I. General Provisions
00 were the same as those
A. Definition, NCC 1156
B. Sources, NCC 1157
G.R. No. 183204               January 13, 2014
THE METROPOLITAN BANK AND TRUST COMPANY, Petitioner, 
vs.
ANA GRACE ROSALES AND YO YUK TO, Respondents.
DECISION
DEL CASTILLO, J.:
Bank deposits, which are in the nature of a simple loan or
mutuum,1 must be paid upon demand by the depositor. 2
This Petition for Review on Certiorari 3 under Rule 45 of the Rules of
Court assails the April 2, 2008 Decision 4 and the May 30, 2008
Resolution5 of he Court of Appeals CA) in CA-G.R. CV No. 89086.
Factual Antecedents
Petitioner Metropolitan Bank and Trust Company is a domestic banking
corporation duly organized and existing under the laws of the
Philippines.6 Respondent Ana Grace Rosales (Rosales) is the owner of
China Golden Bridge Travel Services, 7 a travel agency.8 Respondent Yo
Yuk To is the mother of respondent Rosales.9
In 2000, respondents opened a Joint Peso Account 10 with petitioner’s
Pritil-Tondo Branch.11 As of August 4, 2004, respondents’ Joint Peso
Account showed a balance of ₱2,515,693.52.12
In May 2002, respondent Rosales accompanied her client Liu Chiu Fang,
a Taiwanese National applying for a retiree’s visa from the Philippine
Leisure and Retirement Authority (PLRA), to petitioner’s branch in
Escolta to open a savings account, as required by the PLRA. 13 Since Liu
Chiu Fang could speak only in Mandarin, respondent Rosales acted as
an interpreter for her.14
On March 3, 2003, respondents opened with petitioner’s Pritil-Tondo
Branch a Joint Dollar Account 15 with an initial deposit of
US$14,000.00.16
On July 31, 2003, petitioner issued a "Hold Out" order against
respondents’ accounts.17
On September 3, 2003, petitioner, through its Special Audit Department
Head Antonio Ivan Aguirre, filed before the Office of the Prosecutor of
Manila a criminal case for Estafa through False Pretences,
Misrepresentation, Deceit, and Use of Falsified Documents, docketed as
I.S. No. 03I-25014,18 against respondent Rosales. 19 Petitioner accused
respondent Rosales and an unidentified woman as the ones responsible
for the unauthorized and fraudulent withdrawal of US$75,000.00 from
Liu Chiu Fang’s dollar account with petitioner’s Escolta
Branch.20Petitioner alleged that on February 5, 2003, its branch in
Escolta received from the PLRA a Withdrawal Clearance for the dollar
account of Liu Chiu Fang;21 that in the afternoon of the same day,
respondent Rosales went to petitioner’s Escolta Branch to inform its
Branch Head, Celia A. Gutierrez (Gutierrez), that Liu Chiu Fang was
going to withdraw her dollar deposits in cash; 22 that Gutierrez told
respondent Rosales to come back the following day because the bank
did not have enough dollars; 23 that on February 6, 2003, respondent
Rosales accompanied an unidentified impostor of Liu Chiu Fang to the
bank;24 that the impostor was able to withdraw Liu Chiu Fang’s dollar
deposit in the amount of US$75,000.00; 25 that on March 3, 2003,
respondents opened a dollar account with petitioner; and that the bank
later discovered that the serial numbers of the dollar notes deposited
by respondents in the amount of US$11,800.
withdrawn by the impostor.26
Respondent Rosales, however, denied taking part in the fraudulent and
unauthorized withdrawal from the dollar account of Liu Chiu
Fang.27 Respondent Rosales claimed that she did not go to the bank on
February 5, 2003.28Neither did she inform Gutierrez that Liu Chiu Fang
was going to close her account. 29 Respondent Rosales further claimed
that after Liu Chiu Fang opened an account with petitioner, she lost
track of her.30 Respondent Rosales’ version of the events that transpired
thereafter is as follows:
On February 6, 2003, she received a call from Gutierrez informing her
that Liu Chiu Fang was at the bank to close her account. 31 At noon of the
same day, respondent Rosales went to the bank to make a
transaction.32 While she was transacting with the teller, she caught a
glimpse of a woman seated at the desk of the Branch Operating Officer,
Melinda Perez (Perez).33 After completing her transaction, respondent
Rosales approached Perez who informed her that Liu Chiu Fang had
closed her account and had already left. 34 Perez then gave a copy of the
Withdrawal Clearance issued by the PLRA to respondent Rosales. 35 On
June 16, 2003, respondent Rosales received a call from Liu Chiu Fang
inquiring about the extension of her PLRA Visa and her dollar
account.36 It was only then that Liu Chiu Fang found out that her
account had been closed without her knowledge.37 Respondent Rosales
then went to the bank to inform Gutierrez and Perez of the
unauthorized withdrawal.38 On June 23, 2003, respondent Rosales and
Liu Chiu Fang went to the PLRA Office, where they were informed that
the Withdrawal Clearance was issued on the basis of a Special Power of
Attorney (SPA) executed by Liu Chiu Fang in favor of a certain Richard
So.39 Liu Chiu Fang, however, denied executing the SPA. 40 The following
day, respondent Rosales, Liu Chiu Fang, Gutierrez, and Perez met at the
PLRA Office to discuss the unauthorized withdrawal. 41 During the
conference, the bank officers assured Liu Chiu Fang that the money
would be returned to her.42
On December 15, 2003, the Office of the City Prosecutor of Manila
issued a Resolution dismissing the criminal case for lack of probable
cause.43 Unfazed, petitioner moved for reconsideration.
On September 10, 2004, respondents filed before the Regional Trial
Court (RTC) of Manila a Complaint 44 for Breach of Obligation and
Contract with Damages, docketed as Civil Case No. 04110895 and
raffled to Branch 21, against petitioner. Respondents alleged that they
attempted several times to withdraw their deposits but were unable to
because petitioner had placed their accounts under "Hold Out"
status.45 No explanation, however, was given by petitioner as to why it
issued the "Hold Out" order.46 Thus, they prayed that the "Hold Out"
order be lifted and that they be allowed to withdraw their
deposits.47 They likewise prayed for actual, moral, and exemplary
damages, as well as attorney’s fees.48
Petitioner alleged that respondents have no cause of action because it
has a valid reason for issuing the "Hold Out" order.49 It averred that due
to the fraudulent scheme of respondent Rosales, it was compelled to
reimburse Liu Chiu Fang the amount of US$75,000.00 50 and to file a
criminal complaint for Estafa against respondent Rosales. 51
While the case for breach of contract was being tried, the City
Prosecutor of Manila issued a Resolution dated February 18, 2005,
reversing the dismissal of the criminal complaint. 52 An Information,
docketed as Criminal Case No. 05-236103, 53 was then filed charging
respondent Rosales with Estafa before Branch 14 of the RTC of Manila. 54
Ruling of the Regional Trial Court
On January 15, 2007, the RTC rendered a Decision 55 finding petitioner
liable for damages for breach of contract. 56The RTC ruled that it is the
duty of petitioner to release the deposit to respondents as the act of
withdrawal of a bank deposit is an act of demand by the creditor. 57 The
RTC also said that the recourse of petitioner is against its negligent
employees and not against respondents. 58 The dispositive portion of the
Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered
ordering [petitioner] METROPOLITAN BANK & TRUST COMPANY to
allow [respondents] ANA GRACE ROSALES and YO YUK TO to withdraw
their Savings and Time Deposits with the agreed interest, actual
damages of ₱50,000.00, moral damages of ₱50,000.00, exemplary
damages of ₱30,000.00 and 10% of the amount due [respondents] as
and for attorney’s fees plus the cost of suit.
The counterclaim of [petitioner] is hereby DISMISSED for lack of merit.
SO ORDERED.59
Ruling of the Court of Appeals
Aggrieved, petitioner appealed to the CA.
On April 2, 2008, the CA affirmed the ruling of the RTC but deleted the
award of actual damages because "the basis for [respondents’] claim for
such damages is the professional fee that they paid to their legal
counsel for [respondent] Rosales’ defense against the criminal
complaint of [petitioner] for estafa before the Office of the City
Prosecutor of Manila and not this case." 60 Thus, the CA disposed of the
case in this wise:
WHEREFORE, premises considered, the Decision dated January 15,
2007 of the RTC, Branch 21, Manila in Civil Case No. 04-110895 is
AFFIRMED with MODIFICATION that the award of actual damages to
[respondents] Rosales and Yo Yuk To is hereby DELETED.
SO ORDERED.61
Petitioner sought reconsideration but the same was denied by the CA in
its May 30, 2008 Resolution.62
Issues
Hence, this recourse by petitioner raising the following issues:
A. THE [CA] ERRED IN RULING THAT THE "HOLD-OUT"
PROVISION IN THE APPLICATION AND AGREEMENT FOR
DEPOSIT ACCOUNT DOES NOT APPLY IN THIS CASE.
B. THE [CA] ERRED WHEN IT RULED THAT PETITIONER’S
EMPLOYEES WERE NEGLIGENT IN RELEASING LIU CHIU
FANG’S FUNDS.
C. THE [CA] ERRED IN AFFIRMING THE AWARD OF MORAL
DAMAGES, EXEMPLARY DAMAGES, AND ATTORNEY’S
FEES.63
Petitioner’s Arguments
Petitioner contends that the CA erred in not applying the "Hold Out"
clause stipulated in the Application and Agreement for Deposit
Account.64 It posits that the said clause applies to any and all kinds of
obligation as it does not distinguish between obligations arising ex
contractu or ex delictu. 65 Petitioner also contends that the fraud
committed by respondent Rosales was clearly established by
evidence;66 thus, it was justified in issuing the "Hold-Out"
order.67 Petitioner likewise denies that its employees were negligent in
releasing the dollars.68 It claims that it was the deception employed by
respondent Rosales that caused petitioner’s employees to release Liu
Chiu Fang’s funds to the impostor. 69
Lastly, petitioner puts in issue the award of moral and exemplary
damages and attorney’s fees. It insists that respondents failed to prove
that it acted in bad faith or in a wanton, fraudulent, oppressive or
malevolent manner.70
Respondents’ Arguments
Respondents, on the other hand, argue that there is no legal basis for
petitioner to withhold their deposits because they have no monetary
obligation to petitioner.71 They insist that petitioner miserably failed to
prove its accusations against respondent Rosales. 72 In fact, no
documentary evidence was presented to show that respondent Rosales
participated in the unauthorized withdrawal. 73 They also question the
fact that the list of the serial numbers of the dollar notes fraudulently
withdrawn on February 6, 2003, was not signed or acknowledged by
the alleged impostor.74Respondents likewise maintain that what was
established during the trial was the negligence of petitioner’s
employees as they allowed the withdrawal of the funds without
properly verifying the identity of the depositor. 75Furthermore,
respondents contend that their deposits are in the nature of a loan;
thus, petitioner had the obligation to return the deposits to them upon
demand.76 Failing to do so makes petitioner liable to pay respondents
moral and exemplary damages, as well as attorney’s fees. 77
Our Ruling
The Petition is bereft of merit.
At the outset, the relevant issues in this case are (1) whether petitioner
breached its contract with respondents, and (2) if so, whether it is liable
for damages. The issue of whether petitioner’s employees were
negligent in allowing the withdrawal of Liu Chiu Fang’s dollar deposits
has no bearing in the resolution of this case. Thus, we find no need to
discuss the same.
The "Hold Out" clause does not apply
to the instant case.
Petitioner claims that it did not breach its contract with respondents
because it has a valid reason for issuing the "Hold Out" order. Petitioner
anchors its right to withhold respondents’ deposits on the Application
and Agreement for Deposit Account, which reads:
Authority to Withhold, Sell and/or Set Off:
The Bank is hereby authorized to withhold as security for any and all
obligations with the Bank, all monies, properties or securities of the
Depositor now in or which may hereafter come into the possession or
under the control of the Bank, whether left with the Bank for
safekeeping or otherwise, or coming into the hands of the Bank in any
way, for so much thereof as will be sufficient to pay any or all
obligations incurred by Depositor under the Account or by reason of
any other transactions between the same parties now existing or
hereafter contracted, to sell in any public or private sale any of such
properties or securities of Depositor, and to apply the proceeds to the
payment of any Depositor’s obligations heretofore mentioned.
xxxx
JOINT ACCOUNT
xxxx
The Bank may, at any time in its discretion and with or without notice
to all of the Depositors, assert a lien on any balance of the Account and
apply all or any part thereof against any indebtedness, matured or
unmatured, that may then be owing to the Bank by any or all of the
Depositors. It is understood that if said indebtedness is only owing from
any of the Depositors, then this provision constitutes the consent by all
of the depositors to have the Account answer for the said indebtedness
to the extent of the equal share of the debtor in the amount credited to
the Account.78
In closing, it must be stressed that while we recognize that petitioner
has the right to protect itself from fraud or suspicions of fraud, the
exercise of his right should be done within the bounds of the law and in
accordance with due process, and not in bad faith or in a wanton
disregard of its contractual obligation to respondents.

