages
and attorney's fees to the Spouses Francisco.

The findings of fact of the trial court and the Court of Appeals are in conflict on the
question of whether the Spouses Francisco authorized the deviations on the building
plan, particularly with regard to the closing of the open space and the reduction of the
setback from the property line. They are, however, in agreement as to the following
antecedents quoted from the appellate court's decision:

Plaintiffs-appellees Lino Francisco and Guia Francisco obtained the services of

defendant-appellant DEAC Construction, Inc. (DEAC) to construct a 3-storey
residential building with mezzanine and roof deck on their lot located at 118
Pampanga Street, Gagalangin, Tondo, Manila for a contract price
of P3,500,000.00. As agreed upon, a downpayment of P2,000,000.00 should be
paid upon signing of the contract of construction, and the remaining balance
of P1,500,000.00 was to be paid in two equal installments: the first installment
of P750,000.00 should be paid upon completion of the foundation structure and
the ground floor, which amount would be used primarily for the construction of
the second floor to the roof deck while the final amount of P750,000.00 should
be paid upon completion of the second floor up to the roof deck structure to
defray the expenses necessary for finishing and completion of the building. To
undertake the said project, DEAC engaged the services of a sub-contractor, Vigor
Construction and Development Corporation, but allegedly without the plaintiffs-
appellees' knowledge and consent.

On September 12, 1994, even prior to the execution of the contract, the plaintiffs-
appellees had paid the downpayment of P2,000,000.00. The amount
of P200,000.00 was again paid to DEAC on February 27, 1995 followed by the
payment of P550,000.00 on April 2, 1995. Plaintiff-appellant Guia Francisco
likewise paid the amount of P80,000.00 on June 5, 1995 for the requested
"additional works" on the project.

The construction of the residential building commenced in October 1994

although DEAC, upon which the obligation pertained, had not yet obtained the
necessary building permit for the proposed construction. It was on this basis that
the owner Lino Francisco was charged with violation of Section 301, Chapter 3
(Illegal Construction) of [P.D. No.] 1096 otherwise known as the National
Building Code of the Philippines with the Metropolitan Trial Court of Manila,
Branch 12.

On March 7, 1995, the Office of the Building Official of the City of Manila finally
issued the requisite Building Permit. Thus, the complaint against owner Lino
Francisco was accordingly dismissed. As admitted by DEAC, the release of the
said permit was withheld because of the erroneous designation of the location of
the lot in one of the building plans. Thus, DEAC had to make the necessary
adjustment. However, before the Office of the Building Official finally approved
the amended building plan, it made some necessary corrections therein. And to
facilitate the said approval and the subsequent release of the building permit, the
signatures of plaintiff-appellee Guia Francisco in the said amended and corrected
building plans were forged by DEAC's representative.

But aside from [the] lack of building permit, the building inspector also observed,
after periodic inspections of the construction site, that the contractor deviated, on
some specifications, from the approved plans. Thus, on April 7, 1995, the Office of
the Building Official of Manila issued another Notice of Violation against owner
Lino Francisco, while at the same time calling the attention of the contractor, on
account of the following deviations and violations, to wit:

1. The 1.00 mt. setback from the property line instead of 1.45 mts. as per
approved plan was not followed in violation [of] Sec. 306, Chapter 3 [PD
1096, otherwise known as the National Building Code (NBC)];

2. The [excessive] projection of 0.50 mt. from 3 rd floor level to [roof] deck
in violation [of] Sec. 306, Chapter 3 of the NBC (PD 1096);

3. The required open patio was covered in pursuant (sic) to Sec. 306[,]
Chapter 3 [of PD 1096];
 4. Provision of window opening along the right-side firewall in pursuant
(sic) to Sec. 1007 Chapter 10 of [PD 1096];

5. Stockpiling of [construction materials] along the street/sidewalk area

in violation [of] Sec. 5[,] Rule VI of the IRR;

6. Please provide minimum safety and protection in pursuant (sic) 2.3,

2.4, and 2.5 of Rule XX of the IRR.

The said notice was received on April 11, 1995 by Engr. Mike Marquez of DEAC
Construction, Inc. The plaintiffs-appellees, however, denied having received any
notice from the Office of the Building Official of Manila regarding the on-going
construction.

In a letter dated July 1, 1995, the plaintiffs-appellees, through their counsel,

suddenly complained of several infractions emanating from the construction of
the project allegedly committed by DEAC, to wit:

a. Implementation of the project was started immediately after signing

of the contract on 15 September 1994 without any building permit and
approved plans.

b. Building permit was released only on (sic) March 1995 together with
the approved plans with necessary corrections made by the Office of the
Building Official. You did not inform the owners about the corrections.
The signatures of Mrs. Guia Francisco appearing on the building plans
were forgeries.

c. [The] Approved [C]onstruction [P]lans were not strictly followed

during the actual implementation of the project. Open space/patio which
is 20% of lot area (based on National Building Code) for inside lot was
deleted.

d. No written formal approval from the owners for the alteration of

plans.

e. Poor workmanship.

i. Marble slabs installed were not approved by the owner.

ii. Beam below the 1st landing at the ground floor is too low.

iii. Ground floor Finish floor line is below the ordinary flood level
in the area. The contractor has been repeatedly instructed to raise
the ground floor finish elevation but insisted on their decision.

f. Poor supervision of the construction works.

The plaintiffs-appellees demanded that DEAC must comply with the approved
plan, construction contract, National Building Code, and the Revised Penal Code,
otherwise, they would be compelled to invoke legal remedies. In the meantime
that the necessary works and construction were demanded to be undertaken, the
last and final installment was withheld. DEAC responded, also through a letter
prepared by its counsel, that it had faithfully complied with its obligation under
the contract, thus, to demand for further compliance would be improper. It said
that if somebody had breached the contract, it was the plaintiffs-appellees,
because the last installment of P750,000.00 which was supposed to have been
paid after the second floor and the roof deck structure was completed, which
allegedly had long been accomplished, was not yet paid. To settle their
differences, DEAC had given the plaintiffs-appellees the option to either pay the
full amount of P750,000.00, so that the finishing stage of the project would be
completed, or just pay the worth of the work already done, which was assessed
at P250,000.00.

On July 21, 1995, a Work Stoppage Order was issued against the plaintiff-
appellee Lino Francisco pursuant to the previous April 7, 1995 Notice of
Violations. Having learned of such order, the plaintiffs-appellees allegedly
immediately proceeded to the Office of the Building Official of Manila to explain
that DEAC was the one responsible for such violations, and that the deviations of
the approved plan being imputed against Lino Francisco were unilateral acts of
DEAC. They also filed a complaint for "Non-Compliance of the Building Plan,
Illegal Construction, abandonment and other violations of the Building Code"
against DEAC with the said Office. The said complaint was endorsed to the City
Prosecutor of Manila which culminated in the filing of a criminal case against
Geomar A. Dadula and DEAC project engineer Leoncio C. Alambra for deviation
and violation of specification plan.

The plaintiffs-appellees also filed this civil case for Rescission of Contract and
Damages on September 21, 1995 with the Regional Trial Court of Manila, Branch
28, against DEAC and its President Geomar A. Dadula.

After due proceedings, the defendants-appellants were found to have breached

their contractual obligation with the plaintiffs-appellees. Among their violations
were: (1) the construction of the building without the necessary building permit,
which violated Section 3, Article IV of the Construction Contract; and (2) the
deviation or revision of the approved building plan in the actual construction. On
the other hand, the trial court said that the refusal of the plaintiffs-appellees to
pay the final installment of P750,000.00 was only justified because of the
defendants-appellants' violations of the contract. Thus, on account of such
violations, rescission of the contract was warranted. However, since the subject
building was already 70% to 75% completed, only partial rescission was ordered.
Pursuant thereto, DEAC was ordered to refund the sum of P205,000.00 to the
plaintiffs-appellees after considering the following computations:

Contract price - P3.5 Million

% of work completed - 75%

Contract Price x % of work completed - P3.5 Million x 75%

 = P2,625,000.[00]

Actual Payment - 2,830,000.00

Less cost of work completed - 2,625,000.00

Difference - 205,000.00

In addition, damages was awarded based on par. 2, Article 1191 of the New Civil
Code which provides for the award of damages in case of rescission of contract.
Geomar Dadula, being the President of DEAC, was likewise held solidarily liable
with the latter.3

Ruling that the Spouses Francisco were the ones who initiated and requested the
deviations, the appellate court held that respondents fully complied with their obligation
under the contract and ordered the Spouses Francisco to pay the balance of the contract
price. It also ordered them to pay moral damages, attorney's fees and costs of suit.

Before this Court, the Spouses Francisco question the appellate court's finding that they
were the ones who requested the deviations in the building plan, particularly with
regard to the closing of the open space and the reduction of the setback from the
property line. They maintain that they did not waive their right to demand rescission as
a result of the disputed deviations and because of the fact that DEAC commenced
construction without first securing a building permit as was incumbent upon it under
their contract. In fact, apart from the present case, the Spouses Francisco filed a
criminal suit against respondent Dadula taking him to task for these violations, of which
the latter was found guilty.

