G.R. No.

128690 January 21, 1999 From among the three packages I can only tick off 10 titles we can purchase. Please see
attached. I hope you will understand my position. Most of the action pictures in the list do not
ABS-CBN BROADCASTING CORPORATION, petitioner, have big action stars in the cast. They are not for primetime. In line with this I wish to mention
vs. that I have not scheduled for telecast several action pictures in out very first contract because
HONORABLE COURT OF APPEALS, REPUBLIC BROADCASTING CORP, VIVA PRODUCTION, of the cheap production value of these movies as well as the lack of big action stars. As a film
INC., and VICENTE DEL ROSARIO, respondents. producer, I am sure you understand what I am trying to say as Viva produces only big action
pictures.
DAVIDE, JR., CJ.:
In fact, I would like to request two (2) additional runs for these movies as I can only schedule
In this petition for review on certiorari, petitioner ABS-CBN Broadcasting Corp. (hereafter them in our non-primetime slots. We have to cover the amount that was paid for these
ABS-CBN) seeks to reverse and set aside the decision 1 of 31 October 1996 and the resolution movies because as you very well know that non-primetime advertising rates are very low.
2 of 10 March 1997 of the Court of Appeals in CA-G.R. CV No. 44125. The former affirmed These are the unaired titles in the first contract.
with modification the decision 3 of 28 April 1993 of the Regional Trial Court (RTC) of Quezon
City, Branch 80, in Civil Case No. Q-92-12309. The latter denied the motion to reconsider the 1. Kontra Persa [sic].
decision of 31 October 1996.
2. Raider Platoon.
The antecedents, as found by the RTC and adopted by the Court of Appeals, are as follows:
3. Underground guerillas
In 1990, ABS-CBN and Viva executed a Film Exhibition Agreement (Exh. "A") whereby Viva
gave ABS-CBN an exclusive right to exhibit some Viva films. Sometime in December 1991, in 4. Tiger Command
accordance with paragraph 2.4 [sic] of said agreement stating that —.
5. Boy de Sabog
1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) Viva films
for TV telecast under such terms as may be agreed upon by the parties hereto, provided, 6. Lady Commando
however, that such right shall be exercised by ABS-CBN from the actual offer in writing.
7. Batang Matadero
Viva, through defendant Del Rosario, offered ABS-CBN, through its vice-president Charo
Santos-Concio, a list of three(3) film packages (36 title) from which ABS-CBN may exercise its 8. Rebelyon
right of first refusal under the afore-said agreement (Exhs. "1" par, 2, "2," "2-A'' and "2-B"-
Viva). ABS-CBN, however through Mrs. Concio, "can tick off only ten (10) titles" (from the list) I hope you will consider this request of mine.
"we can purchase" (Exh. "3" - Viva) and therefore did not accept said list (TSN, June 8, 1992,
pp. 9-10). The titles ticked off by Mrs. Concio are not the subject of the case at bar except the The other dramatic films have been offered to us before and have been rejected because of
film ''Maging Sino Ka Man." the ruling of MTRCB to have them aired at 9:00 p.m. due to their very adult themes.

For further enlightenment, this rejection letter dated January 06, 1992 (Exh "3" - Viva) is As for the 10 titles I have choosen [sic] from the 3 packages please consider including all the
hereby quoted: other Viva movies produced last year. I have quite an attractive offer to make.

6 January 1992 Thanking you and with my warmest regards.

Dear Vic, (Signed)

This is not a very formal business letter I am writing to you as I would like to express my Charo Santos-Concio
difficulty in recommending the purchase of the three film packages you are offering ABS-CBN.
On February 27, 1992, defendant Del Rosario approached ABS-CBN's Ms. Concio, with a list
consisting of 52 original movie titles (i.e. not yet aired on television) including the 14 titles
subject of the present case, as well as 104 re-runs (previously aired on television) from which
ABS-CBN may choose another 52 titles, as a total of 156 titles, proposing to sell to ABS-CBN
airing rights over this package of 52 originals and 52 re-runs for P60,000,000.00 of which
P30,000,000.00 will be in cash and P30,000,000.00 worth of television spots (Exh. "4" to "4-C"
Viva; "9" -Viva).
On April 2, 1992, defendant Del Rosario and ABS-CBN general manager, Eugenio Lopez III, met
at the Tamarind Grill Restaurant in Quezon City to discuss the package proposal of Viva. What
transpired in that lunch meeting is the subject of conflicting versions. Mr. Lopez testified that
he and Mr. Del Rosario allegedly agreed that ABS-CRN was granted exclusive film rights to
fourteen (14) films for a total consideration of P36 million; that he allegedly put this
agreement as to the price and number of films in a "napkin'' and signed it and gave it to Mr.
Del Rosario (Exh. D; TSN, pp. 24-26, 77-78, June 8, 1992). On the other hand, Del Rosario
denied having made any agreement with Lopez regarding the 14 Viva films; denied the
existence of a napkin in which Lopez wrote something; and insisted that what he and Lopez
discussed at the lunch meeting was Viva's film package offer of 104 films (52 originals and 52
re-runs) for a total price of P60 million. Mr. Lopez promising [sic]to make a counter proposal
which came in the form of a proposal contract Annex "C" of the complaint (Exh. "1"·- Viva;
Exh. "C" - ABS-CBN).
On April 06, 1992, Del Rosario and Mr. Graciano Gozon of RBS Senior vice-president for
Finance discussed the terms and conditions of Viva's offer to sell the 104 films, after the
rejection of the same package by ABS-CBN.
On April 07, 1992, defendant Del Rosario received through his secretary, a handwritten note
from Ms. Concio, (Exh. "5" - Viva), which reads: "Here's the draft of the contract. I hope you
find everything in order," to which was attached a draft exhibition agreement (Exh. "C''- ABS-
CBN; Exh. "9" - Viva, p. 3) a counter-proposal covering 53 films, 52 of which came from the list
sent by defendant Del Rosario and one film was added by Ms. Concio, for a consideration of
P35 million. Exhibit "C" provides that ABS-CBN is granted films right to 53 films and contains a
right of first refusal to "1992 Viva Films." The said counter proposal was however rejected by
Viva's Board of Directors [in the] evening of the same day, April 7, 1992, as Viva would not sell
anything less than the package of 104 films for P60 million pesos (Exh. "9" - Viva), and such
rejection was relayed to Ms. Concio.
On April 29, 1992, after the rejection of ABS-CBN and following several negotiations and
meetings defendant Del Rosario and Viva's President Teresita Cruz, in consideration of P60
million, signed a letter of agreement dated April 24, 1992. granting RBS the exclusive right to
air 104 Viva-produced and/or acquired films (Exh. "7-A" - RBS; Exh. "4" - RBS) including the
fourteen (14) films subject of the present case. 4
On 27 May 1992, ABS-CBN filed before the RTC a complaint for specific performance with a
prayer for a writ of preliminary injunction and/or temporary restraining order against private
respondents Republic Broadcasting Corporation 5 (hereafter RBS ), Viva Production (hereafter
VIVA), and Vicente Del Rosario. The complaint was docketed as Civil Case No. Q-92-12309.
On 27 May 1992, RTC issued a temporary restraining order 6 enjoining private respondents
from proceeding with the airing, broadcasting, and televising of the fourteen VIVA films
subject of the controversy, starting with the film Maging Sino Ka Man, which was scheduled
to be shown on private respondents RBS' channel 7 at seven o'clock in the evening of said
date.
On 17 June 1992, after appropriate proceedings, the RTC issued an
order 7 directing the issuance of a writ of preliminary injunction upon ABS-CBN's posting of
P35 million bond. ABS-CBN moved for the reduction of the bond, 8 while private respondents
moved for reconsideration of the order and offered to put up a counterbound. 9
In the meantime, private respondents filed separate answers with counterclaim. 10 RBS also
set up a cross-claim against VIVA..
On 3 August 1992, the RTC issued an order 11 dissolving the writ of preliminary injunction
upon the posting by RBS of a P30 million counterbond to answer for whatever damages ABS-
CBN might suffer by virtue of such dissolution. However, it reduced petitioner's injunction
bond to P15 million as a condition precedent for the reinstatement of the writ of preliminary
injunction should private respondents be unable to post a counterbond.
At the pre-trial 12 on 6 August 1992, the parties, upon suggestion of the court, agreed to
explore the possibility of an amicable settlement. In the meantime, RBS prayed for and was
granted reasonable time within which to put up a P30 million counterbond in the event that
no settlement would be reached.
As the parties failed to enter into an amicable settlement RBS posted on 1 October 1992 a
counterbond, which the RTC approved in its Order of 15 October 1992.13
On 19 October 1992, ABS-CBN filed a motion for reconsideration 14 of the 3 August and 15
October 1992 Orders, which RBS opposed. 15
On 29 October 1992, the RTC conducted a pre-trial. 16
Pending resolution of its motion for reconsideration, ABS-CBN filed with the Court of Appeals
a petition17 challenging the RTC's Orders of 3 August and 15 October 1992 and praying for
the issuance of a writ of preliminary injunction to enjoin the RTC from enforcing said orders.
The case was docketed as CA-G.R. SP No. 29300.
On 3 November 1992, the Court of Appeals issued a temporary restraining order18 to enjoin
the airing, broadcasting, and televising of any or all of the films involved in the controversy.
On 18 December 1992, the Court of Appeals promulgated a decision 19 dismissing the
petition in CA -G.R. No. 29300 for being premature. ABS-CBN challenged the dismissal in a
petition for review filed with this Court on 19 January 1993, which was docketed as G.R. No.
108363.
In the meantime the RTC received the evidence for the parties in Civil Case No. Q-192-1209.
Thereafter, on 28 April 1993, it rendered a decision 20 in favor of RBS and VIVA and against
ABS-CBN disposing as follows:
WHEREFORE, under cool reflection and prescinding from the foregoing, judgments is
rendered in favor of defendants and against the plaintiff.
(1) The complaint is hereby dismissed;
(2) Plaintiff ABS-CBN is ordered to pay defendant RBS the following:
a) P107,727.00, the amount of premium paid by RBS to the surety which issued
defendant RBS's bond to lift the injunction;
b) P191,843.00 for the amount of print advertisement for "Maging Sino Ka Man" in
various newspapers;
c) Attorney's fees in the amount of P1 million;
d) P5 million as and by way of moral damages;
e) P5 million as and by way of exemplary damages;
(3) For defendant VIVA, plaintiff ABS-CBN is ordered to pay P212,000.00 by way of
reasonable attorney's fees.
(4) The cross-claim of defendant RBS against defendant VIVA is dismissed.
(5) Plaintiff to pay the costs.
According to the RTC, there was no meeting of minds on the price and terms of the offer. The
alleged agreement between Lopez III and Del Rosario was subject to the approval of the VIVA
Board of Directors, and said agreement was disapproved during the meeting of the Board on
7 April 1992. Hence, there was no basis for ABS-CBN's demand that VIVA signed the 1992 Film
Exhibition Agreement. Furthermore, the right of first refusal under the 1990 Film Exhibition
Agreement had previously been exercised per Ms. Concio's letter to Del Rosario ticking off ten
titles acceptable to them, which would have made the 1992 agreement an entirely new
contract.
On 21 June 1993, this Court denied21 ABS-CBN's petition for review in G.R. No. 108363, as no
reversible error was committed by the Court of Appeals in its challenged decision and the
case had "become moot and academic in view of the dismissal of the main action by the court
a quo in its decision" of 28 April 1993.
Aggrieved by the RTC's decision, ABS-CBN appealed to the Court of Appeals claiming that
there was a perfected contract between ABS-CBN and VIVA granting ABS-CBN the exclusive
right to exhibit the subject films. Private respondents VIVA and Del Rosario also appealed
seeking moral and exemplary damages and additional attorney's fees.
In its decision of 31 October 1996, the Court of Appeals agreed with the RTC that the contract
between ABS-CBN and VIVA had not been perfected, absent the approval by the VIVA Board
of Directors of whatever Del Rosario, it's agent, might have agreed with Lopez III. The
appellate court did not even believe ABS-CBN's evidence that Lopez III actually wrote down
such an agreement on a "napkin," as the same was never produced in court. It likewise
rejected ABS-CBN's insistence on its right of first refusal and ratiocinated as follows:
As regards the matter of right of first refusal, it may be true that a Film Exhibition Agreement
was entered into between Appellant ABS-CBN and appellant VIVA under Exhibit "A" in 1990,
and that parag. 1.4 thereof provides:
1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) VIVA films
for TV telecast under such terms as may be agreed upon by the parties hereto, provided,
however, that such right shall be exercised by ABS-CBN within a period of fifteen (15) days
from the actual offer in writing (Records, p. 14).
[H]owever, it is very clear that said right of first refusal in favor of ABS-CBN shall still be
subject to such terms as may be agreed upon by the parties thereto, and that the said right
shall be exercised by ABS-CBN within fifteen (15) days from the actual offer in writing.
Said parag. 1.4 of the agreement Exhibit "A" on the right of first refusal did not fix the price of
the film right to the twenty-four (24) films, nor did it specify the terms thereof. The same are
still left to be agreed upon by the parties.
In the instant case, ABS-CBN's letter of rejection Exhibit 3 (Records, p. 89) stated that it can
only tick off ten (10) films, and the draft contract Exhibit "C" accepted only fourteen (14)
films, while parag. 1.4 of Exhibit "A'' speaks of the next twenty-four (24) films.
The offer of V1VA was sometime in December 1991 (Exhibits 2, 2-A. 2-B; Records, pp. 86-88;
Decision, p. 11, Records, p. 1150), when the first list of VIVA films was sent by Mr. Del Rosario
to ABS-CBN. The Vice President of ABS-CBN, Ms. Charo Santos-Concio, sent a letter dated
January 6, 1992 (Exhibit 3, Records, p. 89) where ABS-CBN exercised its right of refusal by
rejecting the offer of VIVA.. As aptly observed by the trial court, with the said letter of Mrs.
Concio of January 6, 1992, ABS-CBN had lost its right of first refusal. And even if We reckon
the fifteen (15) day period from February 27, 1992 (Exhibit 4 to 4-C) when another list was
sent to ABS-CBN after the letter of Mrs. Concio, still the fifteen (15) day period within which
ABS-CBN shall exercise its right of first refusal has already expired.22
Accordingly, respondent court sustained the award of actual damages consisting in the cost of
print advertisements and the premium payments for the counterbond, there being adequate
proof of the pecuniary loss which RBS had suffered as a result of the filing of the complaint by
ABS-CBN. As to the award of moral damages, the Court of Appeals found reasonable basis
therefor, holding that RBS's reputation was debased by the filing of the complaint in Civil Case
No. Q-92-12309 and by the non-showing of the film "Maging Sino Ka Man." Respondent court
also held that exemplary damages were correctly imposed by way of example or correction
for the public good in view of the filing of the complaint despite petitioner's knowledge that
the contract with VIVA had not been perfected, It also upheld the award of attorney's fees,
reasoning that with ABS-CBN's act of instituting Civil Case No, Q-92-1209, RBS was
"unnecessarily forced to litigate." The appellate court, however, reduced the awards of moral
damages to P2 million, exemplary damages to P2 million, and attorney's fees to P500, 000.00.
On the other hand, respondent Court of Appeals denied VIVA and Del Rosario's appeal
because it was "RBS and not VIVA which was actually prejudiced when the complaint was filed
by ABS-CBN."
Its motion for reconsideration having been denied, ABS-CBN filed the petition in this case,
contending that the Court of Appeals gravely erred in
I would have spent such an amount to generate interest in the film.
. . . RULING THAT THERE WAS NO PERFECTED CONTRACT BETWEEN PETITIONER AND PRIVATE
RESPONDENT VIVA NOTWITHSTANDING PREPONDERANCE OF EVIDENCE ADDUCED BY
PETITIONER TO THE CONTRARY.
II
. . . IN AWARDING ACTUAL AND COMPENSATORY DAMAGES IN FAVOR OF PRIVATE
RESPONDENT RBS.
III
. . . IN AWARDING MORAL AND EXEMPLARY DAMAGES IN FAVOR OF PRIVATE RESPONDENT
RBS.
IV
. . . IN AWARDING ATTORNEY'S FEES IN FAVOR OF RBS.
ABS-CBN claims that it had yet to fully exercise its right of first refusal over twenty-four titles
under the 1990 Film Exhibition Agreement, as it had chosen only ten titles from the first list. It
insists that we give credence to Lopez's testimony that he and Del Rosario met at the
Tamarind Grill Restaurant, discussed the terms and conditions of the second list (the 1992
Film Exhibition Agreement) and upon agreement thereon, wrote the same on a paper napkin.
It also asserts that the contract has already been effective, as the elements thereof, namely,
consent, object, and consideration were established. It then concludes that the Court of
Appeals' pronouncements were not supported by law and jurisprudence, as per our decision
of 1 December 1995 in Limketkai Sons Milling, Inc. v. Court of Appeals, 23 which cited Toyota
Shaw, Inc. v. Court of Appeals, 24 Ang Yu Asuncion v. Court of Appeals, 25 and Villonco Realty
Company v. Bormaheco. Inc.26
Anent the actual damages awarded to RBS, ABS-CBN disavows liability therefor. RBS spent for
the premium on the counterbond of its own volition in order to negate the injunction issued
by the trial court after the parties had ventilated their respective positions during the
hearings for the purpose. The filing of the counterbond was an option available to RBS, but it
can hardly be argued that ABS-CBN compelled RBS to incur such expense. Besides, RBS had
another available option, i.e., move for the dissolution or the injunction; or if it was
determined to put up a counterbond, it could have presented a cash bond. Furthermore
under Article 2203 of the Civil Code, the party suffering loss or injury is also required to
exercise the diligence of a good father of a family to minimize the damages resulting from the
act or omission. As regards the cost of print advertisements, RBS had not convincingly
established that this was a loss attributable to the non showing "Maging Sino Ka Man"; on the
contrary, it was brought out during trial that with or without the case or the injunction, RBS
ABS-CBN further contends that there was no clear basis for the awards of moral and
exemplary damages. The controversy involving ABS-CBN and RBS did not in any way originate
from business transaction between them. The claims for such damages did not arise from any
contractual dealings or from specific acts committed by ABS-CBN against RBS that may be
characterized as wanton, fraudulent, or reckless; they arose by virtue only of the filing of the
complaint, An award of moral and exemplary damages is not warranted where the record is
bereft of any proof that a party acted maliciously or in bad faith in filing an action. 27 In any
case, free resort to courts for redress of wrongs is a matter of public policy. The law
recognizes the right of every one to sue for that which he honestly believes to be his right
without fear of standing trial for damages where by lack of sufficient evidence, legal
technicalities, or a different interpretation of the laws on the matter, the case would lose
ground. 28 One who makes use of his own legal right does no injury. 29 If damage results
front the filing of the complaint, it is damnum absque injuria. 30 Besides, moral damages are
generally not awarded in favor of a juridical person, unless it enjoys a good reputation that
was debased by the offending party resulting in social humiliation.31

As regards the award of attorney's fees, ABS-CBN maintains that the same had no factual,
legal, or equitable justification. In sustaining the trial court's award, the Court of Appeals
acted in clear disregard of the doctrines laid down in Buan v. Camaganacan 32 that the text of
the decision should state the reason why attorney's fees are being awarded; otherwise, the
award should be disallowed. Besides, no bad faith has been imputed on, much less proved as
having been committed by, ABS-CBN. It has been held that "where no sufficient showing of
bad faith would be reflected in a party' s persistence in a case other than an erroneous
conviction of the righteousness of his cause, attorney's fees shall not be recovered as cost."
33
On the other hand, RBS asserts that there was no perfected contract between ABS-CBN and
VIVA absent any meeting of minds between them regarding the object and consideration of
the alleged contract. It affirms that the ABS-CBN's claim of a right of first refusal was correctly
rejected by the trial court. RBS insist the premium it had paid for the counterbond constituted
a pecuniary loss upon which it may recover. It was obliged to put up the counterbound due to
the injunction procured by ABS-CBN. Since the trial court found that ABS-CBN had no cause of
action or valid claim against RBS and, therefore not entitled to the writ of injunction, RBS
could recover from ABS-CBN the premium paid on the counterbond. Contrary to the claim of
ABS-CBN, the cash bond would prove to be more expensive, as the loss would be equivalent
to the cost of money RBS would forego in case the P30 million came from its funds or was
borrowed from banks.
RBS likewise asserts that it was entitled to the cost of advertisements for the cancelled
showing of the film "Maging Sino Ka Man" because the print advertisements were put out to
announce the showing on a particular day and hour on Channel 7, i.e., in its entirety at one
time, not a series to be shown on a periodic basis. Hence, the print advertisement were good
and relevant for the particular date showing, and since the film could not be shown on that
particular date and hour because of the injunction, the expenses for the advertisements had
gone to waste.
As regards moral and exemplary damages, RBS asserts that ABS-CBN filed the case and
secured injunctions purely for the purpose of harassing and prejudicing RBS. Pursuant then to
Article 19 and 21 of the Civil Code, ABS-CBN must be held liable for such damages. Citing
Tolentino,34 damages may be awarded in cases of abuse of rights even if the act done is not
illicit and there is abuse of rights were plaintiff institutes and action purely for the purpose of
harassing or prejudicing the defendant.
In support of its stand that a juridical entity can recover moral and exemplary damages,
private respondents RBS cited People v. Manero,35 where it was stated that such entity may
recover moral and exemplary damages if it has a good reputation that is debased resulting in
social humiliation. it then ratiocinates; thus:
There can be no doubt that RBS' reputation has been debased by ABS-CBN's acts in this case.
When RBS was not able to fulfill its commitment to the viewing public to show the film
"Maging Sino Ka Man" on the scheduled dates and times (and on two occasions that RBS
advertised), it suffered serious embarrassment and social humiliation. When the showing was
canceled, late viewers called up RBS' offices and subjected RBS to verbal abuse ("Announce
kayo nang announce, hindi ninyo naman ilalabas," "nanloloko yata kayo") (Exh. 3-RBS, par. 3).
This alone was not something RBS brought upon itself. it was exactly what ABS-CBN had
planned to happen.
The amount of moral and exemplary damages cannot be said to be excessive. Two reasons
justify the amount of the award.
The first is that the humiliation suffered by RBS is national extent. RBS operations as a
broadcasting company is [sic] nationwide. Its clientele, like that of ABS-CBN, consists of those
who own and watch television. It is not an exaggeration to state, and it is a matter of judicial
notice that almost every other person in the country watches television. The humiliation
suffered by RBS is multiplied by the number of televiewers who had anticipated the showing
of the film "Maging Sino Ka Man" on May 28 and November 3, 1992 but did not see it owing
to the cancellation. Added to this are the advertisers who had placed commercial spots for
the telecast and to whom RBS had a commitment in consideration of the placement to show
the film in the dates and times specified.
The second is that it is a competitor that caused RBS to suffer the humiliation. The humiliation
and injury are far greater in degree when caused by an entity whose ultimate business
objective is to lure customers (viewers in this case) away from the competition. 36
For their part, VIVA and Vicente del Rosario contend that the findings of fact of the trial court
and the Court of Appeals do not support ABS-CBN's claim that there was a perfected contract.
Such factual findings can no longer be disturbed in this petition for review under Rule 45, as
only questions of law can be raised, not questions of fact. On the issue of damages and
attorneys fees, they adopted the arguments of RBS.
The key issues for our consideration are (1) whether there was a perfected contract between
VIVA and ABS-CBN, and (2) whether RBS is entitled to damages and attorney's fees. It may be
noted that the award of attorney's fees of P212,000 in favor of VIVA is not assigned as
another error.
I.
The first issue should be resolved against ABS-CBN. A contract is a meeting of minds between
two persons whereby one binds himself to give something or to render some service to
another 37 for a consideration. there is no contract unless the following requisites concur: (1)
consent of the contracting parties; (2) object certain which is the subject of the contract; and
(3) cause of the obligation, which is established.38 A contract undergoes three stages:

(a) preparation, conception, or generation, which is the period of negotiation and
bargaining, ending at the moment of agreement of the parties;
(b) perfection or birth of the contract, which is the moment when the parties come to
agree on the terms of the contract; and
(c) consummation or death, which is the fulfillment or performance of the terms
agreed upon in the contract. 39
Contracts that are consensual in nature are perfected upon mere meeting of the minds, Once
there is concurrence between the offer and the acceptance upon the subject matter,
consideration, and terms of payment a contract is produced. The offer must be certain. To
convert the offer into a contract, the acceptance must be absolute and must not qualify the
terms of the offer; it must be plain, unequivocal, unconditional, and without variance of any
sort from the proposal. A qualified acceptance, or one that involves a new proposal,
constitutes a counter-offer and is a rejection of the original offer. Consequently, when
something is desired which is not exactly what is proposed in the offer, such acceptance is not
sufficient to generate consent because any modification or variation from the terms of the
offer annuls the offer.40
When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at the Tamarind Grill on 2 April
1992 to discuss the package of films, said package of 104 VIVA films was VIVA's offer to ABS-
CBN to enter into a new Film Exhibition Agreement. But ABS-CBN, sent, through Ms. Concio, a
counter-proposal in the form of a draft contract proposing exhibition of 53 films for a
consideration of P35 million. This counter-proposal could be nothing less than the counter-
offer of Mr. Lopez during his conference with Del Rosario at Tamarind Grill Restaurant.
Clearly, there was no acceptance of VIVA's offer, for it was met by a counter-offer which
substantially varied the terms of the offer.
ABS-CBN's reliance in Limketkai Sons Milling, Inc. v. Court of
Appeals 41 and Villonco Realty Company v. Bormaheco, Inc., 42 is misplaced. In these cases, it
was held that an acceptance may contain a request for certain changes in the terms of the
offer and yet be a binding acceptance as long as "it is clear that the meaning of the
acceptance is positively and unequivocally to accept the offer, whether such request is
granted or not." This ruling was, however, reversed in the resolution of 29 March 1996, 43
which ruled that the acceptance of all offer must be unqualified and absolute, i.e., it "must be
identical in all respects with that of the offer so as to produce consent or meeting of the
minds."
On the other hand, in Villonco, cited in Limketkai, the alleged changes in the revised counter-
offer were not material but merely clarificatory of what had previously been agreed upon. It
cited the statement in Stuart v. Franklin Life Insurance Co.44 that "a vendor's change in a
phrase of the offer to purchase, which change does not essentially change the terms of the
offer, does not amount to a rejection of the offer and the tender of a counter-offer." 45
However, when any of the elements of the contract is modified upon acceptance, such
alteration amounts to a counter-offer.
In the case at bar, ABS-CBN made no unqualified acceptance of VIVA's offer. Hence, they
underwent a period of bargaining. ABS-CBN then formalized its counter-proposals or counter-
offer in a draft contract, VIVA through its Board of Directors, rejected such counter-offer,
Even if it be conceded arguendo that Del Rosario had accepted the counter-offer, the
acceptance did not bind VIVA, as there was no proof whatsoever that Del Rosario had the
specific authority to do so.
Under Corporation Code,46 unless otherwise provided by said Code, corporate powers, such
as the power; to enter into contracts; are exercised by the Board of Directors. However, the
Board may delegate such powers to either an executive committee or officials or contracted
managers. The delegation, except for the executive committee, must be for specific purposes,
47 Delegation to officers makes the latter agents of the corporation; accordingly, the general
rules of agency as to the bindings effects of their acts would
apply. 48 For such officers to be deemed fully clothed by the corporation to exercise a power
of the Board, the latter must specially authorize them to do so. That Del Rosario did not have
the authority to accept ABS-CBN's counter-offer was best evidenced by his submission of the
draft contract to VIVA's Board of Directors for the latter's approval. In any event, there was
between Del Rosario and Lopez III no meeting of minds. The following findings of the trial
court are instructive:
A number of considerations militate against ABS-CBN's claim that a contract was perfected at
that lunch meeting on April 02, 1992 at the Tamarind Grill.
FIRST, Mr. Lopez claimed that what was agreed upon at the Tamarind Grill referred to the
price and the number of films, which he wrote on a napkin. However, Exhibit "C" contains
numerous provisions which, were not discussed at the Tamarind Grill, if Lopez testimony was
to be believed nor could they have been physically written on a napkin. There was even doubt
as to whether it was a paper napkin or a cloth napkin. In short what were written in Exhibit
"C'' were not discussed, and therefore could not have been agreed upon, by the parties. How
then could this court compel the parties to sign Exhibit "C" when the provisions thereof were
not previously agreed upon?
SECOND, Mr. Lopez claimed that what was agreed upon as the subject matter of the contract
was 14 films. The complaint in fact prays for delivery of 14 films. But Exhibit "C" mentions 53
films as its subject matter. Which is which If Exhibits "C" reflected the true intent of the
parties, then ABS-CBN's claim for 14 films in its complaint is false or if what it alleged in the
complaint is true, then Exhibit "C" did not reflect what was agreed upon by the parties. This
underscores the fact that there was no meeting of the minds as to the subject matter of the
contracts, so as to preclude perfection thereof. For settled is the rule that there can be no
contract where there is no object which is its subject matter (Art. 1318, NCC).

THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit testimony (Exh. "D") states:
We were able to reach an agreement. VIVA gave us the exclusive license to show these
fourteen (14) films, and we agreed to pay Viva the amount of P16,050,000.00 as well as grant
Viva commercial slots worth P19,950,000.00. We had already earmarked this P16,
050,000.00.
which gives a total consideration of P36 million (P19,950,000.00 plus P16,050,000.00. equals
P36,000,000.00).
On cross-examination Mr. Lopez testified:
Q. What was written in this napkin?
A. The total price, the breakdown the known Viva movies, the 7 blockbuster movies
and the other 7 Viva movies because the price was broken down accordingly. The none [sic]
Viva and the seven other Viva movies and the sharing between the cash portion and the
concerned spot portion in the total amount of P35 million pesos.
Now, which is which? P36 million or P35 million? This weakens ABS-CBN's claim.
FOURTH. Mrs. Concio, testifying for ABS-CBN stated that she transmitted Exhibit "C" to Mr.
Del Rosario with a handwritten note, describing said Exhibit "C" as a "draft." (Exh. "5" - Viva;
tsn pp. 23-24 June 08, 1992). The said draft has a well defined meaning.
Since Exhibit "C" is only a draft, or a tentative, provisional or preparatory writing prepared for
discussion, the terms and conditions thereof could not have been previously agreed upon by
ABS-CBN and Viva Exhibit "C'' could not therefore legally bind Viva, not having agreed thereto.
In fact, Ms. Concio admitted that the terms and conditions embodied in Exhibit "C" were
prepared by ABS-CBN's lawyers and there was no discussion on said terms and conditions. . . .
As the parties had not yet discussed the proposed terms and conditions in Exhibit "C," and
there was no evidence whatsoever that Viva agreed to the terms and conditions thereof, said
document cannot be a binding contract. The fact that Viva refused to sign Exhibit "C" reveals
only two [sic] well that it did not agree on its terms and conditions, and this court has no
authority to compel Viva to agree thereto.
FIFTH. Mr. Lopez understand [sic] that what he and Mr. Del Rosario agreed upon at the
Tamarind Grill was only provisional, in the sense that it was subject to approval by the Board
of Directors of Viva. He testified:
Q. Now, Mr. Witness, and after that Tamarind meeting ... the second meeting
wherein you claimed that you have the meeting of the minds between you and Mr. Vic del
Rosario, what happened?
A. Vic Del Rosario was supposed to call us up and tell us specifically the result of the
discussion with the Board of Directors.
Q. And you are referring to the so-called agreement which you wrote in [sic] a piece
of paper?
A. Yes, sir.
Q. So, he was going to forward that to the board of Directors for approval?
A. Yes, sir. (Tsn, pp. 42-43, June 8, 1992)
Q. Did Mr. Del Rosario tell you that he will submit it to his Board for approval?
A. Yes, sir. (Tsn, p. 69, June 8, 1992).
The above testimony of Mr. Lopez shows beyond doubt that he knew Mr. Del Rosario had no
authority to bind Viva to a contract with ABS-CBN until and unless its Board of Directors
approved it. The complaint, in fact, alleges that Mr. Del Rosario "is the Executive Producer of
defendant Viva" which "is a corporation." (par. 2, complaint). As a mere agent of Viva, Del
Rosario could not bind Viva unless what he did is ratified by its Board of Directors. (Vicente vs.
Geraldez, 52 SCRA 210; Arnold vs. Willets and Paterson, 44 Phil. 634). As a mere agent,
recognized as such by plaintiff, Del Rosario could not be held liable jointly and severally with
Viva and his inclusion as party defendant has no legal basis. (Salonga vs. Warner Barner [sic] ,
COLTA , 88 Phil. 125; Salmon vs. Tan, 36 Phil. 556).
The testimony of Mr. Lopez and the allegations in the complaint are clear admissions that
what was supposed to have been agreed upon at the Tamarind Grill between Mr. Lopez and
Del Rosario was not a binding agreement. It is as it should be because corporate power to
enter into a contract is lodged in the Board of Directors. (Sec. 23, Corporation Code). Without
such board approval by the Viva board, whatever agreement Lopez and Del Rosario arrived at
could not ripen into a valid contract binding upon Viva (Yao Ka Sin Trading vs. Court of
Appeals, 209 SCRA 763). The evidence adduced shows that the Board of Directors of Viva
rejected Exhibit "C" and insisted that the film package for 140 films be maintained (Exh. "7-1"
- Viva ). 49
The contention that ABS-CBN had yet to fully exercise its right of first refusal over twenty-four
films under the 1990 Film Exhibition Agreement and that the meeting between Lopez and Del
Rosario was a continuation of said previous contract is untenable. As observed by the trial
court, ABS-CBN right of first refusal had already been exercised when Ms. Concio wrote to
VIVA ticking off ten films, Thus:
[T]he subsequent negotiation with ABS-CBN two (2) months after this letter was sent, was for
an entirely different package. Ms. Concio herself admitted on cross-examination to having
used or exercised the right of first refusal. She stated that the list was not acceptable and was
indeed not accepted by ABS-CBN, (TSN, June 8, 1992, pp. 8-10). Even Mr. Lopez himself
admitted that the right of the first refusal may have been already exercised by Ms. Concio (as
she had). (TSN, June 8, 1992, pp. 71-75). Del Rosario himself knew and understand [sic] that
ABS-CBN has lost its rights of the first refusal when his list of 36 titles were rejected (Tsn, June
9, 1992, pp. 10-11) 50
II
However, we find for ABS-CBN on the issue of damages. We shall first take up actual
damages. Chapter 2, Title XVIII, Book IV of the Civil Code is the specific law on actual or
compensatory damages. Except as provided by law or by stipulation, one is entitled to
compensation for actual damages only for such pecuniary loss suffered by him as he has duly
proved. 51 The indemnification shall comprehend not only the value of the loss suffered, but
also that of the profits that the obligee failed to obtain. 52 In contracts and quasi-contracts
the damages which may be awarded are dependent on whether the obligor acted with good
faith or otherwise, It case of good faith, the damages recoverable are those which are the
natural and probable consequences of the breach of the obligation and which the parties
have foreseen or could have reasonably foreseen at the time of the constitution of the
obligation. If the obligor acted with fraud, bad faith, malice, or wanton attitude, he shall be
responsible for all damages which may be reasonably attributed to the non-performance of
the obligation. 53 In crimes and quasi-delicts, the defendant shall be liable for all damages
which are the natural and probable consequences of the act or omission complained of,
whether or not such damages has been foreseen or could have reasonably been foreseen by
the defendant.54
Actual damages may likewise be recovered for loss or impairment of earning capacity in cases
of temporary or permanent personal injury, or for injury to the plaintiff's business standing or
commercial credit.55
The claim of RBS for actual damages did not arise from contract, quasi-contract, delict, or
quasi-delict. It arose from the fact of filing of the complaint despite ABS-CBN's alleged
knowledge of lack of cause of action. Thus paragraph 12 of RBS's Answer with Counterclaim
and Cross-claim under the heading COUNTERCLAIM specifically alleges:
12. ABS-CBN filed the complaint knowing fully well that it has no cause of action RBS.
As a result thereof, RBS suffered actual damages in the amount of P6,621,195.32. 56
Needless to state the award of actual damages cannot be comprehended under the above
law on actual damages. RBS could only probably take refuge under Articles 19, 20, and 21 of
the Civil Code, which read as follows:
Art. 19. Every person must, in the exercise of his rights and in the performance of his
duties, act with justice, give everyone his due, and observe honesty and good faith.
Art. 20. Every person who, contrary to law, wilfully or negligently causes damage to
another, shall indemnify the latter for tile same.
Art. 21. Any person who wilfully causes loss or injury to another in a manner that is
contrary to morals, good customs or public policy shall compensate the latter for the damage.
It may further be observed that in cases where a writ of preliminary injunction is issued, the
damages which the defendant may suffer by reason of the writ are recoverable from the
injunctive bond. 57 In this case, ABS-CBN had not yet filed the required bond; as a matter of
fact, it asked for reduction of the bond and even went to the Court of Appeals to challenge
the order on the matter, Clearly then, it was not necessary for RBS to file a counterbond.
Hence, ABS-CBN cannot be held responsible for the premium RBS paid for the counterbond.
Neither could ABS-CBN be liable for the print advertisements for "Maging Sino Ka Man" for
lack of sufficient legal basis. The RTC issued a temporary restraining order and later, a writ of
preliminary injunction on the basis of its determination that there existed sufficient ground
for the issuance thereof. Notably, the RTC did not dissolve the injunction on the ground of
lack of legal and factual basis, but because of the plea of RBS that it be allowed to put up a
counterbond.
As regards attorney's fees, the law is clear that in the absence of stipulation, attorney's fees
may be recovered as actual or compensatory damages under any of the circumstances
provided for in Article 2208 of the Civil Code. 58
The general rule is that attorney's fees cannot be recovered as part of damages because of
the policy that no premium should be placed on the right to litigate.59 They are not to be
awarded every time a party wins a suit. The power of the court to award attorney's fees
under Article 2208 demands factual, legal, and equitable justification.60 Even when claimant
is compelled to litigate with third persons or to incur expenses to protect his rights, still
attorney's fees may not be awarded where no sufficient showing of bad faith could be
reflected in a party's persistence in a case other than erroneous conviction of the
righteousness of his cause. 61
As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book IV of the Civil Code.
Article 2217 thereof defines what are included in moral damages, while Article 2219
enumerates the cases where they may be recovered, Article 2220 provides that moral
damages may be recovered in breaches of contract where the defendant acted fraudulently
or in bad faith. RBS's claim for moral damages could possibly fall only under item (10) of
Article 2219, thereof which reads:
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
Moral damages are in the category of an award designed to compensate the claimant for
actual injury suffered. and not to impose a penalty on the wrongdoer.62 The award is not
meant to enrich the complainant at the expense of the defendant, but to enable the injured
party to obtain means, diversion, or amusements that will serve to obviate then moral
suffering he has undergone. It is aimed at the restoration, within the limits of the possible, of
the spiritual status quo ante, and should be proportionate to the suffering inflicted.63 Trial
courts must then guard against the award of exorbitant damages; they should exercise
balanced restrained and measured objectivity to avoid suspicion that it was due to passion,
prejudice, or corruption on the part of the trial court. 64
Verily then, malice or bad faith is at the core of Articles 19, 20, and 21. Malice or bad faith
implies a conscious and intentional design to do a wrongful act for a dishonest purpose or
moral obliquity. 73 Such must be substantiated by evidence. 74
There is no adequate proof that ABS-CBN was inspired by malice or bad faith. It was honestly
convinced of the merits of its cause after it had undergone serious negotiations culminating in
its formal submission of a draft contract. Settled is the rule that the adverse result of an
action does not per se make the action wrongful and subject the actor to damages, for the
law could not have meant to impose a penalty on the right to litigate. If damages result from a
person's exercise of a right, it is damnum absque injuria.75
WHEREFORE, the instant petition is GRANTED. The challenged decision of the Court of
Appeals in CA-G.R. CV No, 44125 is hereby REVERSED except as to unappealed award of
attorney's fees in favor of VIVA Productions, Inc.

The award of moral damages cannot be granted in favor of a corporation because, being an No pronouncement as to costs.
artificial person and having existence only in legal contemplation, it has no feelings, no
emotions, no senses, It cannot, therefore, experience physical suffering and mental anguish, SO ORDERED.
which call be experienced only by one having a nervous system. 65 The statement in People v.
Manero 66 and Mambulao Lumber Co. v. PNB 67 that a corporation may recover moral
damages if it "has a good reputation that is debased, resulting in social humiliation" is an
obiter dictum. On this score alone the award for damages must be set aside, since RBS is a
corporation.

The basic law on exemplary damages is Section 5, Chapter 3, Title XVIII, Book IV of the Civil
Code. These are imposed by way of example or correction for the public good, in addition to
moral, temperate, liquidated or compensatory damages. 68 They are recoverable in criminal
cases as part of the civil liability when the crime was committed with one or more aggravating
circumstances; 69 in quasi-contracts, if the defendant acted with gross negligence; 70 and in
contracts and quasi-contracts, if the defendant acted in a wanton, fraudulent, reckless,
oppressive, or malevolent manner.71

It may be reiterated that the claim of RBS against ABS-CBN is not based on contract, quasi-
contract, delict, or quasi-delict, Hence, the claims for moral and exemplary damages can only
be based on Articles 19, 20, and 21 of the Civil Code.

The elements of abuse of right under Article 19 are the following: (1) the existence of a legal
right or duty, (2) which is exercised in bad faith, and (3) for the sole intent of prejudicing or
injuring another. Article 20 speaks of the general sanction for all other provisions of law which
do not especially provide for their own sanction; while Article 21 deals with acts contra bonus
mores, and has the following elements; (1) there is an act which is legal, (2) but which is
contrary to morals, good custom, public order, or public policy, and (3) and it is done with
intent to injure. 72
G.R. No. 155001 May 5, 2003
DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B. REUNILLA, MANUEL
ANTONIO B. BOÑE, MAMERTO S. CLARA, REUEL E. DIMALANTA, MORY V. DOMALAON,
CONRADO G. DIMAANO, LOLITA R. HIZON, REMEDIOS P. ADOLFO, BIENVENIDO C. HILARIO,
MIASCOR WORKERS UNION - NATIONAL LABOR UNION (MWU-NLU), and PHILIPPINE
AIRLINES EMPLOYEES ASSOCIATION (PALEA), petitioners,
vs.
PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT
AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS and SECRETARY
LEANDRO M. MENDOZA, in his capacity as Head of the Department of Transportation and
Communications, respondents,
MIASCOR GROUNDHANDLING CORPORATION, DNATA-WINGS AVIATION SYSTEMS
CORPORATION, MACROASIA-EUREST SERVICES, INC., MACROASIA-MENZIES AIRPORT
SERVICES CORPORATION, MIASCOR CATERING SERVICES CORPORATION, MIASCOR
AIRCRAFT MAINTENANCE CORPORATION, and MIASCOR LOGISTICS CORPORATION,
petitioners-in-intervention,
x---------------------------------------------------------x
G.R. No. 155547 May 5, 2003
SALACNIB F. BATERINA, CLAVEL A. MARTINEZ and CONSTANTINO G. JARAULA, petitioners,
vs.
PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT
AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS, DEPARTMENT OF
PUBLIC WORKS AND HIGHWAYS, SECRETARY LEANDRO M. MENDOZA, in his capacity as Head
of the Department of Transportation and Communications, and SECRETARY SIMEON A.
DATUMANONG, in his capacity as Head of the Department of Public Works and Highways,
respondents,
JACINTO V. PARAS, RAFAEL P. NANTES, EDUARDO C. ZIALCITA, WILLY BUYSON VILLARAMA,
PROSPERO C. NOGRALES, PROSPERO A. PICHAY, JR., HARLIN CAST ABAYON, and BENASING O.
MACARANBON, respondents-intervenors,
x---------------------------------------------------------x
G.R. No. 155661 May 5, 2003
CEFERINO C. LOPEZ, RAMON M. SALES, ALFREDO B. VALENCIA, MA. TERESA V. GAERLAN,
LEONARDO DE LA ROSA, DINA C. DE LEON, VIRGIE CATAMIN RONALD SCHLOBOM, ANGELITO
SANTOS, MA. LUISA M. PALCON and SAMAHANG MANGGAGAWA SA PALIPARAN NG
PILIPINAS (SMPP), petitioners,
vs.
PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT
AUTHORITY, DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS, SECRETARY
LEANDRO M. MENDOZA, in his capacity as Head of the Department of Transportation and
Communications, respondents.
PUNO, J.:
Petitioners and petitioners-in-intervention filed the instant petitions for prohibition under
Rule 65 of the Revised Rules of Court seeking to prohibit the Manila International Airport
Authority (MIAA) and the Department of Transportation and Communications (DOTC) and its
Secretary from implementing the following agreements executed by the Philippine
Government through the DOTC and the MIAA and the Philippine International Air Terminals
Co., Inc. (PIATCO): (1) the Concession Agreement signed on July 12, 1997, (2) the Amended
and Restated Concession Agreement dated November 26, 1999, (3) the First Supplement to
the Amended and Restated Concession Agreement dated August 27, 1999, (4) the Second
Supplement to the Amended and Restated Concession Agreement dated September 4, 2000,
and (5) the Third Supplement to the Amended and Restated Concession Agreement dated
June 22, 2001 (collectively, the PIATCO Contracts).
The facts are as follows:
In August 1989, the DOTC engaged the services of Aeroport de Paris (ADP) to conduct a
comprehensive study of the Ninoy Aquino International Airport (NAIA) and determine
whether the present airport can cope with the traffic development up to the year 2010. The
study consisted of two parts: first, traffic forecasts, capacity of existing facilities, NAIA future
requirements, proposed master plans and development plans; and second, presentation of
the preliminary design of the passenger terminal building. The ADP submitted a Draft Final
Report to the DOTC in December 1989.
Some time in 1993, six business leaders consisting of John Gokongwei, Andrew Gotianun,
Henry Sy, Sr., Lucio Tan, George Ty and Alfonso Yuchengco met with then President Fidel V.
Ramos to explore the possibility of investing in the construction and operation of a new
international airport terminal. To signify their commitment to pursue the project, they formed
the Asia's Emerging Dragon Corp. (AEDC) which was registered with the Securities and
Exchange Commission (SEC) on September 15, 1993.
On October 5, 1994, AEDC submitted an unsolicited proposal to the Government through the
DOTC/MIAA for the development of NAIA International Passenger Terminal III (NAIA IPT III)
under a build-operate-and-transfer arrangement pursuant to RA 6957 as amended by RA
7718 (BOT Law).1
On December 2, 1994, the DOTC issued Dept. Order No. 94-832 constituting the
Prequalification Bids and Awards Committee (PBAC) for the implementation of the NAIA IPT III
project.