Petitioner’s reliance on the "Hold Out" clause in the Application and WHEREFORE, the Petition is hereby DENIED. The assailed April 2, 2008
Agreement for Deposit Account is misplaced. Decision and the May 30, 2008 Resolution of the Court of Appeals in CA-
G.R. CV No. 89086 are hereby AFFIRMED. SO ORDERED.
The "Hold Out" clause applies only if there is a valid and existing
obligation arising from any of the sources of obligation enumerated in MARIANO C. DEL CASTILLO
Article 115779 of the Civil Code, to wit: law, contracts, quasi-contracts, Associate Justice
delict, and quasi-delict. In this case, petitioner failed to show that
respondents have an obligation to it under any law, contract, quasi-
contract, delict, or quasi-delict. And although a criminal case was filed
by petitioner against respondent Rosales, this is not enough reason for
petitioner to issue a "Hold Out" order as the case is still pending and no
final judgment of conviction has been rendered against respondent
Rosales. In fact, it is significant to note that at the time petitioner issued
the "Hold Out" order, the criminal complaint had not yet been filed.
Thus, considering that respondent Rosales is not liable under any of the
five sources of obligation, there was no legal basis for petitioner to issue
the "Hold Out" order. Accordingly, we agree with the findings of the RTC
and the CA that the "Hold Out" clause does not apply in the instant case.

In view of the foregoing, we find that petitioner is guilty of breach of

contract when it unjustifiably refused to release respondents’ deposit
despite demand. Having breached its contract with respondents,
petitioner is liable for damages.

Respondents are entitled to moral and

exemplary damages and attorney’s fees.1âwphi1

In cases of breach of contract, moral damages may be recovered only if

the defendant acted fraudulently or in bad faith, 80 or is "guilty of gross
negligence amounting to bad faith, or in wanton disregard of his
contractual obligations."81

In this case, a review of the circumstances surrounding the issuance of

the "Hold Out" order reveals that petitioner issued the "Hold Out" order
in bad faith. First of all, the order was issued without any legal basis.
Second, petitioner did not inform respondents of the reason for the
"Hold Out."82 Third, the order was issued prior to the filing of the
criminal complaint. Records show that the "Hold Out" order was issued
on July 31, 2003,83 while the criminal complaint was filed only on
September 3, 2003.84 All these taken together lead us to conclude that
petitioner acted in bad faith when it breached its contract with
respondents. As we see it then, respondents are entitled to moral
damages.

As to the award of exemplary damages, Article 2229 85 of the Civil Code
provides that exemplary damages may be imposed "by way of example
or correction for the public good, in addition to the moral, temperate,
liquidated or compensatory damages." They are awarded only if the
guilty party acted in a wanton, fraudulent, reckless, oppressive or
malevolent manner.86

In this case, we find that petitioner indeed acted in a wanton,

fraudulent, reckless, oppressive or malevolent manner when it refused
to release the deposits of respondents without any legal basis. We need
not belabor the fact that the banking industry is impressed with public
interest.87 As such, "the highest degree of diligence is expected, and high
standards of integrity and performance are even required of it." 88 It
must therefore "treat the accounts of its depositors with meticulous
care and always to have in mind the fiduciary nature of its relationship
with them."89 For failing to do this, an award of exemplary damages is
justified to set an example.

The award of attorney's fees is likewise proper pursuant to paragraph

1, Article 220890 of the Civil Code.