Respondents, in their Comment4 dated 8 June 2006, assert that the deviations in the
building plan were done upon the request of the Spouses Francisco. Respondent Dadula
had even warned them that building the structure close to the property line could violate
the required setback. They also claim that the belated issuance of the building permit
was due to neglect in the supervision of a subordinate and does not indicate any bad
faith on their part.5 At any rate, the fact that this issue was raised only after several
months had passed from the time construction started allegedly suggests waiver on the
part of the Spouses Francisco.

A Reply,6 dated 30 September 2006 was filed by the Spouses Francisco reiterating their
argument that respondent Dadula's conviction in the criminal case should be taken into
account in the present case.

As earlier adverted to, the trial court held that respondents deviated from the
specifications and terms of the contract, particularly with regard to the open space
closing and the setback reduction, without securing the approval of the Spouses
Francisco. On the other hand, the appellate court held that the Spouses Francisco were
the ones who initiated and requested the deviations. The conflict in these findings
warrants a departure from the general rule that this Court shall not entertain petitions
for review which substantially raisequestions of fact. 7 The conflict accounts for the
divergence of the decisions of the courts below.8

The records reveal that respondents admitted having failed to secure a building permit
before construction of the residential building subject of this case commenced. This
blunder exposed petitioner Lino Francisco to criminal prosecution as, in fact, an
Information9 dated 5 December 1995 was filed against him with the Metropolitan Trial
Court of Manila, Branch 12, for violation of Section 301, Chapter 3 (Illegal Construction)
of the National Building Code of the Philippines. 10 It appears that this Information was
preceded by several Notices of Illegal Construction sent by the Office of the Building
Official of Manila supposedly addressed to petitioner Lino Francisco, but which the
latter would not have gotten wind of had he not inquired with the said office about
certain documents relative to the construction.

Respondents DEAC and Dadula, to whom the obligation of securing the building permit
pertained, should obviously have ensured compliance with the requirements set forth by
law. At the very least, good faith and fair dealing ordain that they inform the Spouses
Francisco that the building permit had not yet been issued especially that they had
already received a substantial amount of money from the latter and had already started
the construction of the building.11

Parenthetically, the Spouses Francisco disclose that the Metropolitan Trial Court of
Manila, Branch 23, found respondent Dadula guilty of violating the National Building
Code for his failure to follow the required setback from the property line; the excessive
projection of the roof deck of the structure; the deviation in the covering of the required
patio; the illegal stockpiling of construction materials; the lack of safety standards in the
construction; and his failure to secure a building permit for the construction. 12 This
conviction was consistently affirmed by the Regional Trial Court, 13 the Court of
Appeals14 and ultimately this Court.15 The RTC even noted that "defendants admitted
that there were deviations from the plans and that they forged the signature of Mrs.
Guia Francisco to ensure early approval of the permit."16

The foregoing matters are essential to the propriety of the trial court's ruling that partial
rescission is warranted in view of the failure of respondents to comply with what was
incumbent upon them under the construction contract and the consequent prejudice
and damage caused to petitioners by respondents' actions. Of equal importance, of
course, is the correctness of its finding that the deviations from the building plan were
not authorized by the Spouses Francisco.

Our own review of the records reveals that the open space was closed by respondents
without the approval of the Spouses Francisco and in violation of the National Building
Code. During the 27 May 1995 meeting between the parties in which they were called to
thresh out their differences, respondents stated that the open space indicated on the
plan was omitted in the actual construction "in order to give extra space for the
building,"17 and not because the Spouses Francisco requested such closure, if such was
really the case. Respondents also mentioned that the contractor forged petitioner Guia
Francisco's signature "in the City Hall in order to process the early approval of plans.
Also, alterations were done in the City Hall."18

Curiously, the Court of Appeals relied on the same exhibit in arriving at its conclusion
that the Spouses Francisco authorized, even requested, the changes in the building plan.
Apparently, the appellate court interpreted the agreement between the parties regarding
the extension of the second floor balcony as the Spouses Francisco's approval of the
closure of the open space and reduction in the required setback from the property line.
As pointed out by petitioners, however, the extension of the second floor balcony was
entirely distinct from the closure of the open space and reduction of the setback from
the property line.

Respondents' mistake in identifying the exact location of the property which led to the
delay in the issuance of a building permit and forgery of petitioner Guia Francisco's
signature on the building plan exhibits a proclivity for error and taking the easy way out.
This aspect does not sit well with the Court. The Spouses Francisco should be allowed to
rescind the contract to the extent that this is possible under the circumstances.

Article 1191 of the Civil Code provides that the power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply with what is incumbent
upon him. The rescission referred to in this article, more appropriately referred to as
resolution, is not predicated on injury to economic interests on the part of the party
plaintiff, but of breach of faith by the defendant which is violative of the reciprocity
between the parties.19 The right to rescind may be waived, expressly or impliedly.

The Spouses Francisco, in their 1 July 1995 letter to respondents, complained, among
others, about the belated release of the building permit, the unauthorized corrections in
the building plan, the forgery of petitioner Guia Francisco's signature on the building
plan, and the deletion of the open space/patio in the actual construction of the project.
The filing of a criminal case against respondent Dadula and the subsequent filing of this
civil case for rescission and damages within a reasonable time after the Spouses
Francisco had learned that construction of their building commenced without the
necessary building permit and discovered that there were deviations from the building
plan demonstrate the vigilance with which they guarded their rights. The appellate
court's conclusion that the Spouses Francisco should be deemed to have waived their
right to seek rescission is clearly unfounded.

Finally, given the fact that the construction in this case is already 75% complete, the trial
court was correct in ordering partial rescission only of the undelivered or unfinished
portion of the construction.20 Equitable considerations justify rescission of the portion
of the obligation which had not been delivered.

WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals,

dated 28 July 2005 and its Resolution, dated 31 January 2006
are REVERSED and SET ASIDE. The Decision of the Regional Trial Court of Manila,
Branch 28 in Civil Case No. 95-75430 is hereby REINSTATED.

SO ORDERED.

Quisumbing,Chairperson Carpio, Carpio-Morales, Velasco, Jr., JJ., concur.

Footnotes
1
Rollo, pp. 45-60. Penned by Associate Justice Amelita G. Tolentino and
concurred in by Associate Justices Roberto A. Barrios and Vicente S.E. Veloso.
2
Records, pp. 289-311.
3
Rollo, pp. 46-53.
4
Id. at 132-142.
5
According to respondents, instead of designating the subject property as an
interior lot, its sub-contractor designated the property as a corner lot, resulting in
the delay in the issuance of the building permit. See RTC Decision, id. at 81.
6
Id. at 158-160.
7
Gaw v. Court of Appeals, G.R. No. 147748, 19 April 2006, 487 SCRA 423, 428.
8
The RTC disposed of the case as follows:

In view of all the foregoing, judgment is hereby rendered for the plaintiffs,
ordering partial rescission of the contract and for the defendants to jointly
and severally pay the former the following: For the return or refund of the
sum of P205,000.00 representing the excess payment to cover the
unfinished work as per contract.

Moral Damages - P250,000.00

Exemplary Damages - P250,000.00

Attorney's fees - P100,000.00 and costs

Manila, Philippines, February 2, 1998. (Records, pp. 310-311)

while the Court of appeals decided the appeal with the following fallo:

WHEREFORE, premises considered, the decision appealed from is

REVERSED and SET ASIDE, and a new one is entered ordering the
plaintiffs-appellants the following:

(1) P670,000.00, the remaining balance of the contract price;

(2) P100,000.00 as moral damages;

(3) P50,000.00 as attorney's fees; and

(4) The costs of the suit. (Rollo, pp. 59-60)

9
Exhibit "K", Records.
10
Presidential Decree No. 1096.
11
Rollo, p. 47. Respondents commenced construction in October 1994. By the
time the building permit was issued on March 7, 1995, petitioners had already
paid a total of P2,200,000.00.
12
Id. at 98-102; MeTC Decision dated 14 October 1999.
13
Id. at 104-106; RTC Decision dated 16 July 2001.
14
Id. at 110-123; CA Decision dated 13 December 2002.
15
Id. at 128; Resolution dated 5 May 2004.
16
Id. at 106.
17
Records, p. 45; Minutes of the Meeting.
18
Id.
19
Pryce Corporation v. Philippine Amusement and Gaming Corporation, G.R. No.
157480, 6 May 2005, 458 SCRA 164, 177, citing the Concurring Opinion of Mr.
Justice J.B.L. Reyes in Universal Food Corporation v. Court of Appeals, 144 Phil.
1 (1970).
20
In Tan Guat v. Pamintuan, C.A. 37 O.G. 2494, the Court of Appeals, through
then Associate Justice Sabino Padilla (who later became an Associate Justice of
this Court), ordered partial rescission insofar as the undelivered portion of the
contract was concerned, and specific performance of the portion of the obligation
which had been delivered.
 Republic of the Philippines
Supreme Court
Manila

SECOND DIVISION
SPOUSES FERNANDO G.R. No. 188288
and LOURDES VILORIA,
Petitioners, Present:

CARPIO, J.,
Chairperson,
PEREZ,
- versus - SERENO,
REYES, and
BERNABE, JJ. 