On March 27, 1995, then DOTC Secretary Jose Garcia endorsed the proposal of AEDC to the
National Economic and Development Authority (NEDA). A revised proposal, however, was
forwarded by the DOTC to NEDA on December 13, 1995. On January 5, 1996, the NEDA
Investment Coordinating Council (NEDA ICC) – Technical Board favorably endorsed the project
to the ICC – Cabinet Committee which approved the same, subject to certain conditions, on
January 19, 1996. On February 13, 1996, the NEDA passed Board Resolution No. 2 which
approved the NAIA IPT III project.
On June 7, 14, and 21, 1996, DOTC/MIAA caused the publication in two daily newspapers of
an invitation for competitive or comparative proposals on AEDC's unsolicited proposal, in
accordance with Sec. 4-A of RA 6957, as amended. The alternative bidders were required to
submit three (3) sealed envelopes on or before 5:00 p.m. of September 20, 1996. The first
envelope should contain the Prequalification Documents, the second envelope the Technical
Proposal, and the third envelope the Financial Proposal of the proponent.
On June 20, 1996, PBAC Bulletin No. 1 was issued, postponing the availment of the Bid
Documents and the submission of the comparative bid proposals. Interested firms were
permitted to obtain the Request for Proposal Documents beginning June 28, 1996, upon
submission of a written application and payment of a non-refundable fee of P50,000.00
(US$2,000).
The Bid Documents issued by the PBAC provided among others that the proponent must have
adequate capability to sustain the financing requirement for the detailed engineering, design,
construction, operation, and maintenance phases of the project. The proponent would be
evaluated based on its ability to provide a minimum amount of equity to the project, and its
capacity to secure external financing for the project.
On July 23, 1996, the PBAC issued PBAC Bulletin No. 2 inviting all bidders to a pre-bid
conference on July 29, 1996.
On August 16, 1996, the PBAC issued PBAC Bulletin No. 3 amending the Bid Documents. The
following amendments were made on the Bid Documents:
a. Aside from the fixed Annual Guaranteed Payment, the proponent shall include in its
financial proposal an additional percentage of gross revenue share of the Government, as
follows:
i. First 5 years 5.0%
ii. Next 10 years 7.5%
iii. Next 10 years 10.0%
b. The amount of the fixed Annual Guaranteed Payment shall be subject of the price
challenge. Proponent may offer an Annual Guaranteed Payment which need not be of equal
amount, but payment of which shall start upon site possession.
c. The project proponent must have adequate capability to sustain the financing requirement
for the detailed engineering, design, construction, and/or operation and maintenance phases
of the project as the case may be. For purposes of pre-qualification, this capability shall be
measured in terms of:
i. Proof of the availability of the project proponent and/or the consortium to provide the
minimum amount of equity for the project; and
ii. a letter testimonial from reputable banks attesting that the project proponent and/or the
members of the consortium are banking with them, that the project proponent and/or the
members are of good financial standing, and have adequate resources.
d. The basis for the prequalification shall be the proponent's compliance with the minimum
technical and financial requirements provided in the Bid Documents and the IRR of the BOT
Law. The minimum amount of equity shall be 30% of the Project Cost.
e. Amendments to the draft Concession Agreement shall be issued from time to time. Said
amendments shall only cover items that would not materially affect the preparation of the
proponent's proposal.
On August 29, 1996, the Second Pre-Bid Conference was held where certain clarifications
were made. Upon the request of prospective bidder People's Air Cargo & Warehousing Co.,
Inc (Paircargo), the PBAC warranted that based on Sec. 11.6, Rule 11 of the Implementing
Rules and Regulations of the BOT Law, only the proposed Annual Guaranteed Payment
submitted by the challengers would be revealed to AEDC, and that the challengers' technical
and financial proposals would remain confidential. The PBAC also clarified that the list of
revenue sources contained in Annex 4.2a of the Bid Documents was merely indicative and
that other revenue sources may be included by the proponent, subject to approval by
DOTC/MIAA. Furthermore, the PBAC clarified that only those fees and charges denominated
as Public Utility Fees would be subject to regulation, and those charges which would be
actually deemed Public Utility Fees could still be revised, depending on the outcome of PBAC's
query on the matter with the Department of Justice.
In September 1996, the PBAC issued Bid Bulletin No. 5, entitled "Answers to the Queries of
PAIRCARGO as Per Letter Dated September 3 and 10, 1996." Paircargo's queries and the
PBAC's responses were as follows:
1. It is difficult for Paircargo and Associates to meet the required minimum equity
requirement as prescribed in Section 8.3.4 of the Bid Documents considering that the
capitalization of each member company is so structured to meet the requirements and needs
of their current respective business undertaking/activities. In order to comply with this equity
requirement, Paircargo is requesting PBAC to just allow each member of (sic) corporation of
the Joint Venture to just execute an agreement that embodies a commitment to infuse the
required capital in case the project is awarded to the Joint Venture instead of increasing each
corporation's current authorized capital stock just for prequalification purposes.
In prequalification, the agency is interested in one's financial capability at the time of
prequalification, not future or potential capability.
A commitment to put up equity once awarded the project is not enough to establish that
"present" financial capability. However, total financial capability of all member companies of
the Consortium, to be established by submitting the respective companies' audited financial
statements, shall be acceptable.
2. At present, Paircargo is negotiating with banks and other institutions for the extension of a
Performance Security to the joint venture in the event that the Concessions Agreement (sic) is
awarded to them. However, Paircargo is being required to submit a copy of the draft
concession as one of the documentary requirements. Therefore, Paircargo is requesting that
they'd (sic) be furnished copy of the approved negotiated agreement between the PBAC and
the AEDC at the soonest possible time.
A copy of the draft Concession Agreement is included in the Bid Documents. Any material
changes would be made known to prospective challengers through bid bulletins. However, a
final version will be issued before the award of contract.
The PBAC also stated that it would require AEDC to sign Supplement C of the Bid Documents
(Acceptance of Criteria and Waiver of Rights to Enjoin Project) and to submit the same with
the required Bid Security.
On September 20, 1996, the consortium composed of People's Air Cargo and Warehousing
Co., Inc. (Paircargo), Phil. Air and Grounds Services, Inc. (PAGS) and Security Bank Corp.
(Security Bank) (collectively, Paircargo Consortium) submitted their competitive proposal to
the PBAC. On September 23, 1996, the PBAC opened the first envelope containing the
prequalification documents of the Paircargo Consortium. On the following day, September 24,
1996, the PBAC prequalified the Paircargo Consortium.
On September 26, 1996, AEDC informed the PBAC in writing of its reservations as regards the
Paircargo Consortium, which include:
a. The lack of corporate approvals and financial capability of PAIRCARGO;
b. The lack of corporate approvals and financial capability of PAGS;
c. The prohibition imposed by RA 337, as amended (the General Banking Act) on the amount
that Security Bank could legally invest in the project;
d. The inclusion of Siemens as a contractor of the PAIRCARGO Joint Venture, for
prequalification purposes; and
e. The appointment of Lufthansa as the facility operator, in view of the Philippine
requirement in the operation of a public utility.
The PBAC gave its reply on October 2, 1996, informing AEDC that it had considered the issues
raised by the latter, and that based on the documents submitted by Paircargo and the
established prequalification criteria, the PBAC had found that the challenger, Paircargo, had
prequalified to undertake the project. The Secretary of the DOTC approved the finding of the
PBAC.
The PBAC then proceeded with the opening of the second envelope of the Paircargo
Consortium which contained its Technical Proposal.
On October 3, 1996, AEDC reiterated its objections, particularly with respect to Paircargo's
financial capability, in view of the restrictions imposed by Section 21-B of the General Banking
Act and Sections 1380 and 1381 of the Manual Regulations for Banks and Other Financial
Intermediaries. On October 7, 1996, AEDC again manifested its objections and requested that
it be furnished with excerpts of the PBAC meeting and the accompanying technical evaluation
report where each of the issues they raised were addressed.
On October 16, 1996, the PBAC opened the third envelope submitted by AEDC and the
Paircargo Consortium containing their respective financial proposals. Both proponents
offered to build the NAIA Passenger Terminal III for at least $350 million at no cost to the
government and to pay the government: 5% share in gross revenues for the first five years of
operation, 7.5% share in gross revenues for the next ten years of operation, and 10% share in
gross revenues for the last ten years of operation, in accordance with the Bid Documents.
However, in addition to the foregoing, AEDC offered to pay the government a total of P135
million as guaranteed payment for 27 years while Paircargo Consortium offered to pay the
government a total of P17.75 billion for the same period.
Thus, the PBAC formally informed AEDC that it had accepted the price proposal submitted by
the Paircargo Consortium, and gave AEDC 30 working days or until November 28, 1996 within
which to match the said bid, otherwise, the project would be awarded to Paircargo.
As AEDC failed to match the proposal within the 30-day period, then DOTC Secretary Amado
Lagdameo, on December 11, 1996, issued a notice to Paircargo Consortium regarding AEDC's
failure to match the proposal.
On February 27, 1997, Paircargo Consortium incorporated into Philippine International
Airport Terminals Co., Inc. (PIATCO).
AEDC subsequently protested the alleged undue preference given to PIATCO and reiterated
its objections as regards the prequalification of PIATCO.
On April 11, 1997, the DOTC submitted the concession agreement for the second-pass
approval of the NEDA-ICC.
On April 16, 1997, AEDC filed with the Regional Trial Court of Pasig a Petition for Declaration
of Nullity of the Proceedings, Mandamus and Injunction against the Secretary of the DOTC,
the Chairman of the PBAC, the voting members of the PBAC and Pantaleon D. Alvarez, in his
capacity as Chairman of the PBAC Technical Committee.
On April 17, 1997, the NEDA-ICC conducted an ad referendum to facilitate the approval, on a
no-objection basis, of the BOT agreement between the DOTC and PIATCO. As the ad
referendum gathered only four (4) of the required six (6) signatures, the NEDA merely noted
the agreement.
On July 9, 1997, the DOTC issued the notice of award for the project to PIATCO.
On July 12, 1997, the Government, through then DOTC Secretary Arturo T. Enrile, and PIATCO,
through its President, Henry T. Go, signed the "Concession Agreement for the Build-Operate-
and-Transfer Arrangement of the Ninoy Aquino International Airport Passenger Terminal III"
(1997 Concession Agreement). The Government granted PIATCO the franchise to operate and
maintain the said terminal during the concession period and to collect the fees, rentals and
other charges in accordance with the rates or schedules stipulated in the 1997 Concession
Agreement. The Agreement provided that the concession period shall be for twenty-five (25)
years commencing from the in-service date, and may be renewed at the option of the
Government for a period not exceeding twenty-five (25) years. At the end of the concession
period, PIATCO shall transfer the development facility to MIAA.
On November 26, 1998, the Government and PIATCO signed an Amended and Restated
Concession Agreement (ARCA). Among the provisions of the 1997 Concession Agreement that
were amended by the ARCA were: Sec. 1.11 pertaining to the definition of "certificate of
completion"; Sec. 2.05 pertaining to the Special Obligations of GRP; Sec. 3.02 (a) dealing with
the exclusivity of the franchise given to the Concessionaire; Sec. 4.04 concerning the
assignment by Concessionaire of its interest in the Development Facility; Sec. 5.08 (c) dealing
with the proceeds of Concessionaire's insurance; Sec. 5.10 with respect to the temporary
take-over of operations by GRP; Sec. 5.16 pertaining to the taxes, duties and other imposts
that may be levied on the Concessionaire; Sec. 6.03 as regards the periodic adjustment of
public utility fees and charges; the entire Article VIII concerning the provisions on the
termination of the contract; and Sec. 10.02 providing for the venue of the arbitration
proceedings in case a dispute or controversy arises between the parties to the agreement.
Subsequently, the Government and PIATCO signed three Supplements to the ARCA. The First
Supplement was signed on August 27, 1999; the Second Supplement on September 4, 2000;
and the Third Supplement on June 22, 2001 (collectively, Supplements).
The First Supplement to the ARCA amended Sec. 1.36 of the ARCA defining "Revenues" or
"Gross Revenues"; Sec. 2.05 (d) of the ARCA referring to the obligation of MIAA to provide
sufficient funds for the upkeep, maintenance, repair and/or replacement of all airport
facilities and equipment which are owned or operated by MIAA; and further providing
additional special obligations on the part of GRP aside from those already enumerated in Sec.
2.05 of the ARCA. The First Supplement also provided a stipulation as regards the construction
of a surface road to connect NAIA Terminal II and Terminal III in lieu of the proposed access
tunnel crossing Runway 13/31; the swapping of obligations between GRP and PIATCO
regarding the improvement of Sales Road; and the changes in the timetable. It also amended
Sec. 6.01 (c) of the ARCA pertaining to the Disposition of Terminal Fees; Sec. 6.02 of the ARCA
by inserting an introductory paragraph; and Sec. 6.02 (a) (iii) of the ARCA referring to the
Payments of Percentage Share in Gross Revenues.
The Second Supplement to the ARCA contained provisions concerning the clearing, removal,
demolition or disposal of subterranean structures uncovered or discovered at the site of the
construction of the terminal by the Concessionaire. It defined the scope of works; it provided
for the procedure for the demolition of the said structures and the consideration for the same
which the GRP shall pay PIATCO; it provided for time extensions, incremental and
consequential costs and losses consequent to the existence of such structures; and it
provided for some additional obligations on the part of PIATCO as regards the said structures.
Finally, the Third Supplement provided for the obligations of the Concessionaire as regards
the construction of the surface road connecting Terminals II and III.
Meanwhile, the MIAA which is charged with the maintenance and operation of the NAIA
Terminals I and II, had existing concession contracts with various service providers to offer
international airline airport services, such as in-flight catering, passenger handling, ramp and
ground support, aircraft maintenance and provisions, cargo handling and warehousing, and
other services, to several international airlines at the NAIA. Some of these service providers
are the Miascor Group, DNATA-Wings Aviation Systems Corp., and the MacroAsia Group.
Miascor, DNATA and MacroAsia, together with Philippine Airlines (PAL), are the dominant
players in the industry with an aggregate market share of 70%.
On September 17, 2002, the workers of the international airline service providers, claiming
that they stand to lose their employment upon the implementation of the questioned
agreements, filed before this Court a petition for prohibition to enjoin the enforcement of
said agreements.2
On October 15, 2002, the service providers, joining the cause of the petitioning workers, filed
a motion for intervention and a petition-in-intervention.

On October 24, 2002, Congressmen Salacnib Baterina, Clavel Martinez and Constantino
Jaraula filed a similar petition with this Court.3
On November 6, 2002, several employees of the MIAA likewise filed a petition assailing the
legality of the various agreements.4
On December 11, 2002. another group of Congressmen, Hon. Jacinto V. Paras, Rafael P.
Nantes, Eduardo C. Zialcita, Willie B. Villarama, Prospero C. Nograles, Prospero A. Pichay, Jr.,
Harlin Cast Abayon and Benasing O. Macaranbon, moved to intervene in the case as
Respondents-Intervenors. They filed their Comment-In-Intervention defending the validity of
the assailed agreements and praying for the dismissal of the petitions.
During the pendency of the case before this Court, President Gloria Macapagal Arroyo, on
November 29, 2002, in her speech at the 2002 Golden Shell Export Awards at Malacañang
Palace, stated that she will not "honor (PIATCO) contracts which the Executive Branch's legal
offices have concluded (as) null and void."5
Respondent PIATCO filed its Comments to the present petitions on November 7 and 27, 2002.
The Office of the Solicitor General and the Office of the Government Corporate Counsel filed
their respective Comments in behalf of the public respondents.
On December 10, 2002, the Court heard the case on oral argument. After the oral argument,
the Court then resolved in open court to require the parties to file simultaneously their
respective Memoranda in amplification of the issues heard in the oral arguments within 30
days and to explore the possibility of arbitration or mediation as provided in the challenged
contracts.
In their consolidated Memorandum, the Office of the Solicitor General and the Office of the
Government Corporate Counsel prayed that the present petitions be given due course and
that judgment be rendered declaring the 1997 Concession Agreement, the ARCA and the
Supplements thereto void for being contrary to the Constitution, the BOT Law and its
Implementing Rules and Regulations.
On March 6, 2003, respondent PIATCO informed the Court that on March 4, 2003 PIATCO
commenced arbitration proceedings before the International Chamber of Commerce,
International Court of Arbitration (ICC) by filing a Request for Arbitration with the Secretariat
of the ICC against the Government of the Republic of the Philippines acting through the DOTC
and MIAA.
In the present cases, the Court is again faced with the task of resolving complicated issues
made difficult by their intersecting legal and economic implications. The Court is aware of the
far reaching fall out effects of the ruling which it makes today. For more than a century and
whenever the exigencies of the times demand it, this Court has never shirked from its solemn
duty to dispense justice and resolve "actual controversies involving rights which are legally
demandable and enforceable, and to determine whether or not there has been grave abuse
of discretion amounting to lack or excess of jurisdiction."6 To be sure, this Court will not begin
to do otherwise today.
We shall first dispose of the procedural issues raised by respondent PIATCO which they allege
will bar the resolution of the instant controversy.
Petitioners' Legal Standing to File
the present Petitions
a. G.R. Nos. 155001 and 155661
In G.R. No. 155001 individual petitioners are employees of various service providers7 having
separate concession contracts with MIAA and continuing service agreements with various
international airlines to provide in-flight catering, passenger handling, ramp and ground
support, aircraft maintenance and provisions, cargo handling and warehousing and other
services. Also included as petitioners are labor unions MIASCOR Workers Union-National
Labor Union and Philippine Airlines Employees Association. These petitioners filed the instant
action for prohibition as taxpayers and as parties whose rights and interests stand to be
violated by the implementation of the PIATCO Contracts.
Petitioners-Intervenors in the same case are all corporations organized and existing under
Philippine laws engaged in the business of providing in-flight catering, passenger handling,
ramp and ground support, aircraft maintenance and provisions, cargo handling and
warehousing and other services to several international airlines at the Ninoy Aquino
International Airport. Petitioners-Intervenors allege that as tax-paying international airline
and airport-related service operators, each one of them stands to be irreparably injured by
the implementation of the PIATCO Contracts. Each of the petitioners-intervenors have
separate and subsisting concession agreements with MIAA and with various international
airlines which they allege are being interfered with and violated by respondent PIATCO.
In G.R. No. 155661, petitioners constitute employees of MIAA and Samahang Manggagawa sa
Paliparan ng Pilipinas - a legitimate labor union and accredited as the sole and exclusive
bargaining agent of all the employees in MIAA. Petitioners anchor their petition for
prohibition on the nullity of the contracts entered into by the Government and PIATCO
regarding the build-operate-and-transfer of the NAIA IPT III. They filed the petition as
taxpayers and persons who have a legitimate interest to protect in the implementation of the
PIATCO Contracts.
Petitioners in both cases raise the argument that the PIATCO Contracts contain stipulations
which directly contravene numerous provisions of the Constitution, specific provisions of the
BOT Law and its Implementing Rules and Regulations, and public policy. Petitioners contend
that the DOTC and the MIAA, by entering into said contracts, have committed grave abuse of
discretion amounting to lack or excess of jurisdiction which can be remedied only by a writ of
prohibition, there being no plain, speedy or adequate remedy in the ordinary course of law.
In particular, petitioners assail the provisions in the 1997 Concession Agreement and the
ARCA which grant PIATCO the exclusive right to operate a commercial international passenger
terminal within the Island of Luzon, except those international airports already existing at the
time of the execution of the agreement. The contracts further provide that upon the
commencement of operations at the NAIA IPT III, the Government shall cause the closure of
Ninoy Aquino International Airport Passenger Terminals I and II as international passenger
terminals. With respect to existing concession agreements between MIAA and international
airport service providers regarding certain services or operations, the 1997 Concession
Agreement and the ARCA uniformly provide that such services or operations will not be
carried over to the NAIA IPT III and PIATCO is under no obligation to permit such carry over
except through a separate agreement duly entered into with PIATCO.8
With respect to the petitioning service providers and their employees, upon the
commencement of operations of the NAIA IPT III, they allege that they will be effectively
barred from providing international airline airport services at the NAIA Terminals I and II as all
international airlines and passengers will be diverted to the NAIA IPT III. The petitioning
service providers will thus be compelled to contract with PIATCO alone for such services, with
no assurance that subsisting contracts with MIAA and other international airlines will be
respected. Petitioning service providers stress that despite the very competitive market, the
substantial capital investments required and the high rate of fees, they entered into their
respective contracts with the MIAA with the understanding that the said contracts will be in
force for the stipulated period, and thereafter, renewed so as to allow each of the petitioning
service providers to recoup their investments and obtain a reasonable return thereon.
Petitioning employees of various service providers at the NAIA Terminals I and II and of MIAA
on the other hand allege that with the closure of the NAIA Terminals I and II as international
passenger terminals under the PIATCO Contracts, they stand to lose employment.
The question on legal standing is whether such parties have "alleged such a personal stake in
the outcome of the controversy as to assure that concrete adverseness which sharpens the
presentation of issues upon which the court so largely depends for illumination of difficult
constitutional questions."9 Accordingly, it has been held that the interest of a person assailing
the constitutionality of a statute must be direct and personal. He must be able to show, not
only that the law or any government act is invalid, but also that he sustained or is in imminent
danger of sustaining some direct injury as a result of its enforcement, and not merely that he
suffers thereby in some indefinite way. It must appear that the person complaining has been
or is about to be denied some right or privilege to which he is lawfully entitled or that he is
about to be subjected to some burdens or penalties by reason of the statute or act
complained of.10
We hold that petitioners have the requisite standing. In the above-mentioned cases,
petitioners have a direct and substantial interest to protect by reason of the implementation
of the PIATCO Contracts. They stand to lose their source of livelihood, a property right which
is zealously protected by the Constitution. Moreover, subsisting concession agreements
between MIAA and petitioners-intervenors and service contracts between international
airlines and petitioners-intervenors stand to be nullified or terminated by the operation of the
NAIA IPT III under the PIATCO Contracts. The financial prejudice brought about by the PIATCO
Contracts on petitioners and petitioners-intervenors in these cases are legitimate interests
sufficient to confer on them the requisite standing to file the instant petitions.
b. G.R. No. 155547
In G.R. No. 155547, petitioners filed the petition for prohibition as members of the House of
Representatives, citizens and taxpayers. They allege that as members of the House of
Representatives, they are especially interested in the PIATCO Contracts, because the
contracts compel the Government and/or the House of Representatives to appropriate funds
necessary to comply with the provisions therein.11 They cite provisions of the PIATCO
Contracts which require disbursement of unappropriated amounts in compliance with the
contractual obligations of the Government. They allege that the Government obligations in
the PIATCO Contracts which compel government expenditure without appropriation is a
curtailment of their prerogatives as legislators, contrary to the mandate of the Constitution
that "[n]o money shall be paid out of the treasury except in pursuance of an appropriation
made by law."12
Standing is a peculiar concept in constitutional law because in some cases, suits are not
brought by parties who have been personally injured by the operation of a law or any other
government act but by concerned citizens, taxpayers or voters who actually sue in the public
interest. Although we are not unmindful of the cases of Imus Electric Co. v. Municipality of
Imus13 and Gonzales v. Raquiza14 wherein this Court held that appropriation must be made
only on amounts immediately demandable, public interest demands that we take a more
liberal view in determining whether the petitioners suing as legislators, taxpayers and citizens
have locus standi to file the instant petition. In Kilosbayan, Inc. v. Guingona,15 this Court held
"[i]n line with the liberal policy of this Court on locus standi, ordinary taxpayers, members of
Congress, and even association of planters, and non-profit civic organizations were allowed to
initiate and prosecute actions before this Court to question the constitutionality or validity of
laws, acts, decisions, rulings, or orders of various government agencies or
instrumentalities."16 Further, "insofar as taxpayers' suits are concerned . . . (this Court) is not
devoid of discretion as to whether or not it should be entertained."17 As such ". . . even if,
strictly speaking, they [the petitioners] are not covered by the definition, it is still within the
wide discretion of the Court to waive the requirement and so remove the impediment to its
addressing and resolving the serious constitutional questions raised."18 In view of the serious
legal questions involved and their impact on public interest, we resolve to grant standing to
the petitioners.
Other Procedural Matters
Respondent PIATCO further alleges that this Court is without jurisdiction to review the instant
cases as factual issues are involved which this Court is ill-equipped to resolve. Moreover,
PIATCO alleges that submission of this controversy to this Court at the first instance is a
violation of the rule on hierarchy of courts. They contend that trial courts have concurrent
jurisdiction with this Court with respect to a special civil action for prohibition and hence,
following the rule on hierarchy of courts, resort must first be had before the trial courts.
After a thorough study and careful evaluation of the issues involved, this Court is of the view
that the crux of the instant controversy involves significant legal questions. The facts
necessary to resolve these legal questions are well established and, hence, need not be
determined by a trial court.
The rule on hierarchy of courts will not also prevent this Court from assuming jurisdiction over
the cases at bar. The said rule may be relaxed when the redress desired cannot be obtained in
the appropriate courts or where exceptional and compelling circumstances justify availment
of a remedy within and calling for the exercise of this Court's primary jurisdiction.19
It is easy to discern that exceptional circumstances exist in the cases at bar that call for the
relaxation of the rule. Both petitioners and respondents agree that these cases are of
transcendental importance as they involve the construction and operation of the country's
premier international airport. Moreover, the crucial issues submitted for resolution are of first
impression and they entail the proper legal interpretation of key provisions of the
Constitution, the BOT Law and its Implementing Rules and Regulations. Thus, considering the
nature of the controversy before the Court, procedural bars may be lowered to give way for
the speedy disposition of the instant cases.
Legal Effect of the Commencement
of Arbitration Proceedings by
PIATCO
There is one more procedural obstacle which must be overcome. The Court is aware that
arbitration proceedings pursuant to Section 10.02 of the ARCA have been filed at the instance
of respondent PIATCO. Again, we hold that the arbitration step taken by PIATCO will not oust
this Court of its jurisdiction over the cases at bar.
In Del Monte Corporation-USA v. Court of Appeals,20 even after finding that the arbitration
clause in the Distributorship Agreement in question is valid and the dispute between the
parties is arbitrable, this Court affirmed the trial court's decision denying petitioner's Motion
to Suspend Proceedings pursuant to the arbitration clause under the contract. In so ruling,
this Court held that as contracts produce legal effect between the parties, their assigns and
heirs, only the parties to the Distributorship Agreement are bound by its terms, including the
arbitration clause stipulated therein. This Court ruled that arbitration proceedings could be
called for but only with respect to the parties to the contract in question. Considering that
there are parties to the case who are neither parties to the Distributorship Agreement nor
heirs or assigns of the parties thereto, this Court, citing its previous ruling in Salas, Jr. v.
Laperal Realty Corporation,21 held that to tolerate the splitting of proceedings by allowing
arbitration as to some of the parties on the one hand and trial for the others on the other
hand would, in effect, result in multiplicity of suits, duplicitous procedure and unnecessary
delay.22 Thus, we ruled that the interest of justice would best be served if the trial court
hears and adjudicates the case in a single and complete proceeding.
It is established that petitioners in the present cases who have presented legitimate interests
in the resolution of the controversy are not parties to the PIATCO Contracts. Accordingly, they
cannot be bound by the arbitration clause provided for in the ARCA and hence, cannot be
compelled to submit to arbitration proceedings. A speedy and decisive resolution of all the
critical issues in the present controversy, including those raised by petitioners, cannot be
made before an arbitral tribunal. The object of arbitration is precisely to allow an expeditious
determination of a dispute. This objective would not be met if this Court were to allow the
parties to settle the cases by arbitration as there are certain issues involving non-parties to
the PIATCO Contracts which the arbitral tribunal will not be equipped to resolve.
Now, to the merits of the instant controversy.
I
Is PIATCO a qualified bidder?
Public respondents argue that the Paircargo Consortium, PIATCO's predecessor, was not a
duly pre-qualified bidder on the unsolicited proposal submitted by AEDC as the Paircargo
Consortium failed to meet the financial capability required under the BOT Law and the Bid
Documents. They allege that in computing the ability of the Paircargo Consortium to meet the
minimum equity requirements for the project, the entire net worth of Security Bank, a
member of the consortium, should not be considered.
PIATCO relies, on the other hand, on the strength of the Memorandum dated October 14,
1996 issued by the DOTC Undersecretary Primitivo C. Cal stating that the Paircargo
Consortium is found to have a combined net worth of P3,900,000,000.00, sufficient to meet
the equity requirements of the project. The said Memorandum was in response to a letter
from Mr. Antonio Henson of AEDC to President Fidel V. Ramos questioning the financial
capability of the Paircargo Consortium on the ground that it does not have the financial
resources to put up the required minimum equity of P2,700,000,000.00. This contention is
based on the restriction under R.A. No. 337, as amended or the General Banking Act that a
commercial bank cannot invest in any single enterprise in an amount more than 15% of its net
worth. In the said Memorandum, Undersecretary Cal opined:

The Bid Documents, as clarified through Bid Bulletin Nos. 3 and 5, require that financial
capability will be evaluated based on total financial capability of all the member companies of
the [Paircargo] Consortium. In this connection, the Challenger was found to have a combined
net worth of P3,926,421,242.00 that could support a project costing approximately P13
Billion.
It is not a requirement that the net worth must be "unrestricted." To impose that as a
requirement now will be nothing less than unfair.
The financial statement or the net worth is not the sole basis in establishing financial
capability. As stated in Bid Bulletin No. 3, financial capability may also be established by
testimonial letters issued by reputable banks. The Challenger has complied with this
requirement.
To recap, net worth reflected in the Financial Statement should not be taken as the amount of
the money to be used to answer the required thirty percent (30%) equity of the challenger
but rather to be used in establishing if there is enough basis to believe that the challenger can
comply with the required 30% equity. In fact, proof of sufficient equity is required as one of
the conditions for award of contract (Section 12.1 IRR of the BOT Law) but not for pre-
qualification (Section 5.4 of the same document).23
Under the BOT Law, in case of a build-operate-and-transfer arrangement, the contract shall
be awarded to the bidder "who, having satisfied the minimum financial, technical,
organizational and legal standards" required by the law, has submitted the lowest bid and
most favorable terms of the project.24 Further, the 1994 Implementing Rules and Regulations
of the BOT Law provide:
Section 5.4 Pre-qualification Requirements.
xxx xxx xxx
c. Financial Capability: The project proponent must have adequate capability to sustain the
financing requirements for the detailed engineering design, construction and/or operation
and maintenance phases of the project, as the case may be. For purposes of pre-qualification,
this capability shall be measured in terms of (i) proof of the ability of the project proponent
and/or the consortium to provide a minimum amount of equity to the project, and (ii) a letter
testimonial from reputable banks attesting that the project proponent and/or members of
the consortium are banking with them, that they are in good financial standing, and that they
have adequate resources. The government agency/LGU concerned shall determine on a
project-to-project basis and before pre-qualification, the minimum amount of equity needed.
(emphasis supplied)
Pursuant to this provision, the PBAC issued PBAC Bulletin No. 3 dated August 16, 1996
amending the financial capability requirements for pre-qualification of the project proponent
as follows:
6. Basis of Pre-qualification
The basis for the pre-qualification shall be on the compliance of the proponent to the
minimum technical and financial requirements provided in the Bid Documents and in the IRR
of the BOT Law, R.A. No. 6957, as amended by R.A. 7718.
The minimum amount of equity to which the proponent's financial capability will be based
shall be thirty percent (30%) of the project cost instead of the twenty percent (20%) specified
in Section 3.6.4 of the Bid Documents. This is to correlate with the required debt-to-equity
ratio of 70:30 in Section 2.01a of the draft concession agreement. The debt portion of the
project financing should not exceed 70% of the actual project cost.
Accordingly, based on the above provisions of law, the Paircargo Consortium or any
challenger to the unsolicited proposal of AEDC has to show that it possesses the requisite
financial capability to undertake the project in the minimum amount of 30% of the project
cost through (i) proof of the ability to provide a minimum amount of equity to the project,
and (ii) a letter testimonial from reputable banks attesting that the project proponent or
members of the consortium are banking with them, that they are in good financial standing,
and that they have adequate resources.
As the minimum project cost was estimated to be US$350,000,000.00 or roughly
P9,183,650,000.00,25 the Paircargo Consortium had to show to the satisfaction of the PBAC
that it had the ability to provide the minimum equity for the project in the amount of at least
P2,755,095,000.00.
Paircargo's Audited Financial Statements as of 1993 and 1994 indicated that it had a net
worth of P2,783,592.00 and P3,123,515.00 respectively.26 PAGS' Audited Financial
Statements as of 1995 indicate that it has approximately P26,735,700.00 to invest as its
equity for the project.27 Security Bank's Audited Financial Statements as of 1995 show that it
has a net worth equivalent to its capital funds in the amount of P3,523,504,377.00.28
We agree with public respondents that with respect to Security Bank, the entire amount of its
net worth could not be invested in a single undertaking or enterprise, whether allied or non-
allied in accordance with the provisions of R.A. No. 337, as amended or the General Banking
Act:
Sec. 21-B. The provisions in this or in any other Act to the contrary notwithstanding, the
Monetary Board, whenever it shall deem appropriate and necessary to further national
development objectives or support national priority projects, may authorize a commercial
bank, a bank authorized to provide commercial banking services, as well as a government-
owned and controlled bank, to operate under an expanded commercial banking authority and
by virtue thereof exercise, in addition to powers authorized for commercial banks, the powers
of an Investment House as provided in Presidential Decree No. 129, invest in the equity of a
non-allied undertaking, or own a majority or all of the equity in a financial intermediary other
than a commercial bank or a bank authorized to provide commercial banking services:
Provided, That (a) the total investment in equities shall not exceed fifty percent (50%) of the
net worth of the bank; (b) the equity investment in any one enterprise whether allied or non-
allied shall not exceed fifteen percent (15%) of the net worth of the bank; (c) the equity
investment of the bank, or of its wholly or majority-owned subsidiary, in a single non-allied
undertaking shall not exceed thirty-five percent (35%) of the total equity in the enterprise nor
shall it exceed thirty-five percent (35%) of the voting stock in that enterprise; and (d) the
equity investment in other banks shall be deducted from the investing bank's net worth for
purposes of computing the prescribed ratio of net worth to risk assets.
xxx xxx xxx
Further, the 1993 Manual of Regulations for Banks provides:
SECTION X383. Other Limitations and Restrictions. — The following limitations and
restrictions shall also apply regarding equity investments of banks.
a. In any single enterprise. — The equity investments of banks in any single enterprise shall
not exceed at any time fifteen percent (15%) of the net worth of the investing bank as defined
in Sec. X106 and Subsec. X121.5.
Thus, the maximum amount that Security Bank could validly invest in the Paircargo
Consortium is only P528,525,656.55, representing 15% of its entire net worth. The total net
worth therefore of the Paircargo Consortium, after considering the maximum amounts that
may be validly invested by each of its members is P558,384,871.55 or only 6.08% of the
project cost,29 an amount substantially less than the prescribed minimum equity investment
required for the project in the amount of P2,755,095,000.00 or 30% of the project cost.
The purpose of pre-qualification in any public bidding is to determine, at the earliest
opportunity, the ability of the bidder to undertake the project. Thus, with respect to the
bidder's financial capacity at the pre-qualification stage, the law requires the government
agency to examine and determine the ability of the bidder to fund the entire cost of the
project by considering the maximum amounts that each bidder may invest in the project at
the time of pre-qualification.
The PBAC has determined that any prospective bidder for the construction, operation and
maintenance of the NAIA IPT III project should prove that it has the ability to provide equity in
the minimum amount of 30% of the project cost, in accordance with the 70:30 debt-to-equity
ratio prescribed in the Bid Documents. Thus, in the case of Paircargo Consortium, the PBAC
should determine the maximum amounts that each member of the consortium may commit
for the construction, operation and maintenance of the NAIA IPT III project at the time of pre-
qualification. With respect to Security Bank, the maximum amount which may be invested by
it would only be 15% of its net worth in view of the restrictions imposed by the General
Banking Act. Disregarding the investment ceilings provided by applicable law would not result
in a proper evaluation of whether or not a bidder is pre-qualified to undertake the project as
for all intents and purposes, such ceiling or legal restriction determines the true maximum
amount which a bidder may invest in the project.
Further, the determination of whether or not a bidder is pre-qualified to undertake the
project requires an evaluation of the financial capacity of the said bidder at the time the bid is
submitted based on the required documents presented by the bidder. The PBAC should not
be allowed to speculate on the future financial ability of the bidder to undertake the project
on the basis of documents submitted. This would open doors to abuse and defeat the very
purpose of a public bidding. This is especially true in the case at bar which involves the
investment of billions of pesos by the project proponent. The relevant government authority
is duty-bound to ensure that the awardee of the contract possesses the minimum required
financial capability to complete the project. To allow the PBAC to estimate the bidder's future
financial capability would not secure the viability and integrity of the project. A restrictive and
conservative application of the rules and procedures of public bidding is necessary not only to
protect the impartiality and regularity of the proceedings but also to ensure the financial and
technical reliability of the project. It has been held that:
The basic rule in public bidding is that bids should be evaluated based on the required
documents submitted before and not after the opening of bids. Otherwise, the foundation of
a fair and competitive public bidding would be defeated. Strict observance of the rules,
regulations, and guidelines of the bidding process is the only safeguard to a fair, honest and
competitive public bidding.30
Thus, if the maximum amount of equity that a bidder may invest in the project at the time the
bids are submitted falls short of the minimum amounts required to be put up by the bidder,
said bidder should be properly disqualified. Considering that at the pre-qualification stage,
the maximum amounts which the Paircargo Consortium may invest in the project fell short of
the minimum amounts prescribed by the PBAC, we hold that Paircargo Consortium was not a
qualified bidder. Thus the award of the contract by the PBAC to the Paircargo Consortium, a
disqualified bidder, is null and void.
While it would be proper at this juncture to end the resolution of the instant controversy, as
the legal effects of the disqualification of respondent PIATCO's predecessor would come into
play and necessarily result in the nullity of all the subsequent contracts entered by it in
pursuance of the project, the Court feels that it is necessary to discuss in full the pressing
issues of the present controversy for a complete resolution thereof.
II
Is the 1997 Concession Agreement valid?
Petitioners and public respondents contend that the 1997 Concession Agreement is invalid as
it contains provisions that substantially depart from the draft Concession Agreement included
in the Bid Documents. They maintain that a substantial departure from the draft Concession
Agreement is a violation of public policy and renders the 1997 Concession Agreement null and
void.
PIATCO maintains, however, that the Concession Agreement attached to the Bid Documents
is intended to be a draft, i.e., subject to change, alteration or modification, and that this
intention was clear to all participants, including AEDC, and DOTC/MIAA. It argued further that
said intention is expressed in Part C (6) of Bid Bulletin No. 3 issued by the PBAC which states:
6. Amendments to the Draft Concessions Agreement
Amendments to the Draft Concessions Agreement shall be issued from time to time. Said
amendments shall only cover items that would not materially affect the preparation of the
proponent's proposal.
By its very nature, public bidding aims to protect the public interest by giving the public the
best possible advantages through open competition. Thus:
Competition must be legitimate, fair and honest. In the field of government contract law,
competition requires, not only `bidding upon a common standard, a common basis, upon the
same thing, the same subject matter, the same undertaking,' but also that it be legitimate,
fair and honest; and not designed to injure or defraud the government.31
An essential element of a publicly bidded contract is that all bidders must be on equal footing.
Not simply in terms of application of the procedural rules and regulations imposed by the
relevant government agency, but more importantly, on the contract bidded upon. Each
bidder must be able to bid on the same thing. The rationale is obvious. If the winning bidder is
allowed to later include or modify certain provisions in the contract awarded such that the
contract is altered in any material respect, then the essence of fair competition in the public
bidding is destroyed. A public bidding would indeed be a farce if after the contract is awarded,
the winning bidder may modify the contract and include provisions which are favorable to it
that were not previously made available to the other bidders. Thus:
It is inherent in public biddings that there shall be a fair competition among the bidders. The
specifications in such biddings provide the common ground or basis for the bidders. The
specifications should, accordingly, operate equally or indiscriminately upon all bidders.32
The same rule was restated by Chief Justice Stuart of the Supreme Court of Minnesota:
The law is well settled that where, as in this case, municipal authorities can only let a contract
for public work to the lowest responsible bidder, the proposals and specifications therefore
must be so framed as to permit free and full competition. Nor can they enter into a contract
with the best bidder containing substantial provisions beneficial to him, not included or
contemplated in the terms and specifications upon which the bids were invited.33
In fact, in the PBAC Bid Bulletin No. 3 cited by PIATCO to support its argument that the draft
concession agreement is subject to amendment, the pertinent portion of which was quoted
above, the PBAC also clarified that "[s]aid amendments shall only cover items that would not
materially affect the preparation of the proponent's proposal."
While we concede that a winning bidder is not precluded from modifying or amending certain
provisions of the contract bidded upon, such changes must not constitute substantial or
material amendments that would alter the basic parameters of the contract and would
constitute a denial to the other bidders of the opportunity to bid on the same terms. Hence,
the determination of whether or not a modification or amendment of a contract bidded out
constitutes a substantial amendment rests on whether the contract, when taken as a whole,
would contain substantially different terms and conditions that would have the effect of
altering the technical and/or financial proposals previously submitted by other bidders. The
alterations and modifications in the contract executed between the government and the
winning bidder must be such as to render such executed contract to be an entirely different
contract from the one that was bidded upon.
In the case of Caltex (Philippines), Inc. v. Delgado Brothers, Inc.,34 this Court quoted with
approval the ruling of the trial court that an amendment to a contract awarded through
public bidding, when such subsequent amendment was made without a new public bidding, is
null and void:
The Court agrees with the contention of counsel for the plaintiffs that the due execution of a
contract after public bidding is a limitation upon the right of the contracting parties to alter or
amend it without another public bidding, for otherwise what would a public bidding be good
for if after the execution of a contract after public bidding, the contracting parties may alter
or amend the contract, or even cancel it, at their will? Public biddings are held for the
protection of the public, and to give the public the best possible advantages by means of open
competition between the bidders. He who bids or offers the best terms is awarded the
contract subject of the bid, and it is obvious that such protection and best possible
advantages to the public will disappear if the parties to a contract executed after public
bidding may alter or amend it without another previous public bidding.35
Hence, the question that comes to fore is this: is the 1997 Concession Agreement the same
agreement that was offered for public bidding, i.e., the draft Concession Agreement attached
to the Bid Documents? A close comparison of the draft Concession Agreement attached to
the Bid Documents and the 1997 Concession Agreement reveals that the documents differ in
at least two material respects:
a. Modification on the Public
Utility Revenues and Non-Public
Utility Revenues that may be
collected by PIATCO
The fees that may be imposed and collected by PIATCO under the draft Concession
Agreement and the 1997 Concession Agreement may be classified into three distinct
categories: (1) fees which are subject to periodic adjustment of once every two years in
accordance with a prescribed parametric formula and adjustments are made effective only
upon written approval by MIAA; (2) fees other than those included in the first category which
maybe adjusted by PIATCO whenever it deems necessary without need for consent of
DOTC/MIAA; and (3) new fees and charges that may be imposed by PIATCO which have not
been previously imposed or collected at the Ninoy Aquino International Airport Passenger
Terminal I, pursuant to Administrative Order No. 1, Series of 1993, as amended. The glaring
distinctions between the draft Concession Agreement and the 1997 Concession Agreement lie
in the types of fees included in each category and the extent of the supervision and regulation
which MIAA is allowed to exercise in relation thereto.
For fees under the first category, i.e., those which are subject to periodic adjustment in
accordance with a prescribed parametric formula and effective only upon written approval by
MIAA, the draft Concession Agreement includes the following:36
(1) aircraft parking fees;
(2) aircraft tacking fees;
(3) groundhandling fees;
(4) rentals and airline offices;
(5) check-in counter rentals; and
(6) porterage fees.
Under the 1997 Concession Agreement, fees which are subject to adjustment and effective
upon MIAA approval are classified as "Public Utility Revenues" and include:37
(1) aircraft parking fees;
(2) aircraft tacking fees;
(3) check-in counter fees; and
(4) Terminal Fees.
The implication of the reduced number of fees that are subject to MIAA approval is best
appreciated in relation to fees included in the second category identified above. Under the
1997 Concession Agreement, fees which PIATCO may adjust whenever it deems necessary
without need for consent of DOTC/MIAA are "Non-Public Utility Revenues" and is defined as
"all other income not classified as Public Utility Revenues derived from operations of the
Terminal and the Terminal Complex."38 Thus, under the 1997 Concession Agreement, ground
handling fees, rentals from airline offices and porterage fees are no longer subject to MIAA
regulation.
Further, under Section 6.03 of the draft Concession Agreement, MIAA reserves the right to
regulate (1) lobby and vehicular parking fees and (2) other new fees and charges that may be
imposed by PIATCO. Such regulation may be made by periodic adjustment and is effective
only upon written approval of MIAA. The full text of said provision is quoted below:
Section 6.03. Periodic Adjustment in Fees and Charges. Adjustments in the aircraft parking
fees, aircraft tacking fees, groundhandling fees, rentals and airline offices, check-in-counter
rentals and porterage fees shall be allowed only once every two years and in accordance with
the Parametric Formula attached hereto as Annex F. Provided that adjustments shall be made
effective only after the written express approval of the MIAA. Provided, further, that such
approval of the MIAA, shall be contingent only on the conformity of the adjustments with the
above said parametric formula. The first adjustment shall be made prior to the In-Service Date
of the Terminal.
The MIAA reserves the right to regulate under the foregoing terms and conditions the lobby
and vehicular parking fees and other new fees and charges as contemplated in paragraph 2 of
Section 6.01 if in its judgment the users of the airport shall be deprived of a free option for
the services they cover.39
On the other hand, the equivalent provision under the 1997 Concession Agreement reads:
Section 6.03 Periodic Adjustment in Fees and Charges.
xxx xxx xxx
(c) Concessionaire shall at all times be judicious in fixing fees and charges constituting Non-
Public Utility Revenues in order to ensure that End Users are not unreasonably deprived of
services. While the vehicular parking fee, porterage fee and greeter/well wisher fee constitute
Non-Public Utility Revenues of Concessionaire, GRP may intervene and require Concessionaire
to explain and justify the fee it may set from time to time, if in the reasonable opinion of GRP
the said fees have become exorbitant resulting in the unreasonable deprivation of End Users
of such services.40
Thus, under the 1997 Concession Agreement, with respect to (1) vehicular parking fee, (2)
porterage fee and (3) greeter/well wisher fee, all that MIAA can do is to require PIATCO to
explain and justify the fees set by PIATCO. In the draft Concession Agreement, vehicular
parking fee is subject to MIAA regulation and approval under the second paragraph of Section
6.03 thereof while porterage fee is covered by the first paragraph of the same provision.
There is an obvious relaxation of the extent of control and regulation by MIAA with respect to
the particular fees that may be charged by PIATCO.
Moreover, with respect to the third category of fees that may be imposed and collected by
PIATCO, i.e., new fees and charges that may be imposed by PIATCO which have not been
previously imposed or collected at the Ninoy Aquino International Airport Passenger Terminal
I, under Section 6.03 of the draft Concession Agreement MIAA has reserved the right to
regulate the same under the same conditions that MIAA may regulate fees under the first
category, i.e., periodic adjustment of once every two years in accordance with a prescribed
parametric formula and effective only upon written approval by MIAA. However, under the
1997 Concession Agreement, adjustment of fees under the third category is not subject to
MIAA regulation.
With respect to terminal fees that may be charged by PIATCO,41 as shown earlier, this was
included within the category of "Public Utility Revenues" under the 1997 Concession
Agreement. This classification is significant because under the 1997 Concession Agreement,
"Public Utility Revenues" are subject to an "Interim Adjustment" of fees upon the occurrence
of certain extraordinary events specified in the agreement.42 However, under the draft
Concession Agreement, terminal fees are not included in the types of fees that may be
subject to "Interim Adjustment."43
Finally, under the 1997 Concession Agreement, "Public Utility Revenues," except terminal
fees, are denominated in US Dollars44 while payments to the Government are in Philippine
Pesos. In the draft Concession Agreement, no such stipulation was included. By stipulating
that "Public Utility Revenues" will be paid to PIATCO in US Dollars while payments by PIATCO
to the Government are in Philippine currency under the 1997 Concession Agreement, PIATCO
is able to enjoy the benefits of depreciations of the Philippine Peso, while being effectively
insulated from the detrimental effects of exchange rate fluctuations.
When taken as a whole, the changes under the 1997 Concession Agreement with respect to
reduction in the types of fees that are subject to MIAA regulation and the relaxation of such
regulation with respect to other fees are significant amendments that substantially distinguish
the draft Concession Agreement from the 1997 Concession Agreement. The 1997 Concession
Agreement, in this respect, clearly gives PIATCO more favorable terms than what was
available to other bidders at the time the contract was bidded out. It is not very difficult to
see that the changes in the 1997 Concession Agreement translate to direct and concrete
financial advantages for PIATCO which were not available at the time the contract was offered
for bidding. It cannot be denied that under the 1997 Concession Agreement only "Public
Utility Revenues" are subject to MIAA regulation. Adjustments of all other fees imposed and
collected by PIATCO are entirely within its control. Moreover, with respect to terminal fees,
under the 1997 Concession Agreement, the same is further subject to "Interim Adjustments"
not previously stipulated in the draft Concession Agreement. Finally, the change in the
currency stipulated for "Public Utility Revenues" under the 1997 Concession Agreement,
except terminal fees, gives PIATCO an added benefit which was not available at the time of
bidding.
b. Assumption by the
Government of the liabilities of
PIATCO in the event of the latter's
default thereof
Under the draft Concession Agreement, default by PIATCO of any of its obligations to
creditors who have provided, loaned or advanced funds for the NAIA IPT III project does not
result in the assumption by the Government of these liabilities. In fact, nowhere in the said
contract does default of PIATCO's loans figure in the agreement. Such default does not
directly result in any concomitant right or obligation in favor of the Government.
However, the 1997 Concession Agreement provides:
Section 4.04 Assignment.
xxx xxx xxx
(b) In the event Concessionaire should default in the payment of an Attendant Liability, and
the default has resulted in the acceleration of the payment due date of the Attendant Liability
prior to its stated date of maturity, the Unpaid Creditors and Concessionaire shall
immediately inform GRP in writing of such default. GRP shall, within one hundred eighty (180)
Days from receipt of the joint written notice of the Unpaid Creditors and Concessionaire,
either (i) take over the Development Facility and assume the Attendant Liabilities, or (ii) allow
the Unpaid Creditors, if qualified, to be substituted as concessionaire and operator of the
Development Facility in accordance with the terms and conditions hereof, or designate a
qualified operator acceptable to GRP to operate the Development Facility, likewise under the
terms and conditions of this Agreement; Provided that if at the end of the 180-day period GRP
shall not have served the Unpaid Creditors and Concessionaire written notice of its choice,
GRP shall be deemed to have elected to take over the Development Facility with the
concomitant assumption of Attendant Liabilities.
(c) If GRP should, by written notice, allow the Unpaid Creditors to be substituted as
concessionaire, the latter shall form and organize a concession company qualified to take
over the operation of the Development Facility. If the concession company should elect to
designate an operator for the Development Facility, the concession company shall in good
faith identify and designate a qualified operator acceptable to GRP within one hundred eighty
(180) days from receipt of GRP's written notice. If the concession company, acting in good
faith and with due diligence, is unable to designate a qualified operator within the aforesaid
period, then GRP shall at the end of the 180-day period take over the Development Facility
and assume Attendant Liabilities.
The term "Attendant Liabilities" under the 1997 Concession Agreement is defined as:
Attendant Liabilities refer to all amounts recorded and from time to time outstanding in the
books of the Concessionaire as owing to Unpaid Creditors who have provided, loaned or
advanced funds actually used for the Project, including all interests, penalties, associated fees,
charges, surcharges, indemnities, reimbursements and other related expenses, and further
including amounts owed by Concessionaire to its suppliers, contractors and sub-contractors.
Under the above quoted portions of Section 4.04 in relation to the definition of "Attendant
Liabilities," default by PIATCO of its loans used to finance the NAIA IPT III project triggers the
occurrence of certain events that leads to the assumption by the Government of the liability
for the loans. Only in one instance may the Government escape the assumption of PIATCO's
liabilities, i.e., when the Government so elects and allows a qualified operator to take over as
Concessionaire. However, this circumstance is dependent on the existence and availability of
a qualified operator who is willing to take over the rights and obligations of PIATCO under the
contract, a circumstance that is not entirely within the control of the Government.
Without going into the validity of this provision at this juncture, suffice it to state that Section
4.04 of the 1997 Concession Agreement may be considered a form of security for the loans
PIATCO has obtained to finance the project, an option that was not made available in the
draft Concession Agreement. Section 4.04 is an important amendment to the 1997
Concession Agreement because it grants PIATCO a financial advantage or benefit which was
not previously made available during the bidding process. This financial advantage is a
significant modification that translates to better terms and conditions for PIATCO.
PIATCO, however, argues that the parties to the bidding procedure acknowledge that the
draft Concession Agreement is subject to amendment because the Bid Documents permit
financing or borrowing. They claim that it was the lenders who proposed the amendments to
the draft Concession Agreement which resulted in the 1997 Concession Agreement.
We agree that it is not inconsistent with the rationale and purpose of the BOT Law to allow
the project proponent or the winning bidder to obtain financing for the project, especially in
this case which involves the construction, operation and maintenance of the NAIA IPT III.
Expectedly, compliance by the project proponent of its undertakings therein would involve a
substantial amount of investment. It is therefore inevitable for the awardee of the contract to
seek alternate sources of funds to support the project. Be that as it may, this Court maintains
that amendments to the contract bidded upon should always conform to the general policy
on public bidding if such procedure is to be faithful to its real nature and purpose. By its very
nature and characteristic, competitive public bidding aims to protect the public interest by
giving the public the best possible advantages through open competition.45 It has been held
that the three principles in public bidding are (1) the offer to the public; (2) opportunity for
competition; and (3) a basis for the exact comparison of bids. A regulation of the matter
which excludes any of these factors destroys the distinctive character of the system and
thwarts the purpose of its adoption.46 These are the basic parameters which every awardee
of a contract bidded out must conform to, requirements of financing and borrowing
notwithstanding. Thus, upon a concrete showing that, as in this case, the contract signed by
the government and the contract-awardee is an entirely different contract from the contract
bidded, courts should not hesitate to strike down said contract in its entirety for violation of
public policy on public bidding. A strict adherence on the principles, rules and regulations on
public bidding must be sustained if only to preserve the integrity and the faith of the general
public on the procedure.
Public bidding is a standard practice for procuring government contracts for public service and
for furnishing supplies and other materials. It aims to secure for the government the lowest
possible price under the most favorable terms and conditions, to curtail favoritism in the
award of government contracts and avoid suspicion of anomalies and it places all bidders in
equal footing.47 Any government action which permits any substantial variance between the
conditions under which the bids are invited and the contract executed after the award
thereof is a grave abuse of discretion amounting to lack or excess of jurisdiction which
warrants proper judicial action.
In view of the above discussion, the fact that the foregoing substantial amendments were
made on the 1997 Concession Agreement renders the same null and void for being contrary
to public policy. These amendments convert the 1997 Concession Agreement to an entirely
different agreement from the contract bidded out or the draft Concession Agreement. It is
not difficult to see that the amendments on (1) the types of fees or charges that are subject to
MIAA regulation or control and the extent thereof and (2) the assumption by the
Government, under certain conditions, of the liabilities of PIATCO directly translates concrete
financial advantages to PIATCO that were previously not available during the bidding process.
These amendments cannot be taken as merely supplements to or implementing provisions of
those already existing in the draft Concession Agreement. The amendments discussed above
present new terms and conditions which provide financial benefit to PIATCO which may have
altered the technical and financial parameters of other bidders had they known that such
terms were available.
III
Direct Government Guarantee