1. Law, NCC 1158
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,  Construed in the light of modern day educational
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 Ordoñ ez-
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.
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; 3hence, 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 measures installed, the same may still fail against an individual or
not prevented this Court from determining the existence of a tort even group determined to carry out a nefarious deed inside school premises
when there obtains a contract. In Air France vs. Carrascoso (124 Phil. and environs. Should this be the case, the school may still avoid liability
722), the private respondent was awarded damages for his by proving that the breach of its contractual obligation to the students
unwarranted expulsion from a first-class seat aboard the petitioner was not due to its negligence, here statutorily defined to be the
airline. It is noted, however, that the Court referred to the petitioner- omission of that degree of diligence which is required by the nature of
airline's liability as one arising from tort, not one arising from a the obligation and corresponding to the circumstances of persons, time
contract of carriage. In effect, Air France is authority for the view that and place. 9
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.
As the proceedings a quo have yet to commence on the substance of the
Thomas, 248 Fed. 231).
private respondents' complaint, the record is bereft of all the material
facts. Obviously, at this stage, only the trial court can make such a
This view was not all that revolutionary, for even as early as 1918, this determination from the evidence still to unfold.
Court was already of a similar mind. In Cangco vs. Manila Railroad (38
Phil. 780), Mr. Justice Fisher elucidated thus:
WHEREFORE, the foregoing premises considered, the petition is
DENIED. The court of origin (RTC, Manila, Br. 47) is hereby ordered to
The field of non-contractual obligation is much continue proceedings consistent with this ruling of the Court. Costs
broader than that of contractual obligation, against the petitioners.
comprising, as it does, the whole extent of juridical
human relations. These two fields, figuratively
SO ORDERED.
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 Melencio-Herrera, Paras, Regalado and Nocon, JJ., concur.
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

2. Contracts, NCC 1159
G.R. No. 191431               March 13, 2013
RODOLFO G. CRUZ and ESPERANZA IBIAS, Petitioners,  In their appeal by certiorari with the Court, Cruz and Esperanza assail
vs.
ATTY. DELFIN GRUSPE, Respondent.
DECISION
BRION, J.:
Before the Court is the petition for review on certiorari 1 filed under
Rule 45 of the Rules of Court, assailing the decision 2 dated July 30, 2009
and the resolution3 dated February 19, 2010 of the Court of Appeals
(CA) in CA-G.R. CV No. 86083. The CA rulings affirmed with
modification the decision dated September 27, 2004 of the Regional
Trial Court (RTC) of Bacoor, Cavite, Branch 19, in Civil Case No. BCV-99-
146 which granted respondent Atty. Delfin Grupe’s claim for payment of
sum of money against petitioners Rodolfo G. Cruz and Esperanza Ibias. 4
THE FACTUAL BACKGROUND
The claim arose from an accident that occurred on October 24, 1999,
when the mini bus owned and operated by Cruz and driven by one
Arturo Davin collided with the Toyota Corolla car of Gruspe; Gruspe’s
car was a total wreck. The next day, on October 25, 1999, Cruz, along
with Leonardo Q. Ibias went to Gruspe’s office, apologized for the
incident, and executed a Joint Affidavit of Undertaking promising jointly
and severally to replace the Gruspe’s damaged car in 20 days, or until
November 15, 1999, of the same model and of at least the same quality;
or, alternatively, they would pay the cost of Gruspe’s car amounting to
₱350,000.00, with interest at
12% per month for any delayed payment after November 15, 1999,
until fully paid.5 When Cruz and Leonardo failed to comply with their
undertaking, Gruspe filed a complaint for collection of sum of money
against them on November 19, 1999 before the RTC.
In their answer, Cruz and Leonardo denied Gruspe’s allegation, claiming
that Gruspe, a lawyer, prepared the Joint Affidavit of Undertaking and
forced them to affix their signatures thereon, without explaining and
informing them of its contents; Cruz affixed his signature so that his
mini bus could be released as it was his only means of income;
Leonardo, a barangay official, accompanied Cruz to Gruspe’s office for
the release of the mini bus, but was also deceived into signing the Joint
Affidavit of Undertaking.
Leonardo died during the pendency of the case and was substituted by
his widow, Esperanza. Meanwhile, Gruspe sold the wrecked car for
₱130,000.00.
In a decision dated September 27, 2004, the RTC ruled in favor of
Gruspe and ordered Cruz and Leonardo to pay ₱220,000.00, 6 plus 15%
per annum from November 15, 1999 until fully paid, and the cost of
suit.
On appeal, the CA affirmed the RTC decision, but reduced the interest
rate to 12% per annum pursuant to the Joint Affidavit of
Undertaking.7 It declared that despite its title, the Joint Affidavit of
Undertaking is a contract, as it has all the essential elements of consent,
object certain, and consideration required under Article 1318 of the
Civil
Code. The CA further said that Cruz and Leonardo failed to present
evidence to support their contention of vitiated consent. By signing the
Joint Affidavit of Undertaking, they voluntarily assumed the obligation
for the damage they caused to Gruspe’s car; Leonardo, who was not a
party to the incident, could have refused to sign the affidavit, but he did
not.
THE PETITION
the CA ruling, contending that the Joint Affidavit of Undertaking is not a
contract that can be the basis of an obligation to pay a sum of money in
favor of Gruspe. They consider an affidavit as different from a contract:
an affidavit’s purpose is simply to attest to facts that are within his
knowledge, while a contract requires that there be a meeting of the
minds between the two contracting parties.
Even if the Joint Affidavit of Undertaking was considered as a contract,
Cruz and Esperanza claim that it is invalid because Cruz and Leonardo’s
consent thereto was vitiated; the contract was prepared by Gruspe who
is a lawyer, and its contents were never explained to them. Moreover,
Cruz and Leonardo were simply forced to affix their signatures,
otherwise, the mini van would not be released.
Also, they claim that prior to the filing of the complaint for sum of
money, Gruspe did not make any demand upon them. Hence, pursuant
to Article 1169 of the Civil Code, they could not be considered in default.
Without this demand, Cruz and Esperanza contend that Gruspe could
not yet take any action.
THE COURT’S RULING
The Court finds the petition partly meritorious and accordingly
modifies the judgment of the CA.
Contracts are obligatory no matter what their forms may be, whenever
the essential requisites for their validity are present. In determining
whether a document is an affidavit or a contract, the Court looks
beyond the title of the document, since the denomination or title given
by the parties in their document is not conclusive of the nature of its
contents.8 In the construction or interpretation of an instrument, the
intention of the parties is primordial and is to be pursued. If the terms
of the document are clear and leave no doubt on the intention of the
contracting parties, the literal meaning of its stipulations shall control.
If the words appear to be contrary to the parties’ evident intention, the
latter shall prevail over the former.9
A simple reading of the terms of the Joint Affidavit of Undertaking
readily discloses that it contains stipulations characteristic of a
contract. As quoted in the CA decision, 10 the Joint Affidavit of
Undertaking contained a stipulation where Cruz and Leonardo
promised to replace the damaged car of Gruspe, 20 days from October
25, 1999 or up to November 15, 1999, of the same model and of at least
the same quality. In the event that they cannot replace the car within
the same period, they would pay the cost of Gruspe’s car in the total
amount of ₱350,000.00, with interest at 12% per month for any delayed
payment after November 15, 1999, until fully paid. These, as read by the
CA, are very simple terms that both Cruz and Leonardo could easily
understand.
There is also no merit to the argument of vitiated consent.1âwphi1 An
allegation of vitiated consent must be proven by preponderance of
evidence; Cruz and Leonardo failed to support their allegation.
Although the undertaking in the affidavit appears to be onerous and
lopsided, this does not necessarily prove the alleged vitiation of
consent. They, in fact, admitted the genuineness and due execution of
the Joint Affidavit and Undertaking when they said that they signed the
same to secure possession of their vehicle. If they truly believed that the
vehicle had been illegally impounded, they could have refused to sign
the Joint Affidavit of Undertaking and filed a complaint, but they did not.
That the release of their mini bus was conditioned on their signing the
Joint Affidavit of Undertaking does not, by itself, indicate that their
consent was forced – they may have given it grudgingly, but it is not
indicative of a vitiated consent that is a ground for the annulment of a
contract.

Thus, on the issue of the validity and enforceability of the Joint Affidavit
of Undertaking, the CA did not commit any legal error that merits the
reversal of the assailed decision.

Nevertheless, the CA glossed over the issue of demand which is material

in the computation of interest on the amount due. The RTC ordered
Cruz and Leonardo to pay Gruspe "₱350,000.00 as cost of the car xxx
plus fifteen percent (15%) per annum from November 15, 1999 until
fully paid."11 The 15% interest (later modified by the CA to be 12%) was
computed from November 15, 1999 – the date stipulated in the Joint
Affidavit of Undertaking for the payment of the value of Gruspe’s car. In
the absence of a finding by the lower courts that Gruspe made a
demand prior to the filing of the complaint, the interest cannot be
computed from November 15, 1999 because until a demand has been
made, Cruz and Leonardo could not be said to be in default. 12 "In order
that the debtor may be in default, it is necessary that the following
requisites be present: (1) that the obligation be demandable and
already liquidated; (2) that the debtor delays performance; and (3) that
the creditor requires the performance judicially and
extrajudicially."13 Default generally begins from the moment the
creditor demands the performance of the obligation. In this case,
demand could be considered to have been made upon the filing of the
complaint on November 19, 1999, and it is only from this date that the
interest should be computed.