Promulgated:
CONTINENTAL AIRLINES, INC.,
Respondent. January 16, 2012

x------------------------------------------------------------------------------------x

DECISION

REYES, J.:

This is a petition for review under Rule 45 of the Rules of Court from the January 30,
2009 Decision of the Special Thirteenth Division of the Court of Appeals (CA) in CA-G.R. CV
1

No. 88586 entitled “Spouses Fernando and Lourdes Viloria v. Continental Airlines, Inc.,” the
dispositive portion of which states:

WHEREFORE, the Decision of the Regional Trial Court, Branch 74,

dated 03 April 2006, awarding US$800.00 or its peso equivalent at the time of
payment, plus legal rate of interest from 21 July 1997 until fully paid,
 [P]100,000.00 as moral damages, [P]50,000.00 as exemplary damages,
[P]40,000.00 as attorney’s fees and costs of suit to plaintiffs-appellees is
hereby REVERSED and SET ASIDE.

Defendant-appellant’s counterclaim is DENIED.

Costs against plaintiffs-appellees.

SO ORDERED. 2

On April 3, 2006, the Regional Trial Court of Antipolo City, Branch 74 (RTC) rendered a
Decision, giving due course to the complaint for sum of money and damages filed by petitioners
Fernando Viloria (Fernando) and Lourdes Viloria (Lourdes), collectively called Spouses Viloria,
against respondent Continental Airlines, Inc. (CAI). As culled from the records, below are the
facts giving rise to such complaint.

On or about July 21, 1997 and while in the United States, Fernando purchased for himself
and his wife, Lourdes, two (2) round trip airline tickets from San Diego, California to Newark,
New Jersey on board Continental Airlines. Fernando purchased the tickets at US$400.00 each
from a travel agency called “Holiday Travel” and was attended to by a certain Margaret Mager
(Mager). According to Spouses Viloria, Fernando agreed to buy the said tickets after Mager
informed them that there were no available seats at Amtrak, an intercity passenger train service
provider in the United States. Per the tickets, Spouses Viloria were scheduled to leave for
Newark on August 13, 1997 and return to San Diego on August 21, 1997.

Subsequently, Fernando requested Mager to reschedule their flight to Newark to an

earlier date or August 6, 1997. Mager informed him that flights to Newark via Continental
Airlines were already fully booked and offered the alternative of a round trip flight via Frontier
Air. Since flying with Frontier Air called for a higher fare of US$526.00 per passenger and
would mean traveling by night, Fernando opted to request for a refund. Mager, however, denied
his request as the subject tickets are non-refundable and the only option that Continental Airlines
can offer is the re-issuance of new tickets within one (1) year from the date the subject tickets
were issued. Fernando decided to reserve two (2) seats with Frontier Air.

As he was having second thoughts on traveling via Frontier Air, Fernando went to the
Greyhound Station where he saw an Amtrak station nearby. Fernando made inquiries and was
told that there are seats available and he can travel on Amtrak anytime and any day he pleased.
Fernando then purchased two (2) tickets for Washington, D.C.

From Amtrak, Fernando went to Holiday Travel and confronted Mager with the Amtrak
tickets, telling her that she had misled them into buying the Continental Airlines tickets by
misrepresenting that Amtrak was already fully booked. Fernando reiterated his demand for a
refund but Mager was firm in her position that the subject tickets are non-refundable.

Upon returning to the Philippines, Fernando sent a letter to CAI on February 11, 1998,
demanding a refund and alleging that Mager had deluded them into purchasing the subject
tickets.
3
 In a letter dated February 24, 1998, Continental Micronesia informed Fernando that his
complaint had been referred to the Customer Refund Services of Continental Airlines at Houston,
Texas.4

In a letter dated March 24, 1998, Continental Micronesia denied Fernando’s request for a
refund and advised him that he may take the subject tickets to any Continental ticketing location
for the re-issuance of new tickets within two (2) years from the date they were issued.
Continental Micronesia informed Fernando that the subject tickets may be used as a form of
payment for the purchase of another Continental ticket, albeit with a re-issuance fee. 5

On June 17, 1999, Fernando went to Continental’s ticketing office at Ayala Avenue,
Makati City to have the subject tickets replaced by a single round trip ticket to Los Angeles,
California under his name. Therein, Fernando was informed that Lourdes’ ticket was non-
transferable, thus, cannot be used for the purchase of a ticket in his favor. He was also informed
that a round trip ticket to Los Angeles was US$1,867.40 so he would have to pay what will not
be covered by the value of his San Diego to Newark round trip ticket.

In a letter dated June 21, 1999, Fernando demanded for the refund of the subject tickets
as he no longer wished to have them replaced. In addition to the dubious circumstances under
which the subject tickets were issued, Fernando claimed that CAI’s act of charging him with
US$1,867.40 for a round trip ticket to Los Angeles, which other airlines priced at US$856.00,
and refusal to allow him to use Lourdes’ ticket, breached its undertaking under its March 24,
1998 letter. 6

On September 8, 2000, Spouses Viloria filed a complaint against CAI, praying that CAI
be ordered to refund the money they used in the purchase of the subject tickets with legal interest
from July 21, 1997 and to pay P1,000,000.00 as moral damages, P500,000.00 as exemplary
damages and P250,000.00 as attorney’s fees. 7

CAI interposed the following defenses: (a) Spouses Viloria have no right to ask for a
refund as the subject tickets are non-refundable; (b) Fernando cannot insist on using the ticket in
Lourdes’ name for the purchase of a round trip ticket to Los Angeles since the same is non-
transferable; (c) as Mager is not a CAI employee, CAI is not liable for any of her acts; (d) CAI,
its employees and agents did not act in bad faith as to entitle Spouses Viloria to moral and
exemplary damages and attorney’s fees. CAI also invoked the following clause printed on the
subject tickets:

3. To the extent not in conflict with the foregoing carriage and other services
performed by each carrier are subject to: (i) provisions contained in this ticket, (ii)
applicable tariffs, (iii) carrier’s conditions of carriage and related regulations
which are made part hereof (and are available on application at the offices of
carrier), except in transportation between a place in the United States or Canada
and any place outside thereof to which tariffs in force in those countries apply. 8

According to CAI, one of the conditions attached to their contract of carriage is the non-
transferability and non-refundability of the subject tickets.

The RTC’s Ruling

 Following a full-blown trial, the RTC rendered its April 3, 2006 Decision, holding that
Spouses Viloria are entitled to a refund in view of Mager’s misrepresentation in obtaining their
consent in the purchase of the subject tickets. The relevant portion of the April 3, 2006 Decision
9

states:

Continental Airlines agent Ms. Mager was in bad faith when she was less
candid and diligent in presenting to plaintiffs spouses their booking options.
Plaintiff Fernando clearly wanted to travel via AMTRAK, but defendant’s agent
misled him into purchasing Continental Airlines tickets instead on the fraudulent
misrepresentation that Amtrak was fully booked. In fact, defendant Airline did not
specifically denied (sic) this allegation.

Plainly, plaintiffs spouses, particularly plaintiff Fernando, were tricked

into buying Continental Airline tickets on Ms. Mager’s misleading
misrepresentations. Continental Airlines agent Ms. Mager further relied on and
exploited plaintiff Fernando’s need and told him that they must book a flight
immediately or risk not being able to travel at all on the couple’s preferred date.
Unfortunately, plaintiffs spouses fell prey to the airline’s and its agent’s unethical
tactics for baiting trusting customers.” 10

Citing Articles 1868 and 1869 of the Civil Code, the RTC ruled that Mager is CAI’s
agent, hence, bound by her bad faith and misrepresentation. As far as the RTC is concerned, there
is no issue as to whether Mager was CAI’s agent in view of CAI’s implied recognition of her
status as such in its March 24, 1998 letter.

The act of a travel agent or agency being involved here, the following are
the pertinent New Civil Code provisions on agency:

Art. 1868. By the contract of agency a person binds himself

to render some service or to do something in representation or on
behalf of another, with the consent or authority of the latter.

Art. 1869. Agency may be express, or implied from the acts

of the principal, from his silence or lack of action, or his failure to
repudiate the agency, knowing that another person is acting on his
behalf without authority.

Agency may be oral, unless the law requires a specific

form.

As its very name implies, a travel agency binds itself to render some
service or to do something in representation or on behalf of another, with the
consent or authority of the latter. This court takes judicial notice of the common
services rendered by travel agencies that represent themselves as such,
specifically the reservation and booking of local and foreign tours as well as the
issuance of airline tickets for a commission or fee.
 The services rendered by Ms. Mager of Holiday Travel agency to the
plaintiff spouses on July 21, 1997 were no different from those offered in any
other travel agency. Defendant airline impliedly if not expressly acknowledged its
principal-agent relationship with Ms. Mager by its offer in the letter dated March
24, 1998 – an obvious attempt to assuage plaintiffs spouses’ hurt feelings. 11

Furthermore, the RTC ruled that CAI acted in bad faith in reneging on its undertaking to
replace the subject tickets within two (2) years from their date of issue when it charged Fernando
with the amount of US$1,867.40 for a round trip ticket to Los Angeles and when it refused to
allow Fernando to use Lourdes’ ticket. Specifically:

Tickets may be reissued for up to two years from the original date of issue. When
defendant airline still charged plaintiffs spouses US$1,867.40 or more than double
the then going rate of US$856.00 for the unused tickets when the same were
presented within two (2) years from date of issue, defendant airline exhibited
callous treatment of passengers. 12

The Appellate Court’s Ruling

On appeal, the CA reversed the RTC’s April 3, 2006 Decision, holding that CAI cannot
be held liable for Mager’s act in the absence of any proof that a principal-agent relationship
existed between CAI and Holiday Travel. According to the CA, Spouses Viloria, who have the
burden of proof to establish the fact of agency, failed to present evidence demonstrating that
Holiday Travel is CAI’s agent. Furthermore, contrary to Spouses Viloria’s claim, the contractual
relationship between Holiday Travel and CAI is not an agency but that of a sale.