Article IV, Section 4.04(b) and (c), in relation to Article 1.06, of the 1997 Concession
Agreement provides:
Section 4.04 Assignment
xxx xxx xxx
(b) In the event Concessionaire should default in the payment of an Attendant Liability, and
the default resulted in the acceleration of the payment due date of the Attendant Liability
prior to its stated date of maturity, the Unpaid Creditors and Concessionaire shall
immediately inform GRP in writing of such default. GRP shall within one hundred eighty (180)
days from receipt of the joint written notice of the Unpaid Creditors and Concessionaire,
either (i) take over the Development Facility and assume the Attendant Liabilities, or (ii) allow
the Unpaid Creditors, if qualified to be substituted as concessionaire and operator of the
Development facility in accordance with the terms and conditions hereof, or designate a
qualified operator acceptable to GRP to operate the Development Facility, likewise under the
terms and conditions of this Agreement; Provided, that if at the end of the 180-day period
GRP shall not have served the Unpaid Creditors and Concessionaire written notice of its
choice, GRP shall be deemed to have elected to take over the Development Facility with the
concomitant assumption of Attendant Liabilities.
(c) If GRP, by written notice, allow the Unpaid Creditors to be substituted as concessionaire,
the latter shall form and organize a concession company qualified to takeover the operation
of the Development Facility. If the concession company should elect to designate an operator
for the Development Facility, the concession company shall in good faith identify and
designate a qualified operator acceptable to GRP within one hundred eighty (180) days from
receipt of GRP's written notice. If the concession company, acting in good faith and with due
diligence, is unable to designate a qualified operator within the aforesaid period, then GRP
shall at the end of the 180-day period take over the Development Facility and assume
Attendant Liabilities.
….
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts recorded and from time to time outstanding in the
books of the Concessionaire as owing to Unpaid Creditors who have provided, loaned or
advanced funds actually used for the Project, including all interests, penalties, associated fees,
charges, surcharges, indemnities, reimbursements and other related expenses, and further
including amounts owed by Concessionaire to its suppliers, contractors and sub-
contractors.48
It is clear from the above-quoted provisions that Government, in the event that PIATCO
defaults in its loan obligations, is obligated to pay "all amounts recorded and from time to
time outstanding from the books" of PIATCO which the latter owes to its creditors.49 These
amounts include "all interests, penalties, associated fees, charges, surcharges, indemnities,
reimbursements and other related expenses."50 This obligation of the Government to pay
PIATCO's creditors upon PIATCO's default would arise if the Government opts to take over
NAIA IPT III. It should be noted, however, that even if the Government chooses the second
option, which is to allow PIATCO's unpaid creditors operate NAIA IPT III, the Government is
still at a risk of being liable to PIATCO's creditors should the latter be unable to designate a
qualified operator within the prescribed period.51 In effect, whatever option the Government
chooses to take in the event of PIATCO's failure to fulfill its loan obligations, the Government
is still at a risk of assuming PIATCO's outstanding loans. This is due to the fact that the
Government would only be free from assuming PIATCO's debts if the unpaid creditors would
be able to designate a qualified operator within the period provided for in the contract. Thus,
the Government's assumption of liability is virtually out of its control. The Government under
the circumstances provided for in the 1997 Concession Agreement is at the mercy of the
existence, availability and willingness of a qualified operator. The above contractual
provisions constitute a direct government guarantee which is prohibited by law.
One of the main impetus for the enactment of the BOT Law is the lack of government funds to
construct the infrastructure and development projects necessary for economic growth and
development. This is why private sector resources are being tapped in order to finance these
projects. The BOT law allows the private sector to participate, and is in fact encouraged to do
so by way of incentives, such as minimizing the unstable flow of returns,52 provided that the
government would not have to unnecessarily expend scarcely available funds for the project
itself. As such, direct guarantee, subsidy and equity by the government in these projects are
strictly prohibited.53 This is but logical for if the government would in the end still be at a risk
of paying the debts incurred by the private entity in the BOT projects, then the purpose of the
law is subverted.
Section 2(n) of the BOT Law defines direct guarantee as follows:
(n) Direct government guarantee — An agreement whereby the government or any of its
agencies or local government units assume responsibility for the repayment of debt directly
incurred by the project proponent in implementing the project in case of a loan default.
Clearly by providing that the Government "assumes" the attendant liabilities, which consists
of PIATCO's unpaid debts, the 1997 Concession Agreement provided for a direct government
guarantee for the debts incurred by PIATCO in the implementation of the NAIA IPT III project.
It is of no moment that the relevant sections are subsumed under the title of "assignment".
The provisions providing for direct government guarantee which is prohibited by law is clear
from the terms thereof.
The fact that the ARCA superseded the 1997 Concession Agreement did not cure this fatal
defect. Article IV, Section 4.04(c), in relation to Article I, Section 1.06, of the ARCA provides:
Section 4.04 Security
xxx xxx xxx
(c) GRP agrees with Concessionaire (PIATCO) that it shall negotiate in good faith and enter
into direct agreement with the Senior Lenders, or with an agent of such Senior Lenders (which
agreement shall be subject to the approval of the Bangko Sentral ng Pilipinas), in such form as
may be reasonably acceptable to both GRP and Senior Lenders, with regard, inter alia, to the
following parameters:
xxx xxx xxx
(iv) If the Concessionaire [PIATCO] is in default under a payment obligation owed to the
Senior Lenders, and as a result thereof the Senior Lenders have become entitled to accelerate
the Senior Loans, the Senior Lenders shall have the right to notify GRP of the same, and
without prejudice to any other rights of the Senior Lenders or any Senior Lenders' agent may
have (including without limitation under security interests granted in favor of the Senior
Lenders), to either in good faith identify and designate a nominee which is qualified under
sub-clause (viii)(y) below to operate the Development Facility [NAIA Terminal 3] or transfer
the Concessionaire's [PIATCO] rights and obligations under this Agreement to a transferee
which is qualified under sub-clause (viii) below;
xxx xxx xxx
(vi) if the Senior Lenders, acting in good faith and using reasonable efforts, are unable to
designate a nominee or effect a transfer in terms and conditions satisfactory to the Senior
Lenders within one hundred eighty (180) days after giving GRP notice as referred to
respectively in (iv) or (v) above, then GRP and the Senior Lenders shall endeavor in good faith
to enter into any other arrangement relating to the Development Facility [NAIA Terminal 3]
(other than a turnover of the Development Facility [NAIA Terminal 3] to GRP) within the
following one hundred eighty (180) days. If no agreement relating to the Development Facility
[NAIA Terminal 3] is arrived at by GRP and the Senior Lenders within the said 180-day period,
then at the end thereof the Development Facility [NAIA Terminal 3] shall be transferred by
the Concessionaire [PIATCO] to GRP or its designee and GRP shall make a termination
payment to Concessionaire [PIATCO] equal to the Appraised Value (as hereinafter defined) of
the Development Facility [NAIA Terminal 3] or the sum of the Attendant Liabilities, if greater.
Notwithstanding Section 8.01(c) hereof, this Agreement shall be deemed terminated upon
the transfer of the Development Facility [NAIA Terminal 3] to GRP pursuant hereto;
xxx xxx xxx
Section 1.06. Attendant Liabilities
Attendant Liabilities refer to all amounts in each case supported by verifiable evidence from
time to time owed or which may become owing by Concessionaire [PIATCO] to Senior Lenders
or any other persons or entities who have provided, loaned, or advanced funds or provided
financial facilities to Concessionaire [PIATCO] for the Project [NAIA Terminal 3], including,
without limitation, all principal, interest, associated fees, charges, reimbursements, and other
related expenses (including the fees, charges and expenses of any agents or trustees of such
persons or entities), whether payable at maturity, by acceleration or otherwise, and further
including amounts owed by Concessionaire [PIATCO] to its professional consultants and
advisers, suppliers, contractors and sub-contractors.54
It is clear from the foregoing contractual provisions that in the event that PIATCO fails to fulfill
its loan obligations to its Senior Lenders, the Government is obligated to directly negotiate
and enter into an agreement relating to NAIA IPT III with the Senior Lenders, should the latter
fail to appoint a qualified nominee or transferee who will take the place of PIATCO. If the
Senior Lenders and the Government are unable to enter into an agreement after the
prescribed period, the Government must then pay PIATCO, upon transfer of NAIA IPT III to the
Government, termination payment equal to the appraised value of the project or the value of
the attendant liabilities whichever is greater. Attendant liabilities as defined in the ARCA
includes all amounts owed or thereafter may be owed by PIATCO not only to the Senior
Lenders with whom PIATCO has defaulted in its loan obligations but to all other persons who
may have loaned, advanced funds or provided any other type of financial facilities to PIATCO
for NAIA IPT III. The amount of PIATCO's debt that the Government would have to pay as a
result of PIATCO's default in its loan obligations -- in case no qualified nominee or transferee
is appointed by the Senior Lenders and no other agreement relating to NAIA IPT III has been
reached between the Government and the Senior Lenders -- includes, but is not limited to,
"all principal, interest, associated fees, charges, reimbursements, and other related expenses .
. . whether payable at maturity, by acceleration or otherwise."55
It is clear from the foregoing that the ARCA provides for a direct guarantee by the
government to pay PIATCO's loans not only to its Senior Lenders but all other entities who
provided PIATCO funds or services upon PIATCO's default in its loan obligation with its Senior
Lenders. The fact that the Government's obligation to pay PIATCO's lenders for the latter's
obligation would only arise after the Senior Lenders fail to appoint a qualified nominee or
transferee does not detract from the fact that, should the conditions as stated in the contract
occur, the ARCA still obligates the Government to pay any and all amounts owed by PIATCO to
its lenders in connection with NAIA IPT III. Worse, the conditions that would make the
Government liable for PIATCO's debts is triggered by PIATCO's own default of its loan
obligations to its Senior Lenders to which loan contracts the Government was never a party
to. The Government was not even given an option as to what course of action it should take in
case PIATCO defaulted in the payment of its senior loans. The Government, upon PIATCO's
default, would be merely notified by the Senior Lenders of the same and it is the Senior
Lenders who are authorized to appoint a qualified nominee or transferee. Should the Senior
Lenders fail to make such an appointment, the Government is then automatically obligated to
"directly deal and negotiate" with the Senior Lenders regarding NAIA IPT III. The only way the
Government would not be liable for PIATCO's debt is for a qualified nominee or transferee to
be appointed in place of PIATCO to continue the construction, operation and maintenance of
NAIA IPT III. This "pre-condition", however, will not take the contract out of the ambit of a
direct guarantee by the government as the existence, availability and willingness of a qualified
nominee or transferee is totally out of the government's control. As such the Government is
virtually at the mercy of PIATCO (that it would not default on its loan obligations to its Senior
Lenders), the Senior Lenders (that they would appoint a qualified nominee or transferee or
agree to some other arrangement with the Government) and the existence of a qualified
nominee or transferee who is able and willing to take the place of PIATCO in NAIA IPT III.
The proscription against government guarantee in any form is one of the policy
considerations behind the BOT Law. Clearly, in the present case, the ARCA obligates the
Government to pay for all loans, advances and obligations arising out of financial facilities
extended to PIATCO for the implementation of the NAIA IPT III project should PIATCO default
in its loan obligations to its Senior Lenders and the latter fails to appoint a qualified nominee
or transferee. This in effect would make the Government liable for PIATCO's loans should the
conditions as set forth in the ARCA arise. This is a form of direct government guarantee.
The BOT Law and its implementing rules provide that in order for an unsolicited proposal for a
BOT project may be accepted, the following conditions must first be met: (1) the project
involves a new concept in technology and/or is not part of the list of priority projects, (2) no
direct government guarantee, subsidy or equity is required, and (3) the government agency or
local government unit has invited by publication other interested parties to a public bidding
and conducted the same.56 The failure to meet any of the above conditions will result in the
denial of the proposal. It is further provided that the presence of direct government
guarantee, subsidy or equity will "necessarily disqualify a proposal from being treated and
accepted as an unsolicited proposal."57 The BOT Law clearly and strictly prohibits direct
government guarantee, subsidy and equity in unsolicited proposals that the mere inclusion of
a provision to that effect is fatal and is sufficient to deny the proposal. It stands to reason
therefore that if a proposal can be denied by reason of the existence of direct government
guarantee, then its inclusion in the contract executed after the said proposal has been
accepted is likewise sufficient to invalidate the contract itself. A prohibited provision, the
inclusion of which would result in the denial of a proposal cannot, and should not, be allowed
to later on be inserted in the contract resulting from the said proposal. The basic rules of
justice and fair play alone militate against such an occurrence and must not, therefore, be
countenanced particularly in this instance where the government is exposed to the risk of
shouldering hundreds of million of dollars in debt.
This Court has long and consistently adhered to the legal maxim that those that cannot be
done directly cannot be done indirectly.58 To declare the PIATCO contracts valid despite the
clear statutory prohibition against a direct government guarantee would not only make a
mockery of what the BOT Law seeks to prevent -- which is to expose the government to the
risk of incurring a monetary obligation resulting from a contract of loan between the project
proponent and its lenders and to which the Government is not a party to -- but would also
render the BOT Law useless for what it seeks to achieve –- to make use of the resources of the
private sector in the "financing, operation and maintenance of infrastructure and
development projects"59 which are necessary for national growth and development but
which the government, unfortunately, could ill-afford to finance at this point in time.
IV
Temporary takeover of business affected with public interest
Article XII, Section 17 of the 1987 Constitution provides:
Section 17. In times of national emergency, when the public interest so requires, the State
may, during the emergency and under reasonable terms prescribed by it, temporarily take
over or direct the operation of any privately owned public utility or business affected with
public interest.
The above provision pertains to the right of the State in times of national emergency, and in
the exercise of its police power, to temporarily take over the operation of any business
affected with public interest. In the 1986 Constitutional Commission, the term "national
emergency" was defined to include threat from external aggression, calamities or national
disasters, but not strikes "unless it is of such proportion that would paralyze government
service."60 The duration of the emergency itself is the determining factor as to how long the
temporary takeover by the government would last.61 The temporary takeover by the
government extends only to the operation of the business and not to the ownership thereof.
As such the government is not required to compensate the private entity-owner of the said
business as there is no transfer of ownership, whether permanent or temporary. The private
entity-owner affected by the temporary takeover cannot, likewise, claim just compensation
for the use of the said business and its properties as the temporary takeover by the
government is in exercise of its police power and not of its power of eminent domain.
Article V, Section 5.10 (c) of the 1997 Concession Agreement provides:
Section 5.10 Temporary Take-over of operations by GRP.
….
(c) In the event the development Facility or any part thereof and/or the operations of
Concessionaire or any part thereof, become the subject matter of or be included in any
notice, notification, or declaration concerning or relating to acquisition, seizure or
appropriation by GRP in times of war or national emergency, GRP shall, by written notice to
Concessionaire, immediately take over the operations of the Terminal and/or the Terminal
Complex. During such take over by GRP, the Concession Period shall be suspended; provided,
that upon termination of war, hostilities or national emergency, the operations shall be
returned to Concessionaire, at which time, the Concession period shall commence to run
again. Concessionaire shall be entitled to reasonable compensation for the duration of the
temporary take over by GRP, which compensation shall take into account the reasonable cost
for the use of the Terminal and/or Terminal Complex, (which is in the amount at least equal to
the debt service requirements of Concessionaire, if the temporary take over should occur at
the time when Concessionaire is still servicing debts owed to project lenders), any loss or
damage to the Development Facility, and other consequential damages. If the parties cannot
agree on the reasonable compensation of Concessionaire, or on the liability of GRP as
aforesaid, the matter shall be resolved in accordance with Section 10.01 [Arbitration]. Any
amount determined to be payable by GRP to Concessionaire shall be offset from the amount
next payable by Concessionaire to GRP.62
PIATCO cannot, by mere contractual stipulation, contravene the Constitutional provision on
temporary government takeover and obligate the government to pay "reasonable cost for the
use of the Terminal and/or Terminal Complex."63 Article XII, section 17 of the 1987
Constitution envisions a situation wherein the exigencies of the times necessitate the
government to "temporarily take over or direct the operation of any privately owned public
utility or business affected with public interest." It is the welfare and interest of the public
which is the paramount consideration in determining whether or not to temporarily take over
a particular business. Clearly, the State in effecting the temporary takeover is exercising its
police power. Police power is the "most essential, insistent, and illimitable of powers."64 Its
exercise therefore must not be unreasonably hampered nor its exercise be a source of
obligation by the government in the absence of damage due to arbitrariness of its exercise.65
Thus, requiring the government to pay reasonable compensation for the reasonable use of
the property pursuant to the operation of the business contravenes the Constitution.
V project, in this case PIATCO. Nonetheless, the privilege given to PIATCO is subject to
Regulation of Monopolies
A monopoly is "a privilege or peculiar advantage vested in one or more persons or companies,
consisting in the exclusive right (or power) to carry on a particular business or trade,
manufacture a particular article, or control the sale of a particular commodity."66 The 1987
Constitution strictly regulates monopolies, whether private or public, and even provides for
their prohibition if public interest so requires. Article XII, Section 19 of the 1987 Constitution
states:
Sec. 19. The state shall regulate or prohibit monopolies when the public interest so requires.
No combinations in restraint of trade or unfair competition shall be allowed.
Clearly, monopolies are not per se prohibited by the Constitution but may be permitted to
exist to aid the government in carrying on an enterprise or to aid in the performance of
various services and functions in the interest of the public.67 Nonetheless, a determination
must first be made as to whether public interest requires a monopoly. As monopolies are
subject to abuses that can inflict severe prejudice to the public, they are subject to a higher
level of State regulation than an ordinary business undertaking.
In the cases at bar, PIATCO, under the 1997 Concession Agreement and the ARCA, is granted
the "exclusive right to operate a commercial international passenger terminal within the
Island of Luzon" at the NAIA IPT III.68 This is with the exception of already existing
international airports in Luzon such as those located in the Subic Bay Freeport Special
Economic Zone ("SBFSEZ"), Clark Special Economic Zone ("CSEZ") and in Laoag City.69 As such,
upon commencement of PIATCO's operation of NAIA IPT III, Terminals 1 and 2 of NAIA would
cease to function as international passenger terminals. This, however, does not prevent MIAA
to use Terminals 1 and 2 as domestic passenger terminals or in any other manner as it may
deem appropriate except those activities that would compete with NAIA IPT III in the latter's
operation as an international passenger terminal.70 The right granted to PIATCO to
exclusively operate NAIA IPT III would be for a period of twenty-five (25) years from the In-
Service Date71 and renewable for another twenty-five (25) years at the option of the
government.72 Both the 1997 Concession Agreement and the ARCA further provide that, in
view of the exclusive right granted to PIATCO, the concession contracts of the service
providers currently servicing Terminals 1 and 2 would no longer be renewed and those
concession contracts whose expiration are subsequent to the In-Service Date would cease to
be effective on the said date.73
The operation of an international passenger airport terminal is no doubt an undertaking
imbued with public interest. In entering into a Build–Operate-and-Transfer contract for the
construction, operation and maintenance of NAIA IPT III, the government has determined that
public interest would be served better if private sector resources were used in its construction
and an exclusive right to operate be granted to the private entity undertaking the said
reasonable regulation and supervision by the Government through the MIAA, which is the
government agency authorized to operate the NAIA complex, as well as DOTC, the
department to which MIAA is attached.74
This is in accord with the Constitutional mandate that a monopoly which is not prohibited
must be regulated.75 While it is the declared policy of the BOT Law to encourage private
sector participation by "providing a climate of minimum government regulations,"76 the
same does not mean that Government must completely surrender its sovereign power to
protect public interest in the operation of a public utility as a monopoly. The operation of said
public utility can not be done in an arbitrary manner to the detriment of the public which it
seeks to serve. The right granted to the public utility may be exclusive but the exercise of the
right cannot run riot. Thus, while PIATCO may be authorized to exclusively operate NAIA IPT III
as an international passenger terminal, the Government, through the MIAA, has the right and
the duty to ensure that it is done in accord with public interest. PIATCO's right to operate
NAIA IPT III cannot also violate the rights of third parties.
Section 3.01(e) of the 1997 Concession Agreement and the ARCA provide:
3.01 Concession Period
xxx xxx xxx
(e) GRP confirms that certain concession agreements relative to certain services and
operations currently being undertaken at the Ninoy Aquino International Airport passenger
Terminal I have a validity period extending beyond the In-Service Date. GRP through
DOTC/MIAA, confirms that these services and operations shall not be carried over to the
Terminal and the Concessionaire is under no legal obligation to permit such carry-over except
through a separate agreement duly entered into with Concessionaire. In the event
Concessionaire becomes involved in any litigation initiated by any such concessionaire or
operator, GRP undertakes and hereby holds Concessionaire free and harmless on full
indemnity basis from and against any loss and/or any liability resulting from any such
litigation, including the cost of litigation and the reasonable fees paid or payable to
Concessionaire's counsel of choice, all such amounts shall be fully deductible by way of an
offset from any amount which the Concessionaire is bound to pay GRP under this Agreement.
During the oral arguments on December 10, 2002, the counsel for the petitioners-in-
intervention for G.R. No. 155001 stated that there are two service providers whose contracts
are still existing and whose validity extends beyond the In-Service Date. One contract remains
valid until 2008 and the other until 2010.77
VI
CONCLUSION
In sum, this Court rules that in view of the absence of the requisite financial capacity of the
Paircargo Consortium, predecessor of respondent PIATCO, the award by the PBAC of the
contract for the construction, operation and maintenance of the NAIA IPT III is null and void.
Further, considering that the 1997 Concession Agreement contains material and substantial
amendments, which amendments had the effect of converting the 1997 Concession
Agreement into an entirely different agreement from the contract bidded upon, the 1997
Concession Agreement is similarly null and void for being contrary to public policy. The
provisions under Sections 4.04(b) and (c) in relation to Section 1.06 of the 1997 Concession
Agreement and Section 4.04(c) in relation to Section 1.06 of the ARCA, which constitute a
direct government guarantee expressly prohibited by, among others, the BOT Law and its
Implementing Rules and Regulations are also null and void. The Supplements, being accessory
contracts to the ARCA, are likewise null and void.
WHEREFORE, the 1997 Concession Agreement, the Amended and Restated Concession
Agreement and the Supplements thereto are set aside for being null and void.
SO ORDERED

We hold that while the service providers presently operating at NAIA Terminal 1 do not have
an absolute right for the renewal or the extension of their respective contracts, those
contracts whose duration extends beyond NAIA IPT III's In-Service-Date should not be unduly
prejudiced. These contracts must be respected not just by the parties thereto but also by
third parties. PIATCO cannot, by law and certainly not by contract, render a valid and binding
contract nugatory. PIATCO, by the mere expedient of claiming an exclusive right to operate,
cannot require the Government to break its contractual obligations to the service providers.
In contrast to the arrastre and stevedoring service providers in the case of Anglo-Fil Trading
Corporation v. Lazaro78 whose contracts consist of temporary hold-over permits, the affected
service providers in the cases at bar, have a valid and binding contract with the Government,
through MIAA, whose period of effectivity, as well as the other terms and conditions thereof,
cannot be violated.

In fine, the efficient functioning of NAIA IPT III is imbued with public interest. The provisions
of the 1997 Concession Agreement and the ARCA did not strip government, thru the MIAA, of
its right to supervise the operation of the whole NAIA complex, including NAIA IPT III. As the
primary government agency tasked with the job,79 it is MIAA's responsibility to ensure that
whoever by contract is given the right to operate NAIA IPT III will do so within the bounds of
the law and with due regard to the rights of third parties and above all, the interest of the
public.
G.R. No. L-47745 April 15, 1988
JOSE S. AMADORA, LORETA A. AMADORA, JOSE A. AMADORA JR., NORMA A. YLAYA
PANTALEON A. AMADORA, JOSE A. AMADORA III, LUCY A. AMADORA, ROSALINDA A.
AMADORA, PERFECTO A. AMADORA, SERREC A. AMADORA, VICENTE A. AMADORA and
MARIA TISCALINA A. AMADORA, petitioners
vs.
HONORABLE COURT OF APPEALS, COLEGIO DE SAN JOSE-RECOLETOS, VICTOR LLUCH
SERGIO P. DLMASO JR., CELESTINO DICON, ANIANO ABELLANA, PABLITO DAFFON thru his
parents and natural guardians, MR. and MRS. NICANOR GUMBAN, and ROLANDO
VALENCIA, thru his guardian, A. FRANCISCO ALONSO, respondents.
Jose S. Amadora & Associates for petitioners.
Padilla Law Office for respondents.
CRUZ, J.:
Like any prospective graduate, Alfredo Amadora was looking forward to the commencement
exercises where he would ascend the stage and in the presence of his relatives and friends
receive his high school diploma. These ceremonies were scheduled on April 16, 1972. As it
turned out, though, fate would intervene and deny him that awaited experience. On April 13,
1972, while they were in the auditorium of their school, the Colegio de San Jose-Recoletos, a
classmate, Pablito Damon, fired a gun that mortally hit Alfredo, ending all his expectations
and his life as well. The victim was only seventeen years old. 1
Daffon was convicted of homicide thru reckless imprudence . 2 Additionally, the herein
petitioners, as the victim's parents, filed a civil action for damages under Article 2180 of the
Civil Code against the Colegio de San Jose-Recoletos, its rector the high school principal, the
dean of boys, and the physics teacher, together with Daffon and two other students, through
their respective parents. The complaint against the students was later dropped. After trial,
the Court of First Instance of Cebu held the remaining defendants liable to the plaintiffs in the
sum of P294,984.00, representing death compensation, loss of earning capacity, costs of
litigation, funeral expenses, moral damages, exemplary damages, and attorney's fees .3 On
appeal to the respondent court, however, the decision was reversed and all the defendants
were completely absolved .4
In its decision, which is now the subject of this petition for certiorari under Rule 45 of the
Rules of Court, the respondent court found that Article 2180 was not applicable as the Colegio
de San Jose-Recoletos was not a school of arts and trades but an academic institution of
learning. It also held that the students were not in the custody of the school at the time of the
incident as the semester had already ended, that there was no clear identification of the fatal
gun and that in any event the defendant, had exercised the necessary diligence in preventing
the injury. 5
The basic undisputed facts are that Alfredo Amadora went to the San Jose-Recoletos on April
13, 1972, and while in its auditorium was shot to death by Pablito Daffon, a classmate. On the
implications and consequences of these facts, the parties sharply disagree.
The petitioners contend that their son was in the school to show his physics experiment as a
prerequisite to his graduation; hence, he was then under the custody of the private
respondents. The private respondents submit that Alfredo Amadora had gone to the school
only for the purpose of submitting his physics report and that he was no longer in their
custody because the semester had already ended.
There is also the question of the identity of the gun used which the petitioners consider
important because of an earlier incident which they claim underscores the negligence of the
school and at least one of the private respondents. It is not denied by the respondents that on
April 7, 1972, Sergio Damaso, Jr., the dean of boys, confiscated from Jose Gumban an
unlicensed pistol but later returned it to him without making a report to the principal or
taking any further action .6 As Gumban was one of the companions of Daffon when the latter
fired the gun that killed Alfredo, the petitioners contend that this was the same pistol that
had been confiscated from Gumban and that their son would not have been killed if it had not
been returned by Damaso. The respondents say, however, that there is no proof that the gun
was the same firearm that killed Alfredo.
Resolution of all these disagreements will depend on the interpretation of Article 2180 which,
as it happens, is invoked by both parties in support of their conflicting positions. The pertinent
part of this article reads as follows:
Lastly, teachers or heads of establishments of arts and trades shall be liable for damages
caused by their pupils and students or apprentices so long as they remain in their custody.
Three cases have so far been decided by the Court in connection with the above-quoted
provision, to wit: Exconde v. Capuno 7 Mercado v. Court of Appeals, 8 and Palisoc v.
Brillantes. 9 These will be briefly reviewed in this opinion for a better resolution of the case at
bar.
In the Exconde Case, Dante Capuno, a student of the Balintawak Elementary School and a Boy
Scout, attended a Rizal Day parade on instructions of the city school supervisor. After the
parade, the boy boarded a jeep, took over its wheel and drove it so recklessly that it turned
turtle, resulting in the death of two of its passengers. Dante was found guilty of double
homicide with reckless imprudence. In the separate civil action flied against them, his father
was held solidarily liable with him in damages under Article 1903 (now Article 2180) of the
Civil Code for the tort committed by the 15-year old boy.
This decision, which was penned by Justice Bautista Angelo on June 29,1957, exculpated the
school in an obiter dictum (as it was not a party to the case) on the ground that it was riot a
school of arts and trades. Justice J.B.L. Reyes, with whom Justices Sabino Padilla and Alex
Reyes concurred, dissented, arguing that it was the school authorities who should be held
liable Liability under this rule, he said, was imposed on (1) teachers in general; and (2) heads
of schools of arts and trades in particular. The modifying clause "of establishments of arts and
trades" should apply only to "heads" and not "teachers."
Exconde was reiterated in the Mercado Case, and with an elaboration. A student cut a
classmate with a razor blade during recess time at the Lourdes Catholic School in Quezon City,
and the parents of the victim sued the culprits parents for damages. Through Justice
Labrador, the Court declared in another obiter (as the school itself had also not been sued
that the school was not liable because it was not an establishment of arts and trades.
Moreover, the custody requirement had not been proved as this "contemplates a situation
where the student lives and boards with the teacher, such that the control, direction and
influences on the pupil supersede those of the parents." Justice J.B.L. Reyes did not take part
but the other members of the court concurred in this decision promulgated on May 30, 1960.
In Palisoc vs. Brillantes, decided on October 4, 1971, a 16-year old student was killed by a
classmate with fist blows in the laboratory of the Manila Technical Institute. Although the
wrongdoer — who was already of age — was not boarding in the school, the head thereof
and the teacher in charge were held solidarily liable with him. The Court declared through
Justice Teehankee:
The phrase used in the cited article — "so long as (the students) remain in their custody" —
means the protective and supervisory custody that the school and its heads and teachers
exercise over the pupils and students for as long as they are at attendance in the school,
including recess time. There is nothing in the law that requires that for such liability to attach,
the pupil or student who commits the tortious act must live and board in the school, as
erroneously held by the lower court, and the dicta in Mercado (as well as in Exconde) on
which it relied, must now be deemed to have been set aside by the present decision.
This decision was concurred in by five other members, 10 including Justice J.B.L. Reyes, who
stressed, in answer to the dissenting opinion, that even students already of age were covered
by the provision since they were equally in the custody of the school and subject to its
discipline. Dissenting with three others,11 Justice Makalintal was for retaining the custody
interpretation in Mercado and submitted that the rule should apply only to torts committed
by students not yet of age as the school would be acting only in loco parentis.
In a footnote, Justice Teehankee said he agreed with Justice Reyes' dissent in the Exconde
Case but added that "since the school involved at bar is a non-academic school, the question
as to the applicability of the cited codal provision to academic institutions will have to await
another case wherein it may properly be raised."
This is the case.
Unlike in Exconde and Mercado, the Colegio de San Jose-Recoletos has been directly
impleaded and is sought to be held liable under Article 2180; and unlike in Palisoc, it is not a
school of arts and trades but an academic institution of learning. The parties herein have also
directly raised the question of whether or not Article 2180 covers even establishments which
are technically not schools of arts and trades, and, if so, when the offending student is
supposed to be "in its custody."
After an exhaustive examination of the problem, the Court has come to the conclusion that
the provision in question should apply to all schools, academic as well as non-academic.
Where the school is academic rather than technical or vocational in nature, responsibility for
the tort committed by the student will attach to the teacher in charge of such student,
following the first part of the provision. This is the general rule. In the case of establishments
of arts and trades, it is the head thereof, and only he, who shall be held liable as an exception
to the general rule. In other words, teachers in general shall be liable for the acts of their
students except where the school is technical in nature, in which case it is the head thereof
who shall be answerable. Following the canon of reddendo singula singulis "teachers" should
apply to the words "pupils and students" and "heads of establishments of arts and trades" to
the word "apprentices."
The Court thus conforms to the dissenting opinion expressed by Justice J.B.L. Reyes in
Exconde where he said in part:
I can see no sound reason for limiting Art. 1903 of the Old Civil Code to teachers of arts and
trades and not to academic ones. What substantial difference is there between them insofar
as concerns the proper supervision and vice over their pupils? It cannot be seriously
contended that an academic teacher is exempt from the duty of watching that his pupils do
not commit a tort to the detriment of third Persons, so long as they are in a position to
exercise authority and Supervision over the pupil. In my opinion, in the phrase "teachers or
heads of establishments of arts and trades" used in Art. 1903 of the old Civil Code, the words
"arts and trades" does not qualify "teachers" but only "heads of establishments." The phrase
is only an updated version of the equivalent terms "preceptores y artesanos" used in the
Italian and French Civil Codes.
If, as conceded by all commentators, the basis of the presumption of negligence of Art. 1903
in some culpa in vigilando that the parents, teachers, etc. are supposed to have incurred in
the exercise of their authority, it would seem clear that where the parent places the child
under the effective authority of the teacher, the latter, and not the parent, should be the one
answerable for the torts committed while under his custody, for the very reason/that the
parent is not supposed to interfere with the discipline of the school nor with the authority
and supervision of the teacher while the child is under instruction. And if there is no
authority, there can be no responsibility.
There is really no substantial distinction between the academic and the non-academic schools
insofar as torts committed by their students are concerned. The same vigilance is expected
from the teacher over the students under his control and supervision, whatever the nature of
the school where he is teaching. The suggestion in the Exconde and Mercado Cases is that the
provision would make the teacher or even the head of the school of arts and trades liable for
an injury caused by any student in its custody but if that same tort were committed in an
academic school, no liability would attach to the teacher or the school head. All other
circumstances being the same, the teacher or the head of the academic school would be
absolved whereas the teacher and the head of the non-academic school would be held liable,
and simply because the latter is a school of arts and trades.
The Court cannot see why different degrees of vigilance should be exercised by the school
authorities on the basis only of the nature of their respective schools. There does not seem to
be any plausible reason for relaxing that vigilance simply because the school is academic in
nature and for increasing such vigilance where the school is non-academic. Notably, the injury
subject of liability is caused by the student and not by the school itself nor is it a result of the
operations of the school or its equipment. The injury contemplated may be caused by any
student regardless of the school where he is registered. The teacher certainly should not be
able to excuse himself by simply showing that he is teaching in an academic school where, on
the other hand, the head would be held liable if the school were non-academic.
These questions, though, may be asked: If the teacher of the academic school is to be held
answerable for the torts committed by his students, why is it the head of the school only who
is held liable where the injury is caused in a school of arts and trades? And in the case of the
academic or non- technical school, why not apply the rule also to the head thereof instead of
imposing the liability only on the teacher?
The reason for the disparity can be traced to the fact that historically the head of the school
of arts and trades exercised a closer tutelage over his pupils than the head of the academic
school. The old schools of arts and trades were engaged in the training of artisans apprenticed
to their master who personally and directly instructed them on the technique and secrets of
their craft. The head of the school of arts and trades was such a master and so was personally
involved in the task of teaching his students, who usually even boarded with him and so came
under his constant control, supervision and influence. By contrast, the head of the academic
school was not as involved with his students and exercised only administrative duties over the
teachers who were the persons directly dealing with the students. The head of the academic
school had then (as now) only a vicarious relationship with the students. Consequently, while
he could not be directly faulted for the acts of the students, the head of the school of arts and
trades, because of his closer ties with them, could be so blamed.
It is conceded that the distinction no longer obtains at present in view of the expansion of the
schools of arts and trades, the consequent increase in their enrollment, and the
corresponding diminution of the direct and personal contract of their heads with the
students. Article 2180, however, remains unchanged. In its present state, the provision must
be interpreted by the Court according to its clear and original mandate until the legislature,
taking into account the charges in the situation subject to be regulated, sees fit to enact the
necessary amendment.
The other matter to be resolved is the duration of the responsibility of the teacher or the
head of the school of arts and trades over the students. Is such responsibility co-extensive
with the period when the student is actually undergoing studies during the school term, as
contended by the respondents and impliedly admitted by the petitioners themselves?
From a reading of the provision under examination, it is clear that while the custody
requirement, to repeat Palisoc v. Brillantes, does not mean that the student must be boarding
with the school authorities, it does signify that the student should be within the control and
under the influence of the school authorities at the time of the occurrence of the injury. This
does not necessarily mean that such, custody be co-terminous with the semester, beginning
with the start of classes and ending upon the close thereof, and excluding the time before or
after such period, such as the period of registration, and in the case of graduating students,
the period before the commencement exercises. In the view of the Court, the student is in the
custody of the school authorities as long as he is under the control and influence of the school
and within its premises, whether the semester has not yet begun or has already ended.
It is too tenuous to argue that the student comes under the discipline of the school only upon
the start of classes notwithstanding that before that day he has already registered and thus
placed himself under its rules. Neither should such discipline be deemed ended upon the last
day of classes notwithstanding that there may still be certain requisites to be satisfied for
completion of the course, such as submission of reports, term papers, clearances and the like.
During such periods, the student is still subject to the disciplinary authority of the school and
cannot consider himself released altogether from observance of its rules.
As long as it can be shown that the student is in the school premises in pursuance of a
legitimate student objective, in the exercise of a legitimate student right, and even in the
enjoyment of a legitimate student right, and even in the enjoyment of a legitimate student
privilege, the responsibility of the school authorities over the student continues. Indeed, even
if the student should be doing nothing more than relaxing in the campus in the company of
his classmates and friends and enjoying the ambience and atmosphere of the school, he is still
within the custody and subject to the discipline of the school authorities under the provisions
of Article 2180.
During all these occasions, it is obviously the teacher-in-charge who must answer for his
students' torts, in practically the same way that the parents are responsible for the child when
he is in their custody. The teacher-in-charge is the one designated by the dean, principal, or
other administrative superior to exercise supervision over the pupils in the specific classes or
sections to which they are assigned. It is not necessary that at the time of the injury, the
teacher be physically present and in a position to prevent it. Custody does not connote
immediate and actual physical control but refers more to the influence exerted on the child
and the discipline instilled in him as a result of such influence. Thus, for the injuries caused by
the student, the teacher and not the parent shag be held responsible if the tort was
committed within the premises of the school at any time when its authority could be validly
exercised over him.
In any event, it should be noted that the liability imposed by this article is supposed to fall
directly on the teacher or the head of the school of arts and trades and not on the school
itself. If at all, the school, whatever its nature, may be held to answer for the acts of its
teachers or even of the head thereof under the general principle of respondeat superior, but
then it may exculpate itself from liability by proof that it had exercised the diligence of a
bonus paterfamilias.
Such defense is, of course, also available to the teacher or the head of the school of arts and
trades directly held to answer for the tort committed by the student. As long as the defendant
can show that he had taken the necessary precautions to prevent the injury complained of, he
can exonerate himself from the liability imposed by Article 2180, which also states that:
The responsibility treated of in this article shall cease when the Persons herein mentioned
prove that they observed all the diligence of a good father of a family to prevent damages.
In this connection, it should be observed that the teacher will be held liable not only when he
is acting in loco parentis for the law does not require that the offending student be of
minority age. Unlike the parent, who wig be liable only if his child is still a minor, the teacher
is held answerable by the law for the act of the student under him regardless of the student's
age. Thus, in the Palisoc Case, liability attached to the teacher and the head of the technical
school although the wrongdoer was already of age. In this sense, Article 2180 treats the
parent more favorably than the teacher.
The Court is not unmindful of the apprehensions expressed by Justice Makalintal in his
dissenting opinion in Palisoc that the school may be unduly exposed to liability under this
article in view of the increasing activism among the students that is likely to cause violence
and resulting injuries in the school premises. That is a valid fear, to be sure. Nevertheless, it
should be repeated that, under the present ruling, it is not the school that will be held directly
liable. Moreover, the defense of due diligence is available to it in case it is sought to be held
answerable as principal for the acts or omission of its head or the teacher in its employ.
The school can show that it exercised proper measures in selecting the head or its teachers
and the appropriate supervision over them in the custody and instruction of the pupils
pursuant to its rules and regulations for the maintenance of discipline among them. In almost
all cases now, in fact, these measures are effected through the assistance of an adequate
security force to help the teacher physically enforce those rules upon the students. Ms should
bolster the claim of the school that it has taken adequate steps to prevent any injury that may
be committed by its students.
A fortiori, the teacher himself may invoke this defense as it would otherwise be unfair to hold
him directly answerable for the damage caused by his students as long as they are in the
school premises and presumably under his influence. In this respect, the Court is disposed not
to expect from the teacher the same measure of responsibility imposed on the parent for
their influence over the child is not equal in degree. Obviously, the parent can expect more
obedience from the child because the latter's dependence on him is greater than on the
teacher. It need not be stressed that such dependence includes the child's support and
sustenance whereas submission to the teacher's influence, besides being coterminous with
the period of custody is usually enforced only because of the students' desire to pass the
course. The parent can instill more las discipline on the child than the teacher and so should
be held to a greater accountability than the teacher for the tort committed by the child.
And if it is also considered that under the article in question, the teacher or the head of the
school of arts and trades is responsible for the damage caused by the student or apprentice
even if he is already of age — and therefore less tractable than the minor — then there
should all the more be justification to require from the school authorities less accountability
as long as they can prove reasonable diligence in preventing the injury. After all, if the parent
himself is no longer liable for the student's acts because he has reached majority age and so is
no longer under the former's control, there is then all the more reason for leniency in
assessing the teacher's responsibility for the acts of the student.
Applying the foregoing considerations, the Court has arrived at the following conclusions:
1. At the time Alfredo Amadora was fatally shot, he was still in the custody of the
authorities of Colegio de San Jose-Recoletos notwithstanding that the fourth year classes had
formally ended. It was immaterial if he was in the school auditorium to finish his physics
experiment or merely to submit his physics report for what is important is that he was there
for a legitimate purpose. As previously observed, even the mere savoring of the company of
his friends in the premises of the school is a legitimate purpose that would have also brought
him in the custody of the school authorities.
2. The rector, the high school principal and the dean of boys cannot be held liable
because none of them was the teacher-in-charge as previously defined. Each of them was
exercising only a general authority over the student body and not the direct control and
influence exerted by the teacher placed in charge of particular classes or sections and thus
immediately involved in its discipline. The evidence of the parties does not disclose who the
teacher-in-charge of the offending student was. The mere fact that Alfredo Amadora had
gone to school that day in connection with his physics report did not necessarily make the
physics teacher, respondent Celestino Dicon, the teacher-in-charge of Alfredo's killer.
3. At any rate, assuming that he was the teacher-in-charge, there is no showing that
Dicon was negligent in enforcing discipline upon Daffon or that he had waived observance of
the rules and regulations of the school or condoned their non-observance. His absence when
the tragedy happened cannot be considered against him because he was not supposed or
required to report to school on that day. And while it is true that the offending student was
still in the custody of the teacher-in-charge even if the latter was physically absent when the
tort was committed, it has not been established that it was caused by his laxness in enforcing
discipline upon the student. On the contrary, the private respondents have proved that they
had exercised due diligence, through the enforcement of the school regulations, in
maintaining that discipline.

4. In the absence of a teacher-in-charge, it is probably the dean of boys who should

be held liable especially in view of the unrefuted evidence that he had earlier confiscated an
unlicensed gun from one of the students and returned the same later to him without taking
disciplinary action or reporting the matter to higher authorities. While this was clearly
negligence on his part, for which he deserves sanctions from the school, it does not
necessarily link him to the shooting of Amador as it has not been shown that he confiscated
and returned pistol was the gun that killed the petitioners' son.

5. Finally, as previously observed, the Colegio de San Jose-Recoletos cannot be held

directly liable under the article because only the teacher or the head of the school of arts and
trades is made responsible for the damage caused by the student or apprentice. Neither can it
be held to answer for the tort committed by any of the other private respondents for none of
them has been found to have been charged with the custody of the offending student or has
been remiss in the discharge of his duties in connection with such custody.

In sum, the Court finds under the facts as disclosed by the record and in the light of the
principles herein announced that none of the respondents is liable for the injury inflicted by
Pablito Damon on Alfredo Amadora that resulted in the latter's death at the auditorium of the
Colegio de San Jose-Recoletos on April 13, 1972. While we deeply sympathize with the
petitioners over the loss of their son under the tragic circumstances here related, we
nevertheless are unable to extend them the material relief they seek, as a balm to their grief,
under the law they have invoked.