Although the CA upheld the Joint Affidavit of Undertaking, we note that

it imposed interest rate on a per annum basis, instead of the per month
basis that was stated in the Joint Affidavit of Undertaking without
explaining its reason for doing so.14 Neither party, however, questioned
the change. Nonetheless, the Court affirms the change in the interest
rate from 12% per month to 12% per annum, as we find the interest
rate agreed upon in the Joint Affidavit of Undertaking excessive. 15

WHEREFORE, we AFFIRM the decision dated July 30, 2009 and the
resolution dated February 19, 2010 of the Court of Appeals in CA-G.R.
CV No. 86083, subject to the Modification that the twelve percent (12%)
per annum interest imposed on the amount due shall accrue only from
November 19, 1999, when judicial demand was made.

SO ORDERED.

ARTURO D. BRION
Associate Justice

G.R. No. 200602               December 11, 2013
ACE FOODS, INC., Petitioner,  For its part, MTCL, in its Answer with Counterclaim, 18 maintained that it
vs.
MICRO PACIFIC TECHNOLOGIES CO., LTD.1, Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari2are the Decision 3 dated
October 21, 2011 and Resolution 4 dated February 8, 2012 of the Court
of Appeals (CA) in CA-G.R. CV No. 89426 which reversed and set aside
the Decision5 dated February 28, 2007 of the Regional Trial Court of
Makati, Branch 148 (RTC) in Civil Case No. 02-1248, holding petitioner
ACE Foods, Inc. (ACE Foods) liable to respondent Micro Pacific
Technologies Co., Ltd. (MTCL) for the payment of Cisco Routers and
Frame Relay Products (subject products) amounting to ₱646,464.00
pursuant to a perfected contract of sale.
The Facts
ACE Foods is a domestic corporation engaged in the trading and
distribution of consumer goods in wholesale and retail bases, 6 while
MTCL is one engaged in the supply of computer hardware and
equipment.7
On September 26, 2001, MTCL sent a letter-proposal 8 for the delivery
and sale of the subject products to be installed at various offices of ACE
Foods. Aside from the itemization of the products offered for sale, the
said proposal further provides for the following terms, viz.:9
TERMS : Thirty (30) days upon delivery
VALIDITY : Prices are based on current dollar rate and subject to changes
without prior notice.
DELIVERY : Immediate delivery for items on stock, otherwise thirty (30)
to forty-five days upon receipt of [Purchase Order]
WARRANTY : One (1) year on parts and services. Accessories not included
in warranty.
On October 29, 2001, ACE Foods accepted MTCL’s proposal and
accordingly issued Purchase Order No. 100023 10(Purchase Order) for
the subject products amounting to ₱646,464.00 (purchase price).
Thereafter, or on March 4, 2002, MTCL delivered the said products to
ACE Foods as reflected in Invoice No. 7733 11 (Invoice Receipt). The fine
print of the invoice states, inter alia, that "[t]itle to sold property is
reserved in MICROPACIFIC TECHNOLOGIES CO., LTD. until full
compliance of the terms and conditions of above and payment of the
price"12 (title reservation stipulation). After delivery, the subject
products were then installed and configured in ACE Foods’s premises.
MTCL’s demands against ACE Foods to pay the purchase price,
however, remained unheeded. 13 Instead of paying the purchase price,
ACE Foods sent MTCL a Letter14 dated September 19, 2002, stating that
it "ha[s] been returning the [subject products] to [MTCL] thru [its] sales
representative Mr. Mark Anteola who has agreed to pull out the said
[products] but had failed to do so up to now."
Eventually, or on October 16, 2002, ACE Foods lodged a
Complaint15 against MTCL before the RTC, praying that the latter pull
out from its premises the subject products since MTCL breached its
"after delivery services" obligations to it, particularly, to: (a) install and
configure the subject products; (b) submit a cost benefit study to justify
the purchase of the subject products; and (c) train ACE Foods’s
technicians on how to use and maintain the subject products. 16 ACE
Foods likewise claimed that the subject products MTCL delivered are
defective and not working.17
had duly complied with its obligations to ACE Foods and that the
subject products were in good working condition when they were
delivered, installed and configured in ACE Foods’s premises. Thereafter,
MTCL even conducted a training course for ACE Foods’s
representatives/employees; MTCL, however, alleged that there was
actually no agreement as to the purported "after delivery services."
Further, MTCL posited that ACE Foods refused and failed to pay the
purchase price for the subject products despite the latter’s use of the
same for a period of nine (9) months. As such, MTCL prayed that ACE
Foods be compelled to pay the purchase price, as well as damages
related to the transaction. 19
The RTC Ruling
On February 28, 2007, the RTC rendered a Decision, 20 directing MTCL
to remove the subject products from ACE Foods’s premises and pay
actual damages and attorney fees in the amounts of ₱200,000.00 and
₱100,000.00, respectively.21
At the outset, it observed that the agreement between ACE Foods and
MTCL is in the nature of a contract to sell. Its conclusion was based on
the fine print of the Invoice Receipt which expressly indicated that "title
to sold property is reserved in MICROPACIFIC TECHNOLOGIES CO.,
LTD. until full compliance of the terms and conditions of above and
payment of the price," noting further that in a contract to sell, the
prospective seller explicitly reserves the transfer of title to the
prospective buyer, and said transfer is conditioned upon the full
payment of the purchase price.22 Thus, notwithstanding the execution of
the Purchase Order and the delivery and installation of the subject
products at the offices of ACE Foods, by express stipulation stated in the
Invoice Receipt issued by MTCL and signed by ACE Foods, i.e., the title
reservation stipulation, it is still the former who holds title to the
products until full payment of the purchase price therefor. In this
relation, it noted that the full payment of the price is a positive
suspensive condition, the non-payment of which prevents the
obligation to sell on the part of the seller/vendor from materializing at
all.23 Since title remained with MTCL, the RTC therefore directed it to
withdraw the subject products from ACE Foods’s premises. Also, in
view of the foregoing, the RTC found it unnecessary to delve into the
allegations of breach since the non-happening of the aforesaid
suspensive condition ipso jure prevented the obligation to sell from
arising.24
Dissatisfied, MTCL elevated the matter on appeal.25
The CA Ruling
In a Decision26 dated October 21, 2011, the CA reversed and set aside
the RTC’s ruling, ordering ACE Foods to pay MTCL the amount of
₱646,464.00, plus legal interest at the rate of 6% per annum to be
computed from April 4, 2002, and attorney’s fees amounting to
₱50,000.00.27
It found that the agreement between the parties is in the nature of a
contract of sale, observing that the said contract had been perfected
from the time ACE Foods sent the Purchase Order to MTCL which, in
turn, delivered the subject products covered by the Invoice Receipt and
subsequently installed and configured them in ACE Foods’s
premises.28 Thus, considering that MTCL had already complied with its
obligation, ACE Foods’s corresponding obligation arose and was then
duty bound to pay the agreed purchase price within thirty (30) days
from March 5, 2002.29 In this light, the CA concluded that it was
erroneous for ACE Foods not to pay the purchase price therefor, despite
its receipt of the subject products, because its refusal to pay disregards
the very essence of reciprocity in a contract of sale. 30 The CA also
dismissed ACE Foods’s claim regarding MTCL’s failure to perform its
"after delivery services" obligations since the letter-proposal, Purchase
Order and Invoice Receipt do not reflect any agreement to that effect. 31
Aggrieved, ACE Foods moved for reconsideration which was, however,
denied in a Resolution 32 dated February 8, 2012, hence, this petition.
The Issue Before the Court
The essential issue in this case is whether ACE Foods should pay MTCL
the purchase price for the subject products.
The Court’s Ruling
The petition lacks merit.
A contract is what the law defines it to be, taking into consideration its
essential elements, and not what the contracting parties call it. 33 The
real nature of a contract may be determined from the express terms of
the written agreement and from the contemporaneous and subsequent
acts of the contracting parties. However, in the construction or
interpretation of an instrument, the intention of the parties is
primordial and is to be pursued. The denomination or title given by
the parties in their contract is not conclusive of the nature of its
contents.34
The very essence of a contract of sale is the transfer of ownership in
exchange for a price paid or promised. 35This may be gleaned from
Article 1458 of the Civil Code which defines a contract of sale as follows:
Art. 1458. By the contract of sale one of the contracting parties
obligates himself to transfer the ownership and to deliver a determinate
thing, and the other to pay therefor a price certain in money or its
equivalent.
A contract of sale may be absolute or conditional. (Emphasis supplied)
Corollary thereto, a contract of sale is classified as a consensual
contract, which means that the sale is perfected by mere consent. No
particular form is required for its validity. Upon perfection of the
contract, the parties may reciprocally demand performance, i.e., the
vendee may compel transfer of ownership of the object of the sale, and
the vendor may require the vendee to pay the thing sold. 36
In contrast, a contract to sell is defined as a bilateral contract whereby
the prospective seller, while expressly reserving the ownership of the
property despite delivery thereof to the prospective buyer, binds
himself to sell the property exclusively to the prospective buyer upon
fulfillment of the condition agreed upon, i.e., the full payment of the
purchase price. A contract to sell may not even be considered as
a conditional contract of sale where the seller may likewise reserve
title to the property subject of the sale until the fulfillment of a
suspensive condition, because in a conditional contract of sale, the first
element of consent is present, although it is conditioned upon the
happening of a contingent event which may or may not occur. 37
In this case, the Court concurs with the CA that the parties have agreed
to a contract of sale and not to a contract to sell as adjudged by the RTC.
Bearing in mind its consensual nature, a contract of sale had been
perfected at the precise moment ACE Foods, as evinced by its act of
sending MTCL the Purchase Order, accepted the latter’s proposal to sell
the subject products in consideration of the purchase price of
₱646,464.00. From that point in time, the reciprocal obligations of the
parties – i.e., on the one hand, of MTCL to deliver the said products to
ACE Foods, and, on the other hand, of ACE Foods to pay the purchase
price therefor within thirty (30) days from delivery – already arose and
consequently may be demanded. Article 1475 of the Civil Code makes
this clear:
Art. 1475. The contract of sale is perfected at the moment there is a
meeting of minds upon the thing which is the object of the contract and
upon the price.
From that moment, the parties may reciprocally demand performance,
subject to the provisions of the law governing the form of contracts.
At this juncture, the Court must dispel the notion that the stipulation
anent MTCL’s reservation of ownership of the subject products as
reflected in the Invoice Receipt, i.e., the title reservation stipulation,
changed the complexion of the transaction from a contract of sale into a
contract to sell. Records are bereft of any showing that the said
stipulation novated the contract of sale between the parties which, to
repeat, already existed at the precise moment ACE Foods accepted
MTCL’s proposal. To be sure, novation, in its broad concept, may either
be extinctive or modificatory. It is extinctive when an old obligation is
terminated by the creation of a new obligation that takes the place of
the former; it is merely modificatory when the old obligation subsists to
the extent it remains compatible with the amendatory agreement. In
either case, however, novation is never presumed, and the animus
novandi, whether totally or partially, must appear by express
agreement of the parties, or by their acts that are too clear and
unequivocal to be mistaken.38
In the present case, it has not been shown that the title reservation
stipulation appearing in the Invoice Receipt had been included or had
subsequently modified or superseded the original agreement of the
parties. The fact that the Invoice Receipt was signed by a representative
of ACE Foods does not, by and of itself, prove animus novandi since: (a)
it was not shown that the signatory was authorized by ACE Foods (the
actual party to the transaction) to novate the original agreement; (b)
the signature only proves that the Invoice Receipt was received by a
representative of ACE Foods to show the fact of delivery; and (c) as
matter of judicial notice, invoices are generally issued at the
consummation stage of the contract and not its perfection, and have
been even treated as documents which are not actionable per se,
although they may prove sufficient delivery. 39 Thus, absent any clear
indication that the title reservation stipulation was actually agreed
upon, the Court must deem the same to be a mere unilateral imposition
on the part of MTCL which has no effect on the nature of the parties’
original agreement as a contract of sale. Perforce, the obligations arising
thereto, among others, ACE Foods’s obligation to pay the purchase
price as well as to accept the delivery of the goods,40 remain
enforceable and subsisting.1âwphi1
As a final point, it may not be amiss to state that the return of the
subject products pursuant to a rescissory action 41is neither warranted
by ACE Foods’s claims of breach – either with respect to MTCL’s breach
of its purported "after delivery services" obligations or the defective
condition of the products - since such claims were not adequately
proven in this case. The rule is clear: each party must prove his own
affirmative allegation; one who asserts the affirmative of the issue has
the burden of presenting at the trial such amount of evidence required
by law to obtain a favorable judgment, which in civil cases, is by
preponderance of evidence. 42 This, however, ACE Foods failed to
observe as regards its allegations of breach. Hence, the same cannot be
sustained.
WHEREFORE, the petition is DENIED. Accordingly, the Decision dated
October 21, 2011 and Resolution dated February 8, 2012 of the Court of
Appeals in CA-G.R. CV No. 89426 are hereby AFFIRMED.
SO ORDERED.
ESTELA M. PERLAS-BERNABE
Associate Justice
 and recovery of monthly salary deductions which were earmarked for
his cost-sharing in the car plan. The case was docketed in the National
Labor Relations Commission(NLRC), National Capital Region(NCR),
Quezon City as NLRC NCR CASE NO. 00-05-04139-07.