Plaintiffs-appellees assert that Mager was a sub-agent of Holiday Travel

who was in turn a ticketing agent of Holiday Travel who was in turn a ticketing
agent of Continental Airlines. Proceeding from this premise, they contend that
Continental Airlines should be held liable for the acts of Mager. The trial court
held the same view.

We do not agree. By the contract of agency, a person binds him/herself to

render some service or to do something in representation or on behalf of another,
with the consent or authority of the latter. The elements of agency are: (1)
consent, express or implied, of the parties to establish the relationship; (2) the
object is the execution of a juridical act in relation to a third person; (3) the agent
acts as a representative and not for him/herself; and (4) the agent acts within the
scope of his/her authority. As the basis of agency is representation, there must be,
on the part of the principal, an actual intention to appoint, an intention naturally
inferable from the principal’s words or actions. In the same manner, there must be
an intention on the part of the agent to accept the appointment and act upon it.
Absent such mutual intent, there is generally no agency. It is likewise a settled
rule that persons dealing with an assumed agent are bound at their peril, if they
would hold the principal liable, to ascertain not only the fact of agency but also
the nature and extent of authority, and in case either is controverted, the burden of
proof is upon them to establish it. Agency is never presumed, neither is it created
 by the mere use of the word in a trade or business name. We have perused the
evidence and documents so far presented. We find nothing except bare allegations
of plaintiffs-appellees that Mager/Holiday Travel was acting in behalf of
Continental Airlines. From all sides of legal prism, the transaction in issue was
simply a contract of sale, wherein Holiday Travel buys airline tickets from
Continental Airlines and then, through its employees, Mager included, sells it at a
premium to clients. 13

The CA also ruled that refund is not available to Spouses Viloria as the word “non-
refundable” was clearly printed on the face of the subject tickets, which constitute their contract
with CAI. Therefore, the grant of their prayer for a refund would violate the proscription against
impairment of contracts.

Finally, the CA held that CAI did not act in bad faith when they charged Spouses Viloria
with the higher amount of US$1,867.40 for a round trip ticket to Los Angeles. According to the
CA, there is no compulsion for CAI to charge the lower amount of US$856.00, which Spouses
Viloria claim to be the fee charged by other airlines. The matter of fixing the prices for its
services is CAI’s prerogative, which Spouses Viloria cannot intervene. In particular:

It is within the respective rights of persons owning and/or operating business

entities to peg the premium of the services and items which they provide at a price
which they deem fit, no matter how expensive or exhorbitant said price may
seem vis-à-vis those of the competing companies. The Spouses Viloria may not
intervene with the business judgment of Continental Airlines. 14

The Petitioners’ Case

In this Petition, this Court is being asked to review the findings and conclusions of the
CA, as the latter’s reversal of the RTC’s April 3, 2006 Decision allegedly lacks factual and legal
bases. Spouses Viloria claim that CAI acted in bad faith when it required them to pay a higher
amount for a round trip ticket to Los Angeles considering CAI’s undertaking to re-issue new
tickets to them within the period stated in their March 24, 1998 letter. CAI likewise acted in bad
faith when it disallowed Fernando to use Lourdes’ ticket to purchase a round trip to Los Angeles
given that there is nothing in Lourdes’ ticket indicating that it is non-transferable. As a common
carrier, it is CAI’s duty to inform its passengers of the terms and conditions of their contract and
passengers cannot be bound by such terms and conditions which they are not made aware of.
Also, the subject contract of carriage is a contract of adhesion; therefore, any ambiguities should
be construed against CAI. Notably, the petitioners are no longer questioning the validity of the
subject contracts and limited its claim for a refund on CAI’s alleged breach of its undertaking in
its March 24, 1998 letter.

The Respondent’s Case

In its Comment, CAI claimed that Spouses Viloria’s allegation of bad faith is negated by
its willingness to issue new tickets to them and to credit the value of the subject tickets against
the value of the new ticket Fernando requested. CAI argued that Spouses Viloria’s sole basis to
claim that the price at which CAI was willing to issue the new tickets is unconscionable is a
piece of hearsay evidence – an advertisement appearing on a newspaper stating that airfares from
Manila to Los Angeles or San Francisco cost US$818.00. Also, the advertisement pertains to
15

airfares in September 2000 and not to airfares prevailing in June 1999, the time when Fernando
asked CAI to apply the value of the subject tickets for the purchase of a new one. CAI likewise
16

argued that it did not undertake to protect Spouses Viloria from any changes or fluctuations in
the prices of airline tickets and its only obligation was to apply the value of the subject tickets to
the purchase of the newly issued tickets.

With respect to Spouses Viloria’s claim that they are not aware of CAI’s restrictions on
the subject tickets and that the terms and conditions that are printed on them are ambiguous, CAI
denies any ambiguity and alleged that its representative informed Fernando that the subject
tickets are non-transferable when he applied for the issuance of a new ticket. On the other hand,
the word “non-refundable” clearly appears on the face of the subject tickets.

CAI also denies that it is bound by the acts of Holiday Travel and Mager and that no
principal-agency relationship exists between them. As an independent contractor, Holiday Travel
was without capacity to bind CAI.

Issues

To determine the propriety of disturbing the CA’s January 30, 2009 Decision and whether
Spouses Viloria have the right to the reliefs they prayed for, this Court deems it necessary to
resolve the following issues:

a. Does a principal-agent relationship exist between CAI and Holiday Travel?

b. Assuming that an agency relationship exists between CAI and Holiday Travel,
is CAI bound by the acts of Holiday Travel’s agents and employees such
as Mager?
c. Assuming that CAI is bound by the acts of Holiday Travel’s agents and
employees, can the representation of Mager as to unavailability of seats at
Amtrak be considered fraudulent as to vitiate the consent of Spouse
Viloria in the purchase of the subject tickets?
d. Is CAI justified in insisting that the subject tickets are non-transferable and
non-refundable?
e. Is CAI justified in pegging a different price for the round trip ticket to Los
Angeles requested by Fernando?
f. Alternatively, did CAI act in bad faith or renege its obligation to Spouses
Viloria to apply the value of the subject tickets in the purchase of new
ones when it refused to allow Fernando to use Lourdes’ ticket and in
charging a higher price for a round trip ticket to Los Angeles?

This Court’s Ruling

I. A principal-agent relationship exists between

CAI and Holiday Travel.

With respect to the first issue, which is a question of fact that would require this Court to
review and re-examine the evidence presented by the parties below, this Court takes exception to
the general rule that the CA’s findings of fact are conclusive upon Us and our jurisdiction is
limited to the review of questions of law. It is well-settled to the point of being axiomatic that
this Court is authorized to resolve questions of fact if confronted with contrasting factual
findings of the trial court and appellate court and if the findings of the CA are contradicted by the
evidence on record. 17

According to the CA, agency is never presumed and that he who alleges that it exists has
the burden of proof. Spouses Viloria, on whose shoulders such burden rests, presented evidence
that fell short of indubitably demonstrating the existence of such agency.

We disagree. The CA failed to consider undisputed facts, discrediting CAI’s denial that
Holiday Travel is one of its agents. Furthermore, in erroneously characterizing the contractual
relationship between CAI and Holiday Travel as a contract of sale, the CA failed to apply the
fundamental civil law principles governing agency and differentiating it from sale.

In Rallos v. Felix Go Chan & Sons Realty Corporation, this Court explained the nature
18

of an agency and spelled out the essential elements thereof:

Out of the above given principles, sprung the creation and acceptance of
the relationship of agency whereby one party, called the principal (mandante),
authorizes another, called the agent (mandatario), to act for and in his behalf in
transactions with third persons. The essential elements of agency are: (1) there is
consent, express or implied of the parties to establish the relationship; (2) the
object is the execution of a juridical act in relation to a third person; (3) the agent
acts as a representative and not for himself, and (4) the agent acts within the scope
of his authority.