WHEREFORE, the petition is DENIED, without any pronouncement as to costs. It is so

ordered.
G.R. No. 150843 March 14, 2003
CATHAY PACIFIC AIRWAYS, LTD., petitioner,
vs.
SPOUSES DANIEL VAZQUEZ and MARIA LUISA MADRIGAL VAZQUEZ, respondents.
DAVIDE, JR., C.J.:
Is an involuntary upgrading of an airline passenger’s accommodation from one class to a more
superior class at no extra cost a breach of contract of carriage that would entitle the
passenger to an award of damages? This is a novel question that has to be resolved in this
case.
The facts in this case, as found by the Court of Appeals and adopted by petitioner Cathay
Pacific Airways, Ltd., (hereinafter Cathay) are as follows:
Cathay is a common carrier engaged in the business of transporting passengers and goods by
air. Among the many routes it services is the Manila-Hongkong-Manila course. As part of its
marketing strategy, Cathay accords its frequent flyers membership in its Marco Polo Club. The
members enjoy several privileges, such as priority for upgrading of booking without any extra
charge whenever an opportunity arises. Thus, a frequent flyer booked in the Business Class
has priority for upgrading to First Class if the Business Class Section is fully booked.
Respondents-spouses Dr. Daniel Earnshaw Vazquez and Maria Luisa Madrigal Vazquez are
frequent flyers of Cathay and are Gold Card members of its Marco Polo Club. On 24
September 1996, the Vazquezes, together with their maid and two friends Pacita Cruz and
Josefina Vergel de Dios, went to Hongkong for pleasure and business.
For their return flight to Manila on 28 September 1996, they were booked on Cathay’s Flight
CX-905, with departure time at 9:20 p.m. Two hours before their time of departure, the
Vazquezes and their companions checked in their luggage at Cathay’s check-in counter at Kai
Tak Airport and were given their respective boarding passes, to wit, Business Class boarding
passes for the Vazquezes and their two friends, and Economy Class for their maid. They then
proceeded to the Business Class passenger lounge.
When boarding time was announced, the Vazquezes and their two friends went to Departure
Gate No. 28, which was designated for Business Class passengers. Dr. Vazquez presented his
boarding pass to the ground stewardess, who in turn inserted it into an electronic machine
reader or computer at the gate. The ground stewardess was assisted by a ground attendant
by the name of Clara Lai Han Chiu. When Ms. Chiu glanced at the computer monitor, she saw
a message that there was a "seat change" from Business Class to First Class for the Vazquezes.
Ms. Chiu approached Dr. Vazquez and told him that the Vazquezes’ accommodations were
upgraded to First Class. Dr. Vazquez refused the upgrade, reasoning that it would not look
nice for them as hosts to travel in First Class and their guests, in the Business Class; and
moreover, they were going to discuss business matters during the flight. He also told Ms. Chiu
that she could have other passengers instead transferred to the First Class Section. Taken
aback by the refusal for upgrading, Ms. Chiu consulted her supervisor, who told her to handle
the situation and convince the Vazquezes to accept the upgrading. Ms. Chiu informed the
latter that the Business Class was fully booked, and that since they were Marco Polo Club
members they had the priority to be upgraded to the First Class. Dr. Vazquez continued to
refuse, so Ms. Chiu told them that if they would not avail themselves of the privilege, they
would not be allowed to take the flight. Eventually, after talking to his two friends, Dr.
Vazquez gave in. He and Mrs. Vazquez then proceeded to the First Class Cabin.
Upon their return to Manila, the Vazquezes, in a letter of 2 October 1996 addressed to
Cathay’s Country Manager, demanded that they be indemnified in the amount of P1million
for the "humiliation and embarrassment" caused by its employees. They also demanded "a
written apology from the management of Cathay, preferably a responsible person with a rank
of no less than the Country Manager, as well as the apology from Ms. Chiu" within fifteen
days from receipt of the letter.
In his reply of 14 October 1996, Mr. Larry Yuen, the assistant to Cathay’s Country Manager
Argus Guy Robson, informed the Vazquezes that Cathay would investigate the incident and
get back to them within a week’s time.
On 8 November 1996, after Cathay’s failure to give them any feedback within its self-imposed
deadline, the Vazquezes instituted before the Regional Trial Court of Makati City an action for
damages against Cathay, praying for the payment to each of them the amounts of P250,000
as temperate damages; P500,000 as moral damages; P500,000 as exemplary or corrective
damages; and P250,000 as attorney’s fees.
In their complaint, the Vazquezes alleged that when they informed Ms. Chiu that they
preferred to stay in Business Class, Ms. Chiu "obstinately, uncompromisingly and in a loud,
discourteous and harsh voice threatened" that they could not board and leave with the flight
unless they go to First Class, since the Business Class was overbooked. Ms. Chiu’s loud and
stringent shouting annoyed, embarrassed, and humiliated them because the incident was
witnessed by all the other passengers waiting for boarding. They also claimed that they were
unjustifiably delayed to board the plane, and when they were finally permitted to get into the
aircraft, the forward storage compartment was already full. A flight stewardess instructed Dr.
Vazquez to put his roll-on luggage in the overhead storage compartment. Because he was not
assisted by any of the crew in putting up his luggage, his bilateral carpal tunnel syndrome was
aggravated, causing him extreme pain on his arm and wrist. The Vazquezes also averred that
they "belong to the uppermost and absolutely top elite of both Philippine Society and the
Philippine financial community, [and that] they were among the wealthiest persons in the
Philippine[s]."
In its answer, Cathay alleged that it is a practice among commercial airlines to upgrade
passengers to the next better class of accommodation, whenever an opportunity arises, such
as when a certain section is fully booked. Priority in upgrading is given to its frequent flyers,
who are considered favored passengers like the Vazquezes. Thus, when the Business Class
Section of Flight CX-905 was fully booked, Cathay’s computer sorted out the names of favored
passengers for involuntary upgrading to First Class. When Ms. Chiu informed the Vazquezes
that they were upgraded to First Class, Dr. Vazquez refused. He then stood at the entrance of
the boarding apron, blocking the queue of passengers from boarding the plane, which
inconvenienced other passengers. He shouted that it was impossible for him and his wife to
be upgraded without his two friends who were traveling with them. Because of Dr. Vazquez’s
outburst, Ms. Chiu thought of upgrading the traveling companions of the Vazquezes. But
when she checked the computer, she learned that the Vazquezes’ companions did not have
priority for upgrading. She then tried to book the Vazquezes again to their original seats.
However, since the Business Class Section was already fully booked, she politely informed Dr.
Vazquez of such fact and explained that the upgrading was in recognition of their status as
Cathay’s valued passengers. Finally, after talking to their guests, the Vazquezes eventually
decided to take the First Class accommodation.
Cathay also asserted that its employees at the Hong Kong airport acted in good faith in
dealing with the Vazquezes; none of them shouted, humiliated, embarrassed, or committed
any act of disrespect against them (the Vazquezes). Assuming that there was indeed a breach
of contractual obligation, Cathay acted in good faith, which negates any basis for their claim
for temperate, moral, and exemplary damages and attorney’s fees. Hence, it prayed for the
dismissal of the complaint and for payment of P100,000 for exemplary damages and P300,000
as attorney’s fees and litigation expenses.
During the trial, Dr. Vazquez testified to support the allegations in the complaint. His
testimony was corroborated by his two friends who were with him at the time of the incident,
namely, Pacita G. Cruz and Josefina Vergel de Dios.
For its part, Cathay presented documentary evidence and the testimonies of Mr. Yuen; Ms.
Chiu; Norma Barrientos, Comptroller of its retained counsel; and Mr. Robson. Yuen and
Robson testified on Cathay’s policy of upgrading the seat accommodation of its Marco Polo
Club members when an opportunity arises. The upgrading of the Vazquezes to First Class was
done in good faith; in fact, the First Class Section is definitely much better than the Business
Class in terms of comfort, quality of food, and service from the cabin crew. They also testified
that overbooking is a widely accepted practice in the airline industry and is in accordance with
the International Air Transport Association (IATA) regulations. Airlines overbook because a lot
of passengers do not show up for their flight. With respect to Flight CX-905, there was no
overall overbooking to a degree that a passenger was bumped off or downgraded. Yuen and
Robson also stated that the demand letter of the Vazquezes was immediately acted upon.
Reports were gathered from their office in Hong Kong and immediately forwarded to their
counsel Atty. Remollo for legal advice. However, Atty. Remollo begged off because his
services were likewise retained by the Vazquezes; nonetheless, he undertook to solve the
problem in behalf of Cathay. But nothing happened until Cathay received a copy of the
complaint in this case. For her part, Ms. Chiu denied that she shouted or used foul or impolite
language against the Vazquezes. Ms. Barrientos testified on the amount of attorney’s fees and
other litigation expenses, such as those for the taking of the depositions of Yuen and Chiu.
In its decision1 of 19 October 1998, the trial court found for the Vazquezes and decreed as
follows:
WHEREFORE, finding preponderance of evidence to sustain the instant complaint, judgment is
hereby rendered in favor of plaintiffs Vazquez spouses and against defendant Cathay Pacific
Airways, Ltd., ordering the latter to pay each plaintiff the following:
a) Nominal damages in the amount of P100,000.00 for each plaintiff;
b) Moral damages in the amount of P2,000,000.00 for each plaintiff;
c) Exemplary damages in the amount of P5,000,000.00 for each plaintiff;
d) Attorney’s fees and expenses of litigation in the amount of P1,000,000.00 for each plaintiff;
and
e) Costs of suit.
SO ORDERED.
According to the trial court, Cathay offers various classes of seats from which passengers are
allowed to choose regardless of their reasons or motives, whether it be due to budgetary
constraints or whim. The choice imposes a clear obligation on Cathay to transport the
passengers in the class chosen by them. The carrier cannot, without exposing itself to liability,
force a passenger to involuntarily change his choice. The upgrading of the Vazquezes’
accommodation over and above their vehement objections was due to the overbooking of
the Business Class. It was a pretext to pack as many passengers as possible into the plane to
maximize Cathay’s revenues. Cathay’s actuations in this case displayed deceit, gross
negligence, and bad faith, which entitled the Vazquezes to awards for damages.
On appeal by the petitioners, the Court of Appeals, in its decision of 24 July 2001,2 deleted
the award for exemplary damages; and it reduced the awards for moral and nominal damages
for each of the Vazquezes to P250,000 and P50,000, respectively, and the attorney’s fees and
litigation expenses to P50,000 for both of them.
The Court of Appeals ratiocinated that by upgrading the Vazquezes to First Class, Cathay
novated the contract of carriage without the former’s consent. There was a breach of
contract not because Cathay overbooked the Business Class Section of Flight CX-905 but
because the latter pushed through with the upgrading despite the objections of the
Vazquezes.
However, the Court of Appeals was not convinced that Ms. Chiu shouted at, or meant to be
discourteous to, Dr. Vazquez, although it might seemed that way to the latter, who was a
member of the elite in Philippine society and was not therefore used to being harangued by
anybody. Ms. Chiu was a Hong Kong Chinese whose fractured Chinese was difficult to
understand and whose manner of speaking might sound harsh or shrill to Filipinos because of
cultural differences. But the Court of Appeals did not find her to have acted with deliberate
malice, deceit, gross negligence, or bad faith. If at all, she was negligent in not offering the
First Class accommodations to other passengers. Neither can the flight stewardess in the First
Class Cabin be said to have been in bad faith when she failed to assist Dr. Vazquez in lifting his
baggage into the overhead storage bin. There is no proof that he asked for help and was
refused even after saying that he was suffering from "bilateral carpal tunnel syndrome."
Anent the delay of Yuen in responding to the demand letter of the Vazquezes, the Court of
Appeals found it to have been sufficiently explained.
The Vazquezes and Cathay separately filed motions for a reconsideration of the decision, both
of which were denied by the Court of Appeals.
Cathay seasonably filed with us this petition in this case. Cathay maintains that the award for
moral damages has no basis, since the Court of Appeals found that there was no "wanton,
fraudulent, reckless and oppressive" display of manners on the part of its personnel; and that
the breach of contract was not attended by fraud, malice, or bad faith. If any damage had
been suffered by the Vazquezes, it was damnum absque injuria, which is damage without
injury, damage or injury inflicted without injustice, loss or damage without violation of a legal
right, or a wrong done to a man for which the law provides no remedy. Cathay also invokes
our decision in United Airlines, Inc. v. Court of Appeals3 where we recognized that, in
accordance with the Civil Aeronautics Board’s Economic Regulation No. 7, as amended, an
overbooking that does not exceed ten percent cannot be considered deliberate and done in
bad faith. We thus deleted in that case the awards for moral and exemplary damages, as well
as attorney’s fees, for lack of proof of overbooking exceeding ten percent or of bad faith on
the part of the airline carrier.
On the other hand, the Vazquezes assert that the Court of Appeals was correct in granting
awards for moral and nominal damages and attorney’s fees in view of the breach of contract
committed by Cathay for transferring them from the Business Class to First Class Section
without prior notice or consent and over their vigorous objection. They likewise argue that
the issuance of passenger tickets more than the seating capacity of each section of the plane
is in itself fraudulent, malicious and tainted with bad faith.
The key issues for our consideration are whether (1) by upgrading the seat accommodation of
the Vazquezes from Business Class to First Class Cathay breached its contract of carriage with
the Vazquezes; (2) the upgrading was tainted with fraud or bad faith; and (3) the Vazquezes
are entitled to damages.
We resolve the first issue in the affirmative.
A contract is a meeting of minds between two persons whereby one agrees to give something
or render some service to another for a consideration. There is no contract unless the
following requisites concur: (1) consent of the contracting parties; (2) an object certain which
is the subject of the contract; and (3) the cause of the obligation which is established.4
Undoubtedly, a contract of carriage existed between Cathay and the Vazquezes. They
voluntarily and freely gave their consent to an agreement whose object was the
transportation of the Vazquezes from Manila to Hong Kong and back to Manila, with seats in
the Business Class Section of the aircraft, and whose cause or consideration was the fare paid
by the Vazquezes to Cathay.
The only problem is the legal effect of the upgrading of the seat accommodation of the
Vazquezes. Did it constitute a breach of contract?
Breach of contract is defined as the "failure without legal reason to comply with the terms of
a contract."5 It is also defined as the "[f]ailure, without legal excuse, to perform any promise
which forms the whole or part of the contract."6
In previous cases, the breach of contract of carriage consisted in either the bumping off of a
passenger with confirmed reservation or the downgrading of a passenger’s seat
accommodation from one class to a lower class. In this case, what happened was the reverse.
The contract between the parties was for Cathay to transport the Vazquezes to Manila on a
Business Class accommodation in Flight CX-905. After checking-in their luggage at the Kai Tak
Airport in Hong Kong, the Vazquezes were given boarding cards indicating their seat
assignments in the Business Class Section. However, during the boarding time, when the
Vazquezes presented their boarding passes, they were informed that they had a seat change
from Business Class to First Class. It turned out that the Business Class was overbooked in that
there were more passengers than the number of seats. Thus, the seat assignments of the
Vazquezes were given to waitlisted passengers, and the Vazquezes, being members of the
Marco Polo Club, were upgraded from Business Class to First Class.
We note that in all their pleadings, the Vazquezes never denied that they were members of
Cathay’s Marco Polo Club. They knew that as members of the Club, they had priority for
upgrading of their seat accommodation at no extra cost when an opportunity arises. But, just
like other privileges, such priority could be waived. The Vazquezes should have been
consulted first whether they wanted to avail themselves of the privilege or would consent to
a change of seat accommodation before their seat assignments were given to other
passengers. Normally, one would appreciate and accept an upgrading, for it would mean a
better accommodation. But, whatever their reason was and however odd it might be, the
Vazquezes had every right to decline the upgrade and insist on the Business Class
accommodation they had booked for and which was designated in their boarding passes.
They clearly waived their priority or preference when they asked that other passengers be
given the upgrade. It should not have been imposed on them over their vehement objection.
By insisting on the upgrade, Cathay breached its contract of carriage with the Vazquezes.
We are not, however, convinced that the upgrading or the breach of contract was attended
by fraud or bad faith. Thus, we resolve the second issue in the negative.
Bad faith and fraud are allegations of fact that demand clear and convincing proof. They are
serious accusations that can be so conveniently and casually invoked, and that is why they are
never presumed. They amount to mere slogans or mudslinging unless convincingly
substantiated by whoever is alleging them.
Fraud has been defined to include an inducement through insidious machination. Insidious
machination refers to a deceitful scheme or plot with an evil or devious purpose. Deceit exists
where the party, with intent to deceive, conceals or omits to state material facts and, by
reason of such omission or concealment, the other party was induced to give consent that
would not otherwise have been given.7
Bad faith does not simply connote bad judgment or negligence; it imports a dishonest
purpose or some moral obliquity and conscious doing of a wrong, a breach of a known duty
through some motive or interest or ill will that partakes of the nature of fraud.8
We find no persuasive proof of fraud or bad faith in this case. The Vazquezes were not
induced to agree to the upgrading through insidious words or deceitful machination or
through willful concealment of material facts. Upon boarding, Ms. Chiu told the Vazquezes
that their accommodations were upgraded to First Class in view of their being Gold Card
members of Cathay’s Marco Polo Club. She was honest in telling them that their seats were
already given to other passengers and the Business Class Section was fully booked. Ms. Chiu
might have failed to consider the remedy of offering the First Class seats to other passengers.
But, we find no bad faith in her failure to do so, even if that amounted to an exercise of poor
judgment.
Neither was the transfer of the Vazquezes effected for some evil or devious purpose. As
testified to by Mr. Robson, the First Class Section is better than the Business Class Section in
terms of comfort, quality of food, and service from the cabin crew; thus, the difference in fare
between the First Class and Business Class at that time was $250.9 Needless to state, an
upgrading is for the better condition and, definitely, for the benefit of the passenger.
We are not persuaded by the Vazquezes’ argument that the overbooking of the Business Class
Section constituted bad faith on the part of Cathay. Section 3 of the Economic Regulation No.
7 of the Civil Aeronautics Board, as amended, provides:
Sec 3. Scope. – This regulation shall apply to every Philippine and foreign air carrier with
respect to its operation of flights or portions of flights originating from or terminating at, or
serving a point within the territory of the Republic of the Philippines insofar as it denies
boarding to a passenger on a flight, or portion of a flight inside or outside the Philippines, for
which he holds confirmed reserved space. Furthermore, this Regulation is designed to cover
only honest mistakes on the part of the carriers and excludes deliberate and willful acts of
non-accommodation. Provided, however, that overbooking not exceeding 10% of the seating
capacity of the aircraft shall not be considered as a deliberate and willful act of non-
accommodation.
It is clear from this section that an overbooking that does not exceed ten percent is not
considered deliberate and therefore does not amount to bad faith.10 Here, while there was
admittedly an overbooking of the Business Class, there was no evidence of overbooking of the
plane beyond ten percent, and no passenger was ever bumped off or was refused to board
the aircraft.
Now we come to the third issue on damages.
The Court of Appeals awarded each of the Vazquezes moral damages in the amount of
P250,000. Article 2220 of the Civil Code provides:
Article 2220. Willful injury to property may be a legal ground for awarding moral damages if
the court should find that, under the circumstances, such damages are justly due. The same
rule applies to breaches of contract where the defendant acted fraudulently or in bad faith.
Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation, and similar injury. Although
incapable of pecuniary computation, moral damages may be recovered if they are the
proximate result of the defendant’s wrongful act or omission.11 Thus, case law establishes
the following requisites for the award of moral damages: (1) there must be an injury clearly
sustained by the claimant, whether physical, mental or psychological; (2) there must be a
culpable act or omission factually established; (3) the wrongful act or omission of the
defendant is the proximate cause of the injury sustained by the claimant; and (4) the award
for damages is predicated on any of the cases stated in Article 2219 of the Civil Code.12
Moral damages predicated upon a breach of contract of carriage may only be recoverable in
instances where the carrier is guilty of fraud or bad faith or where the mishap resulted in the
death of a passenger.13 Where in breaching the contract of carriage the airline is not shown
to have acted fraudulently or in bad faith, liability for damages is limited to the natural and
probable consequences of the breach of the obligation which the parties had foreseen or
could have reasonably foreseen. In such a case the liability does not include moral and
exemplary damages.14
In this case, we have ruled that the breach of contract of carriage, which consisted in the
involuntary upgrading of the Vazquezes’ seat accommodation, was not attended by fraud or
bad faith. The Court of Appeals’ award of moral damages has, therefore, no leg to stand on.
The deletion of the award for exemplary damages by the Court of Appeals is correct. It is a
requisite in the grant of exemplary damages that the act of the offender must be
accompanied by bad faith or done in wanton, fraudulent or malevolent manner.15 Such
requisite is absent in this case. Moreover, to be entitled thereto the claimant must first
establish his right to moral, temperate, or compensatory damages.16 Since the Vazquezes are
not entitled to any of these damages, the award for exemplary damages has no legal basis.
And where the awards for moral and exemplary damages are eliminated, so must the award
for attorney’s fees.17
The most that can be adjudged in favor of the Vazquezes for Cathay’s breach of contract is an
award for nominal damages under Article 2221 of the Civil Code, which reads as follows:
Article 2221 of the Civil Code provides:
Article 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has
been violated or invaded by the defendant, may be vindicated or recognized, and not for the
purpose of indemnifying the plaintiff for any loss suffered by him.
Worth noting is the fact that in Cathay’s Memorandum filed with this Court, it prayed only for
the deletion of the award for moral damages. It deferred to the Court of Appeals’ discretion in
awarding nominal damages; thus:
As far as the award of nominal damages is concerned, petitioner respectfully defers to the
Honorable Court of Appeals’ discretion. Aware as it is that somehow, due to the resistance of
respondents-spouses to the normally-appreciated gesture of petitioner to upgrade their
accommodations, petitioner may have disturbed the respondents-spouses’ wish to be with
their companions (who traveled to Hong Kong with them) at the Business Class on their flight
to Manila. Petitioner regrets that in its desire to provide the respondents-spouses with
additional amenities for the one and one-half (1 1/2) hour flight to Manila, unintended
tension ensued.18
Nonetheless, considering that the breach was intended to give more benefit and advantage to
the Vazquezes by upgrading their Business Class accommodation to First Class because of
their valued status as Marco Polo members, we reduce the award for nominal damages to
P5,000.
Before writing finis to this decision, we find it well-worth to quote the apt observation of the
Court of Appeals regarding the awards adjudged by the trial court:
We are not amused but alarmed at the lower court’s unbelievable alacrity, bordering on the
scandalous, to award excessive amounts as damages. In their complaint, appellees asked for
P1 million as moral damages but the lower court awarded P4 million; they asked for
P500,000.00 as exemplary damages but the lower court cavalierly awarded a whooping P10
million; they asked for P250,000.00 as attorney’s fees but were awarded P2 million; they did
not ask for nominal damages but were awarded P200,000.00. It is as if the lower court went
on a rampage, and why it acted that way is beyond all tests of reason. In fact the
excessiveness of the total award invites the suspicion that it was the result of "prejudice or
corruption on the part of the trial court."
The presiding judge of the lower court is enjoined to hearken to the Supreme Court’s
admonition in Singson vs. CA (282 SCRA 149 [1997]), where it said:
The well-entrenched principle is that the grant of moral damages depends upon the
discretion of the court based on the circumstances of each case. This discretion is limited by
the principle that the amount awarded should not be palpably and scandalously excessive as
to indicate that it was the result of prejudice or corruption on the part of the trial court….
and in Alitalia Airways vs. CA (187 SCRA 763 [1990], where it was held:
Nonetheless, we agree with the injunction expressed by the Court of Appeals that passengers
must not prey on international airlines for damage awards, like "trophies in a safari." After all
neither the social standing nor prestige of the passenger should determine the extent to
which he would suffer because of a wrong done, since the dignity affronted in the individual is
a quality inherent in him and not conferred by these social indicators. 19
We adopt as our own this observation of the Court of Appeals.
WHEREFORE, the instant petition is hereby partly GRANTED. The Decision of the Court of
Appeals of 24 July 2001 in CA-G.R. CV No. 63339 is hereby MODIFIED, and as modified, the
awards for moral damages and attorney’s fees are set aside and deleted, and the award for
nominal damages is reduced to P5,000.
No pronouncement on costs.
SO ORDERED.
G.R. No. 171545 December 19, 2007
EQUITABLE PCI BANK,* AIMEE YU and BEJAN LIONEL APAS, Petitioners,
vs.
NG SHEUNG NGOR** doing business under the name and style "KEN MARKETING," KEN
APPLIANCE DIVISION, INC. and BENJAMIN E. GO, Respondents.
DECISION
CORONA, J.:
This petition for review on certiorari1 seeks to set aside the decision2 of the Court of Appeals
(CA) in CA-G.R. SP No. 83112 and its resolution3 denying reconsideration.
On October 7, 2001, respondents Ng Sheung Ngor,4 Ken Appliance Division, Inc. and Benjamin
E. Go filed an action for annulment and/or reformation of documents and contracts5 against
petitioner Equitable PCI Bank (Equitable) and its employees, Aimee Yu and Bejan Lionel Apas,
in the Regional Trial Court (RTC), Branch 16 of Cebu City.6 They claimed that Equitable
induced them to avail of its peso and dollar credit facilities by offering low interest rates7 so
they accepted Equitable's proposal and signed the bank's pre-printed promissory notes on
various dates beginning 1996. They, however, were unaware that the documents contained
identical escalation clauses granting Equitable authority to increase interest rates without
their consent.8
Equitable, in its answer, asserted that respondents knowingly accepted all the terms and
conditions contained in the promissory notes.9 In fact, they continuously availed of and
benefited from Equitable's credit facilities for five years.10
After trial, the RTC upheld the validity of the promissory notes. It found that, in 2001 alone,
Equitable restructured respondents' loans amounting to US$228,200 and ₱1,000,000.11 The
trial court, however, invalidated the escalation clause contained therein because it violated
the principle of mutuality of contracts.12 Nevertheless, it took judicial notice of the steep
depreciation of the peso during the intervening period13 and declared the existence of
extraordinary deflation.14 Consequently, the RTC ordered the use of the 1996 dollar
exchange rate in computing respondents' dollar-denominated loans.15 Lastly, because the
business reputation of respondents was (allegedly) severely damaged when Equitable froze
their accounts,16 the trial court awarded moral and exemplary damages to them.17
The dispositive portion of the February 5, 2004 RTC decision18 provided:
WHEREFORE, premises considered, judgment is hereby rendered:
A) Ordering [Equitable] to reinstate and return the amount of [respondents'] deposit placed
on hold status;
B) Ordering [Equitable] to pay [respondents] the sum of ₱12 [m]illion [p]esos as moral
damages;
C) Ordering [Equitable] to pay [respondents] the sum of ₱10 [m]illion [p]esos as exemplary
damages;
D) Ordering defendants Aimee Yu and Bejan [Lionel] Apas to pay [respondents], jointly and
severally, the sum of [t]wo [m]illion [p]esos as moral and exemplary damages;
E) Ordering [Equitable, Aimee Yu and Bejan Lionel Apas], jointly and severally, to pay
[respondents'] attorney's fees in the sum of ₱300,000; litigation expenses in the sum of
₱50,000 and the cost of suit;
F) Directing plaintiffs Ng Sheung Ngor and Ken Marketing to pay [Equitable] the unpaid
principal obligation for the peso loan as well as the unpaid obligation for the dollar
denominated loan;
G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to pay [Equitable] interest as
follows:
1) 12% per annum for the peso loans;
2) 8% per annum for the dollar loans. The basis for the payment of the dollar obligation is the
conversion rate of P26.50 per dollar availed of at the time of incurring of the obligation in
accordance with Article 1250 of the Civil Code of the Philippines;
H) Dismissing [Equitable's] counterclaim except the payment of the aforestated unpaid
principal loan obligations and interest.
SO ORDERED.19
Equitable and respondents filed their respective notices of appeal.20
In the March 1, 2004 order of the RTC, both notices were denied due course because
Equitable and respondents "failed to submit proof that they paid their respective appeal
fees."21
WHEREFORE, premises considered, the appeal interposed by defendants from the Decision in
the above-entitled case is DENIED due course. As of February 27, 2004, the Decision dated
February 5, 2004, is considered final and executory in so far as [Equitable, Aimee Yu and Bejan
Lionel Apas] are concerned.22 (emphasis supplied)
Equitable moved for the reconsideration of the March 1, 2004 order of the RTC23 on the
ground that it did in fact pay the appeal fees. Respondents, on the other hand, prayed for the
issuance of a writ of execution.24
On March 24, 2004, the RTC issued an omnibus order denying Equitable's motion for
reconsideration for lack of merit25 and ordered the issuance of a writ of execution in favor of
respondents.26 According to the RTC, because respondents did not move for the
reconsideration of the previous order (denying due course to the parties’ notices of
appeal),27 the February 5, 2004 decision became final and executory as to both parties and a
writ of execution against Equitable was in order.28
A writ of execution was thereafter issued29 and three real properties of Equitable were levied
upon.30
On March 26, 2004, Equitable filed a petition for relief in the RTC from the March 1, 2004
order.31 It, however, withdrew that petition on March 30, 200432 and instead filed a petition
for certiorari with an application for an injunction in the CA to enjoin the implementation and
execution of the March 24, 2004 omnibus order.33
On June 16, 2004, the CA granted Equitable's application for injunction. A writ of preliminary
injunction was correspondingly issued.34
Notwithstanding the writ of injunction, the properties of Equitable previously levied upon
were sold in a public auction on July 1, 2004. Respondents were the highest bidders and
certificates of sale were issued to them.35
On August 10, 2004, Equitable moved to annul the July 1, 2004 auction sale and to cite the
sheriffs who conducted the sale in contempt for proceeding with the auction despite the
injunction order of the CA.36
On October 28, 2005, the CA dismissed the petition for certiorari.37 It found Equitable guilty
of forum shopping because the bank filed its petition for certiorari in the CA several hours
before withdrawing its petition for relief in the RTC.38 Moreover, Equitable failed to disclose,
both in the statement of material dates and certificate of non-forum shopping (attached to its
petition for certiorari in the CA), that it had a pending petition for relief in the RTC.39
Equitable moved for reconsideration40 but it was denied.41 Thus, this petition.
Equitable asserts that it was not guilty of forum shopping because the petition for relief was
withdrawn on the same day the petition for certiorari was filed.42 It likewise avers that its
petition for certiorari was meritorious because the RTC committed grave abuse of discretion
in issuing the March 24, 2004 omnibus order which was based on an erroneous assumption.
The March 1, 2004 order denying its notice of appeal for non payment of appeal fees was
erroneous because it had in fact paid the required fees.43 Thus, the RTC, by issuing its March
24, 2004 omnibus order, effectively prevented Equitable from appealing the patently wrong
February 5, 2004 decision.44
This petition is meritorious.
Equitable Was Not Guilty Of Forum shopping
Forum shopping exists when two or more actions involving the same transactions, essential
facts and circumstances are filed and those actions raise identical issues, subject matter and
causes of action.45 The test is whether, in two or more pending cases, there is identity of
parties, rights or causes of actions and reliefs.46
Equitable's petition for relief in the RTC and its petition for certiorari in the CA did not have
identical causes of action. The petition for relief from the denial of its notice of appeal was
based on the RTC’s judgment or final order preventing it from taking an appeal by "fraud,
accident, mistake or excusable negligence."47 On the other hand, its petition for certiorari in
the CA, a special civil action, sought to correct the grave abuse of discretion amounting to lack
of jurisdiction committed by the RTC.48
In a petition for relief, the judgment or final order is rendered by a court with competent
jurisdiction. In a petition for certiorari, the order is rendered by a court without or in excess of
its jurisdiction.
Moreover, Equitable substantially complied with the rule on non-forum shopping when it
moved to withdraw its petition for relief in the RTC on the same day (in fact just four hours
and forty minutes after) it filed the petition for certiorari in the CA. Even if Equitable failed to
disclose that it had a pending petition for relief in the RTC, it rectified what was doubtlessly a
careless oversight by withdrawing the petition for relief just a few hours after it filed its
petition for certiorari in the CA ― a clear indication that it had no intention of maintaining the
two actions at the same time.
The Trial Court Committed Grave Abuse of Discretion In Issuing Its March 1, 2004 and March
24, 2004 Orders
Section 1, Rule 65 of the Rules of Court provides:
Section 1. Petition for Certiorari. When any tribunal, board or officer exercising judicial or
quasi-judicial function has acted without or in excess of its or his jurisdiction, or with grave
abuse of discretion amounting to lack or excess of jurisdiction, and there is no appeal, nor any
plain, speedy or adequate remedy in the ordinary course of law, a person aggrieved thereby
may file a verified petition in the proper court, alleging the facts with certainty and praying
that judgment be rendered annulling or modifying the proceedings of such tribunal, board or
officer, and granting such incidental reliefs as law and justice may require.
The petition shall be accompanied by a certified true copy of the judgment, order or
resolution subject thereof, copies of all pleadings and documents relevant and pertinent
thereto, and a sworn certificate of non-forum shopping as provided in the third paragraph of
Section 3, Rule 46.
There are two substantial requirements in a petition for certiorari. These are:
1. that the tribunal, board or officer exercising judicial or quasi-judicial functions acted
without or in excess of his or its jurisdiction or with grave abuse of discretion amounting to
lack or excess of jurisdiction; and
2. that there is no appeal or any plain, speedy and adequate remedy in the ordinary course of
law.
For a petition for certiorari premised on grave abuse of discretion to prosper, petitioner must
show that the public respondent patently and grossly abused his discretion and that abuse
amounted to an evasion of positive duty or a virtual refusal to perform a duty enjoined by law
or to act at all in contemplation of law, as where the power was exercised in an arbitrary and
despotic manner by reason of passion or hostility.49
The March 1, 2004 order denied due course to the notices of appeal of both Equitable and
respondents. However, it declared that the February 5, 2004 decision was final and executory
only with respect to Equitable.50 As expected, the March 24, 2004 omnibus order denied
Equitable's motion for reconsideration and granted respondents' motion for the issuance of a
writ of execution.51
The March 1, 2004 and March 24, 2004 orders of the RTC were obviously intended to prevent
Equitable, et al. from appealing the February 5, 2004 decision. Not only that. The execution of
the decision was undertaken with indecent haste, effectively obviating or defeating
Equitable's right to avail of possible legal remedies. No matter how we look at it, the RTC
committed grave abuse of discretion in rendering those orders.
With regard to whether Equitable had a plain, speedy and adequate remedy in the ordinary
course of law, we hold that there was none. The RTC denied due course to its notice of appeal
in the March 1, 2004 order. It affirmed that denial in the March 24, 2004 omnibus order.
Hence, there was no way Equitable could have possibly appealed the February 5, 2004
decision.52
Although Equitable filed a petition for relief from the March 24, 2004 order, that petition was
not a plain, speedy and adequate remedy in the ordinary course of law.53 A petition for relief
under Rule 38 is an equitable remedy allowed only in exceptional circumstances or where
there is no other available or adequate remedy.54
Thus, we grant Equitable's petition for certiorari and consequently give due course to its
appeal.
Equitable Raised Pure Questions of Law in Its Petition For Review
The jurisdiction of this Court in Rule 45 petitions is limited to questions of law.55 There is a
question of law "when the doubt or controversy concerns the correct application of law or
jurisprudence to a certain set of facts; or when the issue does not call for the probative value
of the evidence presented, the truth or falsehood of facts being admitted."56
Equitable does not assail the factual findings of the trial court. Its arguments essentially focus
on the nullity of the RTC’s February 5, 2004 decision. Equitable points out that that decision
was patently erroneous, specially the exorbitant award of damages, as it was inconsistent
with existing law and jurisprudence.57
The Promissory Notes Were Valid
The RTC upheld the validity of the promissory notes despite respondents’ assertion that those
documents were contracts of adhesion.
A contract of adhesion is a contract whereby almost all of its provisions are drafted by one
party.58 The participation of the other party is limited to affixing his signature or his
"adhesion" to the contract.59 For this reason, contracts of adhesion are strictly construed
against the party who drafted it.60
It is erroneous, however, to conclude that contracts of adhesion are invalid per se. They are,
on the contrary, as binding as ordinary contracts. A party is in reality free to accept or reject
it. A contract of adhesion becomes void only when the dominant party takes advantage of the
weakness of the other party, completely depriving the latter of the opportunity to bargain on
equal footing.61
That was not the case here. As the trial court noted, if the terms and conditions offered by
Equitable had been truly prejudicial to respondents, they would have walked out and
negotiated with another bank at the first available instance. But they did not. Instead, they
continuously availed of Equitable's credit facilities for five long years.
While the RTC categorically found that respondents had outstanding dollar- and peso-
denominated loans with Equitable, it, however, failed to ascertain the total amount due
(principal, interest and penalties, if any) as of July 9, 2001. The trial court did not explain how
it arrived at the amounts of US$228,200 and ₱1,000,000.62 In Metro Manila Transit
Corporation v. D.M. Consunji,63 we reiterated that this Court is not a trier of facts and it shall
pass upon them only for compelling reasons which unfortunately are not present in this
case.64 Hence, we ordered the partial remand of the case for the sole purpose of determining
the amount of actual damages.65

Escalation Clause Violated The Principle Of Mutuality Of Contracts
Escalation clauses are not void per se. However, one "which grants the creditor an unbridled
right to adjust the interest independently and upwardly, completely depriving the debtor of
the right to assent to an important modification in the agreement" is void. Clauses of that
nature violate the principle of mutuality of contracts.66 Article 130867 of the Civil Code holds
that a contract must bind both contracting parties; its validity or compliance cannot be left to
the will of one of them.68
For this reason, we have consistently held that a valid escalation clause provides:
1. that the rate of interest will only be increased if the applicable maximum rate of interest is
increased by law or by the Monetary Board; and
2. that the stipulated rate of interest will be reduced if the applicable maximum rate of
interest is reduced by law or by the Monetary Board (de-escalation clause).69
The RTC found that Equitable's promissory notes uniformly stated:
If subject promissory note is extended, the interest for subsequent extensions shall be at such
rate as shall be determined by the bank.70
Equitable dictated the interest rates if the term (or period for repayment) of the loan was
extended. Respondents had no choice but to accept them. This was a violation of Article 1308
of the Civil Code. Furthermore, the assailed escalation clause did not contain the necessary
provisions for validity, that is, it neither provided that the rate of interest would be increased
only if allowed by law or the Monetary Board, nor allowed de-escalation. For these reasons,
the escalation clause was void.
With regard to the proper rate of interest, in New Sampaguita Builders v. Philippine National
Bank71 we held that, because the escalation clause was annulled, the principal amount of the
loan was subject to the original or stipulated rate of interest. Upon maturity, the amount due
was subject to legal interest at the rate of 12% per annum.72
Consequently, respondents should pay Equitable the interest rates of 12.66% p.a. for their
dollar-denominated loans and 20% p.a. for their peso-denominated loans from January 10,
2001 to July 9, 2001. Thereafter, Equitable was entitled to legal interest of 12% p.a. on all
amounts due.
There Was No Extraordinary Deflation
Extraordinary inflation exists when there is an unusual decrease in the purchasing power of
currency (that is, beyond the common fluctuation in the value of currency) and such decrease
could not be reasonably foreseen or was manifestly beyond the contemplation of the parties
at the time of the obligation. Extraordinary deflation, on the other hand, involves an inverse
situation.73
Article 1250 of the Civil Code provides:
Article 1250. In case an extraordinary inflation or deflation of the currency stipulated should
intervene, the value of the currency at the time of the establishment of the obligation shall be
the basis of payment, unless there is an agreement to the contrary.
For extraordinary inflation (or deflation) to affect an obligation, the following requisites must
be proven:
1. that there was an official declaration of extraordinary inflation or deflation from the
Bangko Sentral ng Pilipinas (BSP);74
2. that the obligation was contractual in nature;75 and
3. that the parties expressly agreed to consider the effects of the extraordinary inflation or
deflation.76
Despite the devaluation of the peso, the BSP never declared a situation of extraordinary
inflation. Moreover, although the obligation in this instance arose out of a contract, the
parties did not agree to recognize the effects of extraordinary inflation (or deflation).77 The
RTC never mentioned that there was a such stipulation either in the promissory note or loan
agreement. Therefore, respondents should pay their dollar-denominated loans at the
exchange rate fixed by the BSP on the date of maturity.78
The Award Of Moral And Exemplary Damages Lacked Basis
Moral damages are in the category of an award designed to compensate the claimant for
actual injury suffered, not to impose a penalty to the wrongdoer.79 To be entitled to moral
damages, a claimant must prove:
1. That he or she suffered besmirched reputation, or physical, mental or psychological
suffering sustained by the claimant;
2. That the defendant committed a wrongful act or omission;
3. That the wrongful act or omission was the proximate cause of the damages the claimant
sustained;
4. The case is predicated on any of the instances expressed or envisioned by Article 221980
and 222081 . 82
In culpa contractual or breach of contract, moral damages are recoverable only if the
defendant acted fraudulently or in bad faith or in wanton disregard of his contractual
obligations.83 The breach must be wanton, reckless, malicious or in bad faith, and oppressive
or abusive.84
The RTC found that respondents did not pay Equitable the interest due on February 9, 2001
(or any month thereafter prior to the maturity of the loan)85 or the amount due (principal
plus interest) due on July 9, 2001.86 Consequently, Equitable applied respondents' deposits to
their loans upon maturity.
The relationship between a bank and its depositor is that of creditor and debtor.87 For this
reason, a bank has the right to set-off the deposits in its hands for the payment of a
depositor's indebtedness.88
1. ordering respondents Ng Sheung Ngor, doing business under the name and style of "Ken
Marketing," Ken Appliance Division, Inc. and Benjamin E. Go to pay petitioner Equitable PCI
Bank the principal amount of their dollar- and peso-denominated loans;
2. ordering respondents Ng Sheung Ngor, doing business under the name and style of "Ken
Marketing," Ken Appliance Division, Inc. and Benjamin E. Go to pay petitioner Equitable PCI
Bank interest at:
a) 12.66% p.a. with respect to their dollar-denominated loans from January 10, 2001 to July
9, 2001;
b) 20% p.a. with respect to their peso-denominated loans from January 10, 2001 to July 9,
2001;91

Respondents indeed defaulted on their obligation. For this reason, Equitable had the option
to exercise its legal right to set-off or compensation. However, the RTC mistakenly (or, as it
now appears, deliberately) concluded that Equitable acted "fraudulently or in bad faith or in
wanton disregard" of its contractual obligations despite the absence of proof. The undeniable
fact was that, whatever damage respondents sustained was purely the consequence of their
failure to pay their loans. There was therefore absolutely no basis for the award of moral
damages to them.
Neither was there reason to award exemplary damages. Since respondents were not entitled
to moral damages, neither should they be awarded exemplary damages.89 And if
respondents were not entitled to moral and exemplary damages, neither could they be
awarded attorney's fees and litigation expenses.90
ACCORDINGLY, the petition is hereby GRANTED.
The October 28, 2005 decision and February 3, 2006 resolution of the Court of Appeals in
CA-G.R. SP No. 83112 are hereby REVERSED and SET ASIDE.
c) pursuant to our ruling in Eastern Shipping Lines v. Court of Appeals,92 the total amount
due on July 9, 2001 shall earn legal interest at 12% p.a. from the time petitioner Equitable
PCI Bank demanded payment, whether judicially or extra-judicially; and
d) after this Decision becomes final and executory, the applicable rate shall be 12% p.a.
until full satisfaction;
3. all other claims and counterclaims are dismissed.
As a starting point, the Regional Trial Court, Branch 16 of Cebu City shall compute the exact
amounts due on the respective dollar-denominated and peso-denominated loans, as of July
9, 2001, of respondents Ng Sheung Ngor, doing business under the name and style of "Ken
Marketing," Ken Appliance Division and Benjamin E. Go.
SO ORDERED.

The March 24, 2004 omnibus order of the Regional Trial Court, Branch 16, Cebu City in Civil
Case No. CEB-26983 is hereby ANNULLED for being rendered with grave abuse of discretion
amounting to lack or excess of jurisdiction. All proceedings undertaken pursuant thereto
are likewise declared null and void.