3. Quasi-Contract, NCC 1160

On October 30, 2007, Labor Arbiter Cresencio G. Ramos rendered a
Decision,7 decreeing as follows: WHEREFORE, in the light of the
G.R. NO. 192105               December 9, 2013 foregoing premises, judgment is hereby rendered directing respondents
to turn-over to complainant x x x the subject vehicle upon the said
complainant’s payment to them of the sum of ₱100,435.84.SO
ANTONIO LOCSIN, II, Petitioner, 
ORDERED.8 Ruling of the National Labor Relations Commission On
vs.
appeal,9 the Labor Arbiter’s Decision was reversed in a February 27,
MEKENI FOOD CORPORATION, Respondent.
2009 Decision10 of the NLRC, thus: WHEREFORE, premises considered,
the appeal is hereby Granted. The assailed Decision dated October 30,
DECISION 2007 is hereby REVERSED and SET ASIDE and a new one entered
ordering respondent-appellee Mekeni Food Corporation to pay
complainant-appellee the following:
DEL CASTILLO, J.:

1.Unpaid Salary in the amount of ₱12,511.45;

In the absence of specific terms and conditions governing a car plan
agreement between the employer and employe former may not retain
the installment payments made by the latter on the car plan and treat 2.Unpaid sick leave/vacation leave pay in the amount of
them as rents for the use of the service vehicle, in the event that the ₱14,789.15;
employee ceases his employment and is unable to complete the
installment payments on the vehicle. The underlying reason is that the
3.Unpaid commission in the amount of ₱9,780.00; and
service vehicle was precisely used in the former' s business; any
personal benefit obtained by the employee from its use is merely
incidental. This Petition for Review on Certiorari1 assails the January 27, 4.Reimbursement of complainant’s payment under the car
2010 Decision2 of the Court of Appeals (CA) in CA-G.R. SP No. 109550, plan agreement in the amount of ₱112,500.00; and
as well as its April 23, 2010 Resolution 3 denying petitioner’s Motion for
Partial Reconsideration.4
5.The equivalent share of the company as part of the
complainant’s benefit under the car plan 50/50 sharing
Factual Antecedents amounting to ₱112,500.00.

In February 2004, respondent Mekeni Food Corporation(Mekeni)–a Respondent-Appellee Mekeni Food Corporation is hereby authorized to
Philippine company engaged in food manufacturing and meat deduct the sum of ₱4,736.50 representing complainant-appellant’s cash
processing –offered petitioner Antonio Locsin II the position of advance from his total monetary award.
Regional Sales Manager to over see Mekeni’s National Capital Region
Supermarket/Food Service and South Luzon operations. In addition to a
All other claims are dismissed for lack of merit.
compensation and benefit package, Mekeni offered petitioner a car plan,
under which one-half of the cost of the vehicle is to be paid by the
company and the other half to be deducted from petitioner’s salary. SO ORDERED.11 The NLRC held that petitioner’s amortization payments
Mekeni’s offer was contained in an Offer Sheet 5 which was presented to on his service vehicle amounting to ₱112,500.00 should be reimbursed;
petitioner. if not, unjust enrichment would result, as the vehicle remained in the
possession and ownership of Mekeni.
Petitioner began his stint as Mekeni Regional Sales Manager on March
17, 2004. To be able to effectively cover his appointed sales territory, On October 30, 2007, Labor Arbiter Cresencio G. Ramos rendered a
Mekeni furnished petitioner with a used Honda Civic car valued at Decision,7 decreeing as follows:
₱280,000.00, which used to be the service vehicle of petitioner’s
immediate supervisor. Petitioner paid for his 50% share through salary
WHEREFORE, in the light of the foregoing premises, judgment is hereby
deductions of ₱5,000.00 each month.
rendered directing respondents to turn-over to complainant x x xthe
subject vehicle upon the said complainant’s payment to them of the sum
Subsequently, Locsin resigned effective February 25, 2006. By then, a of ₱100,435.84.
total of ₱112,500.00 had been deducted from his monthly salary and
applied as part of the employee’s share in the car plan. Mekeni
SO ORDERED.8
supposedly put in an equivalent amount as its share under the car plan.
In his resignation letter, petitioner made an offer to purchase his
service vehicle by paying the outstanding balance thereon. The parties Ruling of the National Labor Relations Commission
negotiated, but could not agree on the terms of the proposed purchase.
Petitioner thus returned the vehicle to Mekeni on May 2, 2006.
On appeal,9 the Labor Arbiter’s Decision was reversedin a February 27,
2009 Decision10of the NLRC, thus:
Petitioner made personal and written follow-ups regarding his unpaid
salaries, commissions, benefits, and offer to purchase his service
WHEREFORE, premises considered, the appeal is hereby Granted. The
vehicle. Mekeni replied that the company car plan benefit applied only
assailed Decision dated October 30, 2007 is hereby REVERSED and SET
to employees who have been with the company for five years; for this
ASIDE and a new one entered ordering respondent-appellee Mekeni
reason, the balance that petitioner should pay on his service vehicle
Food Corporation to pay complainant-appellee the following:
stood at ₱116,380.00 if he opts to purchase the same.