Agency is basically personal, representative, and derivative in nature. The

authority of the agent to act emanates from the powers granted to him by his
principal; his act is the act of the principal if done within the scope of the
authority. Qui facit per alium facit se. "He who acts through another acts
himself." 19

Contrary to the findings of the CA, all the elements of an agency exist in this case. The
first and second elements are present as CAI does not deny that it concluded an agreement with
Holiday Travel, whereby Holiday Travel would enter into contracts of carriage with third persons
on CAI’s behalf. The third element is also present as it is undisputed that Holiday Travel merely
acted in a representative capacity and it is CAI and not Holiday Travel who is bound by the
contracts of carriage entered into by Holiday Travel on its behalf. The fourth element is also
present considering that CAI has not made any allegation that Holiday Travel exceeded the
authority that was granted to it. In fact, CAI consistently maintains the validity of the contracts of
carriage that Holiday Travel executed with Spouses Viloria and that Mager was not guilty of any
fraudulent misrepresentation. That CAI admits the authority of Holiday Travel to enter into
contracts of carriage on its behalf is easily discernible from its February 24, 1998 and March 24,
1998 letters, where it impliedly recognized the validity of the contracts entered into by Holiday
Travel with Spouses Viloria. When Fernando informed CAI that it was Holiday Travel who
issued to them the subject tickets, CAI did not deny that Holiday Travel is its authorized agent.
 Prior to Spouses Viloria’s filing of a complaint against it, CAI never refuted that it gave
Holiday Travel the power and authority to conclude contracts of carriage on its behalf. As clearly
extant from the records, CAI recognized the validity of the contracts of carriage that Holiday
Travel entered into with Spouses Viloria and considered itself bound with Spouses Viloria by the
terms and conditions thereof; and this constitutes an unequivocal testament to Holiday Travel’s
authority to act as its agent. This Court cannot therefore allow CAI to take an altogether different
position and deny that Holiday Travel is its agent without condoning or giving imprimatur to
whatever damage or prejudice that may result from such denial or retraction to Spouses Viloria,
who relied on good faith on CAI’s acts in recognition of Holiday Travel’s authority. Estoppel is
primarily based on the doctrine of good faith and the avoidance of harm that will befall an
innocent party due to its injurious reliance, the failure to apply it in this case would result in
gross travesty of justice. Estoppel bars CAI from making such denial.
20

As categorically provided under Article 1869 of the Civil Code, “[a]gency may be
express, or implied from the acts of the principal, from his silence or lack of action, or his failure
to repudiate the agency, knowing that another person is acting on his behalf without authority.”

Considering that the fundamental hallmarks of an agency are present, this Court finds it
rather peculiar that the CA had branded the contractual relationship between CAI and Holiday
Travel as one of sale. The distinctions between a sale and an agency are not difficult to discern
and this Court, as early as 1970, had already formulated the guidelines that would aid in
differentiating the two (2) contracts. In Commissioner of Internal Revenue v. Constantino, this
21

Court extrapolated that the primordial differentiating consideration between the two (2) contracts
is the transfer of ownership or title over the property subject of the contract. In an agency, the
principal retains ownership and control over the property and the agent merely acts on the
principal’s behalf and under his instructions in furtherance of the objectives for which the agency
was established. On the other hand, the contract is clearly a sale if the parties intended that the
delivery of the property will effect a relinquishment of title, control and ownership in such a way
that the recipient may do with the property as he pleases.

Since the company retained ownership of the goods, even as it delivered

possession unto the dealer for resale to customers, the price and terms of which
were subject to the company's control, the relationship between the company and
the dealer is one of agency, tested under the following criterion:

“The difficulty in distinguishing between contracts of sale and the

creation of an agency to sell has led to the establishment of rules by the
application of which this difficulty may be solved. The decisions say the
transfer of title or agreement to transfer it for a price paid or promised is
the essence of sale. If such transfer puts the transferee in the attitude or
position of an owner and makes him liable to the transferor as a debtor for
the agreed price, and not merely as an agent who must account for the
proceeds of a resale, the transaction is a sale; while the essence of an
agency to sell is the delivery to an agent, not as his property, but as the
property of the principal, who remains the owner and has the right to
control sales, fix the price, and terms, demand and receive the proceeds
less the agent's commission upon sales made. 1 Mechem on Sales, Sec. 43;
1 Mechem on Agency, Sec. 48; Williston on Sales, 1; Tiedeman on Sales,
1.” (Salisbury v. Brooks, 94 SE 117, 118-119) 22
 As to how the CA have arrived at the conclusion that the contract between CAI and
Holiday Travel is a sale is certainly confounding, considering that CAI is the one bound by the
contracts of carriage embodied by the tickets being sold by Holiday Travel on its behalf. It is
undisputed that CAI and not Holiday Travel who is the party to the contracts of carriage executed
by Holiday Travel with third persons who desire to travel via Continental Airlines, and this
conclusively indicates the existence of a principal-agent relationship. That the principal is bound
by all the obligations contracted by the agent within the scope of the authority granted to him is
clearly provided under Article 1910 of the Civil Code and this constitutes the very notion of
agency.

II. In actions based on quasi-delict, a principal

can only be held liable for the tort committed by
its agent’s employees if it has been established by
preponderance of evidence that the principal was
also at fault or negligent or that the principal
exercise control and supervision over them.

Considering that Holiday Travel is CAI’s agent, does it necessarily follow that CAI is
liable for the fault or negligence of Holiday Travel’s employees? Citing China Air Lines, Ltd. v.
Court of Appeals, et al., CAI argues that it cannot be held liable for the actions of the employee
23

of its ticketing agent in the absence of an employer-employee relationship.

An examination of this Court’s pronouncements in China Air Lines will reveal that an
airline company is not completely exonerated from any liability for the tort committed by its
agent’s employees. A prior determination of the nature of the passenger’s cause of action is
necessary. If the passenger’s cause of action against the airline company is premised on culpa
aquiliana or quasi-delict for a tort committed by the employee of the airline company’s agent,
there must be an independent showing that the airline company was at fault or negligent or has
contributed to the negligence or tortuous conduct committed by the employee of its agent. The
mere fact that the employee of the airline company’s agent has committed a tort is not sufficient
to hold the airline company liable. There is no vinculum juris between the airline company and
its agent’s employees and the contractual relationship between the airline company and its agent
does not operate to create a juridical tie between the airline company and its agent’s employees.
Article 2180 of the Civil Code does not make the principal vicariously liable for the tort
committed by its agent’s employees and the principal-agency relationship per se does not make
the principal a party to such tort; hence, the need to prove the principal’s own fault or negligence.

On the other hand, if the passenger’s cause of action for damages against the airline
company is based on contractual breach or culpa contractual, it is not necessary that there be
evidence of the airline company’s fault or negligence. As this Court previously stated in China
Air Lines and reiterated in Air France vs. Gillego, “in an action based on a breach of contract of
24

carriage, the aggrieved party does not have to prove that the common carrier was at fault or was
negligent. All that he has to prove is the existence of the contract and the fact of its non-
performance by the carrier.”
 Spouses Viloria’s cause of action on the basis of Mager’s alleged fraudulent
misrepresentation is clearly one of tort or quasi-delict, there being no pre-existing contractual
relationship between them. Therefore, it was incumbent upon Spouses Viloria to prove that CAI
was equally at fault.

However, the records are devoid of any evidence by which CAI’s alleged liability can be
substantiated. Apart from their claim that CAI must be held liable for Mager’s supposed fraud
because Holiday Travel is CAI’s agent, Spouses Viloria did not present evidence that CAI was a
party or had contributed to Mager’s complained act either by instructing or authorizing Holiday
Travel and Mager to issue the said misrepresentation.

It may seem unjust at first glance that CAI would consider Spouses Viloria bound by the
terms and conditions of the subject contracts, which Mager entered into with them on CAI’s
behalf, in order to deny Spouses Viloria’s request for a refund or Fernando’s use of Lourdes’
ticket for the re-issuance of a new one, and simultaneously claim that they are not bound by
Mager’s supposed misrepresentation for purposes of avoiding Spouses Viloria’s claim for
damages and maintaining the validity of the subject contracts. It may likewise be argued that
CAI cannot deny liability as it benefited from Mager’s acts, which were performed in
compliance with Holiday Travel’s obligations as CAI’s agent.

However, a person’s vicarious liability is anchored on his possession of control, whether

absolute or limited, on the tortfeasor. Without such control, there is nothing which could justify
extending the liability to a person other than the one who committed the tort. As this Court
explained in Cangco v. Manila Railroad Co.: 25

With respect to extra-contractual obligation arising from negligence, whether

of act or omission, it is competent for the legislature to elect — and our
Legislature has so elected — to limit such liability to cases in which the person
upon whom such an obligation is imposed is morally culpable or, on the
contrary, for reasons of public policy, to extend that liability, without regard
to the lack of moral culpability, so as to include responsibility for the
negligence of those persons whose acts or omissions are imputable, by a legal
fiction, to others who are in a position to exercise an absolute or limited
control over them. The legislature which adopted our Civil Code has elected to
limit extra-contractual liability — with certain well-defined exceptions — to cases
in which moral culpability can be directly imputed to the persons to be charged.
This moral responsibility may consist in having failed to exercise due care in
one's own acts, or in having failed to exercise due care in the selection and control
of one's agent or servants, or in the control of persons who, by reasons of their
status, occupy a position of dependency with respect to the person made liable for
their conduct. (emphasis supplied)
26

It is incumbent upon Spouses Viloria to prove that CAI exercised control or supervision
over Mager by preponderant evidence. The existence of control or supervision cannot be
presumed and CAI is under no obligation to prove its denial or nugatory assertion. Citing Belen
v. Belen, this Court ruled in Jayme v. Apostol, that:
27 28
 In Belen v. Belen, this Court ruled that it was enough for defendant to deny an
alleged employment relationship. The defendant is under no obligation to prove
the negative averment. This Court said:

“It is an old and well-settled rule of the courts that the

burden of proving the action is upon the plaintiff, and that if he
fails satisfactorily to show the facts upon which he bases his claim,
the defendant is under no obligation to prove his exceptions. This
[rule] is in harmony with the provisions of Section 297 of the Code
of Civil Procedure holding that each party must prove his own
affirmative allegations, etc.” (citations omitted)
29

Therefore, without a modicum of evidence that CAI exercised control over Holiday Travel’s
employees or that CAI was equally at fault, no liability can be imposed on CAI for Mager’s
supposed misrepresentation.