The March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu City in Civil Case No.
CEB-26983 is hereby SET ASIDE. The appeal of petitioners Equitable PCI Bank, Aimee Yu and
Bejan Lionel Apas is therefore given due course.1avvphi1

The February 5, 2004 decision of the Regional Trial Court, Branch 16 of Cebu City in Civil
Case No. CEB-26983 is accordingly SET ASIDE. New judgment is hereby entered:
G.R. No. L-10134 June 29, 1957
SABINA EXCONDE, plaintiff-appellant,
vs.
DELFIN CAPUNO and DANTE CAPUNO, defendants-appellees.
Magno T. Bueser for appellant.
Alver Law Offices and Edon B. Brion and Vencedor A. Alimario for appellees.
BAUTISTA ANGELO, J.:
Dante Capuno, son of Delfin Capuno, was accused of double homicide through reckless
imprudence for the death of Isidoro Caperina and Amado Ticzon on March 31, 1949 in the
Court of First Instance of Laguna (Criminal Case No. 15001). During the trial, Sabina Exconde,
as mother of the deceased Isidoro Caperina, reserved her right to bring a separate civil action
for damages against the accused. After trial, Dante Capuno was found guilty of the crime
charged and, on appeal, the Court Appeals affirmed the decision. Dante Capuno was only (15)
years old when he committed the crime.
In line with her reservation, Sabina Exconde filed the present action against Delfin Capuno
and his son Dante Capuno asking for damages in the aggregate amount of P2,959.00 for the
death of her son Isidoro Caperiña. Defendants set up the defense that if any one should be
held liable for the death of Isidoro Caperina, he is Dante Capuno and not his father Delfin
because at the time of the accident, the former was not under the control, supervision and
custody, of the latter. This defense was sustained by the lower court and, as a consequence it
only convicted Dante Capuno to pay the damages claimed in the complaint. From decision,
plaintiff appealed to the Court of Appeals but the case was certified to us on the ground that
the appeal only involves questions of law.
It appears that Dante Capuno was a member of the Boy Scouts Organization and a student of
the Bilintawak Elementary School situated in a barrio in the City of San Pablo and on March
31, 1949 he attended a parade in honor of Dr. Jose Rizal in said city upon instruction of the
city school's supervisor. From the school Dante, with other students, boarded a jeep and
when the same started to run, he took hold of the wheel and drove it while the driver sat on
his left side. They have not gone far when the jeep turned turtle and two of its passengers,
Amado Ticzon and Isidore Caperiña, died as a consequence. It further appears that Delfin
Capuno, father of Dante, was not with his son at the time of the accident, nor did he know
that his son was going to attend a parade. He only came to know it when his son told him
after the accident that he attended the parade upon instruction of his teacher.
The only issue involved in this appeal is whether defendant Delfin Capuno can be held civilly
liable, jointly and severally with his son Dante, for damages resulting from the death of Isidoro
Caperiña caused by the negligent act of minor Dante Capuno.
The case comes under Article 1903 of the Spanish Civil Code, paragraph 1 and 5, which
provides:
ART. 1903. The obligation impossed by the next preceding articles is enforceable not only for
personal acts and omissions, but also for those of persons for whom another is responsible.
The father, and, in case of his death or incapacity, the mother, are liable for any damages
caused by the minor children who live with them.
xxx xxx xxx
Finally, teachers or directors of arts and trades are liable for any damages caused by their
pupils or apprentices while they are under their custody.
Plaintiff contends that defendant Delfin Capuno is liable for the damages in question jointly
and severally with his son Dante because at the time the latter committed the negligent act
which resulted in the death of the victim, he was a minor and was then living with his father,
and inasmuch as these facts are not disputed, the civil liability of the father is evident. And so,
plaintiff contends, the lower court erred in relieving the father from liability.
We find merit in this claim. It is true that under the law above quoted, "teachers or directors
of arts and trades are liable for any damages caused by their pupils or apprentices while they
are under their custody", but this provision only applies to an institution of arts and trades
and not to any academic educational institution (Padilla, Civil Law, 1953, Ed., Vol. IV, p. 841;
See 12 Manresa, 4th Ed., p. 557). Here Dante capuno was then a student of the Balintawak
Elementary School and as part of his extra-curricular activity, he attended the parade in honor
of Dr. Jose Rizal upon instruction of the city school's supervisor. And it was in connection with
that parade that Dante boarded a jeep with some companions and while driving it, the
accident occurred. In the circumstances, it is clear that neither the head of that school, nor
the city school's supervisor, could be held liable for the negligent act of Dante because he was
not then a student of an institute of arts and trades as provided by law.
The civil liability which the law impose upon the father, and, in case of his death or incapacity,
the mother, for any damages that may be caused by the minor children who live with them, is
obvious. This is necessary consequence of the parental authority they exercise over them
which imposes upon the parents the "duty of supporting them, keeping them in their
company, educating them and instructing them in proportion to their means", while, on the
other hand, gives them the "right to correct and punish them in moderation" (Articles 154
and 155, Spanish Civil Code). The only way by which they can relieve themselves of this
liability is if they prove that they exercised all the diligence of a good father of a family to
prevent the damage(Article 1903, last paragraph, Spanish Civil Code). This defendants failed
to prove.
WHEREFORE, the decision appealed from is modified in the sense that defendants Delfin
Capuno and Dante Capuno shall pay to plaintiff, jointly and severally, the sum of P2,959.00
as damages, and the costs of action.
G.R. No. 159709 June 27, 2012
HEIRS OF SERVANDO FRANCO, Petitioners,
vs.
SPOUSES VERONICA AND DANILO GONZALES, Respondents.
DECISION
BERSAMIN, J.:
There is novation when there is an irreconcilable incompatibility between the old and the new
obligations. There is no novation in case of only slight modifications; hence, the old obligation
prevails.
The petitioners challenge the decision promulgated on March 19, 2003,1 whereby the Court
of Appeals (CA) upheld the issuance of a writ of execution by the Regional Trial Court (RTC),
Branch 16, in Malolos, Bulacan.
Antecedents
The Court adopts the following summary of the antecedents rendered by the Court in Medel
v. Court of Appeals,2 the case from which this case originated, to wit:
On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia)
obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was engaged in the
money lending business under the name "Gonzales Credit Enterprises", in the amount of
₱50,000.00, payable in two months. Veronica gave only the amount of ₱47,000.00, to the
borrowers, as she retained ₱3,000.00, as advance interest for one month at 6% per month.
Servado and Leticia executed a promissory note for ₱50,000.00, to evidence the loan, payable
on January 7, 1986.
On November 19, 1985, Servando and Leticia obtained from Veronica another loan in the
amount of ₱90,000.00, payable in two months, at 6% interest per month. They executed a
promissory note to evidence the loan, maturing on January 19, 1986. They received only
₱84,000.00, out of the proceeds of the loan.
On maturity of the two promissory notes, the borrowers failed to pay the indebtedness.
On June 11, 1986, Servando and Leticia secured from Veronica still another loan in the
amount of ₱300,000.00, maturing in one month, secured by a real estate mortgage over a
property belonging to Leticia Makalintal Yaptinchay, who issued a special power of attorney in
favor of Leticia Medel, authorizing her to execute the mortgage. Servando and Leticia
executed a promissory note in favor of Veronica to pay the sum of ₱300,000.00, after a
month, or on July 11, 1986. However, only the sum of ₱275,000.00, was given to them out of
the proceeds of the loan.
Like the previous loans, Servando and Medel failed to pay the third loan on maturity.
On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel,
consolidated all their previous unpaid loans totaling ₱440,000.00, and sought from Veronica
another loan in the amount of ₱60,000.00, bringing their indebtedness to a total of
₱500,000.00, payable on August 23, 1986. They executed a promissory note, reading as
follows:
"Baliwag, Bulacan July 23, 1986
"Maturity Date August 23, 1986
"₱500,000.00
"FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of VERONICA R.
GONZALES doing business in the business style of GONZALES CREDIT ENTERPRISES, Filipino, of
legal age, married to Danilo G. Gonzales, Jr., of Baliwag Bulacan, the sum of PESOS ........ FIVE
HUNDRED THOUSAND ..... (P500,000.00) Philippine Currency with interest thereon at the rate
of 5.5 PER CENT per month plus 2% service charge per annum from date hereof until fully
paid according to the amortization schedule contained herein. (Underscoring supplied)
"Payment will be made in full at the maturity date.
"Should I/WE fail to pay any amortization or portion hereof when due, all the other
installments together with all interest accrued shall immediately be due and payable and
I/WE hereby agree to pay an additional amount equivalent to one per cent (1%) per month of
the amount due and demandable as penalty charges in the form of liquidated damages until
fully paid; and the further sum of TWENTY FIVE PER CENT (25%) thereof in full, without
deductions as Attorney's Fee whether actually incurred or not, of the total amount due and
demandable, exclusive of costs and judicial or extra judicial expenses. (Underscoring supplied)
"I, WE further agree that in the event the present rate of interest on loan is increased by law
or the Central Bank of the Philippines, the holder shall have the option to apply and collect
the increased interest charges without notice although the original interest have already been
collected wholly or partially unless the contrary is required by law.
"It is also a special condition of this contract that the parties herein agree that the amount of
peso-obligation under this agreement is based on the present value of peso, and if there be
any change in the value thereof, due to extraordinary inflation or deflation, or any other
cause or reason, then the peso-obligation herein contracted shall be adjusted in accordance
with the value of the peso then prevailing at the time of the complete fulfillment of
obligation.
"Demand and notice of dishonor waived. Holder may accept partial payments and grant
renewals of this note or extension of payments, reserving rights against each and all indorsers
and all parties to this note.
"IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors waive all
his/their rights under the provisions of Section 12, Rule 39, of the Revised Rules of Court."
On maturity of the loan, the borrowers failed to pay the indebtedness of ₱500,000.00, plus
interests and penalties, evidenced by the above-quoted promissory note.
On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G. Gonzales, filed
with the Regional Trial Court of Bulacan, Branch 16, at Malolos, Bulacan, a complaint for
collection of the full amount of the loan including interests and other charges.
In his answer to the complaint filed with the trial court on April 5, 1990, defendant Servando
alleged that he did not obtain any loan from the plaintiffs; that it was defendants Leticia and
Dr. Rafael Medel who borrowed from the plaintiffs the sum of ₱500,000.00, and actually
received the amount and benefited therefrom; that the loan was secured by a real estate
mortgage executed in favor of the plaintiffs, and that he (Servando Franco) signed the
promissory note only as a witness.
In their separate answer filed on April 10,1990, defendants Leticia and Rafael Medel alleged
that the loan was the transaction of Leticia Yaptinchay, who executed a mortgage in favor of
the plaintiffs over a parcel of real estate situated in San Juan, Batangas; that the interest rate
is excessive at 5.5% per month with additional service charge of 2% per annum, and penalty
charge of 1% per month; that the stipulation for attorney's fees of 25% of the amount due is
unconscionable, illegal and excessive, and that substantial payments made were applied to
interest, penalties and other charges.
After due trial, the lower court declared that the due execution and genuineness of the four
promissory notes had been duly proved, and ruled that although the Usury Law had been
repealed, the interest charged by the plaintiffs on the loans was unconscionable and
"revolting to the conscience". Hence, the trial court applied "the provision of the New [Civil]
Code" that the "legal rate of interest for loan or forbearance of money, goods or credit is 12%
per annum."
Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive portion
of which reads as follows:
"WHEREFORE, premises considered, judgment is hereby rendered, as follows:
"1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally, to pay
plaintiffs the amount of ₱47,000.00 plus 12% interest per annum from November 7, 1985 and
1% per month as penalty, until the entire amount is paid in full.
"2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly and
severally the amount of ₱84,000.00 with 12% interest per annum and 1% per cent per month
as penalty from November 19,1985 until the whole amount is fully paid;
"3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount of
₱285,000.00 plus 12% interest per annum and 1% per month as penalty from July 11, 1986,
until the whole amount is fully paid;
"4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount of ₱50,000.00
as attorney's fees;
"5. All counterclaims are hereby dismissed.
"With costs against the defendants."
In due time, both plaintiffs and defendants appealed to the Court of Appeals.
In their appeal, plaintiffs-appellants argued that the promissory note, which consolidated all
the unpaid loans of the defendants, is the law that governs the parties. They further argued
that Circular No. 416 of the Central Bank prescribing the rate of interest for loans or
forbearance of money, goods or credit at 12% per annum, applies only in the absence of a
stipulation on interest rate, but not when the parties agreed thereon.
The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the Usury
Law having become ‘legally inexistent’ with the promulgation by the Central Bank in 1982 of
Circular No. 905, the lender and borrower could agree on any interest that may be charged on
the loan". The Court of Appeals further held that "the imposition of ‘an additional amount
equivalent to 1% per month of the amount due and demandable as penalty charges in the
form of liquidated damages until fully paid’ was allowed by law".
Accordingly, on March 21, 1997, the Court of Appeals promulgated it decision reversing that
of the Regional Trial Court, disposing as follows:
"WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are hereby
ordered to pay the plaintiffs the sum of ₱500,000.00, plus 5.5% per month interest and 2%
service charge per annum effective July 23, 1986, plus 1% per month of the total amount due
and demandable as penalty charges effective August 24, 1986, until the entire amount is fully
paid.
"The award to the plaintiffs of ₱50,000.00 as attorney's fees is affirmed. And so is the
imposition of costs against the defendants.
"SO ORDERED."
On April 15, 1997, defendants-appellants filed a motion for reconsideration of the said
decision. By resolution dated November 25, 1997, the Court of Appeals denied the motion.3
On review, the Court in Medel v. Court of Appeals struck down as void the stipulation on the
interest for being iniquitous or unconscionable, and revived the judgment of the RTC
rendered on December 9, 1991, viz:
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of Appeals
promulgated on March 21, 1997, and its resolution dated November 25, 1997. Instead, we
render judgment REVIVING and AFFIRMING the decision dated December 9, 1991, of the
Regional Trial Court of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No. 134-M-90,
involving the same parties.
No pronouncement as to costs in this instance.
SO ORDERED.4
Upon the finality of the decision in Medel v. Court of Appeals, the respondents moved for
execution.5 Servando Franco opposed,6 claiming that he and the respondents had agreed to
fix the entire obligation at ₱775,000.00.7 According to Servando, their agreement, which was
allegedly embodied in a receipt dated February 5, 1992,8 whereby he made an initial
payment of ₱400,000.00 and promised to pay the balance of ₱375,000.00 on February 29,
1992, superseded the July 23, 1986 promissory note.
The RTC granted the motion for execution over Servando’s opposition, thus:
There is no doubt that the decision dated December 9, 1991 had already been affirmed and
had already become final and executory. Thus, in accordance with Sec. 1 of Rule 39 of the
1997 Rules of Civil Procedure, execution shall issue as a matter of right. It has likewise been
ruled that a judgment which has acquired finality becomes immutable and unalterable and
hence may no longer be modified at any respect except only to correct clerical errors or
mistakes (Korean Airlines Co. Ltd. vs. C.A., 247 SCRA 599). In this respect, the decision
deserves to be respected.
The argument about the modification of the contract or non-participation of defendant
Servando Franco in the proceedings on appeal on the alleged belief that the payment he
made had already absolved him from liability is of no moment. Primarily, the decision was for
him and Leticia Medel to pay the plaintiffs jointly and severally the amounts stated in the
Decision. In other words, the liability of the defendants thereunder is solidary. Based on this
aspect alone, the new defense raised by defendant Franco is unavailing.
WHEREFORE, in the light of all the foregoing, the Court hereby grants the Motion for
Execution of Judgment.
Accordingly, let a writ of execution be issued for implementation by the Deputy Sheriff of this
Court.
SO ORDERED.9
On March 8, 2001, the RTC issued the writ of execution.10
Servando moved for reconsideration,11 but the RTC denied his motion.12
On March 19, 2003, the CA affirmed the RTC through its assailed decision, ruling that the
execution was proper because of Servando’s failure to comply with the terms of the
compromise agreement, stating:13
Petitioner cannot deny the fact that there was no full compliance with the tenor of the
compromise agreement. Private respondents on their part did not disregard the payments
made by the petitioner. They even offered that whatever payments made by petitioner, it can
be deducted from the principal obligation including interest. However, private respondents
posit that the payments made cannot alter, modify or revoke the decision of the Supreme
Court in the instant case.
In the case of Prudence Realty and Development Corporation vs. Court of Appeals, the
Supreme Court ruled that:
"When the terms of the compromise judgment is violated, the aggrieved party must move for
its execution, not its invalidation."
It is clear from the aforementioned jurisprudence that even if there is a compromise
agreement and the terms have been violated, the aggrieved party, such as the private
respondents, has the right to move for the issuance of a writ of execution of the final
judgment subject of the compromise agreement.
Moreover, under the circumstances of this case, petitioner does not stand to suffer any harm
or prejudice for the simple reason that what has been asked by private respondents to be the
subject of a writ of execution is only the balance of petitioner’s obligation after deducting the
payments made on the basis of the compromise agreement.
WHEREFORE, premises considered, the instant petition is hereby DENIED DUE COURSE and
consequently DISMISSED for lack of merit.

SO ORDERED.
His motion for reconsideration having been denied,14 Servando appealed. He was eventually
substituted by his heirs, now the petitioners herein, on account of his intervening death. The
substitution was pursuant to the resolution dated June 15, 2005.15
Issue
The petitioners submit that the CA erred in ruling that:
I The petitioners’ assertion is wrong.
THE 9 DECEMBER 1991 DECISION OF BRANCH 16 OF THE REGIONAL TRIAL COURT OF
MALOLOS, BULACAN WAS NOT NOVATED BY THE COMPROMISE AGREEMENT BETWEEN THE
PARTIES ON 5 FEBRUARY 1992.
II
THE LIABILITY OF THE PETITIONER TO RESPONDENTS SHOULD BE BASED ON THE DECEMBER
1991 DECISION OF BRANCH 16 OF THE REGIONAL TRIAL COURT OF MALOLOS, BULACAN AND
NOT ON THE COMPROMISE AGREEMENT EXECUTED IN 1992.
The petitioners insist that the RTC could not validly enforce a judgment based on a promissory
note that had been already novated; that the promissory note had been impliedly novated
when the principal obligation of ₱500,000.00 had been fixed at ₱750,000.00, and the maturity
date had been extended from August 23, 1986 to February 29, 1992.
In contrast, the respondents aver that the petitioners seek to alter, modify or revoke the final
and executory decision of the Court; that novation did not take place because there was no
complete incompatibility between the promissory note and the memorandum receipt; that
Servando’s previous payment would be deducted from the total liability of the debtors based
on the RTC’s decision.
Issue
Was there a novation of the August 23, 1986 promissory note when respondent Veronica
Gonzales issued the February 5, 1992 receipt?
Ruling
The petition lacks merits.
I
Novation did not transpire because no
irreconcilable incompatibility existed
between the promissory note and the receipt
To buttress their claim of novation, the petitioners rely on the receipt issued on February 5,
1992 by respondent Veronica whereby Servando’s obligation was fixed at ₱750,000.00. They
insist that even the maturity date was extended until February 29, 1992. Such changes, they
assert, were incompatible with those of the original agreement under the promissory note.
A novation arises when there is a substitution of an obligation by a subsequent one that
extinguishes the first, either by changing the object or the principal conditions, or by
substituting the person of the debtor, or by subrogating a third person in the rights of the
creditor.16 For a valid novation to take place, there must be, therefore: (a) a previous valid
obligation; (b) an agreement of the parties to make a new contract; (c) an extinguishment of
the old contract; and (d) a valid new contract.17 In short, the new obligation extinguishes the
prior agreement only when the substitution is unequivocally declared, or the old and the new
obligations are incompatible on every point. A compromise of a final judgment operates as a
novation of the judgment obligation upon compliance with either of these two conditions.18
The receipt dated February 5, 1992, excerpted below, did not create a new obligation
incompatible with the old one under the promissory note, viz:
February 5, 1992
Received from SERVANDO FRANCO BPI Manager’s Check No. 001700 in the amount of
₱400,00.00 as partial payment of loan. Balance of ₱375,000.00 to be paid on or before
FEBRUARY 29, 1992. In case of default an interest will be charged as stipulated in the
promissory note subject of this case.
(Sgd)
V. Gonzalez19
To be clear, novation is not presumed. This means that the parties to a contract should
expressly agree to abrogate the old contract in favor of a new one. In the absence of the
express agreement, the old and the new obligations must be incompatible on every point.20
According to California Bus Lines, Inc. v. State Investment House, Inc.:21
The extinguishment of the old obligation by the new one is a necessary element of novation
which may be effected either expressly or impliedly.1âwphi1 The term "expressly" means that
the contracting parties incontrovertibly disclose that their object in executing the new
contract is to extinguish the old one. Upon the other hand, no specific form is required for an
implied novation, and all that is prescribed by law would be an incompatibility between the
two contracts. While there is really no hard and fast rule to determine what might constitute
to be a sufficient change that can bring about novation, the touchstone for contrariety,
however, would be an irreconcilable incompatibility between the old and the new obligations.
Lastly, the extension of the maturity date did not constitute a novation of the previous
agreement. It is settled that an extension of the term or period of the maturity date does not
result in novation.31
II

There is incompatibility when the two obligations cannot stand together, each one having its
independent existence. If the two obligations cannot stand together, the latter obligation
novates the first.22 Changes that breed incompatibility must be essential in nature and not
merely accidental. The incompatibility must affect any of the essential elements of the
obligation, such as its object, cause or principal conditions thereof; otherwise, the change is
merely modificatory in nature and insufficient to extinguish the original obligation.23
In light of the foregoing, the issuance of the receipt created no new obligation. Instead, the
respondents only thereby recognized the original obligation by stating in the receipt that the
₱400,000.00 was "partial payment of loan" and by referring to "the promissory note subject
of the case in imposing the interest." The loan mentioned in the receipt was still the same
loan involving the ₱500,000.00 extended to Servando. Advertence to the interest stipulated in
the promissory note indicated that the contract still subsisted, not replaced and extinguished,
as the petitioners claim.
The receipt dated February 5, 1992 was only the proof of Servando’s payment of his
obligation as confirmed by the decision of the RTC. It did not establish the novation of his
agreement with the respondents. Indeed, the Court has ruled that an obligation to pay a sum
of money is not novated by an instrument that expressly recognizes the old, or changes only
the terms of payment, or adds other obligations not incompatible with the old ones, or the
new contract merely supplements the old one.24 A new contract that is a mere reiteration,
acknowledgment or ratification of the old contract with slight modifications or alterations as
to the cause or object or principal conditions can stand together with the former one, and
there can be no incompatibility between them.25 Moreover, a creditor’s acceptance of
payment after demand does not operate as a modification of the original contract.26
Total liability to be reduced by ₱400,000.00
The petitioners argue that Servando’s remaining liability amounted to only ₱375,000.00, the
balance indicated in the February 5, 1992 receipt. Accordingly, the balance was not yet due
because the respondents did not yet make a demand for payment.
The petitioners cannot be upheld.
The balance of ₱375,000.00 was premised on the taking place of a novation. However, as
found now, novation did not take place. Accordingly, Servando’s obligation, being solidary,
remained to be that decreed in the December 9, 1991 decision of the RTC, inclusive of
interests, less the amount of ₱400,000.00 that was meanwhile paid by him.
WHEREFORE, the Court AFFIRMS the decision of the Court of Appeals promulgated on
March 19, 2003; ORDERS the Regional Trial Court, Branch 16, in Malolos, Bulacan to
proceed with the execution based on its decision rendered on December 9, 1991, deducting
the amount of ₱400,000.00 already paid by the late Servando Franco; and DIRECTS the
petitioners to pay the costs of suit.
SO ORDERED.

Worth noting is that Servando’s liability was joint and solidary with his co-debtors. In a
solidary obligation, the creditor may proceed against any one of the solidary debtors or some
or all of them simultaneously.27 The choice to determine against whom the collection is
enforced belongs to the creditor until the obligation is fully satisfied.28 Thus, the obligation
was being enforced against Servando, who, in order to escape liability, should have presented
evidence to prove that his obligation had already been cancelled by the new obligation or that
another debtor had assumed his place. In case of change in the person of the debtor, the
substitution must be clear and express,29 and made with the consent of the creditor.30 Yet,
these circumstances did not obtain herein, proving precisely that Servando remained a
solidary debtor against whom the entire or part of the obligation might be enforced.
G.R. No. 164012 June 8, 2007
FLORDELIZA MENDOZA, petitioner,
vs.
MUTYA SORIANO and Minor JULIE ANN SORIANO duly represented by her natural mother
and guardian ad litem MUTYA SORIANO, respondents.
DECISION
QUISUMBING, J.:
In this petition for review under Rule 45 of the Rules of Court, petitioner asks this Court to
reverse and set aside the Decision1 dated November 17, 2003 and the Resolution2 dated May
24, 2004 of the Court of Appeals in CA-G.R. CV No. 69037. The appellate court found
petitioner, as employer of Lomer Macasasa, liable for damages.
The facts are as follows:
At around 1:00 a.m., July 14, 1997, Sonny Soriano, while crossing Commonwealth Avenue
near Luzon Avenue in Quezon City, was hit by a speeding Tamaraw FX driven by Lomer
Macasasa. Soriano was thrown five meters away, while the vehicle only stopped some 25
meters from the point of impact. Gerard Villaspin, one of Soriano’s companions, asked
Macasasa to bring Soriano to the hospital, but after checking out the scene of the incident,
Macasasa returned to the FX, only to flee. A school bus brought Soriano to East Avenue
Medical Center where he later died. Subsequently, the Quezon City Prosecutor recommended
the filing of a criminal case for reckless imprudence resulting to homicide against Macasasa.3
On August 20, 1997, respondents Mutya Soriano and Julie Ann Soriano, Soriano’s wife and
daughter, respectively, filed a complaint for damages against Macasasa and petitioner
Flordeliza Mendoza, the registered owner of the vehicle. The complaint was docketed as Civil
Case No. C-18038 in the Regional Trial Court of Caloocan City, Branch 121. Respondents
prayed that Macasasa and petitioner be ordered to pay them: ₱200,000 moral damages;
₱500,000 for lost income; ₱22,250 for funeral services; ₱45,000 for burial lot; ₱15,150 for
interment and lapida; ₱8,066 for hospitalization, other medical and transportation expenses;
₱28,540 for food and drinks during the wake; ₱50,000 exemplary damages; ₱60,000
indemnity for Soriano’s death; and ₱25,000 for attorney’s fees plus ₱500 per court
appearance.4
In her answer, petitioner Mendoza maintained that she was not liable since as owner of the
vehicle, she had exercised the diligence of a good father of a family over her employee,
Macasasa.
Upon respondents’ motion, the complaint for damages against Macasasa was dismissed.
After trial, the trial court also dismissed the complaint against petitioner.5 It found Soriano
negligent for crossing Commonwealth Avenue by using a small gap in the island’s fencing
rather than the pedestrian overpass. The lower court also ruled that petitioner was not
negligent in the selection and supervision of Macasasa since complainants presented no
evidence to support their allegation of petitioner’s negligence.6
Respondents appealed. The Court of Appeals reversed the trial court. The dispositive portion
of the appellate court’s decision reads:
WHEREFORE, the judgment appealed from is REVERSED, and another one is hereby rendered
ordering [petitioner] Flordeliza Mendoza to pay [respondents] Mutya Soriano and Julie Ann
Soriano the following amounts:
1. Hospital and Burial Expenses ₱80,926.25
2. Loss of earning capacity ₱77,000.00
3. Moral Damages ₱20,000.00
4. Indemnity for the death of Sonny Soriano ₱50,000.00
Actual payment of the aforementioned amounts should, however, be reduced by twenty
(20%) per cent due to the presence of contributory negligence by the victim as provided for in
Article 2179 of the Civil Code.
SO ORDERED.7
While the appellate court agreed that Soriano was negligent, it also found Macasasa negligent
for speeding, such that he was unable to avoid hitting the victim. It observed that Soriano’s
own negligence did not preclude recovery of damages from Macasasa’s negligence. It further
held that since petitioner failed to present evidence to the contrary, and conformably with
Article 21808 of the Civil Code, the presumption of negligence of the employer in the
selection and supervision of employees stood.
Petitioner’s motion for reconsideration was denied by the appellate court in a Resolution9
dated May 24, 2004.
Hence, this appeal where petitioner alleges that:
I.
THE TOTAL AMOUNT PRAYED FOR IN THE COMPLAINT IS NOT WITHIN THE JURISDICTION OF
THE REGIONAL TRIAL COURT.
II.
[COROLLARILY], THE AWARD OF DAMAGES IN FAVOR OF THE RESPONDENTS [HAS] NO BASIS
IN LAW.10
The issues are simple: (1) Did the Regional Trial Court have jurisdiction to try the case? and (2)
Was there sufficient legal basis to award damages?
Petitioner argues that the amount claimed by respondents is within the jurisdiction of the
Metropolitan Trial Court. She posits that to determine the jurisdictional amount, what should
only be considered are the following: ₱22,250 for funeral services; ₱45,000 for burial lot;
₱15,150 for interment and lapida; ₱8,066 for hospitalization and transportation; ₱28,540 for
food and drinks during the wake; and ₱60,000 indemnity for Soriano’s death. She maintains
that the sum of these amounts, ₱179,006, is below the jurisdictional amount of the Regional
Trial Court. She states that under Section 19(8) of the Judiciary Reorganization Act of 1980,
the following claims of respondents must be excluded: ₱200,000 moral damages, ₱500,000
for lost income; ₱50,000 exemplary damages; ₱25,000 attorney’s fees plus ₱500 per court
appearance. Petitioner thus prays that the decision of the Court of Appeals be reversed, and
the dismissal of the case by the trial court be affirmed on the ground of lack of jurisdiction.
Section 19(8) of Batas Pambansa Blg. 129,11 as amended by Republic Act No. 7691, states the
pertinent law.
SEC. 19. Jurisdiction in civil cases.–Regional Trial Courts shall exercise exclusive original
jurisdiction:
xxxx
(8) In all other cases in which the demand, exclusive of interest, damages of whatever kind,
attorney's fees, litigation expenses, and costs or the value of the property in controversy
exceeds One hundred thousand pesos (₱100,000.00) or, in such other cases in Metro Manila,
where the demand, exclusive of the abovementioned items exceeds Two hundred thousand
pesos (₱200,000.00).
But relatedly, Administrative Circular No. 09-9412 expressly states:
xxxx
2. The exclusion of the term "damages of whatever kind" in determining the jurisdictional
amount under Section 19(8) and Section 33(1) of BP Blg. 129, as amended by RA No. 7691,
applies to cases where the damages are merely incidental to or a consequence of the main
cause of action. However, in cases where the claim for damages is the main cause of action,
or one of the causes of action, the amount of such claim shall be considered in determining
the jurisdiction of the court. (Underscoring supplied.)
Actions for damages based on quasi-delicts, as in this case, are primarily and effectively
actions for the recovery of a sum of money for the damages for tortious acts.13 In this case,
respondents’ claim of ₱929,006 in damages and ₱25,000 attorney’s fees plus ₱500 per court
appearance represents the monetary equivalent for compensation of the alleged injury.
These money claims are the principal reliefs sought by respondents in their complaint for
damages.14 Consequently then, we hold that the Regional Trial Court of Caloocan City
possessed and properly exercised jurisdiction over the case.15
Petitioner further argues that since respondents caused the dismissal of the complaint against
Macasasa, there is no longer any basis to find her liable. She claims that "no iota of evidence"
was presented in this case to prove Macasasa’s negligence, and besides, respondents can
recover damages in the criminal case against him.
Respondents counter that as Macasasa’s employer, petitioner was presumed negligent in
selecting and supervising Macasasa after he was found negligent by the Court of Appeals.
The records show that Macasasa violated two traffic rules under the Land Transportation and
Traffic Code. First, he failed to maintain a safe speed to avoid endangering lives.16 Both the
trial and the appellate courts found Macasasa overspeeding.17 The records show also that
Soriano was thrown five meters away after he was hit.18 Moreover, the vehicle stopped only
some 25 meters from the point of impact.19
Both circumstances support the conclusion that the FX vehicle driven by Macasasa was
overspeeding. Second, Macasasa, the vehicle driver, did not aid Soriano, the accident victim,
in violation of Section 55,20 Article V of the Land Transportation and Traffic Code. While
Macasasa at first agreed to bring Soriano to the hospital, he fled the scene in a hurry.
Contrary to petitioner’s claim, there is no showing of any factual basis that Macasasa fled for
fear of the people’s wrath. What remains undisputed is that he did not report the accident to
a police officer, nor did he summon a doctor. Under Article 218521 of the Civil Code, a person
driving a motor vehicle is presumed negligent if at the time of the mishap, he was violating
traffic regulations.
While respondents could recover damages from Macasasa in a criminal case and petitioner
could become subsidiarily liable, still petitioner, as owner and employer, is directly and
separately civilly liable for her failure to exercise due diligence in supervising Macasasa.22 We
must emphasize that this damage suit is for the quasi-delict of petitioner, as owner and
employer, and not for the delict of Macasasa, as driver and employee.
Under Article 2180 of the Civil Code, employers are liable for the damages caused by their
employees acting within the scope of their assigned tasks. The liability arises due to the
presumed negligence of the employers in supervising their employees unless they prove that
they observed all the diligence of a good father of a family to prevent the damage.
In this case, we hold petitioner primarily and solidarily liable for the damages caused by
Macasasa.23 Respondents could recover directly from petitioner24 since petitioner failed to
prove that she exercised the diligence of a good father of a family in supervising Macasasa.25
Indeed, it is unfortunate that petitioner harbored the notion that the Regional Trial Court did
not have jurisdiction over the case and opted not to present her evidence on this point.

Lastly, we agree that the Court of Appeals did not err in ruling that Soriano was guilty of
contributory negligence for not using the pedestrian overpass while crossing Commonwealth
Avenue. We even note that the respondents now admit this point, and concede that the
appellate court had properly reduced by 20% the amount of damages it awarded. Hence, we
affirm the reduction26 of the amount earlier awarded, based on Article 2179 of the Civil Code
which reads:

When the plaintiff's own negligence was the immediate and proximate cause of his injury, he
cannot recover damages. But if his negligence was only contributory, the immediate and
proximate cause of the injury being the defendant's lack of due care, the plaintiff may recover
damages, but the courts shall mitigate the damages to be awarded.

WHEREFORE, we DENY the petition for lack of merit and hereby AFFIRM the Decision dated
November 17, 2003 and the Resolution dated May 24, 2004 of the Court of Appeals in CA-
G.R. CV No. 69037.

Costs against petitioner.

SO ORDERED.
G.R. No. L-14342 May 30, 1960
CIRIACO L. MERCADO, petitioner,
vs.
THE COURT OF APPEALS, MANUEL QUISUMBING, JR., ET AL., respondents.
Abad Santos and Pablo for petitioner.
Sycip, Quisumbing, Salazar and Associates for respondents.
LABRADOR, J.:
This is a petition to review a decision of the Court of Appeals, which condemned petitioner to
pay P2,000 as moral damages and P50 for medical expenses, for a physical injury caused by
the son of petitioner, Augusto Mercado, on a classmate, Manuel Quisumbing, Jr., both pupils
of the Lourdes Catholic School, Kanlaon, Quezon City. The case had originated in the Court of
First Instance of Manila, Hon. Bienvenido A. Tan, presiding, which dismissed the complaint
filed by Manuel Quisumbing, Jr. and his father against petitioner, father of the above-
mentioned Mercado. The facts found by the Court of Appeals are as follows:
Plaintiff-appellant Manuel Quisumbing, Jr. is the son of his co-plaintiff-appellants Ana Pineda
and Manuel L. Quisumbing, while Augusto Mercado is the son of defendant-appellee Ciriaco
L. Mercado, Manuel Quisumbing, Jr. and Augusto Mercado were classmates in the Lourdes
Catholic School on Kanlaon, Quezon City. A "pitogo", which figures prominently in this case,
may be described as an empty nutshell used by children as a piggy bank. On February 22,
1956, Augusto Mercado and Manuel Quisumbing, Jr. quarrelled over a "pitogo". As a result,
Augusto wounded Manuel, Jr. on the right cheek with a piece of razor.
xxx xxx xxx
The facts of record clearly show that it was Augusto Mercado who started the aggression.
Undeniably, the "pitogo" belonged to Augusto Mercado but he lent it to Benedicto P. Lim and
in turn Benedicto lent it to Renato Legaspi. Renato was not aware that the "pitogo" belonged
to Augusto, because right after Benedicto gave it to him, Benedicto ran away to get a basket
ball with which they could play. Manuel Quisumbing, Jr. was likewise unaware that the
"pitogo" belonged to Augusto. He thought it was the "pitogo" of Benedicto P. Lim, so that
when Augusto attempted to get the "pitogo" from Renato, Manuel, Jr. told him not to do so
because Renato was better at putting the chain into the holes of the "pitogo". However,
Augusto resented Manuel, Jr.'s remark and he aggresively pushed the latter. The fight started
then. After Augusto gave successive blows to Manuel, Jr., and the latter was clutching his
stomach which bore the brunt of Augusto's anger, Augusto seeing that Manuel, Jr. was in a
helpless position, cut him on the right check with a piece of razor.
xxx xxx xxx
Although the doctor who treated Manuel Quisumbing, Jr., Antonio B. Past, testified for
plaintiffs-appellants, he did not declare as to the amount of fees he collected from plaintiff-
appellants for the treatment of Manuel, Jr. the child was not even hospitalized for the wound.
We believe that the sum of P50.00 is a fair approximation of the medical expenses incurred by
plaintiffs-appellants.
xxx xxx xxx
The damages specified in paragraphs C and D of the aforequoted portion of plaintiffs-
appellant's complaint come under the class of moral damages. The evidence of record shows
that the child suffered moral damages by reason of the wound inflicted by Augusto Mercado.
Though such kind of damages cannot be fully appreciated in terms of money, we believe that
the sum of P2,000.00 would fully compensate the child.
As second cause of action, plaintiffs-appellants pray for P5,000.00 covering the moral
damages they allegedly suffered due to their son's being wounded; and the sum of P3,000.00
as attorney's fees. The facts of record do not warrant the granting of moral damages to
plaintiffs-appellants Manuel Quisumbing and Ana Pineda. "In law mental anguish is restricted,
as a rule, to such mental pain or suffering as arises from an injury or wrong to the person
himself, as distinguished from that form of mental suffering which is the accompaniment of
sympathy or sorrow for another's suffering of which arises from a contemplation of wrong
committed on the person of another. Pursuant to the rule stated, a husband or wife cannot
recover for mental suffering caused by his or her sympathy for the other's suffering. Nor can a
parent recover for mental distress and anxiety on account of physical injury sustained by a
child or for anxiety for the safety of his child placed in peril by the negligence of another." (15
Am. Jur. 597). Plaintiffs-appellants are not entitled to attorney's fees, it not appearing that
defendant-appellee had wantonly disregarded their claim for damages.
In the first, second and third assignments of error, counsel for petitioner argues that since the
incident of the inflicting of the wound on respondent occurred in a Catholic School (during
recess time), through no fault of the father, petitioner herein, the teacher or head of the
school should be held responsible instead of the latter. This precise question was brought
before this Court in Exconde vs. Capuno and Capuno, 101 Phil., 843, but we held, through Mr.
Justice Bautista:
We find merit in this claim. It is true that under the law above-quoted, "teachers or directors
of arts and trades are liable for any damage caused by their pupils or apprentices while they
are under their custody", but this provision only applies to an institution of arts and trades
and not to any academic educational institution (Padilla, Civil Law, 1953 Ed., Vol. IV, p. 841;
See 12 Manresa, 4th Ed., p. 557)
The last paragraph of Article 2180 of the Civil Code, upon which petitioner rests his claim that
the school where his son was studying should be made liable, is as follows:
ART. 2180. . . .
Lastly, teachers or heads of establishments of arts and trades shall be liable for damages
caused by their pupils and students or apprentices, so long as they remain in their custody.
It would be seem that the clause "so long as they remain in their custody," contemplates a
situation where the pupil lives and boards with the teacher, such that the control, direction
and influence on the pupil supersedes those of the parents. In these circumstances the
control or influence over the conduct and actions of the pupil would pass from the father and
mother to the teacher; and so would the responsibility for the torts of the pupil. Such a
situation does not appear in the case at bar; the pupils appear to go to school during school
hours and go back to their homes with their parents after school is over. The situation
contemplated in the last paragraph of Article 2180 does not apply, nor does paragraph 2 of
said article, which makes father or mother responsible for the damages caused by their minor
children. The claim of petitioner that responsibility should pass to the school must, therefore,
be held to be without merit.
resentment, which motivated the assault, was occasioned by the fact that Manuel, Jr. had
tried to intervene in or interfere with the attempt of Mercado to get "his pitogo from
Renato." This is, according to the decision appealed from, the reason why Mercado was
incensed and pushed Quisumbing who, in turn, also pushed Mercado. It is, therefore,
apparent that the proximate cause of the injury caused to Quisumbing was Quisumbing's own
fault or negligence for having interfered with Mercado while trying to get the pitogo from
another boy. (Art. 2179, Civil Code.)
After considering all the facts as found by the Court of Appeals, we find that none of the cases
mentioned in Article 2219 of the Civil Code, which authorizes the grant of moral damages,
was shown to have existed. Consequently, the grant of moral damages is not justified.
For the foregoing considerations, the decision appealed from is hereby reversed and the
petitioner is declared exempt or free from the payment of moral damages. The award of
P50 for medical expenses, however, is hereby affirmed. Without costs.

We next come to the claim of petitioner that the moral damages fixed at P2,000 are
excessive. We note that the wound caused to respondent was inflicted in the course of an
ordinary or common fight between boys in a grade school. The Court of Appeals fixed the
medical expenses incurred in treating and curing the wound at P50. Said court stated that the
wound did not even require hospitalization. Neither was Mercado found guilty of any offense
nor the scar in Quisumbing's face pronounced to have caused a deformity, unlike the case of
Araneta, et al. vs. Arreglado, et al., 104 Phil., 529; 55 Off. Gaz. (9) 1561. Petitioner's counsel
argues that if death call for P3,000 to P6,000, certainly the incised wound could cause mental
pain and suffering to the tune of P2,000.

In the decision of the Court of Appeals, said court pronounces that the child Quisumbing
suffered moral damages "by reason of the wound inflicted by Augusto Mercado." While moral
damages included physical suffering, which must have been caused to the wounded boy
Quisumbing (Art. 2217, Civil Code), the decision of the court below does not declare that any
of the cases specified in Article 2219 of the Civil Code in which moral damages may be
recovered, has attended or occasioned the physical injury. The only possible circumstance in
the case at bar in which moral damages are recoverable would be if a criminal offense or a
quasi-delict has been committed.

It does not appear that a criminal action for physical injuries was ever presented. The
offender, Augusto Mercado, was nine years old and it does not appear that he had acted with
discernment when he inflicted the physical injuries on Manuel Quisumbing, Jr.

It is possible that the Court of Appeals may have considered Augusto Mercado responsible for
or guilty, of a quasi-delict causing physical injuries, within the meaning of paragraph 2 of
Article 2219. Even if we assume that said court considered Mercado guilty of a quasi-delict
when it imposed the moral damages, yet the facts found by said court indicate that Augusto's
G.R. No. 194366 October 10, 2012
NAPOLEON D. NERI, ALICIA D. NERI-MONDEJAR, VISMINDA D. NERI-CHAMBERS, ROSA D.
NERI-MILLAN, DOUGLAS D. NERI, EUTROPIA D. ILLUT-COCKINOS AND VICTORIA D. ILLUT-
PIALA, Petitioners,
vs.
HEIRS OF HADJI YUSOP UY AND JULPHA* IBRAHIM UY, Respondents.
DECISION
PERLAS-BERNABE, J.:
In this Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, petitioners
Napoleon D. Neri (Napoleon), Alicia D. Neri-Mondejar (Alicia), Visminda D. Neri-Chambers
(Visminda), Rosa D. Neri-Millan (Rosa), Douglas D. Neri (Douglas), Eutropia D. Illut-Cockinos
(Eutropia), and Victoria D. Illut-Piala (Victoria) seek to reverse and set aside the April 27, 2010
Decision2 and October 18, 2010 Resolution3 of the Court of Appeals (CA) in CA-G.R. CV No.
01031-MIN which annulled the October 25, 2004 Decision4 of the Regional Trial Court (RTC)
of Panabo City, Davao del Norte and instead, entered a new one dismissing petitioners’
complaint for annulment of sale, damages and attorney’s feesagainst herein respondents
heirs of spouses Hadji Yusop Uy and Julpha Ibrahim Uy (heirs of Uy).
The Facts
During her lifetime, Anunciacion Neri (Anunciacion) had seven children, two (2) from her first
marriage with Gonzalo Illut (Gonzalo), namely: Eutropia and Victoria, and five (5) from her
second marriage with Enrique Neri (Enrique), namely: Napoleon, Alicia, Visminda, Douglas
and Rosa. Throughout the marriage of spouses Enrique and Anunciacion, they acquired
several homestead properties with a total area of 296,555 square meters located in Samal,
Davao del Norte, embraced by Original Certificate of Title (OCT) Nos. (P-7998) P-21285 , (P-
14608) P-51536 and P-20551 (P-8348)7 issued on February 15, 1957, August 27, 1962 and July
7, 1967, respectively.
On September 21, 1977, Anunciacion died intestate. Her husband, Enrique, in his personal
capacity and as natural guardian of his minor children Rosa and Douglas, together with
Napoleon, Alicia, and Vismindaexecuted an Extra-Judicial Settlement of the Estate with
Absolute Deed of Sale8 on July 7, 1979, adjudicating among themselves the said homestead
properties, and thereafter, conveying themto the late spouses Hadji Yusop Uy and Julpha
Ibrahim Uy (spouses Uy)for a consideration of ₱ 80,000.00.
On June 11, 1996, the children of Enrique filed a complaint for annulment of saleof the said
homestead properties against spouses Uy (later substituted by their heirs)before the RTC,
docketed as Civil Case No.96-28, assailing the validity of the sale for having been sold within
the prohibited period. Thecomplaint was later amended to include Eutropia and Victoriaas
additional plaintiffs for having been excluded and deprived of their legitimes as childrenof
Anunciacion from her first marriage.
In their amended answer with counterclaim, the heirs of Uy countered that the sale took
place beyond the 5-year prohibitory period from the issuance of the homestead patents. They
also denied knowledge of Eutropia and Victoria’s exclusionfrom the extrajudicial settlement
and sale of the subject properties, and interposed further the defenses of prescription and
laches.
The RTC Ruling
On October 25, 2004, the RTC rendered a decision ordering, among others, the annulment of
the Extra-Judicial Settlement of the Estate with Absolute Deed of Sale. It ruled that while the
sale occurred beyond the 5-year prohibitory period, the sale is still void because Eutropia and
Victoria were deprived of their hereditary rights and that Enrique had no judicial authority to
sell the shares of his minor children, Rosa and Douglas.
Consequently, it rejected the defenses of laches and prescription raised by spouses Uy, who
claimed possession of the subject properties for 17 years, holding that co-ownership rights
are imprescriptible.
The CA Ruling
On appeal, the CAreversed and set aside the ruling of the RTC in its April 27, 2010 Decision
and dismissed the complaint of the petitioners. It held that, while Eutropia and Victoria had
no knowledge of the extrajudicial settlement and sale of the subject properties and as such,
were not bound by it, the CA found it unconscionable to permit the annulment of the sale
considering spouses Uy’s possession thereof for 17 years, and thatEutropia and
Victoriabelatedlyfiled their actionin 1997, ormore than two years fromknowledge of their
exclusion as heirs in 1994 when their stepfather died. It, however, did not preclude the
excluded heirs from recovering their legitimes from their co-heirs.
Similarly, the CA declared the extrajudicial settlement and the subsequent saleas valid and
binding with respect to Enrique and hischildren, holding that as co-owners, they have the
right to dispose of their respective shares as they consider necessary or fit.While recognizing
Rosa and Douglas to be minors at that time, they were deemed to have ratified the sale
whenthey failed to question it upon reaching the age of majority.Italso found laches to have
set in because of their inaction for a long period of time.
The Issues
In this petition, petitioners imputeto the CA the following errors:
I. WHEN IT UPHELDTHE VALIDITY OF THE "EXTRA JUDICIAL SETTLEMENT OF THE ESTATE WITH
ABSOLUTE DEED OF SALE" AS FAR AS THE SHARES OF EUTROPIA AND VICTORIA WERE
CONCERNED, THEREBY DEPRIVING THEM OF THEIR INHERITANCE;
II. WHEN IT DID NOT NULLIFY OR ANNUL THE "EXTRA JUDICIAL SETTLEMENT OF THE ESTATE
WITH ABSOLUTE DEED OF SALE" WITH RESPECT TO THE SHARESOF ROSA AND DOUGLAS,
THEREBY DEPRIVING THEM OF THEIR INHERITANCE; and
III. WHEN IT FOUND THAT LACHES OR PRESCRIPTION HAS SET IN.
The fact of the extrajudicial settlement or administration shall be published in a newspaper of
general circulation in the manner provided in the next succeeding section; but no extrajudicial
settlement shall be binding upon any person who has not participated therein or had no
notice thereof. (Underscoring added)

The Ruling of the Court The effect of excluding the heirs in the settlement of estate was further elucidated in Segura
The petitionis meritorious. v. Segura,10 thus:

It bears to stress that all the petitioners herein are indisputably legitimate children of
Anunciacion from her first and second marriages with Gonzalo and Enrique, respectively, and
consequently, are entitled to inherit from her in equal shares, pursuant to Articles 979 and
980 of the Civil Code which read:
ART. 979. Legitimate children and their descendants succeed the parents and other
ascendants, without distinction as to sex or age, and even if they should come from different
marriages.
It is clear that Section 1 of Rule 74 does not apply to the partition in question which was null
and void as far as the plaintiffs were concerned. The rule covers only valid partitions. The
partition in the present case was invalid because it excluded six of the nine heirs who were
entitled to equal shares in the partitioned property. Under the rule "no extrajudicial
settlement shall be binding upon any person who has not participated therein or had no
notice thereof." As the partition was a total nullity and did not affect the excluded heirs, it
was not correct for the trial court to hold that their right to challenge the partition had
prescribed after two years from its execution…

xxx However, while the settlement of the estate is null and void, the subsequent sale of the
subject propertiesmade by Enrique and his children, Napoleon, Alicia and Visminda, in favor
ART. 980. The children of the deceased shall always inherit from him in their own right, of the respondents isvalid but only with respect to their proportionate shares therein.It
dividing the inheritance in equal shares. cannot be denied that these heirs have acquired their respective shares in the properties of
Anunciacion from the moment of her death11 and that, as owners thereof, they can very well
As such, upon the death of Anunciacion on September 21, 1977, her children and Enrique sell their undivided share in the estate.12
acquired their respective inheritances,9 entitling them to their pro indiviso shares in her
whole estate, as follows: With respect to Rosa and Douglas who were minors at the time of the execution of the
settlement and sale, their natural guardian and father, Enrique, represented them in the
Enrique 9/16 (1/2 of the conjugal assets + 1/16) transaction. However, on the basis of the laws prevailing at that time, Enrique was merely
Eutropia 1/16 clothed with powers of administration and bereft of any authority to dispose of their 2/16
Victoria 1/16 shares in the estate of their mother, Anunciacion.
Napoleon 1/16
Alicia 1/16 Articles 320 and 326 of the Civil Code, the laws in force at the time of the execution of the
Visminda 1/16 settlement and sale, provide:
Rosa 1/16
Douglas 1/16 ART. 320. The father, or in his absence the mother, is the legal administrator of the property
Hence, in the execution of the Extra-Judicial Settlement of the Estate with Absolute Deed of pertaining to the child under parental authority. If the property is worth more than two
Sale in favor of spouses Uy, all the heirs of Anunciacionshould have participated. Considering thousand pesos, the father or mother shall give a bond subject to the approval of the Court of
that Eutropia and Victoria were admittedly excluded and that then minors Rosa and Douglas First Instance.
were not properly represented therein, the settlement was not valid and binding uponthem
and consequently, a total nullity. ART. 326. When the property of the child is worth more than two thousand pesos, the father
or mother shall be considered a guardian of the child’s property, subject to the duties and
Section 1, Rule 74 of the Rules of Court provides: obligations of guardians under the Rules of Court.

SECTION 1. Extrajudicial settlement by agreement between heirs. – x x x Corollarily, Section 7, Rule 93 of the Rules of Court also provides:
SEC. 7. Parents as Guardians. – When the property of the child under parental authority is
worth two thousand pesos or less, the father or the mother, without the necessity of court
appointment, shall be his legal guardian. When the property of the child is worth more than
two thousand pesos, the father or the mother shall be considered guardian of the child’s
property, with the duties and obligations of guardians under these Rules, and shall file the
petition required by Section 2 hereof. For good reasons, the court may, however, appoint
another suitable persons.
Administration includes all acts for the preservation of the property and the receipt of fruits
according to the natural purpose of the thing. Any act of disposition or alienation, or any
reduction in the substance of the patrimony of child, exceeds the limits of administration.13
Thus, a father or mother, as the natural guardian of the minor under parental authority, does
not have the power to dispose or encumber the property of the latter. Such power is granted
by law only to a judicial guardian of the ward’s property and even then only with courts’ prior
approval secured in accordance with the proceedings set forth by the Rules of Court.14
Consequently, the disputed sale entered into by Enrique in behalf of his minor children
without the proper judicial authority, unless ratified by them upon reaching the age of
majority,15 is unenforceable in accordance with Articles 1317 and 1403(1) of the Civil Code
which provide:
ART. 1317. No one may contract in the name of another without being authorized by the
latter or unless he has by law a right to represent him.
A contract entered into in the name of another by one who has no authority or legal
representation, or who has acted beyond his powers, shall be unenforceable, unless it is
ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it
is revoked by the other contracting party.
ART. 1403. The following contracts are unenforceable, unless they are ratified:
(1) Those entered into the name of another person by one who has been given no authority
or legal representation, or who has acted beyond his powers;
xxx
Ratification means that one under no disability voluntarily adopts and gives sanction to some
unauthorized act or defective proceeding, which without his sanction would not be binding on
him. It is this voluntary choice, knowingly made, which amounts to a ratification of what was
theretofore unauthorized, and becomes the authorized act of the party so making the
ratification.16 Once ratified, expressly or impliedly such as when the person knowingly
received benefits from it, the contract is cleansed from all its defects from the moment it was
constituted,17 as it has a retroactive effect.
Records, however, show that Rosa had ratified the extrajudicial settlement of the estate with
absolute deed of sale. In Napoleon and Rosa’s Manifestation18 before the RTC dated July 11,
1997,they stated:
"Concerning the sale of our parcel of land executed by our father, Enrique Neri concurred in
and conformed to by us and our other two sisters and brother (the other plaintiffs), in favor of
Hadji Yusop Uy and his spouse Hadja Julpa Uy on July 7, 1979, we both confirmed that the
same was voluntary and freely made by all of us and therefore the sale was absolutely valid
and enforceable as far as we all plaintiffs in this case are concerned;" (Underscoring supplied)
In their June 30, 1997 Joint-Affidavit,19 Napoleon and Rosa also alleged:
"That we are surprised that our names are included in this case since we do not have any
intention to file a case against Hadji Yusop Uy and Julpha Ibrahim Uy and their family and we
respect and acknowledge the validity of the Extra-Judicial Settlement of the Estate with
Absolute Deed of Sale dated July 7, 1979;" (Underscoring supplied)
Clearly, the foregoing statements constitutedratification of the settlement of the estate and
the subsequent sale, thus, purging all the defects existing at the time of its execution and
legitimizing the conveyance of Rosa’s 1/16 share in the estate of Anunciacion to spouses Uy.
The same, however, is not true with respect to Douglas for lack of evidence showing
ratification.
Considering, thus, that the extrajudicial settlement with sale is invalid and therefore, not
binding on Eutropia, Victoria and Douglas, only the shares ofEnrique, Napoleon, Alicia,
Visminda and Rosa in the homestead properties have effectivelybeen disposed in favor of
spouses Uy. "A person can only sell what he owns, or is authorized to sell and the buyer can
as a consequence acquire no more than what the sellercan legally transfer."20 On this score,
Article 493 of the Civil Codeis relevant, which provides:
Each co-owner shall have the full ownership of his part and of the fruits and benefits
pertaining thereto, and he may therefore alienate, assign or mortgage it, and even substitute
another person in its enjoyment, except when personal rights are involved. But the effect of
the alienation or the mortgage, with respect to the co-owners, shall be limited to the portion
which may be allotted to him in the division upon the termination of the co-ownership.
Consequently, spouses Uy or their substituted heirs became pro indiviso co-owners of the
homestead properties with Eutropia, Victoria and Douglas, who retained title to their
respective 1/16 shares. They were deemed to be holding the 3/16 shares of Eutropia, Victoria
and Douglas under an implied constructive trust for the latter’s benefit, conformably with
Article 1456 of the Civil Code which states:"if property is acquired through mistake or fraud,
the person obtaining it is, by force of law, considered a trustee of an implied trust for the
benefit of the person from whom the property comes." As such, it is only fair, just and
equitable that the amount paid for their shares equivalent to ₱ 5,000.0021 each or a total of ₱
15,000.00 be returned to spouses Uy with legal interest.