1.Unpaid Salary in the amount of ₱12,511.45;

On May 3, 2007, petitioner filed against Mekeni and/or its President,
Prudencio S. Garcia, a Complaint6for the recovery of monetary claims
consisting of unpaid salaries, commissions, sick/vacation leave benefits,
 2.Unpaid sick leave/vacation leave pay in the amount of
₱14,789.15;
3.Unpaid commission in the amount of ₱9,780.00; and
4.Reimbursement of complainant’s payment under the car
plan agreement in the amount of ₱112,500.00; and
5.The equivalent share of the company as part of the
complainant’s benefit under the car plan 50/50 sharing
amounting to ₱112,500.00.
Respondent-Appellee Mekeni Food Corporation is hereby authorized to
deduct the sum of ₱4,736.50 representing complainant-appellant’s cash
advance from his total monetary award.
All other claims are dismissed for lack of merit.
SO ORDERED.11
The NLRC held that petitioner’s amortization payments on his service
vehicle amounting to ₱112,500.00 should be reimbursed; if not, unjust
enrichment would result, as the vehicle remained in the possession and
ownership of Mekeni.
In addition, the employer’s share in the monthly car plan payments
should likewise be awarded to petitioner because it forms part of the
latter’s benefits under the car plan. It held further that Mekeni’s claim
that the company car plan benefit applied only to employees who have
been with the company for five years has not been substantiated by its
evidence, in which case the car plan agreement should be construed in
petitioner’s favor. Mekeni moved to reconsider, but in an April 30, 2009
Resolution,12 the NLRC sustained its original findings.
Ruling of the Court of Appeals
Mekeni filed a Petition for Certiorari 13 with the CA assailing the NLRC’s
February 27, 2009 Decision, saying that the NLRC committed grave
abuse of discretion in holding it liable to petitioner as it had no
jurisdiction to resolve petitioner’s claims, which are civil in nature.
On January 27, 2010, the CA issued the assailed Decision, decreeing as
follows:
WHEREFORE, the petition for certiorari is GRANTED. The Decision of
the National Labor Relations Commission dated 27 February 2009, in
NLRC NCR Case No. 00-05-04139-07, and its Resolution dated 30 April
2009 denying reconsideration thereof, are MODIFIED in that the
reimbursement of Locsin’s payment under the car plan in the amount of
₱112,500.00, and the payment to him of Mekeni’s 50% share in the
amount of ₱112,500.00 are DELETED. The rest of the decision is
AFFIRMED.
SO ORDERED.14
In arriving at the above conclusion, the CA held that the NLRC
possessed jurisdiction over petitioner’s claims, including the amounts
he paid under the car plan, since his Complaint against Mekeni is one
for the payment of salaries and employee benefits. With regard to the
car plan arrangement, the CA applied the ruling in Elisco Tool
Manufacturing Corporation v. Court of Appeals,15 where it was held that
–
First. Petitioner does not deny that private respondent Rolando Lantan
acquired the vehicle in question under a car plan for executives of the
Elizalde group of companies. Under a typical car plan, the company
advances the purchase price of a car to be paid back by the employee
through monthly deductions from his salary. The company retains
ownership of the motor vehicle until it shall have been fully paid for.
However, retention of registration of the car in the company’s name is
only a form of a lien on the vehicle in the event that the employee would
abscond before he has fully paid for it. There are also stipulations in car
plan agreements to the effect that should the employment of the
employee concerned be terminated before all installments are fully
paid, the vehicle will be taken by the employer and all installments paid
shall be considered rentals per agreement.16
In the absence of evidence as to the stipulations of the car plan
arrangement between Mekeni and petitioner, the CA treated
petitioner’s monthly contributions in the total amount of ₱112,500.00
as rentals for the use of his service vehicle for the duration of his
employment with Mekeni. The appellate court applied Articles 1484-
1486 of the Civil Code,17 and added that the installments paid by
petitioner should not be returned to him inasmuch as the amounts are
not unconscionable. It made the following pronouncement:
Having used the car in question for the duration of his employment, it is
but fair that all of Locsin’s payments be considered as rentals therefor
which may be forfeited by Mekeni. Therefore, Mekeni has no obligation
to return these payments to Locsin. Conversely, Mekeni has no right to
demand the payment of the balance of the purchase price from Locsin
since the latter has already surrendered possession of the vehicle. 18
Moreover, the CA held that petitioner cannot recover Mekeni’s
corresponding share in the purchase price of the service vehicle, as this
would constitute unjust enrichment on the part of petitioner at
Mekeni’s expense.
The CA affirmed the NLRC judgment in all other respects. Petitioner
filed his Motion for Partial Reconsideration, 19but the CA denied the
same in its April 23, 2010 Resolution.
Thus, petitioner filed the instant Petition; Mekeni, on the other hand,
took no further action.
Issue
Petitioner raises the following solitary issue:
WITH ALL DUE RESPECT, THE HONORABLE COURT OF APPEALS
ERRED IN NOT CONSIDERING THE CAR PLAN PRIVILEGE AS PART OF
THE COMPENSATION PACKAGE OFFERED TO PETITIONER AT THE
INCEPTION OF HIS EMPLOYMENT AND INSTEAD LIKENED IT TO A
CAR LOAN ON INSTALLMENT, IN SPITE OF THE ABSENCE OF
EVIDENCE ONRECORD.20
Petitioner’s Arguments
In his Petition and Reply,21 petitioner mainly argues that the CA erred in
treating his monthly contributions to the car plan, totaling ₱112,500.00,
as rentals for the use of his service vehicle during his employment; the
car plan which he availed ofwasa benefit and it formed part of the
package of economic benefits granted to him when he was hired as
Regional Sales Manager. Petitioner submits that this is shown by the
Offer Sheet which was shown to him and which became the basis for his
decision to accept the offer and work for Mekeni.
Petitioner adds that the absence of documentary or other evidence
showing the terms and conditions of the Mekeni company car plan
cannot justify a reliance on Mekeni’s self-serving claimsthat the full
terms thereof applied only to employees who have been with the
company for at least five years; in the absence of evidence, doubts
should be resolved in his favor pursuant to the policy of the law that
affords protection to labor, as well asthe principle that all doubts
shouldbe construed to its benefit.
Finally, petitioner submits that the ruling in the Elisco Tool casecannot
apply to his case because the car plan subject of the said case involved a
car loan, which his car plan benefit was not; it was part of his
compensation package, and the vehicle was an important component of
his work which required constant and uninterrupted mobility.
Petitioner claims that the car plan was in fact more beneficial to Mekeni
than to him; besides, he did not choose to avail of it, as it was simply
imposed upon him. He concludes that it is only just that his payments
should be refunded and returned to him.
Petitioner thus prays for the reversal of the assailed CA Decision and
Resolution, and that the Court reinstate the NLRC’s February 27, 2009
Decision.
Respondent’s Arguments
In its Comment,22 Mekeni argues that the Petition does not raise
questions of law, but merely of fact, which thus requires the Court to
review anew issues already passed upon by the CA – an unauthorized
exercise given that the Supreme Court is not a trier of facts, nor is it its
function to analyze or weigh the evidence of the parties all over
again.23 It adds that the issue regarding the car plan and the conclusions
of the CA drawn from the evidence on record are questions of fact.
Mekeni asserts further that the service vehicle was merely a loan which
had to be paid through the monthly salary deductions.If it is not allowed
to recover on the loan, this would constitute unjust enrichment on the
part of petitioner.
Our Ruling
The Petition is partially granted.
To begin with, the Court notes that Mekeni did not file a similar petition
questioning the CA Decision; thus, it is deemed to have accepted what
was decreed. The only issue that must be resolved in this Petition, then,
is whether petitioner is entitled to a refund of all the amounts applied
to the cost of the service vehicle under the car plan.
When the conclusions of the CA are grounded entirely on speculation,
surmises and conjectures, or when the inferences made by it are
manifestly mistaken or absurd, its findings are subject to review by this
Court.24
From the evidence on record, it is seen that the Mekeni car plan offered
to petitioner was subject to no other term or condition than that Mekeni
shall cover one-half of its value, and petitioner shall in turn pay the
other half through deductions from his monthly salary.Mekeni has not
shown, by documentary evidence or otherwise, that there are other
terms and conditions governing its car plan agreement with petitioner.
There is no evidence to suggest that if petitioner failed to completely
cover one-half of the cost of the vehicle, then all the deductions from his
salary going to the cost of the vehicle will be treated as rentals for his
use thereof while working with Mekeni, and shall not be refunded.
Indeed, there is no such stipulation or arrangement between them.
Thus, the CA’s reliance on Elisco Toolis without basis, and its
conclusions arrived at in the questioned decision are manifestly
mistaken. To repeat what was said in Elisco Tool –
First. Petitioner does not deny that private respondent Rolando Lantan
acquired the vehicle in question under a car plan for executives of the
Elizalde group of companies. Under a typical car plan, the company
advances the purchase price of a car to be paid back by the employee
through monthly deductions from his salary. The company retains
ownership of the motor vehicle until it shall have been fully paid for.
However, retention of registration of the car in the company’s name is
only a form of a lien on the vehicle in the event that the employee would
abscond before he has fully paid for it. There are also stipulations in car
plan agreements to the effect that should the employment of the
employee concerned be terminated before all installments are fully
paid, the vehicle will be taken by the employer and all installments paid
shall be considered rentals per agreement.25 (Emphasis supplied)
It was made clear in the above pronouncement that installments made
on the car plan may be treated as rentals only when there is an express
stipulation in the car plan agreement to such effect. It was therefore
patent error for the appellate court to assume that, even in the absence
of express stipulation, petitioner’s payments on the car plan may be
considered as rentals which need not be returned.
Indeed, the Court cannot allow that payments made on the car plan
should be forfeited by Mekeni and treated simply as rentals for
petitioner’s use of the company service vehicle. Nor may they be
retained by it as purported loan payments, as it would have this Court
believe. In the first place, there is precisely no stipulation to such effect
in their agreement. Secondly, it may not be said that the car plan
arrangement between the parties was a benefit that the petitioner
enjoyed; on the contrary, it wasan absolute necessity in Mekeni’s
business operations, which benefit edit to the fullest extent: without the
service vehicle, petitioner would have been unable to rapidly cover the
vast sales territory assigned to him, and sales or marketing of Mekeni’s
products could not have been booked or made fast enough to move
Mekeni’s inventory. Poor sales, inability to market Mekeni’s products, a
high rate of product spoil age resulting from stagnant inventory, and
poor monitoring of the sales territory are the necessary consequences
of lack of mobility. Without a service vehicle, petitioner would have
been placed at the mercy of inefficient and unreliable public
transportation; his official schedule would have been dependent on the
arrival and departure times of buses or jeeps, not to mention the
availability of seats in them. Clearly, without a service vehicle, Mekeni’s
business could only prosper at a snail’s pace, if not completely
paralyzed. Its cost of doing business would be higher as well. The Court
expressed just such a view in the past. Thus –
In the case at bar, the disallowance of the subject car plan benefits
would hamper the officials in the performance of their functions to
promote and develop trade which requires mobility in the performance
of official business. Indeed, the car plan benefits are supportive of the
implementation of the objectives and mission of the agency relative to
the nature of its operation and responsive to the exigencies of the
service.26 (Emphasis supplied) Any benefit or privilege enjoyed by
petitioner from using the service vehicle was merely incidental and
insignificant, because for the most part the vehicle was under Mekeni’s
control and supervision. Free and complete disposal is given to the
petitioner only after the vehicle’s cost is covered or paid in full. Until
then, the vehicle remains at the beck and call of Mekeni. Given the vast
territory petitioner had to cover to be able to perform his work
effectively and generate business for his employer, the service vehicle
was an absolute necessity, or else Mekeni’s business would suffer
adversely. Thus, it is clear that while petitioner was paying for half of
the vehicle’s value, Mekeni was reaping the full benefits from the use
thereof.
In light of the foregoing, it is unfair to deny petitioner a refund of all his
contributions to the car plan.1âwphi1 Under Article 22 of the Civil Code,
"[e]very person who through an act of performance by another, or any
other means, acquires or comes into possession of something at the
expense of the latter without just or legal ground, shall return the same
to him." Article 214227of the same Code likewise clarifies that there are
certain lawful, voluntary and unilateral acts which give rise to the
juridical relation of quasi-contract, to the end that no one shall be
unjustly enriched or benefited at the expense of another. In the absence
of specific terms and conditions governing the car plan arrangement
between the petitioner and Mekeni, a quasi-contractual relation was
created between them. Consequently, Mekeni may not enrich itself by
charging petitioner for the use of its vehicle which is otherwise
absolutely necessaryto the full and effective promotion of its business.
It may not, under the claim that petitioner’s payments constitute rents
for the use of the company vehicle, refuse to refund what petitioner had
paid, for the reasons that the car plan did not carry such a condition; the
subject vehicle is an old car that is substantially, if not fully,
depreciated; the car plan arrangement benefited Mekeni for the most
part; and any personal benefit obtained by petitioner from using the
vehicle was merely incidental.