III. Even on the assumption that CAI may be

held liable for the acts of Mager, still,
Spouses Viloria are not entitled to a
refund. Mager’s statement cannot be
considered a causal fraud that would
justify the annulment of the subject
contracts that would oblige CAI to
indemnify Spouses Viloria and return the
money they paid for the subject tickets.

Article 1390, in relation to Article 1391 of the Civil Code, provides that if the consent of
the contracting parties was obtained through fraud, the contract is considered voidable and may
be annulled within four (4) years from the time of the discovery of the fraud. Once a contract is
annulled, the parties are obliged under Article 1398 of the same Code to restore to each other the
things subject matter of the contract, including their fruits and interest.

On the basis of the foregoing and given the allegation of Spouses Viloria that Fernando’s
consent to the subject contracts was supposedly secured by Mager through fraudulent means, it is
plainly apparent that their demand for a refund is tantamount to seeking for an annulment of the
subject contracts on the ground of vitiated consent.

Whether the subject contracts are annullable, this Court is required to determine whether
Mager’s alleged misrepresentation constitutes causal fraud. Similar to the dispute on the
existence of an agency, whether fraud attended the execution of a contract is factual in nature and
this Court, as discussed above, may scrutinize the records if the findings of the CA are contrary
to those of the RTC.

Under Article 1338 of the Civil Code, there is fraud when, through insidious words or
machinations of one of the contracting parties, the other is induced to enter into a contract which,
without them, he would not have agreed to. In order that fraud may vitiate consent, it must be the
causal (dolo causante), not merely the incidental (dolo incidente), inducement to the making of
the contract. In Samson v. Court of Appeals, causal fraud was defined as “a deception employed
30 31

by one party prior to or simultaneous to the contract in order to secure the consent of the other.”
32

Also, fraud must be serious and its existence must be established by clear and convincing
evidence. As ruled by this Court in Sierra v. Hon. Court of Appeals, et al., mere preponderance
33

of evidence is not adequate:

Fraud must also be discounted, for according to the Civil Code:

Art. 1338. There is fraud when, through insidious words or

machinations of one of the contracting parties, the other is induced
to enter into a contract which without them, he would not have
agreed to.

Art. 1344. In order that fraud may make a contract

voidable, it should be serious and should not have been employed
by both contracting parties.

To quote Tolentino again, the “misrepresentation constituting the fraud

must be established by full, clear, and convincing evidence, and not merely by a
preponderance thereof. The deceit must be serious. The fraud is serious when it is
sufficient to impress, or to lead an ordinarily prudent person into error; that which
cannot deceive a prudent person cannot be a ground for nullity. The circumstances
of each case should be considered, taking into account the personal conditions of
the victim.” 34

After meticulously poring over the records, this Court finds that the fraud alleged by
Spouses Viloria has not been satisfactorily established as causal in nature to warrant the
annulment of the subject contracts. In fact, Spouses Viloria failed to prove by clear and
convincing evidence that Mager’s statement was fraudulent. Specifically, Spouses Viloria failed
to prove that (a) there were indeed available seats at Amtrak for a trip to New Jersey on August
13, 1997 at the time they spoke with Mager on July 21, 1997; (b) Mager knew about this; and (c)
that she purposely informed them otherwise.

This Court finds the only proof of Mager’s alleged fraud, which is Fernando’s testimony
that an Amtrak had assured him of the perennial availability of seats at Amtrak, to be wanting. As
CAI correctly pointed out and as Fernando admitted, it was possible that during the intervening
period of three (3) weeks from the time Fernando purchased the subject tickets to the time he
talked to said Amtrak employee, other passengers may have cancelled their bookings and
reservations with Amtrak, making it possible for Amtrak to accommodate them. Indeed, the
existence of fraud cannot be proved by mere speculations and conjectures. Fraud is never lightly
inferred; it is good faith that is. Under the Rules of Court, it is presumed that "a person is
innocent of crime or wrong" and that "private transactions have been fair and regular." Spouses
35

Viloria failed to overcome this presumption.

IV. Assuming the contrary, Spouses Viloria are

nevertheless deemed to have ratified the subject
contracts.
 Even assuming that Mager’s representation is causal fraud, the subject contracts have
been impliedly ratified when Spouses Viloria decided to exercise their right to use the subject
tickets for the purchase of new ones. Under Article 1392 of the Civil Code, “ratification
extinguishes the action to annul a voidable contract.”

Ratification of a voidable contract is defined under Article 1393 of the Civil Code as
follows:

Art. 1393. Ratification may be effected expressly or tacitly. It is understood that

there is a tacit ratification if, with knowledge of the reason which renders the
contract voidable and such reason having ceased, the person who has a right to
invoke it should execute an act which necessarily implies an intention to waive
his right.

Implied ratification may take diverse forms, such as by silence or acquiescence; by acts
showing approval or adoption of the contract; or by acceptance and retention of benefits flowing
therefrom.36

Simultaneous with their demand for a refund on the ground of Fernando’s vitiated
consent, Spouses Viloria likewise asked for a refund based on CAI’s supposed bad faith in
reneging on its undertaking to replace the subject tickets with a round trip ticket from Manila to
Los Angeles.

In doing so, Spouses Viloria are actually asking for a rescission of the subject contracts
based on contractual breach. Resolution, the action referred to in Article 1191, is based on the
defendant’s breach of faith, a violation of the reciprocity between the parties and in Solar
37

Harvest, Inc. v. Davao Corrugated Carton Corporation, this Court ruled that a claim for a
38

reimbursement in view of the other party’s failure to comply with his obligations under the
contract is one for rescission or resolution.

However, annulment under Article 1390 of the Civil Code and rescission under Article
1191 are two (2) inconsistent remedies. In resolution, all the elements to make the contract valid
are present; in annulment, one of the essential elements to a formation of a contract, which is
consent, is absent. In resolution, the defect is in the consummation stage of the contract when the
parties are in the process of performing their respective obligations; in annulment, the defect is
already present at the time of the negotiation and perfection stages of the contract. Accordingly,
by pursuing the remedy of rescission under Article 1191, the Vilorias had impliedly admitted the
validity of the subject contracts, forfeiting their right to demand their annulment. A party cannot
rely on the contract and claim rights or obligations under it and at the same time impugn its
existence or validity. Indeed, litigants are enjoined from taking inconsistent positions.
39

V. Contracts cannot be rescinded for a slight or

casual breach.
CAI cannot insist on the non-transferability of the
subject tickets.

Considering that the subject contracts are not annullable on the ground of vitiated
consent, the next question is: “Do Spouses Viloria have the right to rescind the contract on the
ground of CAI’s supposed breach of its undertaking to issue new tickets upon surrender of the
subject tickets?”

Article 1191, as presently worded, states:

The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfilment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.

The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage
Law.

According to Spouses Viloria, CAI acted in bad faith and breached the subject contracts
when it refused to apply the value of Lourdes’ ticket for Fernando’s purchase of a round trip
ticket to Los Angeles and in requiring him to pay an amount higher than the price fixed by other
airline companies.

In its March 24, 1998 letter, CAI stated that “non-refundable tickets may be used as a
form of payment toward the purchase of another Continental ticket for $75.00, per ticket, reissue
fee ($50.00, per ticket, for tickets purchased prior to October 30, 1997).”

Clearly, there is nothing in the above-quoted section of CAI’s letter from which the
restriction on the non-transferability of the subject tickets can be inferred. In fact, the words used
by CAI in its letter supports the position of Spouses Viloria, that each of them can use the ticket
under their name for the purchase of new tickets whether for themselves or for some other
person.

Moreover, as CAI admitted, it was only when Fernando had expressed his interest to use
the subject tickets for the purchase of a round trip ticket between Manila and Los Angeles that he
was informed that he cannot use the ticket in Lourdes’ name as payment.

Contrary to CAI’s claim, that the subject tickets are non-transferable cannot be implied
from a plain reading of the provision printed on the subject tickets stating that “[t]o the extent not
in conflict with the foregoing carriage and other services performed by each carrier are subject
to: (a) provisions contained in this ticket, x x x (iii) carrier’s conditions of carriage and related
regulations which are made part hereof (and are available on application at the offices of carrier)
x x x.” As a common carrier whose business is imbued with public interest, the exercise of
extraordinary diligence requires CAI to inform Spouses Viloria, or all of its passengers for that
matter, of all the terms and conditions governing their contract of carriage. CAI is proscribed
from taking advantage of any ambiguity in the contract of carriage to impute knowledge on its
passengers of and demand compliance with a certain condition or undertaking that is not clearly
stipulated. Since the prohibition on transferability is not written on the face of the subject tickets
and CAI failed to inform Spouses Viloria thereof, CAI cannot refuse to apply the value of
Lourdes’ ticket as payment for Fernando’s purchase of a new ticket.

CAI’s refusal to accept Lourdes’ ticket for the

purchase of a new ticket for Fernando is only a
casual breach.