On the issue of prescription, the Court agrees with petitioners that the present action has not
prescribed in so far as it seeks to annul the extrajudicial settlement of the estate. Contrary to
the ruling of the CA, the prescriptive period of 2 years provided in Section 1 Rule 74 of the
Rules of

Court reckoned from the execution of the extrajudicial settlement finds no application to
petitioners Eutropia, Victoria and Douglas, who were deprived of their lawful participation in
the subject estate. Besides, an "action or defense for the declaration of the inexistence of a
contract does not prescribe" in accordance with Article 1410 of the Civil Code.

However, the action to recover property held in trust prescribes after 10 years from the time
the cause of action accrues,22 which is from the time of actual notice in case of unregistered
deed.23 In this case, Eutropia, Victoria and Douglas claimed to have knowledge of the
extrajudicial settlement with sale after the death of their father, Enrique, in 1994 which
spouses Uy failed to refute. Hence, the complaint filed in 1997 was well within the
prescriptive period of 10 years.

WHEREFORE, the instant petition is GRANTED. The April 27, 2010 Decision and October 18,
2010 Resolution of the Court of Appeals are REVERSED and SET ASIDE and a new judgment
is entered:

1. Declaring the Extra-Judicial Settlement of the Estate of Anunciacion Neri NULL and VOID;

2. Declaring the Absolute Deed of Sale in favor of the late spouses Hadji Yusop Uy and
Julpha Ibrahim Uy as regards the 13/16 total shares of the late Enrique Neri, Napoleon Neri,
Alicia D. Neri-Mondejar, Visminda D. Neri-Chambers and Rosa D. Neri-Millan VALID;

3. Declaring Eutropia D. Illut-Cockinos, Victoria D. Illut-Piala and Douglas D. Neri as the

LAWFUL OWNERS of the 3/16 portions of the subject homestead properties, covered by
Original Certificate of Title Nos. (P-7998) P-2128, (P-14608) P-5153 and P-20551 (P-8348);
and

4. Ordering the estate of the late Enrique Neri, as well as Napoleon Neri, Alicia D. Neri-
Mondejar, Visminda D. Neri-Chambers and Rosa D. Neri-Millan to return to the respondents
jointly and solidarily the amount paid corresponding to the 3/16 shares of Eutropia, Victoria
and Douglas in the total amount of ₱ 15,000.00, with legal interest at 6% per annum
computed from the time of payment until finality of this decision and 12% per annum
thereafter until fully paid.

No pronouncement as to costs. SO ORDERED

G.R. No. 146364 June 3, 2004
COLITO T. PAJUYO, petitioner,
vs.
COURT OF APPEALS and EDDIE GUEVARRA, respondents.
DECISION
CARPIO, J.:
The Case
Before us is a petition for review1 of the 21 June 2000 Decision2 and 14 December 2000
Resolution of the Court of Appeals in CA-G.R. SP No. 43129. The Court of Appeals set aside the
11 November 1996 decision3 of the Regional Trial Court of Quezon City, Branch 81,4 affirming
the 15 December 1995 decision5 of the Metropolitan Trial Court of Quezon City, Branch 31.6
The Antecedents
In June 1979, petitioner Colito T. Pajuyo ("Pajuyo") paid ₱400 to a certain Pedro Perez for the
rights over a 250-square meter lot in Barrio Payatas, Quezon City. Pajuyo then constructed a
house made of light materials on the lot. Pajuyo and his family lived in the house from 1979
to 7 December 1985.
On 8 December 1985, Pajuyo and private respondent Eddie Guevarra ("Guevarra") executed a
Kasunduan or agreement. Pajuyo, as owner of the house, allowed Guevarra to live in the
house for free provided Guevarra would maintain the cleanliness and orderliness of the
house. Guevarra promised that he would voluntarily vacate the premises on Pajuyo’s
demand.
In September 1994, Pajuyo informed Guevarra of his need of the house and demanded that
Guevarra vacate the house. Guevarra refused.
Pajuyo filed an ejectment case against Guevarra with the Metropolitan Trial Court of Quezon
City, Branch 31 ("MTC").
In his Answer, Guevarra claimed that Pajuyo had no valid title or right of possession over the
lot where the house stands because the lot is within the 150 hectares set aside by
Proclamation No. 137 for socialized housing. Guevarra pointed out that from December 1985
to September 1994, Pajuyo did not show up or communicate with him. Guevarra insisted that
neither he nor Pajuyo has valid title to the lot.
On 15 December 1995, the MTC rendered its decision in favor of Pajuyo. The dispositive
portion of the MTC decision reads:
WHEREFORE, premises considered, judgment is hereby rendered for the plaintiff and against
defendant, ordering the latter to:
A) vacate the house and lot occupied by the defendant or any other person or persons
claiming any right under him;
B) pay unto plaintiff the sum of THREE HUNDRED PESOS (₱300.00) monthly as reasonable
compensation for the use of the premises starting from the last demand;
C) pay plaintiff the sum of ₱3,000.00 as and by way of attorney’s fees; and
D) pay the cost of suit.
SO ORDERED.7
Aggrieved, Guevarra appealed to the Regional Trial Court of Quezon City, Branch 81 ("RTC").
On 11 November 1996, the RTC affirmed the MTC decision. The dispositive portion of the RTC
decision reads:
WHEREFORE, premises considered, the Court finds no reversible error in the decision
appealed from, being in accord with the law and evidence presented, and the same is hereby
affirmed en toto.
SO ORDERED.8
Guevarra received the RTC decision on 29 November 1996. Guevarra had only until 14
December 1996 to file his appeal with the Court of Appeals. Instead of filing his appeal with
the Court of Appeals, Guevarra filed with the Supreme Court a "Motion for Extension of Time
to File Appeal by Certiorari Based on Rule 42" ("motion for extension"). Guevarra theorized
that his appeal raised pure questions of law. The Receiving Clerk of the Supreme Court
received the motion for extension on 13 December 1996 or one day before the right to appeal
expired.
On 3 January 1997, Guevarra filed his petition for review with the Supreme Court.
On 8 January 1997, the First Division of the Supreme Court issued a Resolution9 referring the
motion for extension to the Court of Appeals which has concurrent jurisdiction over the case.
The case presented no special and important matter for the Supreme Court to take
cognizance of at the first instance.
On 28 January 1997, the Thirteenth Division of the Court of Appeals issued a Resolution10
granting the motion for extension conditioned on the timeliness of the filing of the motion.
On 27 February 1997, the Court of Appeals ordered Pajuyo to comment on Guevara’s petition
for review. On 11 April 1997, Pajuyo filed his Comment.
On 21 June 2000, the Court of Appeals issued its decision reversing the RTC decision. The
dispositive portion of the decision reads:
WHEREFORE, premises considered, the assailed Decision of the court a quo in Civil Case No.
Q-96-26943 is REVERSED and SET ASIDE; and it is hereby declared that the ejectment case
filed against defendant-appellant is without factual and legal basis.
SO ORDERED.11
Pajuyo filed a motion for reconsideration of the decision. Pajuyo pointed out that the Court of
Appeals should have dismissed outright Guevarra’s petition for review because it was filed
out of time. Moreover, it was Guevarra’s counsel and not Guevarra who signed the
certification against forum-shopping.
On 14 December 2000, the Court of Appeals issued a resolution denying Pajuyo’s motion for
reconsideration. The dispositive portion of the resolution reads:
WHEREFORE, for lack of merit, the motion for reconsideration is hereby DENIED. No costs.
SO ORDERED.12
The Ruling of the MTC
The MTC ruled that the subject of the agreement between Pajuyo and Guevarra is the house
and not the lot. Pajuyo is the owner of the house, and he allowed Guevarra to use the house
only by tolerance. Thus, Guevarra’s refusal to vacate the house on Pajuyo’s demand made
Guevarra’s continued possession of the house illegal.
The Ruling of the RTC
The RTC upheld the Kasunduan, which established the landlord and tenant relationship
between Pajuyo and Guevarra. The terms of the Kasunduan bound Guevarra to return
possession of the house on demand.
The RTC rejected Guevarra’s claim of a better right under Proclamation No. 137, the Revised
National Government Center Housing Project Code of Policies and other pertinent laws. In an
ejectment suit, the RTC has no power to decide Guevarra’s rights under these laws. The RTC
declared that in an ejectment case, the only issue for resolution is material or physical
possession, not ownership.
The Ruling of the Court of Appeals
The Court of Appeals declared that Pajuyo and Guevarra are squatters. Pajuyo and Guevarra
illegally occupied the contested lot which the government owned.
Perez, the person from whom Pajuyo acquired his rights, was also a squatter. Perez had no
right or title over the lot because it is public land. The assignment of rights between Perez and
Pajuyo, and the Kasunduan between Pajuyo and Guevarra, did not have any legal effect.
Pajuyo and Guevarra are in pari delicto or in equal fault. The court will leave them where they
are.
The Court of Appeals reversed the MTC and RTC rulings, which held that the Kasunduan
between Pajuyo and Guevarra created a legal tie akin to that of a landlord and tenant
relationship. The Court of Appeals ruled that the Kasunduan is not a lease contract but a
commodatum because the agreement is not for a price certain.
Since Pajuyo admitted that he resurfaced only in 1994 to claim the property, the appellate
court held that Guevarra has a better right over the property under Proclamation No. 137.
President Corazon C. Aquino ("President Aquino") issued Proclamation No. 137 on 7
September 1987. At that time, Guevarra was in physical possession of the property. Under
Article VI of the Code of Policies Beneficiary Selection and Disposition of Homelots and
Structures in the National Housing Project ("the Code"), the actual occupant or caretaker of
the lot shall have first priority as beneficiary of the project. The Court of Appeals concluded
that Guevarra is first in the hierarchy of priority.
In denying Pajuyo’s motion for reconsideration, the appellate court debunked Pajuyo’s claim
that Guevarra filed his motion for extension beyond the period to appeal.
The Court of Appeals pointed out that Guevarra’s motion for extension filed before the
Supreme Court was stamped "13 December 1996 at 4:09 PM" by the Supreme Court’s
Receiving Clerk. The Court of Appeals concluded that the motion for extension bore a date,
contrary to Pajuyo’s claim that the motion for extension was undated. Guevarra filed the
motion for extension on time on 13 December 1996 since he filed the motion one day before
the expiration of the reglementary period on 14 December 1996. Thus, the motion for
extension properly complied with the condition imposed by the Court of Appeals in its 28
January 1997 Resolution. The Court of Appeals explained that the thirty-day extension to file
the petition for review was deemed granted because of such compliance.
The Court of Appeals rejected Pajuyo’s argument that the appellate court should have
dismissed the petition for review because it was Guevarra’s counsel and not Guevarra who
signed the certification against forum-shopping. The Court of Appeals pointed out that Pajuyo
did not raise this issue in his Comment. The Court of Appeals held that Pajuyo could not now
seek the dismissal of the case after he had extensively argued on the merits of the case. This
technicality, the appellate court opined, was clearly an afterthought.
The Issues
Pajuyo raises the following issues for resolution:
WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS AUTHORITY AND DISCRETION
TANTAMOUNT TO LACK OF JURISDICTION:
1) in GRANTING, instead of denying, Private Respondent’s Motion for an Extension of thirty
days to file petition for review at the time when there was no more period to extend as the
decision of the Regional Trial Court had already become final and executory.
2) in giving due course, instead of dismissing, private respondent’s Petition for Review even
though the certification against forum-shopping was signed only by counsel instead of by
petitioner himself.
3) in ruling that the Kasunduan voluntarily entered into by the parties was in fact a
commodatum, instead of a Contract of Lease as found by the Metropolitan Trial Court and in
holding that "the ejectment case filed against defendant-appellant is without legal and factual
basis".
4) in reversing and setting aside the Decision of the Regional Trial Court in Civil Case No. Q-96-
26943 and in holding that the parties are in pari delicto being both squatters, therefore, illegal
occupants of the contested parcel of land.
5) in deciding the unlawful detainer case based on the so-called Code of Policies of the
National Government Center Housing Project instead of deciding the same under the
Kasunduan voluntarily executed by the parties, the terms and conditions of which are the
laws between themselves.13
The Ruling of the Court
The procedural issues Pajuyo is raising are baseless. However, we find merit in the substantive
issues Pajuyo is submitting for resolution.
Procedural Issues
Pajuyo insists that the Court of Appeals should have dismissed outright Guevarra’s petition for
review because the RTC decision had already become final and executory when the appellate
court acted on Guevarra’s motion for extension to file the petition. Pajuyo points out that
Guevarra had only one day before the expiry of his period to appeal the RTC decision. Instead
of filing the petition for review with the Court of Appeals, Guevarra filed with this Court an
undated motion for extension of 30 days to file a petition for review. This Court merely
referred the motion to the Court of Appeals. Pajuyo believes that the filing of the motion for
extension with this Court did not toll the running of the period to perfect the appeal. Hence,
when the Court of Appeals received the motion, the period to appeal had already expired.
We are not persuaded.
Decisions of the regional trial courts in the exercise of their appellate jurisdiction are
appealable to the Court of Appeals by petition for review in cases involving questions of fact
or mixed questions of fact and law.14 Decisions of the regional trial courts involving pure
questions of law are appealable directly to this Court by petition for review.15 These modes
of appeal are now embodied in Section 2, Rule 41 of the 1997 Rules of Civil Procedure.
Guevarra believed that his appeal of the RTC decision involved only questions of law.
Guevarra thus filed his motion for extension to file petition for review before this Court on 14
December 1996. On 3 January 1997, Guevarra then filed his petition for review with this
Court. A perusal of Guevarra’s petition for review gives the impression that the issues he
raised were pure questions of law. There is a question of law when the doubt or difference is
on what the law is on a certain state of facts.16 There is a question of fact when the doubt or
difference is on the truth or falsity of the facts alleged.17
In his petition for review before this Court, Guevarra no longer disputed the facts. Guevarra’s
petition for review raised these questions: (1) Do ejectment cases pertain only to possession
of a structure, and not the lot on which the structure stands? (2) Does a suit by a squatter
against a fellow squatter constitute a valid case for ejectment? (3) Should a Presidential
Proclamation governing the lot on which a squatter’s structure stands be considered in an
ejectment suit filed by the owner of the structure?
These questions call for the evaluation of the rights of the parties under the law on ejectment
and the Presidential Proclamation. At first glance, the questions Guevarra raised appeared
purely legal. However, some factual questions still have to be resolved because they have a
bearing on the legal questions raised in the petition for review. These factual matters refer to
the metes and bounds of the disputed property and the application of Guevarra as beneficiary
of Proclamation No. 137.
The Court of Appeals has the power to grant an extension of time to file a petition for review.
In Lacsamana v. Second Special Cases Division of the Intermediate Appellate Court,18 we
declared that the Court of Appeals could grant extension of time in appeals by petition for
review. In Liboro v. Court of Appeals,19 we clarified that the prohibition against granting an
extension of time applies only in a case where ordinary appeal is perfected by a mere notice
of appeal. The prohibition does not apply in a petition for review where the pleading needs
verification. A petition for review, unlike an ordinary appeal, requires preparation and
research to present a persuasive position.20 The drafting of the petition for review entails
more time and effort than filing a notice of appeal.21 Hence, the Court of Appeals may allow
an extension of time to file a petition for review.
In the more recent case of Commissioner of Internal Revenue v. Court of Appeals,22 we held
that Liboro’s clarification of Lacsamana is consistent with the Revised Internal Rules of the
Court of Appeals and Supreme Court Circular No. 1-91. They all allow an extension of time for
filing petitions for review with the Court of Appeals. The extension, however, should be
limited to only fifteen days save in exceptionally meritorious cases where the Court of
Appeals may grant a longer period.
A judgment becomes "final and executory" by operation of law. Finality of judgment becomes
a fact on the lapse of the reglementary period to appeal if no appeal is perfected.23 The RTC
decision could not have gained finality because the Court of Appeals granted the 30-day
extension to Guevarra.
The Court of Appeals did not commit grave abuse of discretion when it approved Guevarra’s
motion for extension. The Court of Appeals gave due course to the motion for extension
because it complied with the condition set by the appellate court in its resolution dated 28
January 1997. The resolution stated that the Court of Appeals would only give due course to
the motion for extension if filed on time. The motion for extension met this condition.
The material dates to consider in determining the timeliness of the filing of the motion for
extension are (1) the date of receipt of the judgment or final order or resolution subject of the
petition, and (2) the date of filing of the motion for extension.24 It is the date of the filing of
the motion or pleading, and not the date of execution, that determines the timeliness of the
filing of that motion or pleading. Thus, even if the motion for extension bears no date, the
date of filing stamped on it is the reckoning point for determining the timeliness of its filing.
Guevarra had until 14 December 1996 to file an appeal from the RTC decision. Guevarra filed
his motion for extension before this Court on 13 December 1996, the date stamped by this
Court’s Receiving Clerk on the motion for extension. Clearly, Guevarra filed the motion for
extension exactly one day before the lapse of the reglementary period to appeal.
Assuming that the Court of Appeals should have dismissed Guevarra’s appeal on technical
grounds, Pajuyo did not ask the appellate court to deny the motion for extension and dismiss
the petition for review at the earliest opportunity. Instead, Pajuyo vigorously discussed the
merits of the case. It was only when the Court of Appeals ruled in Guevarra’s favor that
Pajuyo raised the procedural issues against Guevarra’s petition for review.
A party who, after voluntarily submitting a dispute for resolution, receives an adverse
decision on the merits, is estopped from attacking the jurisdiction of the court.25 Estoppel
sets in not because the judgment of the court is a valid and conclusive adjudication, but
because the practice of attacking the court’s jurisdiction after voluntarily submitting to it is
against public policy.26
In his Comment before the Court of Appeals, Pajuyo also failed to discuss Guevarra’s failure to
sign the certification against forum shopping. Instead, Pajuyo harped on Guevarra’s counsel
signing the verification, claiming that the counsel’s verification is insufficient since it is based
only on "mere information."
A party’s failure to sign the certification against forum shopping is different from the party’s
failure to sign personally the verification. The certificate of non-forum shopping must be
signed by the party, and not by counsel.27 The certification of counsel renders the petition
defective.28
On the other hand, the requirement on verification of a pleading is a formal and not a
jurisdictional requisite.29 It is intended simply to secure an assurance that what are alleged in
the pleading are true and correct and not the product of the imagination or a matter of
speculation, and that the pleading is filed in good faith.30 The party need not sign the
verification. A party’s representative, lawyer or any person who personally knows the truth of
the facts alleged in the pleading may sign the verification.31
We agree with the Court of Appeals that the issue on the certificate against forum shopping
was merely an afterthought. Pajuyo did not call the Court of Appeals’ attention to this defect
at the early stage of the proceedings. Pajuyo raised this procedural issue too late in the
proceedings.
Absence of Title over the Disputed Property will not Divest the Courts of Jurisdiction to
Resolve the Issue of Possession
Settled is the rule that the defendant’s claim of ownership of the disputed property will not
divest the inferior court of its jurisdiction over the ejectment case.32 Even if the pleadings
raise the issue of ownership, the court may pass on such issue to determine only the question
of possession, especially if the ownership is inseparably linked with the possession.33 The
adjudication on the issue of ownership is only provisional and will not bar an action between
the same parties involving title to the land.34 This doctrine is a necessary consequence of the
nature of the two summary actions of ejectment, forcible entry and unlawful detainer, where
the only issue for adjudication is the physical or material possession over the real property.35
In this case, what Guevarra raised before the courts was that he and Pajuyo are not the
owners of the contested property and that they are mere squatters. Will the defense that the
parties to the ejectment case are not the owners of the disputed lot allow the courts to
renounce their jurisdiction over the case? The Court of Appeals believed so and held that it
would just leave the parties where they are since they are in pari delicto.
We do not agree with the Court of Appeals.
Ownership or the right to possess arising from ownership is not at issue in an action for
recovery of possession. The parties cannot present evidence to prove ownership or right to
legal possession except to prove the nature of the possession when necessary to resolve the
issue of physical possession.36 The same is true when the defendant asserts the absence of
title over the property. The absence of title over the contested lot is not a ground for the
courts to withhold relief from the parties in an ejectment case.
The only question that the courts must resolve in ejectment proceedings is - who is entitled to
the physical possession of the premises, that is, to the possession de facto and not to the
possession de jure.37 It does not even matter if a party’s title to the property is
questionable,38 or when both parties intruded into public land and their applications to own
the land have yet to be approved by the proper government agency.39 Regardless of the
actual condition of the title to the property, the party in peaceable quiet possession shall not
be thrown out by a strong hand, violence or terror.40 Neither is the unlawful withholding of
property allowed. Courts will always uphold respect for prior possession.
Thus, a party who can prove prior possession can recover such possession even against the
owner himself.41 Whatever may be the character of his possession, if he has in his favor prior
possession in time, he has the security that entitles him to remain on the property until a
person with a better right lawfully ejects him.42 To repeat, the only issue that the court has to
settle in an ejectment suit is the right to physical possession.
In Pitargue v. Sorilla,43 the government owned the land in dispute. The government did not
authorize either the plaintiff or the defendant in the case of forcible entry case to occupy the
land. The plaintiff had prior possession and had already introduced improvements on the
public land. The plaintiff had a pending application for the land with the Bureau of Lands
when the defendant ousted him from possession. The plaintiff filed the action of forcible
entry against the defendant. The government was not a party in the case of forcible entry.
The defendant questioned the jurisdiction of the courts to settle the issue of possession
because while the application of the plaintiff was still pending, title remained with the
government, and the Bureau of Public Lands had jurisdiction over the case. We disagreed with
the defendant. We ruled that courts have jurisdiction to entertain ejectment suits even
before the resolution of the application. The plaintiff, by priority of his application and of his
entry, acquired prior physical possession over the public land applied for as against other
private claimants. That prior physical possession enjoys legal protection against other private
claimants because only a court can take away such physical possession in an ejectment case.
While the Court did not brand the plaintiff and the defendant in Pitargue44 as squatters,
strictly speaking, their entry into the disputed land was illegal. Both the plaintiff and
defendant entered the public land without the owner’s permission. Title to the land remained
with the government because it had not awarded to anyone ownership of the contested
public land. Both the plaintiff and the defendant were in effect squatting on government
property. Yet, we upheld the courts’ jurisdiction to resolve the issue of possession even if the
plaintiff and the defendant in the ejectment case did not have any title over the contested
land.
Courts must not abdicate their jurisdiction to resolve the issue of physical possession because
of the public need to preserve the basic policy behind the summary actions of forcible entry
and unlawful detainer. The underlying philosophy behind ejectment suits is to prevent breach
of the peace and criminal disorder and to compel the party out of possession to respect and
resort to the law alone to obtain what he claims is his.45 The party deprived of possession
must not take the law into his own hands.46 Ejectment proceedings are summary in nature so
the authorities can settle speedily actions to recover possession because of the overriding
need to quell social disturbances.47
We further explained in Pitargue the greater interest that is at stake in actions for recovery of
possession. We made the following pronouncements in Pitargue:
The question that is before this Court is: Are courts without jurisdiction to take cognizance of
possessory actions involving these public lands before final award is made by the Lands
Department, and before title is given any of the conflicting claimants? It is one of utmost
importance, as there are public lands everywhere and there are thousands of settlers,
especially in newly opened regions. It also involves a matter of policy, as it requires the
determination of the respective authorities and functions of two coordinate branches of the
Government in connection with public land conflicts.
Our problem is made simple by the fact that under the Civil Code, either in the old, which was
in force in this country before the American occupation, or in the new, we have a possessory
action, the aim and purpose of which is the recovery of the physical possession of real
property, irrespective of the question as to who has the title thereto. Under the Spanish Civil
Code we had the accion interdictal, a summary proceeding which could be brought within one
year from dispossession (Roman Catholic Bishop of Cebu vs. Mangaron, 6 Phil. 286, 291); and
as early as October 1, 1901, upon the enactment of the Code of Civil Procedure (Act No. 190
of the Philippine Commission) we implanted the common law action of forcible entry (section
80 of Act No. 190), the object of which has been stated by this Court to be "to prevent
breaches of the peace and criminal disorder which would ensue from the withdrawal of the
remedy, and the reasonable hope such withdrawal would create that some advantage must
accrue to those persons who, believing themselves entitled to the possession of property,
resort to force to gain possession rather than to some appropriate action in the court to
assert their claims." (Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) So before
the enactment of the first Public Land Act (Act No. 926) the action of forcible entry was
already available in the courts of the country. So the question to be resolved is, Did the
Legislature intend, when it vested the power and authority to alienate and dispose of the
public lands in the Lands Department, to exclude the courts from entertaining the possessory
action of forcible entry between rival claimants or occupants of any land before award
thereof to any of the parties? Did Congress intend that the lands applied for, or all public
lands for that matter, be removed from the jurisdiction of the judicial Branch of the
Government, so that any troubles arising therefrom, or any breaches of the peace or
disorders caused by rival claimants, could be inquired into only by the Lands Department to
the exclusion of the courts? The answer to this question seems to us evident. The Lands
Department does not have the means to police public lands; neither does it have the means
to prevent disorders arising therefrom, or contain breaches of the peace among settlers; or to
pass promptly upon conflicts of possession. Then its power is clearly limited to disposition and
alienation, and while it may decide conflicts of possession in order to make proper award, the
settlement of conflicts of possession which is recognized in the court herein has another
ultimate purpose, i.e., the protection of actual possessors and occupants with a view to the
prevention of breaches of the peace. The power to dispose and alienate could not have been
intended to include the power to prevent or settle disorders or breaches of the peace among
rival settlers or claimants prior to the final award. As to this, therefore, the corresponding
branches of the Government must continue to exercise power and jurisdiction within the
limits of their respective functions. The vesting of the Lands Department with authority to
administer, dispose, and alienate public lands, therefore, must not be understood as
depriving the other branches of the Government of the exercise of the respective functions or
powers thereon, such as the authority to stop disorders and quell breaches of the peace by
the police, the authority on the part of the courts to take jurisdiction over possessory actions
arising therefrom not involving, directly or indirectly, alienation and disposition.
Our attention has been called to a principle enunciated in American courts to the effect that
courts have no jurisdiction to determine the rights of claimants to public lands, and that until
the disposition of the land has passed from the control of the Federal Government, the courts
will not interfere with the administration of matters concerning the same. (50 C. J. 1093-
1094.) We have no quarrel with this principle. The determination of the respective rights of
rival claimants to public lands is different from the determination of who has the actual
physical possession or occupation with a view to protecting the same and preventing disorder
and breaches of the peace. A judgment of the court ordering restitution of the possession of a
parcel of land to the actual occupant, who has been deprived thereof by another through the
use of force or in any other illegal manner, can never be "prejudicial interference" with the
disposition or alienation of public lands. On the other hand, if courts were deprived of
jurisdiction of cases involving conflicts of possession, that threat of judicial action against
breaches of the peace committed on public lands would be eliminated, and a state of
lawlessness would probably be produced between applicants, occupants or squatters, where
force or might, not right or justice, would rule.
It must be borne in mind that the action that would be used to solve conflicts of possession
between rivals or conflicting applicants or claimants would be no other than that of forcible
entry. This action, both in England and the United States and in our jurisdiction, is a summary
and expeditious remedy whereby one in peaceful and quiet possession may recover the
possession of which he has been deprived by a stronger hand, by violence or terror; its
ultimate object being to prevent breach of the peace and criminal disorder. (Supia and
Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) The basis of the remedy is mere possession
as a fact, of physical possession, not a legal possession. (Mediran vs. Villanueva, 37 Phil. 752.)
The title or right to possession is never in issue in an action of forcible entry; as a matter of
fact, evidence thereof is expressly banned, except to prove the nature of the possession.
(Second 4, Rule 72, Rules of Court.) With this nature of the action in mind, by no stretch of the
imagination can conclusion be arrived at that the use of the remedy in the courts of justice
would constitute an interference with the alienation, disposition, and control of public lands.
To limit ourselves to the case at bar can it be pretended at all that its result would in any way
interfere with the manner of the alienation or disposition of the land contested? On the
contrary, it would facilitate adjudication, for the question of priority of possession having
been decided in a final manner by the courts, said question need no longer waste the time of
the land officers making the adjudication or award. (Emphasis ours)
The Principle of Pari Delicto is not Applicable to Ejectment Cases
The Court of Appeals erroneously applied the principle of pari delicto to this case.
Articles 1411 and 1412 of the Civil Code48 embody the principle of pari delicto. We explained
the principle of pari delicto in these words:
The rule of pari delicto is expressed in the maxims ‘ex dolo malo non eritur actio’ and ‘in pari
delicto potior est conditio defedentis.’ The law will not aid either party to an illegal
agreement. It leaves the parties where it finds them.49
The application of the pari delicto principle is not absolute, as there are exceptions to its
application. One of these exceptions is where the application of the pari delicto rule would
violate well-established public policy.50
In Drilon v. Gaurana,51 we reiterated the basic policy behind the summary actions of forcible
entry and unlawful detainer. We held that:
It must be stated that the purpose of an action of forcible entry and detainer is that,
regardless of the actual condition of the title to the property, the party in peaceable quiet
possession shall not be turned out by strong hand, violence or terror. In affording this remedy
of restitution the object of the statute is to prevent breaches of the peace and criminal
disorder which would ensue from the withdrawal of the remedy, and the reasonable hope
such withdrawal would create that some advantage must accrue to those persons who,
believing themselves entitled to the possession of property, resort to force to gain possession
rather than to some appropriate action in the courts to assert their claims. This is the
philosophy at the foundation of all these actions of forcible entry and detainer which are
designed to compel the party out of possession to respect and resort to the law alone to
obtain what he claims is his.52
Clearly, the application of the principle of pari delicto to a case of ejectment between
squatters is fraught with danger. To shut out relief to squatters on the ground of pari delicto
would openly invite mayhem and lawlessness. A squatter would oust another squatter from
possession of the lot that the latter had illegally occupied, emboldened by the knowledge that
the courts would leave them where they are. Nothing would then stand in the way of the
ousted squatter from re-claiming his prior possession at all cost.
Petty warfare over possession of properties is precisely what ejectment cases or actions for
recovery of possession seek to prevent.53 Even the owner who has title over the disputed
property cannot take the law into his own hands to regain possession of his property. The
owner must go to court.
Courts must resolve the issue of possession even if the parties to the ejectment suit are
squatters. The determination of priority and superiority of possession is a serious and urgent
matter that cannot be left to the squatters to decide. To do so would make squatters receive
better treatment under the law. The law restrains property owners from taking the law into
their own hands. However, the principle of pari delicto as applied by the Court of Appeals
would give squatters free rein to dispossess fellow squatters or violently retake possession of
properties usurped from them. Courts should not leave squatters to their own devices in
cases involving recovery of possession.
Possession is the only Issue for Resolution in an Ejectment Case
The case for review before the Court of Appeals was a simple case of ejectment. The Court of
Appeals refused to rule on the issue of physical possession. Nevertheless, the appellate court
held that the pivotal issue in this case is who between Pajuyo and Guevarra has the "priority
right as beneficiary of the contested land under Proclamation No. 137."54 According to the
Court of Appeals, Guevarra enjoys preferential right under Proclamation No. 137 because
Article VI of the Code declares that the actual occupant or caretaker is the one qualified to
apply for socialized housing.
The ruling of the Court of Appeals has no factual and legal basis.
First. Guevarra did not present evidence to show that the contested lot is part of a relocation
site under Proclamation No. 137. Proclamation No. 137 laid down the metes and bounds of
the land that it declared open for disposition to bona fide residents.
The records do not show that the contested lot is within the land specified by Proclamation
No. 137. Guevarra had the burden to prove that the disputed lot is within the coverage of
Proclamation No. 137. He failed to do so.
Second. The Court of Appeals should not have given credence to Guevarra’s unsubstantiated
claim that he is the beneficiary of Proclamation No. 137. Guevarra merely alleged that in the
survey the project administrator conducted, he and not Pajuyo appeared as the actual
occupant of the lot.
There is no proof that Guevarra actually availed of the benefits of Proclamation No. 137.
Pajuyo allowed Guevarra to occupy the disputed property in 1985. President Aquino signed
Proclamation No. 137 into law on 11 March 1986. Pajuyo made his earliest demand for
Guevarra to vacate the property in September 1994.
During the time that Guevarra temporarily held the property up to the time that Proclamation
No. 137 allegedly segregated the disputed lot, Guevarra never applied as beneficiary of
Proclamation No. 137. Even when Guevarra already knew that Pajuyo was reclaiming
possession of the property, Guevarra did not take any step to comply with the requirements
of Proclamation No. 137.
Third. Even assuming that the disputed lot is within the coverage of Proclamation No. 137 and
Guevarra has a pending application over the lot, courts should still assume jurisdiction and
resolve the issue of possession. However, the jurisdiction of the courts would be limited to
the issue of physical possession only.
In Pitargue,55 we ruled that courts have jurisdiction over possessory actions involving public
land to determine the issue of physical possession. The determination of the respective rights
of rival claimants to public land is, however, distinct from the determination of who has the
actual physical possession or who has a better right of physical possession.56 The
administrative disposition and alienation of public lands should be threshed out in the proper
government agency.57
The Court of Appeals’ determination of Pajuyo and Guevarra’s rights under Proclamation No.
137 was premature. Pajuyo and Guevarra were at most merely potential beneficiaries of the
law. Courts should not preempt the decision of the administrative agency mandated by law to
determine the qualifications of applicants for the acquisition of public lands. Instead, courts
should expeditiously resolve the issue of physical possession in ejectment cases to prevent
disorder and breaches of peace.58
Pajuyo is Entitled to Physical Possession of the Disputed Property
Guevarra does not dispute Pajuyo’s prior possession of the lot and ownership of the house
built on it. Guevarra expressly admitted the existence and due execution of the Kasunduan.
The Kasunduan reads:
Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas, Quezon City, ay nagbibigay
pahintulot kay G. Eddie Guevarra, na pansamantalang manirahan sa nasabing bahay at lote ng
"walang bayad." Kaugnay nito, kailangang panatilihin nila ang kalinisan at kaayusan ng bahay
at lote.
Sa sandaling kailangan na namin ang bahay at lote, sila’y kusang aalis ng walang reklamo.
Based on the Kasunduan, Pajuyo permitted Guevarra to reside in the house and lot free of
rent, but Guevarra was under obligation to maintain the premises in good condition.
Guevarra promised to vacate the premises on Pajuyo’s demand but Guevarra broke his
promise and refused to heed Pajuyo’s demand to vacate.
These facts make out a case for unlawful detainer. Unlawful detainer involves the withholding
by a person from another of the possession of real property to which the latter is entitled
after the expiration or termination of the former’s right to hold possession under a contract,
express or implied.59
Where the plaintiff allows the defendant to use his property by tolerance without any
contract, the defendant is necessarily bound by an implied promise that he will vacate on
demand, failing which, an action for unlawful detainer will lie.60 The defendant’s refusal to
comply with the demand makes his continued possession of the property unlawful.61 The
status of the defendant in such a case is similar to that of a lessee or tenant whose term of
lease has expired but whose occupancy continues by tolerance of the owner.62
This principle should apply with greater force in cases where a contract embodies the
permission or tolerance to use the property. The Kasunduan expressly articulated Pajuyo’s
forbearance. Pajuyo did not require Guevarra to pay any rent but only to maintain the house
and lot in good condition. Guevarra expressly vowed in the Kasunduan that he would vacate
the property on demand. Guevarra’s refusal to comply with Pajuyo’s demand to vacate made
Guevarra’s continued possession of the property unlawful.
We do not subscribe to the Court of Appeals’ theory that the Kasunduan is one of
commodatum.
In a contract of commodatum, one of the parties delivers to another something not
consumable so that the latter may use the same for a certain time and return it.63 An
essential feature of commodatum is that it is gratuitous. Another feature of commodatum is
that the use of the thing belonging to another is for a certain period.64 Thus, the bailor
cannot demand the return of the thing loaned until after expiration of the period stipulated,
or after accomplishment of the use for which the commodatum is constituted.65 If the bailor
should have urgent need of the thing, he may demand its return for temporary use.66 If the
use of the thing is merely tolerated by the bailor, he can demand the return of the thing at
will, in which case the contractual relation is called a precarium.67 Under the Civil Code,
precarium is a kind of commodatum.68
The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not
essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated
him to maintain the property in good condition. The imposition of this obligation makes the
Kasunduan a contract different from a commodatum. The effects of the Kasunduan are also
different from that of a commodatum. Case law on ejectment has treated relationship based
on tolerance as one that is akin to a landlord-tenant relationship where the withdrawal of
permission would result in the termination of the lease.69 The tenant’s withholding of the
property would then be unlawful. This is settled jurisprudence.
Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum,
Guevarra as bailee would still have the duty to turn over possession of the property to Pajuyo,
the bailor. The obligation to deliver or to return the thing received attaches to contracts for
safekeeping, or contracts of commission, administration and commodatum.70 These
contracts certainly involve the obligation to deliver or return the thing received.71
Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also a
squatter. Squatters, Guevarra pointed out, cannot enter into a contract involving the land
they illegally occupy. Guevarra insists that the contract is void.
Guevarra should know that there must be honor even between squatters. Guevarra freely
entered into the Kasunduan. Guevarra cannot now impugn the Kasunduan after he had
benefited from it. The Kasunduan binds Guevarra.
The Kasunduan is not void for purposes of determining who between Pajuyo and Guevarra
has a right to physical possession of the contested property. The Kasunduan is the undeniable
evidence of Guevarra’s recognition of Pajuyo’s better right of physical possession. Guevarra is
clearly a possessor in bad faith. The absence of a contract would not yield a different result, as
there would still be an implied promise to vacate.
Guevarra contends that there is "a pernicious evil that is sought to be avoided, and that is
allowing an absentee squatter who (sic) makes (sic) a profit out of his illegal act."72 Guevarra
bases his argument on the preferential right given to the actual occupant or caretaker under
Proclamation No. 137 on socialized housing.
We are not convinced.
Pajuyo did not profit from his arrangement with Guevarra because Guevarra stayed in the
property without paying any rent. There is also no proof that Pajuyo is a professional squatter
who rents out usurped properties to other squatters. Moreover, it is for the proper
government agency to decide who between Pajuyo and Guevarra qualifies for socialized
housing. The only issue that we are addressing is physical possession.
Prior possession is not always a condition sine qua non in ejectment.73 This is one of the
distinctions between forcible entry and unlawful detainer.74 In forcible entry, the plaintiff is
deprived of physical possession of his land or building by means of force, intimidation, threat,
strategy or stealth. Thus, he must allege and prove prior possession.75 But in unlawful
detainer, the defendant unlawfully withholds possession after the expiration or termination
of his right to possess under any contract, express or implied. In such a case, prior physical
possession is not required.76
Pajuyo’s withdrawal of his permission to Guevarra terminated the Kasunduan. Guevarra’s
transient right to possess the property ended as well. Moreover, it was Pajuyo who was in
actual possession of the property because Guevarra had to seek Pajuyo’s permission to
temporarily hold the property and Guevarra had to follow the conditions set by Pajuyo in the
Kasunduan. Control over the property still rested with Pajuyo and this is evidence of actual
possession.
Pajuyo’s absence did not affect his actual possession of the disputed property. Possession in
the eyes of the law does not mean that a man has to have his feet on every square meter of
the ground before he is deemed in possession.77 One may acquire possession not only by
physical occupation, but also by the fact that a thing is subject to the action of one’s will.78
Actual or physical occupation is not always necessary.79
Ruling on Possession Does not Bind Title to the Land in Dispute
We are aware of our pronouncement in cases where we declared that "squatters and
intruders who clandestinely enter into titled government property cannot, by such act,
acquire any legal right to said property."80 We made this declaration because the person who
had title or who had the right to legal possession over the disputed property was a party in
the ejectment suit and that party instituted the case against squatters or usurpers.
In this case, the owner of the land, which is the government, is not a party to the ejectment
case. This case is between squatters. Had the government participated in this case, the courts
could have evicted the contending squatters, Pajuyo and Guevarra.
Since the party that has title or a better right over the property is not impleaded in this case,
we cannot evict on our own the parties. Such a ruling would discourage squatters from
seeking the aid of the courts in settling the issue of physical possession. Stripping both the
plaintiff and the defendant of possession just because they are squatters would have the
same dangerous implications as the application of the principle of pari delicto. Squatters
would then rather settle the issue of physical possession among themselves than seek relief
from the courts if the plaintiff and defendant in the ejectment case would both stand to lose
possession of the disputed property. This would subvert the policy underlying actions for
recovery of possession.
The MTC and RTC failed to justify the award of ₱3,000 attorney’s fees to Pajuyo. Attorney’s
fees as part of damages are awarded only in the instances enumerated in Article 2208 of the
Civil Code.83 Thus, the award of attorney’s fees is the exception rather than the rule.84
Attorney’s fees are not awarded every time a party prevails in a suit because of the policy that
no premium should be placed on the right to litigate.85 We therefore delete the attorney’s
fees awarded to Pajuyo.
We sustain the ₱300 monthly rentals the MTC and RTC assessed against Guevarra. Guevarra
did not dispute this factual finding of the two courts. We find the amount reasonable
compensation to Pajuyo. The ₱300 monthly rental is counted from the last demand to vacate,
which was on 16 February 1995.
WHEREFORE, we GRANT the petition. The Decision dated 21 June 2000 and Resolution
dated 14 December 2000 of the Court of Appeals in CA-G.R. SP No. 43129 are SET ASIDE.
The Decision dated 11 November 1996 of the Regional Trial Court of Quezon City, Branch 81
in Civil Case No. Q-96-26943, affirming the Decision dated 15 December 1995 of the
Metropolitan Trial Court of Quezon City, Branch 31 in Civil Case No. 12432, is REINSTATED
with MODIFICATION. The award of attorney’s fees is deleted. No costs.
SO ORDERED.

Since Pajuyo has in his favor priority in time in holding the property, he is entitled to remain
on the property until a person who has title or a better right lawfully ejects him. Guevarra is
certainly not that person. The ruling in this case, however, does not preclude Pajuyo and
Guevarra from introducing evidence and presenting arguments before the proper
administrative agency to establish any right to which they may be entitled under the law.81

In no way should our ruling in this case be interpreted to condone squatting. The ruling on the
issue of physical possession does not affect title to the property nor constitute a binding and
conclusive adjudication on the merits on the issue of ownership.82 The owner can still go to
court to recover lawfully the property from the person who holds the property without legal
title. Our ruling here does not diminish the power of government agencies, including local
governments, to condemn, abate, remove or demolish illegal or unauthorized structures in
accordance with existing laws.