Conversely, petitioner cannot recover the monetary value of Mekeni’s

counterpart contribution to the cost of the vehicle; that is not property
or money that belongs to him, nor was it intended to be given to him in
lieu of the car plan. In other words, Mekeni’s share of the vehicle’s cost
was not part of petitioner’s compensation package. To start with, the
vehicle is an asset that belonged to Mekeni. Just as Mekeni is unjustly
enriched by failing to refund petitioner’s payments, so should petitioner
not be awarded the value of Mekeni’s counter part contribution to the
car plan, as this would unjustly enrich him at Mekeni’s expense.

There is unjust enrichment ''when a person unjustly retains a benefit to

the loss of another, or when a person retains money or property of
another against the fundamental principles of justice, equity and good
conscience." The principle of unjust enrichment requires two
conditions: (1) that a person is benefited without a valid basis or
justification, and (2) that such benefit is derived at the expense of
another. The main objective of the principle against unjust enrichment
is to prevent one from enriching himself at the expense of another
without just cause or consideration. x x x28

WHEREFORE, the Petition is GRANTED IN PART. The assailed January

27, 2010 Decision and April 23, 2010 Resolution of the Court of Appeals
in CA-G.R. SP No. 109550 are MODIFIED, in that respondent Mekeni
Food Corporation is hereby ordered to REFUND petitioner Antonio
Locsin II's payments under the car plan agreement in the total amount
of₱112,500.00.

Thus, except for the counterpart or equivalent share of Mekeni Food

Corporation in the car plan agreement amounting to ₱112,500.00,
which is DELETED, the February 27, 2009 Decision of the National
Labor Relations Commission is affirmed in all respects.

SO ORDERED.