Nonetheless, the right to rescind a contract for non-performance of its stipulations is not
absolute. The general rule is that rescission of a contract will not be permitted for a slight or
casual breach, but only for such substantial and fundamental violations as would defeat the very
object of the parties in making the agreement. Whether a breach is substantial is largely
40

determined by the attendant circumstances. 41

While CAI’s refusal to allow Fernando to use the value of Lourdes’ ticket as payment for
the purchase of a new ticket is unjustified as the non-transferability of the subject tickets was not
clearly stipulated, it cannot, however be considered substantial. The endorsability of the subject
tickets is not an essential part of the underlying contracts and CAI’s failure to comply is not
essential to its fulfillment of its undertaking to issue new tickets upon Spouses Viloria’s
surrender of the subject tickets. This Court takes note of CAI’s willingness to perform its
principal obligation and this is to apply the price of the ticket in Fernando’s name to the price of
the round trip ticket between Manila and Los Angeles. CAI was likewise willing to accept the
ticket in Lourdes’ name as full or partial payment as the case may be for the purchase of any
ticket, albeit under her name and for her exclusive use. In other words, CAI’s willingness to
comply with its undertaking under its March 24, 1998 cannot be doubted, albeit tainted with its
erroneous insistence that Lourdes’ ticket is non-transferable.

Moreover, Spouses Viloria’s demand for rescission cannot prosper as CAI cannot be
solely faulted for the fact that their agreement failed to consummate and no new ticket was
issued to Fernando. Spouses Viloria have no right to insist that a single round trip ticket between
Manila and Los Angeles should be priced at around $856.00 and refuse to pay the difference
between the price of the subject tickets and the amount fixed by CAI. The petitioners failed to
allege, much less prove, that CAI had obliged itself to issue to them tickets for any flight
anywhere in the world upon their surrender of the subject tickets. In its March 24, 1998 letter, it
was clearly stated that “[n]on-refundable tickets may be used as a form of payment toward the
purchase of another Continental ticket” and there is nothing in it suggesting that CAI had
42

obliged itself to protect Spouses Viloria from any fluctuation in the prices of tickets or that the
surrender of the subject tickets will be considered as full payment for any ticket that the
petitioners intend to buy regardless of actual price and destination. The CA was correct in
holding that it is CAI’s right and exclusive prerogative to fix the prices for its services and it may
not be compelled to observe and maintain the prices of other airline companies. 43
 The conflict as to the endorsability of the subject tickets is an altogether different matter,
which does not preclude CAI from fixing the price of a round trip ticket between Manila and Los
Angeles in an amount it deems proper and which does not provide Spouses Viloria an excuse not
to pay such price, albeit subject to a reduction coming from the value of the subject tickets. It
cannot be denied that Spouses Viloria had the concomitant obligation to pay whatever is not
covered by the value of the subject tickets whether or not the subject tickets are transferable or
not.

There is also no showing that Spouses Viloria were discriminated against in bad faith by
being charged with a higher rate. The only evidence the petitioners presented to prove that the
price of a round trip ticket between Manila and Los Angeles at that time was only $856.00 is a
newspaper advertisement for another airline company, which is inadmissible for being “hearsay
evidence, twice removed.” Newspaper clippings are hearsay if they were offered for the purpose
of proving the truth of the matter alleged. As ruled in Feria v. Court of Appeals,: 44

[N]ewspaper articles amount to “hearsay evidence, twice removed” and are

therefore not only inadmissible but without any probative value at all whether
objected to or not, unless offered for a purpose other than proving the truth of the
matter asserted. In this case, the news article is admissible only as evidence that
such publication does exist with the tenor of the news therein stated. (citations
45

omitted)

The records of this case demonstrate that both parties were equally in default; hence,
none of them can seek judicial redress for the cancellation or resolution of the subject contracts
and they are therefore bound to their respective obligations thereunder. As the 1st sentence of
Article 1192 provides:
Art. 1192. In case both parties have committed a breach of the
obligation, the liability of the first infractor shall be equitably tempered by
the courts. If it cannot be determined which of the parties first violated the
contract, the same shall be deemed extinguished, and each shall bear his own
damages. (emphasis supplied)

Therefore, CAI’s liability for damages for its refusal to accept Lourdes’ ticket for the
purchase of Fernando’s round trip ticket is offset by Spouses Viloria’s liability for their refusal to
pay the amount, which is not covered by the subject tickets. Moreover, the contract between
them remains, hence, CAI is duty bound to issue new tickets for a destination chosen by Spouses
Viloria upon their surrender of the subject tickets and Spouses Viloria are obliged to pay
whatever amount is not covered by the value of the subject tickets.

This Court made a similar ruling in Central Bank of the Philippines v. Court of
Appeals. Thus:
46

Since both parties were in default in the performance of their respective

reciprocal obligations, that is, Island Savings Bank failed to comply with its
obligation to furnish the entire loan and Sulpicio M. Tolentino failed to comply
with his obligation to pay his P17,000.00 debt within 3 years as stipulated, they
are both liable for damages.
 Article 1192 of the Civil Code provides that in case both parties have
committed a breach of their reciprocal obligations, the liability of the first
infractor shall be equitably tempered by the courts. WE rule that the liability of
Island Savings Bank for damages in not furnishing the entire loan is offset by the
liability of Sulpicio M. Tolentino for damages, in the form of penalties and
surcharges, for not paying his overdue P17,000.00 debt. x x x. 47

Another consideration that militates against the propriety of holding CAI liable for moral
damages is the absence of a showing that the latter acted fraudulently and in bad faith. Article
2220 of the Civil Code requires evidence of bad faith and fraud and moral damages are generally
not recoverable in culpa contractual except when bad faith had been proven. The award of
48

exemplary damages is likewise not warranted. Apart from the requirement that the defendant
acted in a wanton, oppressive and malevolent manner, the claimant must prove his entitlement to
moral damages. 49

WHEREFORE, premises considered, the instant Petition is DENIED.

SO ORDERED.

BIENVENIDO L. REYES
Associate Justice

WE CONCUR:
ANTONIO T. CARPIO
Associate Justice
JOSE PORTUGAL PEREZ MARIA LOURDES P. A. SERENO
Associate Justice Associate Justice

ESTELA M. PERLAS-BERNABE
Associate Justice

ATT E S TATI O N
I attest that the conclusions in the above Decision had been reached in consultation before the
case was assigned to the writer of the opinion of the Court’s Division.

ANTONIO T. CARPIO
Associate Justice
Chairperson, Second Division

C E RT I FI CAT I O N
Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's
Attestation, I certify that the conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion of the Court’s Division.

Jose Abesamis, vs. Woodcraft

Works, Ltd.
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-18916 November 28, 1969

JOSE ABESAMIS, plaintiff-appellee,

vs.
WOODCRAFT WORKS, LTD., defendant-appellant.

Ramon O. de Veyra for plaintiff-appellee.

Zosimo Rivas for defendant-appellant.

MAKALINTAL, J.:

The plaintiff, doing business under the name "East Samar Lumber Mills," was the owner of a
timber concession and sawmill located at Dolores, Samar. On November 8, 1950 the defendant
Woodcraft Works, Ltd., entered into an agreement with the plaintiff to purchase from the latter
300,000 board feet of Philippine round logs at P60.00 per thousand board feet. Due to bad
weather conditions and the failure of the defendant to send the necessary vessels to Dolores,
Samar, only 13,068 board feet of logs were delivered.

On January 22, 1951 the parties entered into a new contract. The previous one was cancelled,
with the plaintiff waiving all his claims thereunder. Certain advances which had been given by
the defendant to the plaintiff, in the aggregate amount of P9,000.00, were transferred to and
considered as advances on the new contract. It was stipulated that the defendant would
purchase from the plaintiff 1,700,000 board feet of logs of the specifications stated in the
contract — 1,300,000 board feet at P78.00 per thousand and the rest at P70.00. It was also
agreed that the shipment was to be "before the end of July, but will not commence earlier than
April with the option to make partial shipment depending on the availability of logs and
vessels."

Of the quantity of logs agreed upon, only two shipments were made, one in March and the other
in April, 1951, amounting to 333,832 board feet and 128,825 board feet, respectively, or a total
of 462,657 board feet. On September 13, 1951 the plaintiff filed in the Court of First Instance of
Leyte an action for rescission of the contract of January 22, 1951 and for recovery of damages in
the sum of P155,000.00 by reason of the defendant's failure to comply with its obligations. The
defendant filed an answer and later an amended answer, denying the material allegations of the
complaint, with special defenses and counterclaims.
After due trial the lower court rendered judgment as follows:

WHEREFORE and on the strength of all the foregoing, the Court renders judgment:
declaring the aforementioned contract of January 22, 1951, rescinded; ordering the
defendant to pay to the plaintiff for actual damages suffered by the latter in the amount
of P145,623.03, plus the amount of P50,000.00 representing the plaintiff's actual loss of
credit in the operation of his business, and, another sum of P5,000.00 as attorney's fees.
The defendant is likewise ordered to pay the costs.

The defendant appealed to this Court and now avers that the lower court erred: "(1) in stating
that Woodcraft Works, Ltd. was obligated to send the boat to receive the shipment of logs of the
East Samar Lumber Mills at Dolores, Samar, before the end of July 1951; (2) in deciding that
(appellee) had sufficient stock of logs to cover the contract on July 31, 1951; (3) in stating that
appellant failed to comply with the terms and conditions of the contract; (4) in granting
damages to appellee; and (5) in not granting damages and recovery of money in favor of herein
appellant."