Attorney’s Fees and Rentals

G.R. No. L-29025 October 4, 1971
Spouses MOISES P. PALISOC and BRIGIDA P. PALISOC, plaintiffs-appellants,
vs.
ANTONIO C. BRILLANTES and TEODOSIO V. VALENTON, owner and President, respectively,
of a school of arts and trades, known under the name and style of "Manila Technical
Institute" (M.I.T.), VIRGILIO L. DAFFON and SANTIAGO M. QUIBULUE, defendants-appellees.
Leovillo C. Agustin for plaintiffs-appellants. .
Honorato S. Reyes for appellee Brillantes, et al. .
Villareal, Almacen Navarra & Amores for appellee Daffon. .
TEEHANKEE, J.:
An appeal in forma pauperis on pure questions of law from a decision of the Court of First
Instance of Manila. .
Plaintiffs-appellants as parents of their sixteen-year old son, Dominador Palisoc, and a student
in automotive mechanics at the Manila Technical Institute, Quezon Boulevard, Manila, had
filed on May 19, 1966, the action below for damages arising from the death on March 10,
1966 of their son at the hands of a fellow student, defendant Virgilio L. Daffon, at the
laboratory room of the said Institute. .
Defendants, per the trial court's decision, are: "(T)he defendant Antonio C. Brillantes, at the
time when the incident which gave rise to his action occurred was a member of the Board of
Directors of the institute;1 the defendant Teodosio Valenton, the president thereof; the
defendant Santiago M. Quibulue, instructor of the class to which the deceased belonged; and
the defendant Virgilio L. Daffon, a fellow student of the deceased. At the beginning the
Manila Technical Institute was a single proprietorship, but lately on August 2, 1962, it was
duly incorporated."
The facts that led to the tragic death of plaintiffs' son were thus narrated by the trial court:
"(T)he deceased Dominador Palisoc and the defendant Virgilio L. Daffon were classmates, and
on the afternoon of March 10, 1966, between two and three o'clock, they, together with
another classmate Desiderio Cruz were in the laboratory room located on the ground floor. At
that time the classes were in recess. Desiderio Cruz and Virgilio L. Daffon were working on a
machine while Dominador Palisoc was merely looking on at them. Daffon made a remark to
the effect that Palisoc was acting like a foreman. Because of this remark Palisoc slapped
slightly Daffon on the face. Daffon, in retaliation, gave Palisoc a strong flat blow on the face,
which was followed by other fist blows on the stomach. Palisoc retreated apparently to avoid
the fist blows, but Daffon followed him and both exchanged blows until Palisoc stumbled on
an engine block which caused him to fall face downward. Palisoc became pale and fainted.
First aid was administered to him but he was not revived, so he was immediately taken to a
hospital. He never regained consciousness; finally he died. The foregoing is the substance of
the testimony of Desiderio Cruz, the lone witness to the incident."
The trial court expressly gave credence to this version of the incident, as testified to by the
lone eyewitness, Desiderio Cruz, a classmate of the protagonists, as that of a disinterested
witness who "has no motive or reason to testify one way or another in favor of any party" and
rejected the self-exculpatory version of defendant Daffon denying that he had inflicted any
fist blows on the deceased. .
With the postmortem findings of Dr. Angelo Singian of the Manila Police Department who
performed the autopsy re "Cause of death: shock due to traumatic fracture of theribs (6th
and 7th, left, contusion of the pancreas and stomach with intra-gastric hemorrhage and slight
subarachnoid hemorrhage on the brain," and his testimony that these internal injuries of the
deceased were caused "probably by strong fist blows," the trial court found defendant Daffon
liable for the quasi delict under Article 2176 of the Civil Code.3 It held that "(T)he act,
therefore, of the accused Daffon in giving the deceased strong fistblows in the stomach which
ruptured his internal organs and caused his death falls within the purview of this article of the
Code."4
The trial court, however, absolved from liability the three other defendants-officials of the
Manila Technical Institute, in this wise:
... Their liabilities are based on the provisions of Article 2180 of the New Civil Code which
reads:
Art. 2180. ... .
Lastly, teachers or heads of establishments of arts and trades shall be liable for damages
caused by their pupils and students and apprentices, so long as they remain in their custody.
In the opinion of the Court, this article of the Code is not applicable to the case at bar, since
this contemplates the situation where the control or influence of the teachers and heads of
school establishments over the conduct and actions by the pupil supersedes those of the
parents.
CIVIL LAW: DAMAGES ART 2180. NEW CIVIL CODE CONSTRUED: — The clause "so long as they
remain in their custody" contained in Article 2180 of the new civil code contemplated a
situation where the pupil lives and boards with the teacher, such that the control or influence
on the pupil supersedes those of the parents. In those circumstances the control or influence
over the conduct and actions of the pupil as well as the responsibilities for their sort would
pass from the father and mother to the teachers. (Ciriaco L. Mercado, Petitioner vs. the Court
of Appeals, Manuel Quisumbing, Jr., et al., respondents, G.R. No. L-14862, May 30, 1960).5
There is no evidence that the accused Daffon lived and boarded with his teacher or the other
defendant officials of the school. These defendants cannot therefore be made responsible for
the tort of the defendant Daffon.
Judgment was therefore rendered by the trial court as follows:
1. Sentencing the defendant Virgilio L. Daffon to pay the plaintiffs as heirs of the
deceased Dominador Palisoc (a) P6,000.00 for the death of Dominador Palisoc; (b) P3,375.00
for actual and compensatory expenses; (c) P5,000.00 for moral damages; (d) P10,000.00 for
loss of earning power, considering that the deceased was only between sixteen and
seventeen years, and in good health when he died, and (e) P2,000.00 for attorney's fee, plus
the costs of this action. .
2. Absolving the other defendants. .
3. Dismissing the defendants' counterclaim for lack of merit.
Plaintiffs' appeal raises the principal legal question that under the factual findings of the trial
court, which are now beyond review, the trial court erred in absolving the defendants-school
officials instead of holding them jointly and severally liable as tortfeasors, with defendant
Daffon, for the damages awarded them as a result of their son's death. The Court finds the
appeal, in the main, to be meritorious. .
1. The lower court absolved defendants-school officials on the ground that the
provisions of Article 2180, Civil Code, which expressly hold "teachers or heads of
establishments of arts and trades ... liable for damages caused by their pupils and students
and apprentices, so long as they remain in their custody," are not applicable to to the case at
bar, since "there is no evidence that the accused Daffon [who inflicted the fatal fistblows]6
lived and boarded with his teacher or the other defendants-officials of the school. These
defendants cannot therefore be made responsible for the tort of the defendant Daffon."
The lower court based its legal conclusion expressly on the Court's dictum in Mercado vs.
Court of Appeals,7 that "(I)t would seem that the clause "so long as they remain in their
custody," contemplates a situation where the pupil lives and boards with the teacher, such
that the control, direction and influence on the pupil supersedes those of the parents. In
these circumstances the control or influence over the conduct and actions of the pupil would
pass from the father and mother to the teacher; and so would the responsibility for the torts
of the pupil. Such a situation does not appear in the case at bar; the pupils appear to go to
school during school hours and go back to their homes with their parents after school is over."
This dictum had been made in rejecting therein petitioner father's contention that his minor
son's school, Lourdes Catholic School at Kanlaon, Quezon City [which was not a party to the
case] should be held responsible, rather than him as father, for the moral damages of
P2,000.00 adjudged against him for the physical injury inflicted by his son on a classmate. [A
cut on the right cheek with a piece of razor which costs only P50.00 by way of medical
expenses to treat and cure, since the wound left no scar.] The moral damages award was
after all set aside by the Court on the ground that none of the specific cases provided in
Article 2219, Civil Code, for awarding moral damages had been established, petitioner's son
being only nine years old and not having been shown to have "acted with discernment" in
inflicting the injuries on his classmate. .
The dictum in Mercado was based in turn on another dictum in the earlier case of Exconde vs.
Capuno,8 where the only issue involved as expressly stated in the decision, was whether the
therein defendant-father could be civilly liable for damages resulting from a death caused in a
motor vehicle accident driven unauthorizedly and negligently by his minor son, (which issue
was resolved adversely against the father). Nevertheless, the dictum in such earlier case that
"It is true that under the law abovequoted, teachers or directors of arts and trades are liable
for any damage caused by their pupils or apprentices while they are under their custody, but
this provision only applies to an institution of arts and trades and not to any academic
educational institution" was expressly cited and quoted in Mercado. .
2. The case at bar was instituted directly against the school officials and squarely
raises the issue of liability of teachers and heads of schools under Article 2180, Civil Code, for
damages caused by their pupils and students against fellow students on the school premises.
Here, the parents of the student at fault, defendant Daffon, are not involved, since Daffon
was already of age at the time of the tragic incident. There is no question, either, that the
school involved is a non-academic school,9 the Manila Technical Institute being admittedly a
technical vocational and industrial school. .
The Court holds that under the cited codal article, defendants head and teacher of the Manila
Technical Institute (defendants Valenton and Quibulue, respectively) are liable jointly and
severally for damages to plaintiffs-appellants for the death of the latter's minor son at the
hands of defendant Daffon at the school's laboratory room. No liability attaches to defendant
Brillantes as a mere member of the school's board of directors. The school itself cannot be
held similarly liable, since it has not been properly impleaded as party defendant. While
plaintiffs sought to so implead it, by impleading improperly defendant Brillantes, its former
single proprietor, the lower court found that it had been incorporated since August 2, 1962,
and therefore the school itself, as thus incorporated, should have been brought in as party
defendant. Plaintiffs failed to do so, notwithstanding that Brillantes and his co-defendants in
their reply to plaintiffs' request for admission had expressly manifested and made of record
that "defendant Antonio C. Brillantes is not the registered owner/head of the "Manila
Technical Institute" which is now a corporation and is not owned by any individual person."10
3. The rationale of such liability of school heads and teachers for the tortious acts of
their pupils and students, so long as they remain in their custody, is that they stand, to a
certain extent, as to their pupils and students, in loco parentis and are called upon to
"exercise reasonable supervision over the conduct of the child."11 This is expressly provided
for in Articles 349, 350 and 352 of the Civil Code.12 In the law of torts, the governing principle
is that the protective custody of the school heads and teachers is mandatorily substituted for
that of the parents, and hence, it becomes their obligation as well as that of the school itself
to provide proper supervision of the students' activities during the whole time that they are at
attendance in the school, including recess time, as well as to take the necessary precautions
to protect the students in their custody from dangers and hazards that would reasonably be
anticipated, including injuries that some student themselves may inflict willfully or through
negligence on their fellow students. .
4. As tersely summarized by Mr. Justice J.B.L. Reyes in his dissenting opinion in
Exconde, "the basis of the presumption of negligence of Art. 1903 [now 2180] is some culpa in
vigilando that the parents, teachers, etc. are supposed to have incurred in the exercise of
their authority" 13 and "where the parent places the child under the effective authority of the
teacher, the latter, and not the parent, should be the one answerable for the torts committed
while under his custody, for the very reason that the parent is not supposed to interfere with
the discipline of the school nor with the authority and supervision of the teacher while the
child is under instruction." The school itself, likewise, has to respond for the fault or
negligence of its school head and teachers under the same cited article.14
5. The lower court therefore erred in law in absolving defendants-school officials on
the ground that they could be held liable under Article 2180, Civil Code, only if the student
who inflicted the fatal fistblows on his classmate and victim "lived and boarded with his
teacher or the other defendants officials of the school." As stated above, the phrase used in
the cited article — "so long as (the students) remain in their custody" means the protective
and supervisory custody that the school and its heads and teachers exercise over the pupils
and students for as long as they are at attendance in the school, including recess time. There
is nothing in the law that requires that for such liability to attach the pupil or student who
commits the tortious act must live and board in the school, as erroneously held by the lower
court, and the dicta in Mercado (as well as in Exconde) on which it relied, must now be
deemed to have been set aside by the present decision. .
6. Defendants Valenton and Quibulue as president and teacher-in-charge of the
school must therefore be held jointly and severally liable for the quasi-delict of their co-
defendant Daffon in the latter's having caused the death of his classmate, the deceased
Dominador Palisoc. The unfortunate death resulting from the fight between the protagonists-
students could have been avoided, had said defendants but complied with their duty of
providing adequate supervision over the activities of the students in the school premises to
protect their students from harm, whether at the hands of fellow students or other parties. At
any rate, the law holds them liable unless they relieve themselves of such liability, in
compliance with the last paragraph of Article 2180, Civil Code, by "(proving) that they
observed all the diligence of a good father of a family to prevent damage." In the light of the
factual findings of the lower court's decision, said defendants failed to prove such exemption
from liability. .
7. Plaintiffs-appellees' contention that the award of P6,000.00 as indemnity for the
death of their son should be increased to P12,000.00 as set by the Court in People vs.
Pantoja,15 and observed in all death indemnity cases thereafter is well taken. The Court, in
Pantoja, after noting the decline in the purchasing power of the Philippine peso, had
expressed its "considered opinion that the amount of award of compensatory damages for
death caused by a crime or quasi-delict should now be P12,000.00." The Court thereby
adjusted the minimum amount of "compensatory damages for death caused by a crime or
quasi-delict" as per Article 2206, Civil Code, from the old stated minimum of P3,000.00 to
P12,000.00, which amount is to be awarded "even though there may have been mitigating
circumstances" pursuant to the express provisions of said codal article. .
8. Plaintiffs-appellees' other claims on appeal that the lower court should have
awarded exemplary damages and imposed legal interest on the total damages awarded,
besides increasing the award of attorney's fees all concern matters that are left by law to the
discretion of the trial court and the Court has not been shown any error or abuse in the
exercise of such discretion on the part of the trial court.16 Decisive here is the touchstone
provision of Article 2231, Civil Code, that "In quasi-delicts, exemplary damages may be
granted if the defendant acted with gross negligence." No gross negligence on the part of
defendants was found by the trial court to warrant the imposition of exemplary damages, as
well as of interest and increased attorney's fees, and the Court has not been shown in this
appeal any compelling reason to disturb such finding. .
ACCORDINGLY, the judgment appealed from is modified so as to provide as follows: .
1. Sentencing the defendants Virgilio L. Daffon, TeodosioV. Valenton and Santiago
M. Quibulue jointly and severally to pay plaintiffs as heirs of the deceased Dominador
Palisoc (a) P12,000.00 for the death of Dominador Palisoc; (b) P3,375.00 for actual and
compensatory expenses; (c) P5,000.00 for moral, damages; (d) P10,000.00 for loss of
earning power and (e) P2,000.00 for attorney's fee, plus the costs of this action in both
instances; 2. absolving defendant Antonio C. Brillantes from the complaint; and 3.
dismissing defendants' counterclaims. .
G.R. No. 126297 January 31, 2007 series of medical examinations, Dr. Miguel Ampil, petitioner in G.R. No. 127590, diagnosed
her to be suffering from "cancer of the sigmoid."
PROFESSIONAL SERVICES, INC., Petitioner,
vs. On April 11, 1984, Dr. Ampil, assisted by the medical staff4 of the Medical City Hospital,
NATIVIDAD and ENRIQUE AGANA, Respondents. performed an anterior resection surgery on Natividad. He found that the malignancy in her
sigmoid area had spread on her left ovary, necessitating the removal of certain portions of it.
x-----------------------x Thus, Dr. Ampil obtained the consent of Natividad’s husband, Enrique Agana, to permit Dr.
Juan Fuentes, respondent in G.R. No. 126467, to perform hysterectomy on her.
G.R. No. 126467 January 31, 2007
After Dr. Fuentes had completed the hysterectomy, Dr. Ampil took over, completed the
NATIVIDAD (Substituted by her children MARCELINO AGANA III, ENRIQUE AGANA, JR., EMMA operation and closed the incision.
AGANA ANDAYA, JESUS AGANA, and RAYMUND AGANA) and ENRIQUE AGANA, Petitioners,
vs. However, the operation appeared to be flawed. In the corresponding Record of Operation
JUAN FUENTES, Respondent. dated April 11, 1984, the attending nurses entered these remarks:

x- - - - - - - - - - - - - - - - - - - -- - - - x "sponge count lacking 2

G.R. No. 127590 January 31, 2007 "announced to surgeon searched (sic) done but to no avail continue for closure."

MIGUEL AMPIL, Petitioner, On April 24, 1984, Natividad was released from the hospital. Her hospital and medical bills,
vs. including the doctors’ fees, amounted to P60,000.00.
NATIVIDAD AGANA and ENRIQUE AGANA, Respondents.
After a couple of days, Natividad complained of excruciating pain in her anal region. She
DECISION consulted both Dr. Ampil and Dr. Fuentes about it. They told her that the pain was the natural
consequence of the surgery. Dr. Ampil then recommended that she consult an oncologist to
SANDOVAL-GUTIERREZ, J.: examine the cancerous nodes which were not removed during the operation.

Hospitals, having undertaken one of mankind’s most important and delicate endeavors, must
assume the grave responsibility of pursuing it with appropriate care. The care and service
dispensed through this high trust, however technical, complex and esoteric its character may
be, must meet standards of responsibility commensurate with the undertaking to preserve
and protect the health, and indeed, the very lives of those placed in the hospital’s keeping.1
Assailed in these three consolidated petitions for review on certiorari is the Court of Appeals’
Decision2 dated September 6, 1996 in CA-G.R. CV No. 42062 and CA-G.R. SP No. 32198
affirming with modification the Decision3 dated March 17, 1993 of the Regional Trial Court
(RTC), Branch 96, Quezon City in Civil Case No. Q-43322 and nullifying its Order dated
September 21, 1993.
The facts, as culled from the records, are:
On April 4, 1984, Natividad Agana was rushed to the Medical City General Hospital (Medical
City Hospital) because of difficulty of bowel movement and bloody anal discharge. After a
On May 9, 1984, Natividad, accompanied by her husband, went to the United States to seek
further treatment. After four months of consultations and laboratory examinations, Natividad
was told she was free of cancer. Hence, she was advised to return to the Philippines.
On August 31, 1984, Natividad flew back to the Philippines, still suffering from pains. Two
weeks thereafter, her daughter found a piece of gauze protruding from her vagina. Upon
being informed about it, Dr. Ampil proceeded to her house where he managed to extract by
hand a piece of gauze measuring 1.5 inches in width. He then assured her that the pains
would soon vanish.
Dr. Ampil’s assurance did not come true. Instead, the pains intensified, prompting Natividad
to seek treatment at the Polymedic General Hospital. While confined there, Dr. Ramon
Gutierrez detected the presence of another foreign object in her vagina -- a foul-smelling
gauze measuring 1.5 inches in width which badly infected her vaginal vault. A recto-vaginal
fistula had formed in her reproductive organs which forced stool to excrete through the
vagina. Another surgical operation was needed to remedy the damage. Thus, in October 1984,
Natividad underwent another surgery.

On November 12, 1984, Natividad and her husband filed with the RTC, Branch 96, Quezon City
a complaint for damages against the Professional Services, Inc. (PSI), owner of the Medical
City Hospital, Dr. Ampil, and Dr. Fuentes, docketed as Civil Case No. Q-43322. They alleged
that the latter are liable for negligence for leaving two pieces of gauze inside Natividad’s body
and malpractice for concealing their acts of negligence.
Meanwhile, Enrique Agana also filed with the Professional Regulation Commission (PRC) an
administrative complaint for gross negligence and malpractice against Dr. Ampil and Dr.
Fuentes, docketed as Administrative Case No. 1690. The PRC Board of Medicine heard the
case only with respect to Dr. Fuentes because it failed to acquire jurisdiction over Dr. Ampil
who was then in the United States.
On February 16, 1986, pending the outcome of the above cases, Natividad died and was duly
substituted by her above-named children (the Aganas).
On March 17, 1993, the RTC rendered its Decision in favor of the Aganas, finding PSI, Dr.
Ampil and Dr. Fuentes liable for negligence and malpractice, the decretal part of which reads:
WHEREFORE, judgment is hereby rendered for the plaintiffs ordering the defendants
PROFESSIONAL SERVICES, INC., DR. MIGUEL AMPIL and DR. JUAN FUENTES to pay to the
plaintiffs, jointly and severally, except in respect of the award for exemplary damages and the
interest thereon which are the liabilities of defendants Dr. Ampil and Dr. Fuentes only, as
follows:
1. As actual damages, the following amounts:
a. The equivalent in Philippine Currency of the total of US$19,900.00 at the rate of P21.60-
US$1.00, as reimbursement of actual expenses incurred in the United States of America;
b. The sum of P4,800.00 as travel taxes of plaintiffs and their physician daughter;
c. The total sum of P45,802.50, representing the cost of hospitalization at Polymedic Hospital,
medical fees, and cost of the saline solution;
2. As moral damages, the sum of P2,000,000.00;
3. As exemplary damages, the sum of P300,000.00;
4. As attorney’s fees, the sum of P250,000.00;
5. Legal interest on items 1 (a), (b), and (c); 2; and 3 hereinabove, from date of filing of the
complaint until full payment; and
6. Costs of suit.
SO ORDERED.
Aggrieved, PSI, Dr. Fuentes and Dr. Ampil interposed an appeal to the Court of Appeals,
docketed as CA-G.R. CV No. 42062.
Incidentally, on April 3, 1993, the Aganas filed with the RTC a motion for a partial execution of
its Decision, which was granted in an Order dated May 11, 1993. Thereafter, the sheriff levied
upon certain properties of Dr. Ampil and sold them for P451,275.00 and delivered the amount
to the Aganas.
Following their receipt of the money, the Aganas entered into an agreement with PSI and Dr.
Fuentes to indefinitely suspend any further execution of the RTC Decision. However, not long
thereafter, the Aganas again filed a motion for an alias writ of execution against the
properties of PSI and Dr. Fuentes. On September 21, 1993, the RTC granted the motion and
issued the corresponding writ, prompting Dr. Fuentes to file with the Court of Appeals a
petition for certiorari and prohibition, with prayer for preliminary injunction, docketed as CA-
G.R. SP No. 32198. During its pendency, the Court of Appeals issued a Resolution5 dated
October 29, 1993 granting Dr. Fuentes’ prayer for injunctive relief.
On January 24, 1994, CA-G.R. SP No. 32198 was consolidated with CA-G.R. CV No. 42062.
Meanwhile, on January 23, 1995, the PRC Board of Medicine rendered its Decision6 in
Administrative Case No. 1690 dismissing the case against Dr. Fuentes. The Board held that the
prosecution failed to show that Dr. Fuentes was the one who left the two pieces of gauze
inside Natividad’s body; and that he concealed such fact from Natividad.
On September 6, 1996, the Court of Appeals rendered its Decision jointly disposing of CA-G.R.
CV No. 42062 and CA-G.R. SP No. 32198, thus:
WHEREFORE, except for the modification that the case against defendant-appellant Dr. Juan
Fuentes is hereby DISMISSED, and with the pronouncement that defendant-appellant Dr.
Miguel Ampil is liable to reimburse defendant-appellant Professional Services, Inc., whatever
amount the latter will pay or had paid to the plaintiffs-appellees, the decision appealed from
is hereby AFFIRMED and the instant appeal DISMISSED.
Concomitant with the above, the petition for certiorari and prohibition filed by herein
defendant-appellant Dr. Juan Fuentes in CA-G.R. SP No. 32198 is hereby GRANTED and the
challenged order of the respondent judge dated September 21, 1993, as well as the alias writ
of execution issued pursuant thereto are hereby NULLIFIED and SET ASIDE. The bond posted
by the petitioner in connection with the writ of preliminary injunction issued by this Court on
November 29, 1993 is hereby cancelled.
Costs against defendants-appellants Dr. Miguel Ampil and Professional Services, Inc.
SO ORDERED.
Only Dr. Ampil filed a motion for reconsideration, but it was denied in a Resolution7 dated
December 19, 1996.
Hence, the instant consolidated petitions.
In G.R. No. 126297, PSI alleged in its petition that the Court of Appeals erred in holding that:
(1) it is estopped from raising the defense that Dr. Ampil is not its employee; (2) it is solidarily
liable with Dr. Ampil; and (3) it is not entitled to its counterclaim against the Aganas. PSI
contends that Dr. Ampil is not its employee, but a mere consultant or independent
contractor. As such, he alone should answer for his negligence.
In G.R. No. 126467, the Aganas maintain that the Court of Appeals erred in finding that Dr.
Fuentes is not guilty of negligence or medical malpractice, invoking the doctrine of res ipsa
loquitur. They contend that the pieces of gauze are prima facie proofs that the operating
surgeons have been negligent.
Finally, in G.R. No. 127590, Dr. Ampil asserts that the Court of Appeals erred in finding him
liable for negligence and malpractice sans evidence that he left the two pieces of gauze in
Natividad’s vagina. He pointed to other probable causes, such as: (1) it was Dr. Fuentes who
used gauzes in performing the hysterectomy; (2) the attending nurses’ failure to properly
count the gauzes used during surgery; and (3) the medical intervention of the American
doctors who examined Natividad in the United States of America.
For our resolution are these three vital issues: first, whether the Court of Appeals erred in
holding Dr. Ampil liable for negligence and malpractice; second, whether the Court of Appeals
erred in absolving Dr. Fuentes of any liability; and third, whether PSI may be held solidarily
liable for the negligence of Dr. Ampil.
I - G.R. No. 127590
Whether the Court of Appeals Erred in Holding Dr. Ampil
Liable for Negligence and Malpractice.
Dr. Ampil, in an attempt to absolve himself, gears the Court’s attention to other possible
causes of Natividad’s detriment. He argues that the Court should not discount either of the
following possibilities: first, Dr. Fuentes left the gauzes in Natividad’s body after performing
hysterectomy; second, the attending nurses erred in counting the gauzes; and third, the
American doctors were the ones who placed the gauzes in Natividad’s body.
Dr. Ampil’s arguments are purely conjectural and without basis. Records show that he did not
present any evidence to prove that the American doctors were the ones who put or left the
gauzes in Natividad’s body. Neither did he submit evidence to rebut the correctness of the
record of operation, particularly the number of gauzes used. As to the alleged negligence of
Dr. Fuentes, we are mindful that Dr. Ampil examined his (Dr. Fuentes’) work and found it in
order.
The glaring truth is that all the major circumstances, taken together, as specified by the Court
of Appeals, directly point to Dr. Ampil as the negligent party, thus:
First, it is not disputed that the surgeons used gauzes as sponges to control the bleeding of
the patient during the surgical operation.
Second, immediately after the operation, the nurses who assisted in the surgery noted in
their report that the ‘sponge count (was) lacking 2’; that such anomaly was ‘announced to
surgeon’ and that a ‘search was done but to no avail’ prompting Dr. Ampil to ‘continue for
closure’ x x x.
Third, after the operation, two (2) gauzes were extracted from the same spot of the body of
Mrs. Agana where the surgery was performed.
An operation requiring the placing of sponges in the incision is not complete until the sponges
are properly removed, and it is settled that the leaving of sponges or other foreign substances
in the wound after the incision has been closed is at least prima facie negligence by the
operating surgeon.8 To put it simply, such act is considered so inconsistent with due care as
to raise an inference of negligence. There are even legions of authorities to the effect that
such act is negligence per se.9
Of course, the Court is not blind to the reality that there are times when danger to a patient’s
life precludes a surgeon from further searching missing sponges or foreign objects left in the
body. But this does not leave him free from any obligation. Even if it has been shown that a
surgeon was required by the urgent necessities of the case to leave a sponge in his patient’s
abdomen, because of the dangers attendant upon delay, still, it is his legal duty to so inform
his patient within a reasonable time thereafter by advising her of what he had been
compelled to do. This is in order that she might seek relief from the effects of the foreign
object left in her body as her condition might permit. The ruling in Smith v. Zeagler10 is
explicit, thus:
The removal of all sponges used is part of a surgical operation, and when a physician or
surgeon fails to remove a sponge he has placed in his patient’s body that should be removed
as part of the operation, he thereby leaves his operation uncompleted and creates a new
condition which imposes upon him the legal duty of calling the new condition to his patient’s
attention, and endeavoring with the means he has at hand to minimize and avoid untoward
results likely to ensue therefrom.

Here, Dr. Ampil did not inform Natividad about the missing two pieces of gauze. Worse, he
even misled her that the pain she was experiencing was the ordinary consequence of her
operation. Had he been more candid, Natividad could have taken the immediate and
appropriate medical remedy to remove the gauzes from her body. To our mind, what was
initially an act of negligence by Dr. Ampil has ripened into a deliberate wrongful act of
deceiving his patient.
This is a clear case of medical malpractice or more appropriately, medical negligence. To
successfully pursue this kind of case, a patient must only prove that a health care provider
either failed to do something which a reasonably prudent health care provider would have
done, or that he did something that a reasonably prudent provider would not have done; and
that failure or action caused injury to the patient.11 Simply put, the elements are duty,
breach, injury and proximate causation. Dr, Ampil, as the lead surgeon, had the duty to
remove all foreign objects, such as gauzes, from Natividad’s body before closure of the
incision. When he failed to do so, it was his duty to inform Natividad about it. Dr. Ampil
breached both duties. Such breach caused injury to Natividad, necessitating her further
examination by American doctors and another surgery. That Dr. Ampil’s negligence is the
proximate cause12 of Natividad’s injury could be traced from his act of closing the incision
despite the information given by the attending nurses that two pieces of gauze were still
missing. That they were later on extracted from Natividad’s vagina established the causal link
between Dr. Ampil’s negligence and the injury. And what further aggravated such injury was
his deliberate concealment of the missing gauzes from the knowledge of Natividad and her
family.
II - G.R. No. 126467
Whether the Court of Appeals Erred in Absolving
Dr. Fuentes of any Liability
The Aganas assailed the dismissal by the trial court of the case against Dr. Fuentes on the
ground that it is contrary to the doctrine of res ipsa loquitur. According to them, the fact that
the two pieces of gauze were left inside Natividad’s body is a prima facie evidence of Dr.
Fuentes’ negligence.
We are not convinced.
Literally, res ipsa loquitur means "the thing speaks for itself." It is the rule that the fact of the
occurrence of an injury, taken with the surrounding circumstances, may permit an inference
or raise a presumption of negligence, or make out a plaintiff’s prima facie case, and present a
question of fact for defendant to meet with an explanation.13 Stated differently, where the
thing which caused the injury, without the fault of the injured, is under the exclusive control
of the defendant and the injury is such that it should not have occurred if he, having such
control used proper care, it affords reasonable evidence, in the absence of explanation that
the injury arose from the defendant’s want of care, and the burden of proof is shifted to him
to establish that he has observed due care and diligence.14
From the foregoing statements of the rule, the requisites for the applicability of the doctrine
of res ipsa loquitur are: (1) the occurrence of an injury; (2) the thing which caused the injury
was under the control and management of the defendant; (3) the occurrence was such that in
the ordinary course of things, would not have happened if those who had control or
management used proper care; and (4) the absence of explanation by the defendant. Of the
foregoing requisites, the most instrumental is the "control and management of the thing
which caused the injury."15
We find the element of "control and management of the thing which caused the injury" to be
wanting. Hence, the doctrine of res ipsa loquitur will not lie.
It was duly established that Dr. Ampil was the lead surgeon during the operation of Natividad.
He requested the assistance of Dr. Fuentes only to perform hysterectomy when he (Dr. Ampil)
found that the malignancy in her sigmoid area had spread to her left ovary. Dr. Fuentes
performed the surgery and thereafter reported and showed his work to Dr. Ampil. The latter
examined it and finding everything to be in order, allowed Dr. Fuentes to leave the operating
room. Dr. Ampil then resumed operating on Natividad. He was about to finish the procedure
when the attending nurses informed him that two pieces of gauze were missing. A "diligent
search" was conducted, but the misplaced gauzes were not found. Dr. Ampil then directed
that the incision be closed. During this entire period, Dr. Fuentes was no longer in the
operating room and had, in fact, left the hospital.
Under the "Captain of the Ship" rule, the operating surgeon is the person in complete charge
of the surgery room and all personnel connected with the operation. Their duty is to obey his
orders.16 As stated before, Dr. Ampil was the lead surgeon. In other words, he was the
"Captain of the Ship." That he discharged such role is evident from his following conduct: (1)
calling Dr. Fuentes to perform a hysterectomy; (2) examining the work of Dr. Fuentes and
finding it in order; (3) granting Dr. Fuentes’ permission to leave; and (4) ordering the closure
of the incision. To our mind, it was this act of ordering the closure of the incision
notwithstanding that two pieces of gauze remained unaccounted for, that caused injury to
Natividad’s body. Clearly, the control and management of the thing which caused the injury
was in the hands of Dr. Ampil, not Dr. Fuentes.
In this jurisdiction, res ipsa loquitur is not a rule of substantive law, hence, does not per se
create or constitute an independent or separate ground of liability, being a mere evidentiary
rule.17 In other words, mere invocation and application of the doctrine does not dispense
with the requirement of proof of negligence. Here, the negligence was proven to have been
committed by Dr. Ampil and not by Dr. Fuentes.
III - G.R. No. 126297
Whether PSI Is Liable for the Negligence of Dr. Ampil
The third issue necessitates a glimpse at the historical development of hospitals and the
resulting theories concerning their liability for the negligence of physicians.
Until the mid-nineteenth century, hospitals were generally charitable institutions, providing
medical services to the lowest classes of society, without regard for a patient’s ability to
pay.18 Those who could afford medical treatment were usually treated at home by their
doctors.19 However, the days of house calls and philanthropic health care are over. The
modern health care industry continues to distance itself from its charitable past and has
experienced a significant conversion from a not-for-profit health care to for-profit hospital
businesses. Consequently, significant changes in health law have accompanied the business-
related changes in the hospital industry. One important legal change is an increase in hospital
liability for medical malpractice. Many courts now allow claims for hospital vicarious liability
under the theories of respondeat superior, apparent authority, ostensible authority, or
agency by estoppel. 20
In this jurisdiction, the statute governing liability for negligent acts is Article 2176 of the Civil
Code, which reads:
Art. 2176. Whoever by act or omission causes damage to another, there being fault or
negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-
existing contractual relation between the parties, is called a quasi-delict and is governed by
the provisions of this Chapter.
A derivative of this provision is Article 2180, the rule governing vicarious liability under the
doctrine of respondeat superior, thus:
ART. 2180. The obligation imposed by Article 2176 is demandable not only for one’s own acts
or omissions, but also for those of persons for whom one is responsible.
x x x x x x
The owners and managers of an establishment or enterprise are likewise responsible for
damages caused by their employees in the service of the branches in which the latter are
employed or on the occasion of their functions.
Employers shall be liable for the damages caused by their employees and household helpers
acting within the scope of their assigned tasks even though the former are not engaged in any
business or industry.
x x x x x x
The responsibility treated of in this article shall cease when the persons herein mentioned
prove that they observed all the diligence of a good father of a family to prevent damage.
A prominent civilist commented that professionals engaged by an employer, such as
physicians, dentists, and pharmacists, are not "employees" under this article because the
manner in which they perform their work is not within the control of the latter (employer). In
other words, professionals are considered personally liable for the fault or negligence they
commit in the discharge of their duties, and their employer cannot be held liable for such
fault or negligence. In the context of the present case, "a hospital cannot be held liable for the
fault or negligence of a physician or surgeon in the treatment or operation of patients."21
The foregoing view is grounded on the traditional notion that the professional status and the
very nature of the physician’s calling preclude him from being classed as an agent or
employee of a hospital, whenever he acts in a professional capacity.22 It has been said that
medical practice strictly involves highly developed and specialized knowledge,23 such that
physicians are generally free to exercise their own skill and judgment in rendering medical
services sans interference.24 Hence, when a doctor practices medicine in a hospital setting,
the hospital and its employees are deemed to subserve him in his ministrations to the patient
and his actions are of his own responsibility.25
The case of Schloendorff v. Society of New York Hospital26 was then considered an authority
for this view. The "Schloendorff doctrine" regards a physician, even if employed by a hospital,
as an independent contractor because of the skill he exercises and the lack of control exerted
over his work. Under this doctrine, hospitals are exempt from the application of the
respondeat superior principle for fault or negligence committed by physicians in the discharge
of their profession.
However, the efficacy of the foregoing doctrine has weakened with the significant
developments in medical care. Courts came to realize that modern hospitals are increasingly
taking active role in supplying and regulating medical care to patients. No longer were a
hospital’s functions limited to furnishing room, food, facilities for treatment and operation,
and attendants for its patients. Thus, in Bing v. Thunig,27 the New York Court of Appeals
deviated from the Schloendorff doctrine, noting that modern hospitals actually do far more
than provide facilities for treatment. Rather, they regularly employ, on a salaried basis, a large
staff of physicians, interns, nurses, administrative and manual workers. They charge patients
for medical care and treatment, even collecting for such services through legal action, if
necessary. The court then concluded that there is no reason to exempt hospitals from the
universal rule of respondeat superior.
In our shores, the nature of the relationship between the hospital and the physicians is
rendered inconsequential in view of our categorical pronouncement in Ramos v. Court of
Appeals28 that for purposes of apportioning responsibility in medical negligence cases, an
employer-employee relationship in effect exists between hospitals and their attending and
visiting physicians. This Court held:
"We now discuss the responsibility of the hospital in this particular incident. The unique
practice (among private hospitals) of filling up specialist staff with attending and visiting
"consultants," who are allegedly not hospital employees, presents problems in apportioning
responsibility for negligence in medical malpractice cases. However, the difficulty is more
apparent than real.
In the first place, hospitals exercise significant control in the hiring and firing of consultants
and in the conduct of their work within the hospital premises. Doctors who apply for
‘consultant’ slots, visiting or attending, are required to submit proof of completion of
residency, their educational qualifications, generally, evidence of accreditation by the
appropriate board (diplomate), evidence of fellowship in most cases, and references. These
requirements are carefully scrutinized by members of the hospital administration or by a
review committee set up by the hospital who either accept or reject the application. x x x.
After a physician is accepted, either as a visiting or attending consultant, he is normally
required to attend clinico-pathological conferences, conduct bedside rounds for clerks,
interns and residents, moderate grand rounds and patient audits and perform other tasks and
responsibilities, for the privilege of being able to maintain a clinic in the hospital, and/or for
the privilege of admitting patients into the hospital. In addition to these, the physician’s
performance as a specialist is generally evaluated by a peer review committee on the basis of
mortality and morbidity statistics, and feedback from patients, nurses, interns and residents.
A consultant remiss in his duties, or a consultant who regularly falls short of the minimum
standards acceptable to the hospital or its peer review committee, is normally politely
terminated.
In other words, private hospitals, hire, fire and exercise real control over their attending and
visiting ‘consultant’ staff. While ‘consultants’ are not, technically employees, x x x, the control
exercised, the hiring, and the right to terminate consultants all fulfill the important hallmarks
of an employer-employee relationship, with the exception of the payment of wages. In
assessing whether such a relationship in fact exists, the control test is determining.
Accordingly, on the basis of the foregoing, we rule that for the purpose of allocating
responsibility in medical negligence cases, an employer-employee relationship in effect exists
between hospitals and their attending and visiting physicians. "
But the Ramos pronouncement is not our only basis in sustaining PSI’s liability. Its liability is
also anchored upon the agency principle of apparent authority or agency by estoppel and the
doctrine of corporate negligence which have gained acceptance in the determination of a
hospital’s liability for negligent acts of health professionals. The present case serves as a
perfect platform to test the applicability of these doctrines, thus, enriching our jurisprudence.
Apparent authority, or what is sometimes referred to as the "holding
out" theory, or doctrine of ostensible agency or agency by estoppel,29 has its origin from the
law of agency. It imposes liability, not as the result of the reality of a contractual relationship,
but rather because of the actions of a principal or an employer in somehow misleading the
public into believing that the relationship or the authority exists.30 The concept is essentially
one of estoppel and has been explained in this manner:
"The principal is bound by the acts of his agent with the apparent authority which he
knowingly permits the agent to assume, or which he holds the agent out to the public as
possessing. The question in every case is whether the principal has by his voluntary act placed
the agent in such a situation that a person of ordinary prudence, conversant with business
usages and the nature of the particular business, is justified in presuming that such agent has
authority to perform the particular act in question.31
The applicability of apparent authority in the field of hospital liability was upheld long time
ago in Irving v. Doctor Hospital of Lake Worth, Inc.32 There, it was explicitly stated that "there
does not appear to be any rational basis for excluding the concept of apparent authority from
the field of hospital liability." Thus, in cases where it can be shown that a hospital, by its
actions, has held out a particular physician as its agent and/or employee and that a patient
has accepted treatment from that physician in the reasonable belief that it is being rendered
in behalf of the hospital, then the hospital will be liable for the physician’s negligence.
Our jurisdiction recognizes the concept of an agency by implication or estoppel. Article 1869
of the Civil Code reads:
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.
In this case, PSI publicly displays in the lobby of the Medical City Hospital the names and
specializations of the physicians associated or accredited by it, including those of Dr. Ampil
and Dr. Fuentes. We concur with the Court of Appeals’ conclusion that it "is now estopped
from passing all the blame to the physicians whose names it proudly paraded in the public
directory leading the public to believe that it vouched for their skill and competence." Indeed,
PSI’s act is tantamount to holding out to the public that Medical City Hospital, through its
accredited physicians, offers quality health care services. By accrediting Dr. Ampil and Dr.
Fuentes and publicly advertising their qualifications, the hospital created the impression that
they were its agents, authorized to perform medical or surgical services for its patients. As
expected, these patients, Natividad being one of them, accepted the services on the
reasonable belief that such were being rendered by the hospital or its employees, agents, or
servants. The trial court correctly pointed out:
x x x regardless of the education and status in life of the patient, he ought not be burdened
with the defense of absence of employer-employee relationship between the hospital and the
independent physician whose name and competence are certainly certified to the general
public by the hospital’s act of listing him and his specialty in its lobby directory, as in the case
herein. The high costs of today’s medical and health care should at least exact on the hospital
greater, if not broader, legal responsibility for the conduct of treatment and surgery within its
facility by its accredited physician or surgeon, regardless of whether he is independent or
employed."33
The wisdom of the foregoing ratiocination is easy to discern. Corporate entities, like PSI, are
capable of acting only through other individuals, such as physicians. If these accredited
physicians do their job well, the hospital succeeds in its mission of offering quality medical
services and thus profits financially. Logically, where negligence mars the quality of its
services, the hospital should not be allowed to escape liability for the acts of its ostensible
agents.
We now proceed to the doctrine of corporate negligence or corporate responsibility.
One allegation in the complaint in Civil Case No. Q-43332 for negligence and malpractice is
that PSI as owner, operator and manager of Medical City Hospital, "did not perform the
necessary supervision nor exercise diligent efforts in the supervision of Drs. Ampil and
Fuentes and its nursing staff, resident doctors, and medical interns who assisted Drs. Ampil
and Fuentes in the performance of their duties as surgeons."34 Premised on the doctrine of
corporate negligence, the trial court held that PSI is directly liable for such breach of duty.
We agree with the trial court.
Recent years have seen the doctrine of corporate negligence as the judicial answer to the
problem of allocating hospital’s liability for the negligent acts of health practitioners, absent
facts to support the application of respondeat superior or apparent authority. Its formulation
proceeds from the judiciary’s acknowledgment that in these modern times, the duty of
providing quality medical service is no longer the sole prerogative and responsibility of the
physician. The modern hospitals have changed structure. Hospitals now tend to organize a
highly professional medical staff whose competence and performance need to be monitored
by the hospitals commensurate with their inherent responsibility to provide quality medical
care.35
The doctrine has its genesis in Darling v. Charleston Community Hospital.36 There, the
Supreme Court of Illinois held that "the jury could have found a hospital negligent, inter alia,
in failing to have a sufficient number of trained nurses attending the patient; failing to require
a consultation with or examination by members of the hospital staff; and failing to review the
treatment rendered to the patient." On the basis of Darling, other jurisdictions held that a
hospital’s corporate negligence extends to permitting a physician known to be incompetent
to practice at the hospital.37 With the passage of time, more duties were expected from
hospitals, among them: (1) the use of reasonable care in the maintenance of safe and
adequate facilities and equipment; (2) the selection and retention of competent physicians;
(3) the overseeing or supervision of all persons who practice medicine within its walls; and (4)
the formulation, adoption and enforcement of adequate rules and policies that ensure quality
care for its patients.38 Thus, in Tucson Medical Center, Inc. v. Misevich,39 it was held that a
hospital, following the doctrine of corporate responsibility, has the duty to see that it meets
the standards of responsibilities for the care of patients. Such duty includes the proper
supervision of the members of its medical staff. And in Bost v. Riley,40 the court concluded
that a patient who enters a hospital does so with the reasonable expectation that it will
attempt to cure him. The hospital accordingly has the duty to make a reasonable effort to
monitor and oversee the treatment prescribed and administered by the physicians practicing
in its premises.
In the present case, it was duly established that PSI operates the Medical City Hospital for the
purpose and under the concept of providing comprehensive medical services to the public.
Accordingly, it has the duty to exercise reasonable care to protect from harm all patients
admitted into its facility for medical treatment. Unfortunately, PSI failed to perform such
duty. The findings of the trial court are convincing, thus:
x x x PSI’s liability is traceable to its failure to conduct an investigation of the matter reported
in the nota bene of the count nurse. Such failure established PSI’s part in the dark conspiracy
of silence and concealment about the gauzes. Ethical considerations, if not also legal, dictated
the holding of an immediate inquiry into the events, if not for the benefit of the patient to
whom the duty is primarily owed, then in the interest of arriving at the truth. The Court
cannot accept that the medical and the healing professions, through their members like
defendant surgeons, and their institutions like PSI’s hospital facility, can callously turn their
backs on and disregard even a mere probability of mistake or negligence by refusing or failing
to investigate a report of such seriousness as the one in Natividad’s case.
It is worthy to note that Dr. Ampil and Dr. Fuentes operated on Natividad with the assistance
of the Medical City Hospital’s staff, composed of resident doctors, nurses, and interns. As
such, it is reasonable to conclude that PSI, as the operator of the hospital, has actual or
constructive knowledge of the procedures carried out, particularly the report of the attending
nurses that the two pieces of gauze were missing. In Fridena v. Evans,41 it was held that a
corporation is bound by the knowledge acquired by or notice given to its agents or officers
within the scope of their authority and in reference to a matter to which their authority
extends. This means that the knowledge of any of the staff of Medical City Hospital
constitutes knowledge of PSI. Now, the failure of PSI, despite the attending nurses’ report, to
investigate and inform Natividad regarding the missing gauzes amounts to callous negligence.
Not only did PSI breach its duties to oversee or supervise all persons who practice medicine
within its walls, it also failed to take an active step in fixing the negligence committed. This
renders PSI, not only vicariously liable for the negligence of Dr. Ampil under Article 2180 of
the Civil Code, but also directly liable for its own negligence under Article 2176. In Fridena,
the Supreme Court of Arizona held:
x x x In recent years, however, the duty of care owed to the patient by the hospital has
expanded. The emerging trend is to hold the hospital responsible where the hospital has
failed to monitor and review medical services being provided within its walls. See Kahn
Hospital Malpractice Prevention, 27 De Paul . Rev. 23 (1977).
Among the cases indicative of the ‘emerging trend’ is Purcell v. Zimbelman, 18 Ariz. App.
75,500 P. 2d 335 (1972). In Purcell, the hospital argued that it could not be held liable for the
malpractice of a medical practitioner because he was an independent contractor within the
hospital. The Court of Appeals pointed out that the hospital had created a professional staff
whose competence and performance was to be monitored and reviewed by the governing
body of the hospital, and the court held that a hospital would be negligent where it had
knowledge or reason to believe that a doctor using the facilities was employing a method of
treatment or care which fell below the recognized standard of care.

Subsequent to the Purcell decision, the Arizona Court of Appeals held that a hospital has
certain inherent responsibilities regarding the quality of medical care furnished to patients
within its walls and it must meet the standards of responsibility commensurate with this
undertaking. Beeck v. Tucson General Hospital, 18 Ariz. App. 165, 500 P. 2d 1153 (1972). This
court has confirmed the rulings of the Court of Appeals that a hospital has the duty of
supervising the competence of the doctors on its staff. x x x.

x x x x x x
In the amended complaint, the plaintiffs did plead that the operation was performed at the
hospital with its knowledge, aid, and assistance, and that the negligence of the defendants
was the proximate cause of the patient’s injuries. We find that such general allegations of
negligence, along with the evidence produced at the trial of this case, are sufficient to support
the hospital’s liability based on the theory of negligent supervision."

Anent the corollary issue of whether PSI is solidarily liable with Dr. Ampil for damages, let it
be emphasized that PSI, apart from a general denial of its responsibility, failed to adduce
evidence showing that it exercised the diligence of a good father of a family in the
accreditation and supervision of the latter. In neglecting to offer such proof, PSI failed to
discharge its burden under the last paragraph of Article 2180 cited earlier, and, therefore,
must be adjudged solidarily liable with Dr. Ampil. Moreover, as we have discussed, PSI is also
directly liable to the Aganas.

One final word. Once a physician undertakes the treatment and care of a patient, the law
imposes on him certain obligations. In order to escape liability, he must possess that
reasonable degree of learning, skill and experience required by his profession. At the same
time, he must apply reasonable care and diligence in the exercise of his skill and the
application of his knowledge, and exert his best judgment.

WHEREFORE, we DENY all the petitions and AFFIRM the challenged Decision of the Court of
Appeals in CA-G.R. CV No. 42062 and CA-G.R. SP No. 32198.

Costs against petitioners PSI and Dr. Miguel Ampil.

SO ORDERED.
G.R. No. 84698 February 4, 1992
PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION, JUAN D. LIM, BENJAMIN P. PAULINO,
ANTONIO M. MAGTALAS, COL. PEDRO SACRO and LT. M. SORIANO, petitioners,
vs.
COURT OF APPEALS, HON. REGINA ORDOÑEZ-BENITEZ, in her capacity as Presiding Judge of
Branch 47, Regional Trial Court, Manila, SEGUNDA R. BAUTISTA and ARSENIA D. BAUTISTA,
respondents.
Balgos and Perez for petitioners.
Collantes, Ramirez & Associates for private respondents.
PADILLA, J.:
A stabbing incident on 30 August 1985 which caused the death of Carlitos Bautista while on
the second-floor premises of the Philippine School of Business Administration (PSBA)
prompted the parents of the deceased to file suit in the Regional Trial Court of Manila (Branch
47) presided over by Judge (now Court of Appeals justice) Regina Ordoñez-Benitez, for
damages against the said PSBA and its corporate officers. At the time of his death, Carlitos
was enrolled in the third year commerce course at the PSBA. It was established that his
assailants were not members of the school's academic community but were elements from
outside the school.
Specifically, the suit impleaded the PSBA and the following school authorities: Juan D. Lim
(President), Benjamin P. Paulino (Vice-President), Antonio M. Magtalas (Treasurer/Cashier),
Col. Pedro Sacro (Chief of Security) and a Lt. M. Soriano (Assistant Chief of Security).
Substantially, the plaintiffs (now private respondents) sought to adjudge them liable for the
victim's untimely demise due to their alleged negligence, recklessness and lack of security
precautions, means and methods before, during and after the attack on the victim. During the
proceedings a quo, Lt. M. Soriano terminated his relationship with the other petitioners by
resigning from his position in the school.
Defendants a quo (now petitioners) sought to have the suit dismissed, alleging that since they
are presumably sued under Article 2180 of the Civil Code, the complaint states no cause of
action against them, as jurisprudence on the subject is to the effect that academic
institutions, such as the PSBA, are beyond the ambit of the rule in the afore-stated article.
The respondent trial court, however, overruled petitioners' contention and thru an order
dated 8 December 1987, denied their motion to dismiss. A subsequent motion for
reconsideration was similarly dealt with by an order dated 25 January 1988. Petitioners then
assailed the trial court's disposition before the respondent appellate court which, in a
decision * promulgated on 10 June 1988, affirmed the trial court's orders. On 22 August 1988,
the respondent appellate court resolved to deny the petitioners' motion for reconsideration.
Hence, this petition.
At the outset, it is to be observed that the respondent appellate court primarily anchored its
decision on the law of quasi-delicts, as enunciated in Articles 2176 and 2180 of the Civil Code.
1 Pertinent portions of the appellate court's now assailed ruling state:
Article 2180 (formerly Article 1903) of the Civil Code is an adoption from the old Spanish Civil
Code. The comments of Manresa and learned authorities on its meaning should give way to
present day changes. The law is not fixed and flexible (sic); it must be dynamic. In fact, the
greatest value and significance of law as a rule of conduct in (sic) its flexibility to adopt to
changing social conditions and its capacity to meet the new challenges of progress.
Construed in the light of modern day educational system, Article 2180 cannot be construed in
its narrow concept as held in the old case of Exconde vs. Capuno 2 and Mercado vs. Court of
Appeals; 3 hence, the ruling in the Palisoc 4 case that it should apply to all kinds of
educational institutions, academic or vocational.
At any rate, the law holds the teachers and heads of the school staff liable unless they relieve
themselves of such liability pursuant to the last paragraph of Article 2180 by "proving that
they observed all the diligence to prevent damage." This can only be done at a trial on the
merits of the case. 5
While we agree with the respondent appellate court that the motion to dismiss the complaint
was correctly denied and the complaint should be tried on the merits, we do not however
agree with the premises of the appellate court's ruling.
Article 2180, in conjunction with Article 2176 of the Civil Code, establishes the rule of in loco
parentis. This Court discussed this doctrine in the afore-cited cases of Exconde, Mendoza,
Palisoc and, more recently, in Amadora vs. Court of Appeals. 6 In all such cases, it had been
stressed that the law (Article 2180) plainly provides that the damage should have been
caused or inflicted by pupils or students of he educational institution sought to be held liable
for the acts of its pupils or students while in its custody. However, this material situation does
not exist in the present case for, as earlier indicated, the assailants of Carlitos were not
students of the PSBA, for whose acts the school could be made liable.
However, does the appellate court's failure to consider such material facts mean the
exculpation of the petitioners from liability? It does not necessarily follow.
When an academic institution accepts students for enrollment, there is established a contract
between them, resulting in bilateral obligations which both parties are bound to comply with.
7 For its part, the school undertakes to provide the student with an education that would
presumably suffice to equip him with the necessary tools and skills to pursue higher
education or a profession. On the other hand, the student covenants to abide by the school's
academic requirements and observe its rules and regulations.
Institutions of learning must also meet the implicit or "built-in" obligation of providing their
students with an atmosphere that promotes or assists in attaining its primary undertaking of
imparting knowledge. Certainly, no student can absorb the intricacies of physics or higher
mathematics or explore the realm of the arts and other sciences when bullets are flying or
grenades exploding in the air or where there looms around the school premises a constant
threat to life and limb. Necessarily, the school must ensure that adequate steps are taken to
maintain peace and order within the campus premises and to prevent the breakdown
thereof.
Because the circumstances of the present case evince a contractual relation between the
PSBA and Carlitos Bautista, the rules on quasi-delict do not really govern. 8 A perusal of
Article 2176 shows that obligations arising from quasi-delicts or tort, also known as extra-
contractual obligations, arise only between parties not otherwise bound by contract, whether
express or implied. However, this impression has not prevented this Court from determining
the existence of a tort even when there obtains a contract. In Air France vs. Carrascoso (124
Phil. 722), the private respondent was awarded damages for his unwarranted expulsion from
a first-class seat aboard the petitioner airline. It is noted, however, that the Court referred to
the petitioner-airline's liability as one arising from tort, not one arising from a contract of
carriage. In effect, Air France is authority for the view that liability from tort may exist even if
there is a contract, for the act that breaks the contract may be also a tort. (Austro-America
S.S. Co. vs. Thomas, 248 Fed. 231).
This view was not all that revolutionary, for even as early as 1918, this Court was already of a
similar mind. In Cangco vs. Manila Railroad (38 Phil. 780), Mr. Justice Fisher elucidated thus:
The field of non-contractual obligation is much broader than that of contractual obligation,
comprising, as it does, the whole extent of juridical human relations. These two fields,
figuratively speaking, concentric; that is to say, the mere fact that a person is bound to
another by contract does not relieve him from extra-contractual liability to such person.
When such a contractual relation exists the obligor may break the contract under such
conditions that the same act which constitutes a breach of the contract would have
constituted the source of an extra-contractual obligation had no contract existed between the
parties.
Immediately what comes to mind is the chapter of the Civil Code on Human Relations,
particularly Article 21, which provides:
Any person who wilfully causes loss or injury to another in a manner that is contrary to
morals, good custom or public policy shall compensate the latter for the damage. (emphasis
supplied).
Air France penalized the racist policy of the airline which emboldened the petitioner's
employee to forcibly oust the private respondent to cater to the comfort of a white man who
allegedly "had a better right to the seat." In Austro-American, supra, the public
embarrassment caused to the passenger was the justification for the Circuit Court of Appeals,
(Second Circuit), to award damages to the latter. From the foregoing, it can be concluded that
should the act which breaches a contract be done in bad faith and be violative of Article 21,
then there is a cause to view the act as constituting a quasi-delict.
In the circumstances obtaining in the case at bar, however, there is, as yet, no finding that the
contract between the school and Bautista had been breached thru the former's negligence in
providing proper security measures. This would be for the trial court to determine. And, even
if there be a finding of negligence, the same could give rise generally to a breach of
contractual obligation only. Using the test of Cangco, supra, the negligence of the school
would not be relevant absent a contract. In fact, that negligence becomes material only
because of the contractual relation between PSBA and Bautista. In other words, a contractual
relation is a condition sine qua non to the school's liability. The negligence of the school
cannot exist independently of the contract, unless the negligence occurs under the
circumstances set out in Article 21 of the Civil Code.
This Court is not unmindful of the attendant difficulties posed by the obligation of schools,
above-mentioned, for conceptually a school, like a common carrier, cannot be an insurer of its
students against all risks. This is specially true in the populous student communities of the so-
called "university belt" in Manila where there have been reported several incidents ranging
from gang wars to other forms of hooliganism. It would not be equitable to expect of schools
to anticipate all types of violent trespass upon their premises, for notwithstanding the
security measures installed, the same may still fail against an individual or group determined
to carry out a nefarious deed inside school premises and environs. Should this be the case,
the school may still avoid liability by proving that the breach of its contractual obligation to
the students was not due to its negligence, here statutorily defined to be the omission of that
degree of diligence which is required by the nature of the obligation and corresponding to the
circumstances of persons, time and place. 9
As the proceedings a quo have yet to commence on the substance of the private respondents'
complaint, the record is bereft of all the material facts. Obviously, at this stage, only the trial
court can make such a determination from the evidence still to unfold.
WHEREFORE, the foregoing premises considered, the petition is DENIED. The court of origin
(RTC, Manila, Br. 47) is hereby ordered to continue proceedings consistent with this ruling
of the Court. Costs against the petitioners. SO ORDERED.
G.R. No. 156109 November 18, 2004
KHRISTINE REA M. REGINO, Assisted and Represented by ARMANDO REGINO, petitioner,
vs.
PANGASINAN COLLEGES OF SCIENCE AND TECHNOLOGY, RACHELLE A. GAMUROT and
ELISSA BALADAD, respondents.
DECISION
PANGANIBAN, J.:
Upon enrolment, students and their school enter upon a reciprocal contract. The students
agree to abide by the standards of academic performance and codes of conduct, issued
usually in the form of manuals that are distributed to the enrollees at the start of the school
term. Further, the school informs them of the itemized fees they are expected to pay.
Consequently, it cannot, after the enrolment of a student, vary the terms of the contract. It
cannot require fees other than those it specified upon enrolment.
The Case
Before the Court is a Petition for Review under Rule 45,1 seeking to nullify the July 12, 20022
and the November 22, 20023 Orders of the Regional Trial Court (RTC) of Urdaneta City,
Pangasinan (Branch 48) in Civil Case No. U-7541. The decretal portion of the first assailed
Order reads:
"WHEREFORE, the Court GRANTS the instant motion to dismiss for lack of cause of action."4
The second challenged Order denied petitioner's Motion for Reconsideration.
The Facts
Petitioner Khristine Rea M. Regino was a first year computer science student at Respondent
Pangasinan Colleges of Science and Technology (PCST). Reared in a poor family, Regino went
to college mainly through the financial support of her relatives. During the second semester
of school year 2001-2002, she enrolled in logic and statistics subjects under Respondents
Rachelle A. Gamurot and Elissa Baladad, respectively, as teachers.
In February 2002, PCST held a fund raising campaign dubbed the "Rave Party and Dance
Revolution," the proceeds of which were to go to the construction of the school's tennis and
volleyball courts. Each student was required to pay for two tickets at the price of P100 each.
The project was allegedly implemented by recompensing students who purchased tickets
with additional points in their test scores; those who refused to pay were denied the
opportunity to take the final examinations.
Financially strapped and prohibited by her religion from attending dance parties and
celebrations, Regino refused to pay for the tickets. On March 14 and March 15, 2002, the
scheduled dates of the final examinations in logic and statistics, her teachers -- Respondents
Rachelle A. Gamurot and Elissa Baladad -- allegedly disallowed her from taking the tests.
According to petitioner, Gamurot made her sit out her logic class while her classmates were
taking their examinations. The next day, Baladad, after announcing to the entire class that she
was not permitting petitioner and another student to take their statistics examinations for
failing to pay for their tickets, allegedly ejected them from the classroom. Petitioner's pleas
ostensibly went unheeded by Gamurot and Baladad, who unrelentingly defended their
positions as compliance with PCST's policy.
On April 25, 2002, petitioner filed, as a pauper litigant, a Complaint5 for damages against
PCST, Gamurot and Baladad. In her Complaint, she prayed for P500,000 as nominal damages;
P500,000 as moral damages; at least P1,000,000 as exemplary damages; P250,000 as actual
damages; plus the costs of litigation and attorney's fees.
On May 30, 2002, respondents filed a Motion to Dismiss6 on the ground of petitioner's failure
to exhaust administrative remedies. According to respondents, the question raised involved
the determination of the wisdom of an administrative policy of the PCST; hence, the case
should have been initiated before the proper administrative body, the Commission of Higher
Education (CHED).
In her Comment to respondents' Motion, petitioner argued that prior exhaustion of
administrative remedies was unnecessary, because her action was not administrative in
nature, but one purely for damages arising from respondents' breach of the laws on human
relations. As such, jurisdiction lay with the courts.
On July 12, 2002, the RTC dismissed the Complaint for lack of cause of action.
Ruling of the Regional Trial Court
In granting respondents' Motion to Dismiss, the trial court noted that the instant controversy
involved a higher institution of learning, two of its faculty members and one of its students. It
added that Section 54 of the Education Act of 1982 vested in the Commission on Higher
Education (CHED) the supervision and regulation of tertiary schools. Thus, it ruled that the
CHED, not the courts, had jurisdiction over the controversy.7
In its dispositive portion, the assailed Order dismissed the Complaint for "lack of cause of
action" without, however, explaining this ground.
Aggrieved, petitioner filed the present Petition on pure questions of law.8
Issues
In her Memorandum, petitioner raises the following issues for our consideration:
"Whether or not the principle of exhaustion of administrative remedies applies in a civil
action exclusively for damages based on violation of the human relation provisions of the Civil
Code, filed by a student against her former school.
"Whether or not there is a need for prior declaration of invalidity of a certain school
administrative policy by the Commission on Higher Education (CHED) before a former student
can successfully maintain an action exclusively for damages in regular courts.
"Whether or not the Commission on Higher Education (CHED) has exclusive original
jurisdiction over actions for damages based upon violation of the Civil Code provisions on
human relations filed by a student against the school."9
All of the foregoing point to one issue -- whether the doctrine of exhaustion of administrative
remedies is applicable. The Court, however, sees a second issue which, though not expressly
raised by petitioner, was impliedly contained in her Petition: whether the Complaint stated
sufficient cause(s) of action.
The Court's Ruling
The Petition is meritorious.
First Issue:
Exhaustion of Administrative Remedies
Respondents anchored their Motion to Dismiss on petitioner's alleged failure to exhaust
administrative remedies before resorting to the RTC. According to them, the determination of
the controversy hinge on the validity, the wisdom and the propriety of PCST's academic
policy. Thus, the Complaint should have been lodged in the CHED, the administrative body
tasked under Republic Act No. 7722 to implement the state policy to "protect, foster and
promote the right of all citizens to affordable quality education at all levels and to take
appropriate steps to ensure that education is accessible to all."10
Petitioner counters that the doctrine finds no relevance to the present case since she is
praying for damages, a remedy beyond the domain of the CHED and well within the
jurisdiction of the courts.11
Petitioner is correct. First, the doctrine of exhaustion of administrative remedies has no
bearing on the present case. In Factoran Jr. v. CA,12 the Court had occasion to elucidate on
the rationale behind this doctrine:
"The doctrine of exhaustion of administrative remedies is basic. Courts, for reasons of law,
comity, and convenience, should not entertain suits unless the available administrative
remedies have first been resorted to and the proper authorities have been given the
appropriate opportunity to act and correct their alleged errors, if any, committed in the
administrative forum. x x x.13 "
Petitioner is not asking for the reversal of the policies of PCST. Neither is she demanding it to
allow her to take her final examinations; she was already enrolled in another educational
institution. A reversal of the acts complained of would not adequately redress her grievances;
under the circumstances, the consequences of respondents' acts could no longer be undone
or rectified.
Second, exhaustion of administrative remedies is applicable when there is competence on the
part of the administrative body to act upon the matter complained of.14 Administrative
agencies are not courts; they are neither part of the judicial system, nor are they deemed
judicial tribunals.15 Specifically, the CHED does not have the power to award damages.16
Hence, petitioner could not have commenced her case before the Commission.
Third, the exhaustion doctrine admits of exceptions, one of which arises when the issue is
purely legal and well within the jurisdiction of the trial court.17 Petitioner's action for
damages inevitably calls for the application and the interpretation of the Civil Code, a function
that falls within the jurisdiction of the courts.18
Second Issue:
Cause of Action
Sufficient Causes of Action Stated in the Allegations in the Complaint
As a rule, every complaint must sufficiently allege a cause of action; failure to do so warrants
its dismissal.19 A complaint is said to assert a sufficient cause of action if, admitting what
appears solely on its face to be correct, the plaintiff would be entitled to the relief prayed for.
Assuming the facts that are alleged to be true, the court should be able to render a valid
judgment in accordance with the prayer in the complaint.20
A motion to dismiss based on lack of cause of action hypothetically admits the truth of the
alleged facts. In their Motion to Dismiss, respondents did not dispute any of petitioner's
allegations, and they admitted that "x x x the crux of plaintiff's cause of action is the
determination of whether or not the assessment of P100 per ticket is excessive or
oppressive."21 They thereby premised their prayer for dismissal on the Complaint's alleged
failure to state a cause of action. Thus, a reexamination of the Complaint is in order.
The Complaint contains the following factual allegations:
"10. In the second week of February 2002, defendant Rachelle A. Gamurot, in connivance
with PCST, forced plaintiff and her classmates to buy or take two tickets each, x x x;
"11. Plaintiff and many of her classmates objected to the forced distribution and selling of
tickets to them but the said defendant warned them that if they refused [to] take or pay the
price of the two tickets they would not be allowed at all to take the final examinations;
"12. As if to add insult to injury, defendant Rachelle A. Gamurot bribed students with
additional fifty points or so in their test score in her subject just to unjustly influence and
compel them into taking the tickets;
"13. Despite the students' refusal, they were forced to take the tickets because [of] defendant
Rachelle A. Gamurot's coercion and act of intimidation, but still many of them including the
plaintiff did not attend the dance party imposed upon them by defendants PCST and Rachelle
A. Gamurot;
"14. Plaintiff was not able to pay the price of her own two tickets because aside form the fact
that she could not afford to pay them it is also against her religious practice as a member of a
certain religious congregation to be attending dance parties and celebrations;
"15. On March 14, 2002, before defendant Rachelle A. Gamurot gave her class its final
examination in the subject 'Logic' she warned that students who had not paid the tickets
would not be allowed to participate in the examination, for which threat and intimidation
many students were eventually forced to make payments:
"16. Because plaintiff could not afford to pay, defendant Rachelle A. Gamurot inhumanly
made plaintiff sit out the class but the defendant did not allow her to take her final
examination in 'Logic;'
"17. On March 15, 2002 just before the giving of the final examination in the subject
'Statistics,' defendant Elissa Baladad, in connivance with defendants Rachelle A. Gamurot and
PCST, announced in the classroom that she was not allowing plaintiff and another student to
take the examination for their failure and refusal to pay the price of the tickets, and
thenceforth she ejected plaintiff and the other student from the classroom;
"18. Plaintiff pleaded for a chance to take the examination but all defendants could say was
that the prohibition to give the examinations to non-paying students was an administrative
decision;
"19. Plaintiff has already paid her tuition fees and other obligations in the school;
"20. That the above-cited incident was not a first since PCST also did another forced
distribution of tickets to its students in the first semester of school year 2001-2002; x x x " 22
The foregoing allegations show two causes of action; first, breach of contract; and second,
liability for tort.
Reciprocity of the
School-Student Contract
In Alcuaz v. PSBA,23 the Court characterized the relationship between the school and the
student as a contract, in which "a student, once admitted by the school is considered enrolled
for one semester."24 Two years later, in Non v. Dames II,25 the Court modified the
"termination of contract theory" in Alcuaz by holding that the contractual relationship
between the school and the student is not only semestral in duration, but for the entire
period the latter are expected to complete it."26 Except for the variance in the period during
which the contractual relationship is considered to subsist, both Alcuaz and Non were
unanimous in characterizing the school-student relationship as contractual in nature.
The school-student relationship is also reciprocal. Thus, it has consequences appurtenant to
and inherent in all contracts of such kind -- it gives rise to bilateral or reciprocal rights and
obligations. The school undertakes to provide students with education sufficient to enable
them to pursue higher education or a profession. On the other hand, the students agree to
abide by the academic requirements of the school and to observe its rules and regulations.27
The terms of the school-student contract are defined at the moment of its inception -- upon
enrolment of the student. Standards of academic performance and the code of behavior and
discipline are usually set forth in manuals distributed to new students at the start of every
school year. Further, schools inform prospective enrollees the amount of fees and the terms
of payment.
In practice, students are normally required to make a down payment upon enrollment, with
the balance to be paid before every preliminary, midterm and final examination. Their failure
to pay their financial obligation is regarded as a valid ground for the school to deny them the
opportunity to take these examinations.
The foregoing practice does not merely ensure compliance with financial obligations; it also
underlines the importance of major examinations. Failure to take a major examination is
usually fatal to the students' promotion to the next grade or to graduation. Examination
results form a significant basis for their final grades. These tests are usually a primary and an
indispensable requisite to their elevation to the next educational level and, ultimately, to
their completion of a course.
Education is not a measurable commodity. It is not possible to determine who is "better
educated" than another. Nevertheless, a student's grades are an accepted approximation of
what would otherwise be an intangible product of countless hours of study. The importance
of grades cannot be discounted in a setting where education is generally the gate pass to
employment opportunities and better life; such grades are often the means by which a
prospective employer measures whether a job applicant has acquired the necessary tools or
skills for a particular profession or trade.
Thus, students expect that upon their payment of tuition fees, satisfaction of the set
academic standards, completion of academic requirements and observance of school rules
and regulations, the school would reward them by recognizing their "completion" of the
course enrolled in.
The obligation on the part of the school has been established in Magtibay v. Garcia,28 Licup v.
University of San Carlos29 and Ateneo de Manila University v. Garcia,30 in which the Court
held that, barring any violation of the rules on the part of the students, an institution of
higher learning has a contractual obligation to afford its students a fair opportunity to
complete the course they seek to pursue.
We recognize the need of a school to fund its facilities and to meet astronomical operating
costs; this is a reality in running it. Crystal v. Cebu International School31 upheld the
imposition by respondent school of a "land purchase deposit" in the amount of P50,000 per
student to be used for the "purchase of a piece of land and for the construction of new
buildings and other facilities x x x which the school would transfer [to] and occupy after the
expiration of its lease contract over its present site."
The amount was refundable after the student graduated or left the school. After noting that
the imposition of the fee was made only after prior consultation and approval by the parents
of the students, the Court held that the school committed no actionable wrong in refusing to
admit the children of the petitioners therein for their failure to pay the "land purchase
deposit" and the 2.5 percent monthly surcharge thereon.
In the present case, PCST imposed the assailed revenue-raising measure belatedly, in the
middle of the semester. It exacted the dance party fee as a condition for the students' taking
the final examinations, and ultimately for its recognition of their ability to finish a course. The
fee, however, was not part of the school-student contract entered into at the start of the
school year. Hence, it could not be unilaterally imposed to the prejudice of the enrollees.
Such contract is by no means an ordinary one. In Non, we stressed that the school-student
contract "is imbued with public interest, considering the high priority given by the
Constitution to education and the grant to the State of supervisory and regulatory powers
over all educational institutions."32 Sections 5 (1) and (3) of Article XIV of the 1987
Constitution provide:
"The State shall protect and promote the right of all citizens to quality education at all levels
and shall take appropriate steps to make such declaration accessible to all.
"Every student has a right to select a profession or course of study, subject to fair, reasonable
and equitable admission and academic requirements."
The same state policy resonates in Section 9(2) of BP 232, otherwise known as the Education
Act of 1982:
"Section 9. Rights of Students in School. – In addition to other rights, and subject to the
limitations prescribed by law and regulations, students and pupils in all schools shall enjoy the
following rights:
xxx xxx xxx
(2) The right to freely choose their field of study subject to existing curricula and to continue
their course therein up to graduation, except in cases of academic deficiency, or violation of
disciplinary regulations."
Liability for Tort
In her Complaint, petitioner also charged that private respondents "inhumanly punish
students x x x by reason only of their poverty, religious practice or lowly station in life, which
inculcated upon [petitioner] the feelings of guilt, disgrace and unworthiness;"33 as a result of
such punishment, she was allegedly unable to finish any of her subjects for the second
semester of that school year and had to lag behind in her studies by a full year. The acts of
respondents supposedly caused her extreme humiliation, mental agony and "demoralization
of unimaginable proportions" in violation of Articles 19, 21 and 26 of the Civil Code. These
provisions of the law state thus:
"Article 19. Every person must, in the exercise of his rights and in the performance of his
duties, act with justice, give everyone his due, and observe honesty and good faith."
"Article 21. Any person who wilfully causes loss or injury to another in a manner that is
contrary to morals, good customs or public policy shall compensate the latter for the
damage."
"Article 26. Every person shall respect the dignity, personality, privacy and peace of mind of
his neighbors and other persons. The following and similar acts, though they may not
constitute a criminal offense, shall produce a cause of action for damages, prevention and
other relief:
(1) Prying into the privacy of another's residence;
(2) Meddling with or disturbing the private life or family relations of another;
(3) Intriguing to cause another to be alienated from his friends;
(4) Vexing or humiliating another on account of his beliefs, lowly station in life, place of birth, should be meticulously observed and should not be used to discriminate against certain
physical defect, or other personal condition." students.40 After accepting them upon enrollment, the school cannot renege on its
contractual obligation on grounds other than those made known to, and accepted by,
Generally, liability for tort arises only between parties not otherwise bound by a contract. An students at the start of the school year.
academic institution, however, may be held liable for tort even if it has an existing contract
with its students, since the act that violated the contract may also be a tort. We ruled thus in In sum, the Court holds that the Complaint alleges sufficient causes of action against
PSBA vs. CA,34 from which we quote: respondents, and that it should not have been summarily dismissed. Needless to say, the
Court is not holding respondents liable for the acts complained of. That will have to be ruled
"x x x A perusal of Article 2176 [of the Civil Code] shows that obligations arising from quasi- upon in due course by the court a quo.
delicts or tort, also known as extra-contractual obligations, arise only between parties not
otherwise bound by contract, whether express or implied. However, this impression has not WHEREFORE, the Petition is hereby GRANTED, and the assailed Orders REVERSED. The trial
prevented this Court from determining the existence of a tort even when there obtains a court is DIRECTED to reinstate the Complaint and, with all deliberate speed, to continue the
contract. In Air France v. Carrascoso (124 Phil. 722), the private respondent was awarded proceedings in Civil Case No. U-7541. No costs.
damages for his unwarranted expulsion from a first-class seat aboard the petitioner airline. It
is noted, however, that the Court referred to the petitioner-airline's liability as one arising SO ORDERED.
from tort, not one arising form a contract of carriage. In effect, Air France is authority for the
view that liability from tort may exist even if there is a contract, for the act that breaks the
contract may be also a tort. x x x This view was not all that revolutionary, for even as early as
1918, this Court was already of a similar mind. In Cangco v. Manila Railroad (38 Phil. 780), Mr.
Justice Fisher elucidated thus: 'x x x. When such a contractual relation exists the obligor may
break the contract under such conditions that the same act which constitutes a breach of the
contract would have constituted the source of an extra-contractual obligation had no contract
existed between the parties.'

"Immediately what comes to mind is the chapter of the Civil Code on Human Relations,
particularly Article 21 x x x."35

Academic Freedom

In their Memorandum, respondents harp on their right to "academic freedom." We are not
impressed. According to present jurisprudence, academic freedom encompasses the
independence of an academic institution to determine for itself (1) who may teach, (2) what
may be taught, (3) how it shall teach, and (4) who may be admitted to study.36 In Garcia v.
the Faculty Admission Committee, Loyola School of Theology,37 the Court upheld the
respondent therein when it denied a female student's admission to theological studies in a
seminary for prospective priests. The Court defined the freedom of an academic institution
thus: "to decide for itself aims and objectives and how best to attain them x x x free from
outside coercion or interference save possibly when overriding public welfare calls for some
restraint."38

In Tangonan v. Paño,39 the Court upheld, in the name of academic freedom, the right of the
school to refuse readmission of a nursing student who had been enrolled on probation, and
who had failed her nursing subjects. These instances notwithstanding, the Court has
emphasized that once a school has, in the name of academic freedom, set its standards, these
G.R. No. 142305 December 10, 2003
SINGAPORE AIRLINES LIMITED, petitioner,
vs.
ANDION FERNANDEZ, respondent.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari assailing the Decision1 of the Court of Appeals which
affirmed in toto the decision2 of the Regional Trial Court of Pasig City, Branch 164 in Civil Case
No. 60985 filed by the respondent for damages.
The Case for the Respondent
Respondent Andion Fernandez is an acclaimed soprano here in the Philippines and abroad. At
the time of the incident, she was availing an educational grant from the Federal Republic of
Germany, pursuing a Master’s Degree in Music majoring in Voice.3
She was invited to sing before the King and Queen of Malaysia on February 3 and 4, 1991. For
this singing engagement, an airline passage ticket was purchased from petitioner Singapore
Airlines which would transport her to Manila from Frankfurt, Germany on January 28, 1991.
From Manila, she would proceed to Malaysia on the next day.4 It was necessary for the
respondent to pass by Manila in order to gather her wardrobe; and to rehearse and
coordinate with her pianist her repertoire for the aforesaid performance.
The petitioner issued the respondent a Singapore Airlines ticket for Flight No. SQ 27, leaving
Frankfurt, Germany on January 27, 1991 bound for Singapore with onward connections from
Singapore to Manila. Flight No. SQ 27 was scheduled to leave Frankfurt at 1:45 in the
afternoon of January 27, 1991, arriving at Singapore at 8:50 in the morning of January 28,
1991. The connecting flight from Singapore to Manila, Flight No. SQ 72, was leaving Singapore
at 11:00 in the morning of January 28, 1991, arriving in Manila at 2:20 in the afternoon of the
same day.5
On January 27, 1991, Flight No. SQ 27 left Frankfurt but arrived in Singapore two hours late or
at about 11:00 in the morning of January 28, 1991. By then, the aircraft bound for Manila had
left as scheduled, leaving the respondent and about 25 other passengers stranded in the
Changi Airport in Singapore.6
Upon disembarkation at Singapore, the respondent approached the transit counter who
referred her to the nightstop counter and told the lady employee thereat that it was
important for her to reach Manila on that day, January 28, 1991. The lady employee told her
that there were no more flights to Manila for that day and that respondent had no choice but
to stay in Singapore. Upon respondent’s persistence, she was told that she can actually fly to
Hong Kong going to Manila but since her ticket was non-transferable, she would have to pay
for the ticket. The respondent could not accept the offer because she had no money to pay
for it.7 Her pleas for the respondent to make arrangements to transport her to Manila were
unheeded.8
The respondent then requested the lady employee to use their phone to make a call to
Manila. Over the employees’ reluctance, the respondent telephoned her mother to inform
the latter that she missed the connecting flight. The respondent was able to contact a family
friend who picked her up from the airport for her overnight stay in Singapore.9
The next day, after being brought back to the airport, the respondent proceeded to
petitioner’s counter which says: "Immediate Attention To Passengers with Immediate
Booking." There were four or five passengers in line. The respondent approached petitioner’s
male employee at the counter to make arrangements for immediate booking only to be told:
"Can’t you see I am doing something." She explained her predicament but the male employee
uncaringly retorted: "It’s your problem, not ours."10
The respondent never made it to Manila and was forced to take a direct flight from Singapore
to Malaysia on January 29, 1991, through the efforts of her mother and travel agency in
Manila. Her mother also had to travel to Malaysia bringing with her respondent’s wardrobe
and personal things needed for the performance that caused them to incur an expense of
about P50,000.11
As a result of this incident, the respondent’s performance before the Royal Family of Malaysia
was below par. Because of the rude and unkind treatment she received from the petitioner’s
personnel in Singapore, the respondent was engulfed with fear, anxiety, humiliation and
embarrassment causing her to suffer mental fatigue and skin rashes. She was thereby
compelled to seek immediate medical attention upon her return to Manila for "acute
urticaria."12
On June 15, 1993, the RTC rendered a decision with the following dispositive portion:
ACCORDINGLY and as prayed for, defendant Singapore Airlines is ordered to pay herein
plaintiff Andion H. Fernandez the sum of:
1. FIFTY THOUSAND (P50,000.00) PESOS as compensatory or actual damages;
2. TWO HUNDRED and FIFTY THOUSAND (P250,000.00) PESOS as moral damages considering
plaintiff’s professional standing in the field of culture at home and abroad;
3. ONE HUNDRED THOUSAND (P100,000.00) PESOS as exemplary damages;
4. SEVENTY-FIVE THOUSAND (P75,000.00) PESOS as attorney’s fees; and
5. To pay the costs of suit.
SO ORDERED.13
The petitioner appealed the decision to the Court of Appeals.
On June 10, 1998, the CA promulgated the assailed decision finding no reversible error in the
appealed decision of the trial court.14
Forthwith, the petitioner filed the instant petition for review, raising the following errors:
I
THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING IN TOTO THE DECISION OF THE
TRIAL COURT THAT AWARDED DAMAGES TO RESPONDENT FOR THE ALLEGED FAILURE OF THE
PETITIONER TO EXERCISE EXTRAORDINARY DILIGENCE.
II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE PETITIONER ACTED IN
BAD FAITH.
III
THE HONORABLE COURT OF APPEALS ERRED IN DISMISSING THE PETITIONER’S
COUNTERCLAIMS.15
The petitioner assails the award of damages contending that it exercised the extraordinary
diligence required by law under the given circumstances. The delay of Flight No. SQ 27 from
Frankfurt to Singapore on January 28, 1991 for more than two hours was due to a fortuitous
event and beyond petitioner’s control. Inclement weather prevented the petitioner’s plane
coming from Copenhagen, Denmark to arrive in Frankfurt on time on January 27, 1991. The
plane could not take off from the airport as the place was shrouded with fog. This delay
caused a "snowball effect" whereby the other flights were consequently delayed. The plane
carrying the respondent arrived in Singapore two (2) hours behind schedule.16 The delay was
even compounded when the plane could not travel the normal route which was through the
Middle East due to the raging Gulf War at that time. It had to pass through the restricted
Russian airspace which was more congested.17
Under these circumstances, petitioner therefore alleged that it cannot be faulted for the
delay in arriving in Singapore on January 28, 1991 and causing the respondent to miss her
connecting flight to Manila.
The petitioner further contends that it could not also be held in bad faith because its
personnel did their best to look after the needs and interests of the passengers including the
respondent. Because the respondent and the other 25 passengers missed their connecting
flight to Manila, the petitioner automatically booked them to the flight the next day and gave
them free hotel accommodations for the night. It was respondent who did not take
petitioner’s offer and opted to stay with a family friend in Singapore.
The petitioner also alleges that the action of the respondent was baseless and it tarnished its
good name and image earned through the years for which, it was entitled to damages in the
amount of ₱1,000,000; exemplary damages of ₱500,000; and attorney’s fees also in the
amount of ₱500,000.18
The petition is barren of merit.
When an airline issues a ticket to a passenger, confirmed for a particular flight on a certain
date, a contract of carriage arises. The passenger then has every right to expect that he be
transported on that flight and on that date. If he does not, then the carrier opens itself to a
suit for a breach of contract of carriage.19
The contract of air carriage is a peculiar one. Imbued with public interest, the law requires
common carriers to carry the passengers safely as far as human care and foresight can
provide, using the utmost diligence of very cautious persons with due regard for all the
circumstances.20 In an action for breach of contract of carriage, the aggrieved party does not
have to prove that the common carrier was at fault or was negligent. All that is necessary to
prove is the existence of the contract and the fact of its non-performance by the carrier.21
In the case at bar, it is undisputed that the respondent carried a confirmed ticket for the two-
legged trip from Frankfurt to Manila: 1) Frankfurt-Singapore; and 2) Singapore-Manila. In her
contract of carriage with the petitioner, the respondent certainly expected that she would fly
to Manila on Flight No. SQ 72 on January 28, 1991. Since the petitioner did not transport the
respondent as covenanted by it on said terms, the petitioner clearly breached its contract of
carriage with the respondent. The respondent had every right to sue the petitioner for this
breach. The defense that the delay was due to fortuitous events and beyond petitioner’s
control is unavailing. In PAL vs. CA,22 we held that:
.... Undisputably, PAL’s diversion of its flight due to inclement weather was a fortuitous event.
Nonetheless, such occurrence did not terminate PAL’s contract with its passengers. Being in
the business of air carriage and the sole one to operate in the country, PAL is deemed to be
equipped to deal with situations as in the case at bar. What we said in one case once again
must be stressed, i.e., the relation of carrier and passenger continues until the latter has been
landed at the port of destination and has left the carrier’s premises. Hence, PAL necessarily
would still have to exercise extraordinary diligence in safeguarding the comfort, convenience
and safety of its stranded passengers until they have reached their final destination...
...
"...If the cause of non-fulfillment of the contract is due to a fortuitous event, it has to be the
sole and only cause (Art. 1755 C.C., Art. 1733 C.C.). Since part of the failure to comply with the
obligation of common carrier to deliver its passengers safely to their destination lay in the
defendant’s failure to provide comfort and convenience to its stranded passengers using
extraordinary diligence, the cause of non-fulfillment is not solely and exclusively due to
fortuitous event, but due to something which defendant airline could have prevented,
defendant becomes liable to plaintiff."
Indeed, in the instant case, petitioner was not without recourse to enable it to fulfill its
obligation to transport the respondent safely as scheduled as far as human care and foresight
can provide to her destination. Tagged as a premiere airline as it claims to be and with the
complexities of air travel, it was certainly well-equipped to be able to foresee and deal with
such situation. The petitioner’s indifference and negligence by its absence and insensitivity
was exposed by the trial court, thus:
(a) Under Section 9.1 of its Traffic Manual (Exhibit 4) "…flights can be delayed to await the
uplift of connecting cargo and passengers arriving on a late in-bound flight…" As adverted to
by the trial court,…"Flight SQ-27/28 maybe delayed for about half an hour to transfer plaintiff
to her connecting flight. As pointed out above, delay is normal in commercial air
transportation" (RTC Decision, p. 22); or
(b) Petitioner airlines could have carried her on one of its flights bound for Hongkong and
arranged for a connecting flight from Hongkong to Manila all on the same date. But then the
airline personnel who informed her of such possibility told her that she has to pay for that
flight. Regrettably, respondent did not have sufficient funds to pay for it. (TSN, 30 March
1992, pp.8-9; RTC Decision, pp. 22-23) Knowing the predicament of the respondent,
petitioner did not offer to shoulder the cost of the ticket for that flight; or
(c) As noted by the trial court from the account of petitioner’s witness, Bob Khkimyong, that
"a passenger such as the plaintiff could have been accommodated in another international
airline such as Lufthansa to bring the plaintiff to Singapore early enough from Frankfurt
provided that there was prior communication from that station to enable her to catch the
connecting flight to Manila because of the urgency of her business in Manila…(RTC Decision,
p. 23)
The petitioner’s diligence in communicating to its passengers the consequences of the delay
in their flights was wanting. As elucidated by the trial court:
It maybe that delay in the take off and arrival of commercial aircraft could not be avoided and
may be caused by diverse factors such as those testified to by defendant’s pilot. However,
knowing fully well that even before the plaintiff boarded defendant’s Jumbo aircraft in
Frankfurt bound for Singapore, it has already incurred a delay of two hours. Nevertheless,
defendant did not take the trouble of informing plaintiff, among its other passengers of such a
delay and that in such a case, the usual practice of defendant airline will be that they have to
stay overnight at their connecting airport; and much less did it inquire from the plaintiff and
the other 25 passengers bound for Manila whether they are amenable to stay overnight in
Singapore and to take the connecting flight to Manila the next day. Such information should
have been given and inquiries made in Frankfurt because even the defendant airline’s manual
provides that in case of urgency to reach his or her destination on the same date, the head
office of defendant in Singapore must be informed by telephone or telefax so as the latter
may make certain arrangements with other airlines in Frankfurt to bring such a passenger
with urgent business to Singapore in such a manner that the latter can catch up with her
connecting flight such as S-27/28 without spending the night in Singapore…23
The respondent was not remiss in conveying her apprehension about the delay of the flight
when she was still in Frankfurt. Upon the assurance of petitioner’s personnel in Frankfurt that
she will be transported to Manila on the same date, she had every right to expect that
obligation fulfilled. She testified, to wit:
Q: Now, since you were late, when the plane that arrived from Frankfurt was late, did you not
make arrangements so that your flight from Singapore to Manila would be adjusted?
A: I asked the lady at the ticket counter, the one who gave the boarding pass in Frankfurt and
I asked her, "Since my flight going to Singapore would be late, what would happen to my
Singapore-Manila flight?" and then she said, "Don’t worry, Singapore Airlines would be
responsible to bring you to Manila on the same date." And then they have informed the name
of the officer, or whatever, that our flight is going to be late.24
When a passenger contracts for a specific flight, he has a purpose in making that choice which
must be respected. This choice, once exercised, must not be impaired by a breach on the part
of the airline without the latter incurring any liability.25 For petitioner’s failure to bring the
respondent to her destination, as scheduled, we find the petitioner clearly liable for the
breach of its contract of carriage with the respondent.
We are convinced that the petitioner acted in bad faith.1âwphi1 Bad faith means a breach of
known duty through some motive of interest or ill will. Self-enrichment or fraternal interest,
and not personal ill will, may well have been the motive; but it is malice nevertheless.26 Bad
faith was imputed by the trial court when it found that the petitioner’s employees at the
Singapore airport did not accord the respondent the attention and treatment allegedly
warranted under the circumstances. The lady employee at the counter was unkind and of no
help to her. The respondent further alleged that without her threats of suing the company,
she was not allowed to use the company’s phone to make long distance calls to her mother in
Manila. The male employee at the counter where it says: "Immediate Attention to Passengers
with Immediate Booking" was rude to her when he curtly retorted that he was busy attending
to other passengers in line. The trial court concluded that this inattentiveness and rudeness of
petitioner’s personnel to respondent’s plight was gross enough amounting to bad faith. This is
a finding that is generally binding upon the Court which we find no reason to disturb.

Article 2232 of the Civil Code provides that in a contractual or quasi-contractual relationship,
exemplary damages may be awarded only if the defendant had acted in a "wanton,
fraudulent, reckless, oppressive or malevolent manner." In this case, petitioner’s employees
acted in a wanton, oppressive or malevolent manner. The award of exemplary damages is,
therefore, warranted in this case.

WHEREFORE, the Petition is DENIED. The Decision of the Court of Appeals is AFFIRMED.

SO ORDERED.
G.R. No. 66207 May 18, 1992
MAXIMINO SOLIMAN, JR., represented by his judicial guardian VIRGINIA C. SOLIMAN,
petitioner,
vs.
HON. JUDGE RAMON TUAZON, Presiding Judge of Branch LXI, Regional Trial Court of Region
III, Angeles City, and the REPUBLIC CENTRAL COLLEGES, represented by its President,
respondents.
Mariano Y. Navarro for Republic Central Colleges.
RESOLUTION
FELICIANO, J.:
On 22 March 1983, petitioner Soliman, Jr. filed a civil complaint for damages against private
respondent Republic Central Colleges ("Colleges"), the R.L. Security Agency Inc. and one
Jimmy B. Solomon, a security guard, as defendants. The complaint alleged that:
. . . on 13 August 1982, in the morning thereof, while the plaintiff was in the campus ground
and premises of the defendant, REPUBLIC CENTRAL COLLEGES, as he was and is still a regular
enrolled student of said school taking his morning classes, the defendant, JIMMY B.
SOLOMON, who was on said date and hour in the premises of said school performing his
duties and obligations as a duly appointed security guard under the employment, supervision
and control of his employer-defendant R.L. SECURITY AGENCY, INC., headed by Mr. Benjamin
Serrano, without any provocation, in a wanton, fraudulent, reckless, oppressive or malevolent
manner, with intent to kill, attack, assault, strike and shoot the plaintiff on the abdomen with
a .38 Caliber Revolver, a deadly weapon, which ordinarily such wound sustained would have
caused plaintiff's death were it not for the timely medical assistance given to him. The
plaintiff was treated and confined at Angeles Medical Center, Angeles City, and, as per
doctor's opinion, the plaintiff may not be able to attend to his regular classes and will be
incapacitated in the performance of his usual work for a duration of from three to four
months before his wounds would be completely healed. 1
Private respondent Colleges filed a motion to dismiss, contending that the complaint stated
no cause of action against it. Private respondent argued that it is free from any liability for the
injuries sustained by petitioner student for the reason that private respondent school was not
the employer of the security guard charged, Jimmy Solomon, and hence was not responsible
for any wrongful act of Solomon. Private respondent school further argued that Article 2180,
7th paragraph, of the Civil Code did not apply, since said paragraph holds teachers and heads
of establishment of arts and trades liable for damages caused by their pupils and students or
apprentices, while security guard Jimmy Solomon was not a pupil, student or apprentice of
the school.
In an order dated 29 November 1983, respondent Judge granted private respondent school's
motion to dismiss, holding that security guard Jimmy Solomon was not an employee of the
school which accordingly could not be held liable for his acts or omissions. Petitioner moved
for reconsideration, without success.
In this Petition for Certiorari and Prohibition, it is contended that respondent trial judge
committed a grave abuse of discretion when he refused to apply the provisions of Article
2180, as well as those of Articles 349, 350 and 352, of the Civil Code and granted the school's
motion to dismiss.
Under Article 2180 of the Civil Code, the obligation to respond for damage inflicted by one
against another by fault or negligence exists not only for one's own act or omission, but also
for acts or omissions of a person for whom one is by law responsible. Among the persons held
vicariously responsible for acts or omissions of another person are the following:
xxx xxx xxx
Employers shall be liable for the damages caused by their employees and household helpers
acting within the scope of their assigned tasks, even though the former are not engaged in
any business or industry.
xxx xxx xxx
Lastly, teachers or heads of establishments of arts and trades shall be liable for damages
caused by their pupils, their students or apprentices, so long as they remain in their custody.
xxx xxx xxx
The first paragraph quoted above offers no basis for holding the Colleges liable for the alleged
wrongful acts of security guard Jimmy B. Solomon inflicted upon petitioner Soliman, Jr.
Private respondent school was not the employer of Jimmy Solomon. The employer of Jimmy
Solomon was the R.L. Security Agency Inc., while the school was the client or customer of the
R.L. Security Agency Inc. It is settled that where the security agency, as here, recruits, hires
and assigns the work of its watchmen or security guards, the agency is the employer of such
guards or watchmen. 2 Liability for illegal or harmful acts committed by the security guards
attaches to the employer agency, and not to the clients or customers of such agency. 3 As a
general rule, a client or customer of a security agency has no hand in selecting who among
the pool of security guards or watchmen employed by the agency shall be assigned to it; the
duty to observe the diligence of a good father of a family in the selection of the guards
cannot, in the ordinary course of events, be demanded from the client whose premises or
property are protected by the security guards. The fact that a client company may give
instructions or directions to the security guards assigned to it, does not, by itself, render the
client responsible as an employer of the security guards concerned and liable for their
wrongful acts or omissions. Those instructions or directions are ordinarily no more than
requests commonly envisaged in the contract for services entered into with the security
agency. There being no employer-employee relationship between the Colleges and Jimmy
Solomon, petitioner student cannot impose vicarious liability upon the Colleges for the acts of
security guard Solomon.
Since there is no question that Jimmy Solomon was not a pupil or student or an apprentice of
the Colleges, he being in fact an employee of the R.L. Security Agency Inc., the other above-
quoted paragraph of Article 2180 of the Civil Code is similarly not available for imposing
liability upon the Republic Central Colleges for the acts or omissions of Jimmy Solomon.
The relevant portions of the other Articles of the Civil Code invoked by petitioner are as
follows:
Art. 349. The following persons shall exercise substitute parental authority:
xxx xxx xxx
(2) Teachers and professors;
xxx xxx xxx
(4) Directors of trade establishments with regard to apprentices;
xxx xxx xxx
Art. 350. The persons named in the preceding article shall exercise reasonable supervision
over the conduct of the child.
xxx xxx xxx
Art. 352. The relations between teacher and pupil, professor and student are fixed by
government regulations and those of each school or institution. In no case shall corporal
punishment be countenanced. The teacher or professor shall cultivate the best potentialities
of the heart and mind of the pupil or student.
In Palisoc v. Brillantes, 4 invoked by petitioner, the Court held the owner and president of a
school of arts and trades known as the "Manila Technical Institute," Quezon Blvd., Manila,
responsible in damages for the death of Dominador Palisoc, a student of Institute, which
resulted from fist blows delivered by Virgilio L. Daffon, another student of the Institute. It will
be seen that the facts of Palisoc v. Brillantes brought it expressly within the 7th paragraph of
Article 2180, quoted above; but those facts are entirely different from the facts existing in the
instant case.
Persons exercising substitute parental authority are made responsible for damage inflicted
upon a third person by the child or person subject to such substitute parental authority. In the
instant case, as already noted, Jimmy Solomon who committed allegedly tortious acts
resulting in injury to petitioner, was not a pupil, student or apprentice of the Republic Central
Colleges; the school had no substitute parental authority over Solomon.
Clearly, within the confines of its limited logic, i.e., treating the petitioner's claim as one based
wholly and exclusively on Article 2180 of the Civil Code, the order of the respondent trial
judge was correct. Does it follow, however, that respondent Colleges could not be held liable
upon any other basis in law, for or in respect of the injury sustained by petitioner, so as to
entitle respondent school to dismissal of petitioner's complaint in respect of itself?
The very recent case of the Philippine School of Business Administration (PSBA) v. Court of
Appeals, 5 requires us to give a negative answer to that question.
In PSBA, the Court held that Article 2180 of the Civil Code was not applicable where a student
had been injured by one who was an outsider or by one over whom the school did not
exercise any custody or control or supervision. At the same time, however, the Court stressed
that an implied contract may be held to be established between a school which accepts
students for enrollment, on the one hand, and the students who are enrolled, on the other
hand, which contract results in obligations for both parties:
When an academic institution accepts students for enrollment, there is established a contract
between them, resulting in bilateral obligations which parties are bound to comply with. For
its part, the school undertakes to provide the student with an education that would
presumably suffice to equip him with the necessary tools and skills to pursue higher
education or a profession. On the other hand, the student covenants to abide by the school's
academic requirements and observe its rules and regulations.
Institutions of learning must also meet the implicit or "built-in" obligation of providing their
students with an atmosphere that promotes or assists in attaining its primary undertaking of
imparting knowledge. Certainly, no student can absorb the intricacies of physics or higher
mathematics or explore the realm of the arts and other sciences when bullets are flying or
grenades exploding in the air or where there looms around the school premises a constant
threat to life and limb. Necessarily, the school must ensure that adequate steps are taken to
maintain peace and order within the campus premises and to prevent the breakdown
thereof. 6
In that case, the Court was careful to point out that:
In the circumstances obtaining in the case at bar, however, there is, as yet, no finding that the
contract between the school and Bautista had been breached thru the former's negligence in
providing proper security measures. This would be for the trial court to determine. And, even
if there be a finding of negligence, the same could give rise generally to a breach of
contractual obligation only. Using the test of Cangco, supra, the negligence of the school
would not be relevant absent a contract. In fact, that negligence becomes material only
because of the contractual relation between PSBA and Bautista. In other words, a contractual
relation is a condition sine qua non to the school's liability. The negligence of the school
cannot exist independently of the contract, unless the negligence occurs under the
circumstances set out in Article 21 of the Civil Code.

The Court is not unmindful of the attendant difficulties posed by the obligation of schools,
above-mentioned, for conceptually a school, like a common carrier, cannot be an insurer of its
students against all risks. This is specially true in the populous student communities of the so-
called "university belt" in Manila where there have been reported several incidents ranging
from gang wars to other forms of hooliganism. It would not be equitable to expect of schools
to anticipate all types of violent trespass upon their premises, for notwithstanding the
security measures installed, the same may still fail against an individual or group determined
to carry out a nefarious deed inside school premises and environs. Should this be the case,
the school may still avoid liability by proving that the breach of its contractual obligation to
the students was not due to its negligence, here statutorily defined to be the omission of that
degree of diligence which is required by the nature of obligation and corresponding to the
circumstances of person, time and place. 7

In the PSBA case, the trial court had denied the school's motion to dismiss the complaint
against it, and both the Court of Appeals and this Court affirmed the trial court's order. In the
case at bar, the court a quo granted the motion to dismiss filed by respondent Colleges, upon
the assumption that petitioner's cause of action was based, and could have been based, only
on Article 2180 of the Civil Code. As PSBA, however, states, acts which are tortious or
allegedly tortious in character may at the same time constitute breach of a contractual, or
other legal, obligation. Respondent trial judge was in serious error when he supposed that
petitioner could have no cause of action other than one based on Article 2180 of the Civil
Code. Respondent trial judge should not have granted the motion to dismiss but rather should
have, in the interest of justice, allowed petitioner to prove acts constituting breach of an
obligation ex contractu or ex lege on the part of respondent Colleges.

In line, therefore, with the most recent jurisprudence of this Court, and in order to avoid a
possible substantial miscarriage of justice, and putting aside technical considerations, we
consider that respondent trial judge committed serious error correctible by this Court in the
instant case.

ACCORDINGLY, the Court Resolved to GRANT DUE COURSE to the Petition, to TREAT the
comment of respondent Colleges as its answer, and to REVERSE and SET ASIDE the Order
dated 29 November 1983. This case is REMANDED to the court a quo for further
proceedings consistent with this Resolution.