The main issue before us is whether or not appellant Woodcraft Works, Ltd. failed to comply
with its obligations under the contract, or more specifically, whether or not it was obligated to
furnish the vessel to receive the shipment of logs from appellee. Appellant contends that it was
not.

The contract (Exh. A) does not expressly provide as to which of the parties should furnish the
vessel. But it does contain provisions which show clearly, albeit only by implication, that the
obligation to do so devolved upon appellant, thus:

Fees & Charges: Bureau of Forestry inspection charges and Philippine

Government wharfage fees are for account of Woodcraft Works, Ltd.

Dispatch of Ship: Immediately upon arrival of the vessel at Dolores, Samar, you
will commence loading at the rate of 200,000 bd. ft. per working day per four
hatches. Should the weather be unfavorable, be sure to have a certificate signed
by the captain confirming time idle due to this fact. Furthermore, in the event the
ship's gears are not functioning well, kindly do likewise and get a statement from
the captain.

Demurrage: Failure to load 200,000 bd. ft. per working day, you agree to pay us
the sum of P800.00 per day pro-rata.

The contract was in the form of a letter addressed by appellant to appellee, and the terms set
forth in the portions aforequoted, particularly with respect to wharfage dues, demurrage and
condition of the weather and of the ship's machinery, would have been of little concern to
appellant and would not have been imposed by it if appellee were the one to furnish the vessel.
Besides, the contemporaneous and subsequent acts of the parties, which under the law may be
taken into consideration to determine their intention (Art. 1371, Civil Code), point unequivocally
to the same conclusion. In the two shipments of logs in March and April of 1961 the vessels "SS
AEULUS" and "SS DON JOSE" were furnished by appellant. In several telegraphic
communications exchanged between the parties it was invariably appellee who requested
information as to the arrival of the vessels and appellant who gave the information accordingly.

Finally it was appellant, through its witness Irza Toeg, who had to explain at length during the
trial its failure to furnish the necessary vessels, as follows:

A. Well, when the shipping firms in Manila learned about the failures of the vessels
which we sent to Dolores, Samar to load, and news travels fast from one shipping
 company to the other, the other shipping companies were very hesitant when we asked
for a vessel to call at the port of Dolores, Samar. They asked us whether any vessel has
already gone there to load and what is the loading rate for that particular vessel. So the
facts of loading rates that the East Samar Lumber Mills was able to effect on the Bunyo
Maru had a very bad effect in obtaining additional vessels. Other shipping companies
instructed their vessels not to go to Dolores, Samar because shipping companies as a rule
do not want to gamble and sent vessels to a loading port when they know of the place and
they know that the people operating there would not be able to handle the loading of the
vessels judging from their past performances.

... . You will recall that the first vessel that loaded in this contract was a foreign vessel
which was the Bunyo Maru. Out of the expected quantity of 400,000 bd. ft. of logs only
13,000 approximately was loaded. Therefore, that had a very bad effect on the other
foreign vessels. The second and third vessels however were of Philippine Registry, and it
was only thru our good connection with the shipping company that they even permitted
their vessels to call at Dolores, Samar. So, after the three sad experiences, each one with
considerable delay in the loading time with incomplete quantities that should have been
loaded, it was difficult for us to obtain vessels to call at that port. (T.S.N. pp. 28-30,
Deposition)

In the light of all these circumstances, appellant's claim that it was not obligated to furnish the
vessel cannot prevail.

It is next contended that appellee was not in a position to comply with his own obligation to ship
the quantities of logs called for under the contract. This was sought to be proven by means of a
certificate issued by the Bureau of Forestry (Exhs. 11 & 11-A), which is the official record of
timber cut under appellee's permit, showing that appellee's production from January to July,
1951, amounted only to 1,926.64 cubic meters or 816,795 board feet of logs, which was short by
833,205 board feet of the quantity called for in the contract.

There is indeed a discrepancy between the certificate of production issued by the Bureau of
Forestry and the testimony of Francisco Abesamis regarding the quantity of the timber cut
under appellee's permit, but this was satisfactorily explained by him at the trial in this wise:

A. Because my export grade logs is a big quantity, and if we immediately report those
export grade logs to the Bureau of Forestry before shipment is made, we will be paying
forest charges for the logs for which we have not received payment yet. So we make it a
practice to report only the logs that are actually shipped. The forest charges amount to so
much money that we could hardly afford to pay this in advance. This was more or less a
convenience given to us by the lumber grader. And besides that, we prepare a big
quantity of logs but the lumber grader usually is instructed by the buyer to grade only a
certain portion of it because of the limitation of cargo space in buyer's vessel. For
example, we have there prepared 1,000,000 board feet but Mr. Selga is instructed to
inspect only 400,000 board feet which is the capacity of incoming vessel. So the balance
of 600,000 board feet could not be graded as this quantity could not be loaded.

Abesamis categorically stated on the witness stand that by the end of July 1951 he had
1,300,000 board feet of logs available — 800,000 at hand and ready for loading and the rest
deposited at various stations; and that he advised appellant of that fact in a telegram dated July
31, 1951 (Exh. S), at the same time requesting that a grader and a vessel be dispatched to Dolores
immediately as the logs were in danger of deteriorating.

Nicanor Selga, lumber inspector of the Bureau of Forestry, reported to appellant that as of July
3, 1951 he had graded appellee's logs amounting to 488,015 board feet (Exh. aa). Of this quantity
appellant, in its reply telegram of July 13, 1951 (Exh. BB) said that it could accept 239,547 board
feet, made up of logs at least 13 feet in length and 20 inches in diameter. However, Selga
likewise testified that appellee had other logs — some 600,000 board feet in all — in the two
barrios of Aroganga and Genolaso. After July 3, 1951, which was the last day Selga made his
inspection, there is evidence that appellee continued its logging operations, such that there was
enough to cover the quantity called for in the contract by due date, that is, on July 31, 1951.

Appellee divides his claim for damages into three categories, each based on a separate breach of
contract by appellant.

First, appellee maintains that due to the failure of appellant to send a vessel to Dolores, Samar,
the storm on May 5, 1951 swept away almost all the logs then awaiting shipment, amounting to
410,000 board feet, valued at P73,537.77. On this point it should be noted that under the
contract shipment was to be made before the end of July 1951, but not to commence earlier than
April of the same year. The obligation between the parties was a reciprocal one, appellant to
furnish the vessel and appellee to furnish the logs. It was also an obligation with a term, which
obviously was intended for the benefit of both parties, the period having been agreed upon in
order to avoid the stormy weather in Dolores, Samar, during the months of January to March.
The obligation being reciprocal and with a period, neither party could demand performance nor
incur in delay before the expiration of the period. Consequently, when the typhoon struck on
May 5, 1951 there was yet no delay on the part of appellant, and the corresponding loss must be
shouldered by appellee.

As regards the second breach it has been established that after the storm of May 5, 1951 appellee
continued its logging operations. Appellant was advised of the quantity of logs ready for
shipment and was urged to send a vessel to take delivery. It thereupon gave assurance that a
vessel, the "SS ALBAY," with a capacity of 450,000 board feet, was coming to Dolores, Samar, to
load on June 25, 1951. Appellee readied the necessary quantity of logs but the vessel did not
arrive. As a result, 60,000 board feet of logs which had been rafted broke loose and were lost.
Appellee's loss on this account amounted to a total of P7,685.26, representing the value of the
logs lost, the cost of rafting and other incidental expenses. It may be observed in this respect
that although the obligation would not become due until July 31, 1951 appellant waived the
benefit of the period by assuring appellee that it would take delivery of the logs on June 25, 1951.
On that date appellee was ready to comply, but appellant failed on his commitment, without any
satisfactory explanation for such failure. Therefore, appellant should bear the corresponding
loss.

Third and finally, as heretofore pointed out, by the end of July 1951 appellee had sufficient logs
ready for shipment in accordance with the contract. But appellant, in spite of the
representations made by the former, failed to send a vessel on the aforesaid date. There is no
evidence that such failure was due to circumstances beyond appellant's control. As a result logs
totalling 800,000 board feet were destroyed by marine borers, causing a loss of P62,000.00, for
which appellant should be held liable.

The trial court sentenced appellant to pay P50,000.00 representing appellee's loss of credit in
the operation of his business. The decision does not say upon what evidence the award is based.
Nor is there any attempt in appellee's brief to justify the amount awarded. Actual or
compensatory damages must be established by clear evidence. In this case, other than a few
letters of demand for payment of money accounts received by appellee from its creditors and
presented as exhibits, there is nothing to go upon, and the mere fact that such demands were
made does not necessarily prove loss of credit. This item must therefore be eliminated.

IN VIEW OF THE FOREGOING, the judgment appealed from is affirmed, with the modification
that appellant Woodcraft Works, Ltd. is sentenced to pay appellee the aggregate sum of
P69,685.26 by way of damages, plus P5,000 as attorney's fees, without costs in this instance.
Concepcion, C.J., Reyes, J.B.L., Dizon, Zaldivar, Sanchez, Castro, Teehankee and Barredo,
JJ., concur.