4. Delict, NCC 1161
G.R. No. 172505               October 1, 2014
ANTONIO M. GARCIA, Petitioner, 
vs.
FERRO CHEMICALS, INC., Respondent.
DECISION
LEONEN, J.:
1 of the status of the subject CLUB SHARES. Thus, the element of false
Before this court is a petition for review on certiorari  assailing the
decision 2 of the Court of Appeals dated August 11, 2005 and its·
resolution3 dated April 27, 2006, denying petitioner Antonio Garcia's
motion for reconsideration.
Antonio Garcia, as seller, and Ferro Chemicals, Inc., through Ramon
Garcia, as buyer, entered into a deed of absolute· sale and purchase of
shares of stock on July 15, 1988. The deed was for the sale and purchase
of shares of stock from various corporations, including one class "A"
share in Alabang Country Club, Inc. and one proprietary membership in
the Manila Polo Club, Inc.4 These shares of stock were in the name of
Antonio Garcia.5 The contract was allegedly entered into to prevent
these shares of stock from being sold at public auction to pay the
outstanding obligations of Antonio Garcia.6
On March 3, 1989, a deed of right of repurchase over the same shares of
stock subject of the deed of absolute sale and purchase of shares of
stock was entered into between Antonio Garcia and Ferro Chemicals,
Inc. Under the deed of right of repurchase, Antonio Garcia can redeem
the properties sold within 180 days from the signing of the agreement. 7
Before the end of the 180-day period, Antonio Garcia exercised his right
to repurchase the properties. 8 However, Ferro Chemicals, Inc. did not
agree to the repurchase ofthe shares of stock.9 Thus, Antonio Garcia
filed an action for specific performance and annulment of transfer of
shares.10
On September 6, 1989, the class "A" share in Alabang Country Club, Inc.
and proprietary membership in the Manila Polo Club, Inc., which were
included in the contracts entered intobetween Antonio Garcia and Ferro
Chemicals, Inc., were sold at public auction to Philippine Investment
System Organization.11
On September 3, 1990, the information based on the complaint of Ferro
Chemicals, Inc. was filed against Antonio Garcia before the Regional
Trial Court.12 He was charged with estafaunder Article 318 (Other
Deceits) of the Revised Penal Code for allegedly misrepresenting to
Ferro Chemicals, Inc. that the shares subject of the contracts entered
into were free from all liens and encumbrances. The information reads:
The undersigned Assistant Prosecutor accuses Antonio M. Garcia of the
felony of Estafa as defined and penalized under Art. 318 of the Revised
Penal Code as amended, committed as follows:
THAT on or about 15 July 1988, in Makati, Metro Manila, Philippines, a
place within the jurisdiction of this Honorable Court, the above-named
accused, with evident bad faith and deceit, did, then and there, willfully,
unlawfully and feloniously, misrepresent to FERRO CHEMICALS, INC.
(FCI) represented by Ramon M. Garcia, that his share of
stock/proprietary share with Ayala Alabang Country Club, Inc. and
Manila Polo Club, Inc. collectively valued at about ₱10.00 Million Pesos,
being part of other shares of stock subject matter of a Deed of Absolute
Sale and Purchase of Shares of Stock between the accused and FCI, were
free from all liens, encumbrances and claims by third persons, when in
truth and in fact, accused well knew that aforesaid share of
stock/proprietary share had already been garnished in July 1985 and
subsequently sold at public auction in September 1989, and which
misrepresentation and assurance FCI relied upon and paid the
consideration in accordance with the stipulated condition/manner of
payment, all to the damage and prejudice of FCI in the aforestated
amount of ₱10.00 Million Pesos.
Contrary to law.13
In the decision dated December 12, 1996 of the Regional Trial Court,
Antonio Garcia was acquitted for insufficiency of evidence. 14 The
Regional Trial Court held:
From the foregoing, it is very clear that private complainant was aware
pretense, fraudulent act or fraudulent means which constitute the very
cause or the only motive which induced the private complainant to
enter into the questioned deed of sale (Exh. "A") is wanting in the case
at bar.15 (Underscoring in the original)
Ferro Chemicals, Inc. filed a motion for reconsideration, which was
denied by the Regional Trial Court in the order dated July 29, 1997. 16
On August 25, 1997, Ferro Chemicals, Inc. appealed to the Court of
Appeals the July 29, 1997 order of the Regional Trial Court as to the
civil aspect of the case. 17 The notice of appeal 18 filed was entitled "Notice
of Appeal Ex Gratia Abudantia Ad Cautelam (Of The Civil Aspect of the
Case)." It alleged:
4. Herein private complainant hereby gives notice, out of extreme
caution, that it is appealing the Decision dated 12 December 1996 and
the Order dated 29 July 1997 on the civil aspect of the case to the Court
of Appeals on the ground that it is notin accordance with the law and
the facts of the case.
5. This notice of appeal is without prejudice to the filing of an
appropriate petition for certiorari under Rule 65 of the Rules of Court
on the criminal aspect, upon the giving of due course thereto, private
complainant shall endeavor to seek the consolidation of this appeal
with the said petition.19
On October 15, 1997, the Makati City Prosecutor’s Office and Ferro
Chemicals, Inc. also filed a petition for certiorari 20 with this court,
assailing the Regional Trial Court’s December 12, 1996 decision and
July 29, 1997 order acquitting Antonio Garcia.21
The petition for certiorari 22 filed before this court sought to annul the
decision of the trial court acquitting Antonio Garcia. People of the
Philippines and Ferro Chemicals, Inc. argued that the trial court "acted
in grave abuse of discretion amounting to lack or excess of jurisdiction
when it rendered the judgment of acquittal based on affidavits not at all
introduced in evidence by either of the parties thereby depriving the
people of their substantive right to due process of law." 23 The
verification/certification against forum shopping, signed by Ramon
Garcia as president of Ferro Chemicals, Inc., disclosed that the notice of
appeal was filed "with respect to the civil aspect of the case." 24
In the resolution25 dated November 16, 1998, this court dismissed the
petition for certiorari filed, and entry of judgment was made on
December 24, 1998.26
On the other hand, the Court of Appeals, 27 in its decision28 dated August
11, 2005, granted the appeal and awarded Ferro Chemicals, Inc. the
amount of ₱1,000,000.00 as actual loss with legal interest and the case, [the affidavits of Gonzalez and Navarro] are admissible and
attorney’s fees in the amount of ₱20,000.00. 29 The appellate court found should be given weight."38
that Antonio Garcia failed to disclose the Philippine Investment and
Savings Organization’s lien over the club shares.30 Thus:
Finally, Antonio Garcia claims thatboth he and and Ferro Chemicals, Inc.
acted in bad faith when they entered into the deed of absolute sale as a
The issue in this case is whether or not Antonio Garcia disclosed to scheme to defraud Antonio Garcia’s creditors. Thus, they are in pari
Ferro-Chemicals, during the negotiation stage of the impending sale of delicto and Ferro Chemicals, Inc. should not be allowed to recover from
the imputed club shares, the third attachment lien in favor of Philippine Antonio Garcia.39
Investment and Savings Organization (PISO) which, ultimately, became
the basis of the auction sale of said club shares. We have scrutinized the
In its comment,40 Ferro Chemicals, Inc. points out that Antonio Garcia
records of the case but found no evidence that Antonio Garcia intimated
raised factual issues not proper ina Rule 45 petition and reiterates the
to his brother the third attachment lien of PISO over the said club
findings of the Court of Appeals. 41
shares. While it is true that Antonio Garcia divulged the two liens of
Security Bank and Insular Bank of Asia and America, the lien of PISO
was clearly not discussed. The affidavits executed by the two lawyers to There are pertinent and important issues that the parties failed to raise
the effect that the lien of PISO was considered but deliberately left out before the trial court, Court of Appeals, and this court. Nonetheless, we
in the deed cannot be given much weight as they were never placed on resolve to rule on these issues.
the witness stand and cross-examined by Ferro-Chemicals. If their
affidavits, although not offered, were considered inthe criminal aspect
As a general rule, this court through its appellate jurisdiction can only
and placed a cloud on the prosecution’s thrust, theycannot be given the
decide on matters or issues raised by the parties. 42 However, the rule
same probative value in this civil aspect as only a preponderance of
admits of exceptions.43 When the unassigned error affects jurisdiction
evidence is necessary to carry the day for the plaintiff, Ferro Chemicals.
over the subject matter44 or when the consideration of the error is
necessary for a complete resolution of the case, 45 this court can still
While Antonio Garcia insists that no consideration was ever made over decide on these issues.
the club shares as the same were merely given for safekeeping, the
document denominated as Deed of Absolute Sale states otherwise. It is
We cannot turn a blind eye on glaring misapplications of the law or
a basic rule of evidence that between documentary evidence and oral
patently erroneous decisions or resolutions simply because the parties
evidence, the former carries more weight.
failed to raise these errors before the court. Otherwise, we will be
allowing injustice by reason of the mistakes of the parties’ counsel and
Also, We have observed that in Antonio Garcia’s letter of redemption condoning reckless and negligent acts of lawyers to the prejudice of the
addressed to Ferro Chemicals, he mentioned his interest in redeeming litigants. Failure to rule on these issues amounts to an abdication of our
the company shares only. That he did not include the club shares only duty to dispense justice to all parties.
meant that said club shares no longer had any much redeemable value
as there was a lienover them. To redeem them would be pointless.
The issues are:

If they had no redeemable value to Antonio Garcia, to Ferro Chemical

they were certainly marketable assets. The non-disclosure of the third
lien in favor of PISO materially affected Ferro Chemicals since it was not
able to act on time to protect its interest when the auction sale over the
club shares actually took place. As a result, Ferro Chemicals suffered
losses due to the unfortunate public auction sale. It is but just and fair
that Antonio Garcia be made to compensate the loss pursuant to
Articles 21 and 2199 of the Civil Code.
I. Whether the Regional Trial Court had jurisdiction over the
case
II. Whether the act of FerroChemicals, Inc. in filing the notice
of appeal before the Court of Appeals and the petition for
certiorari assailing the same trial court decision amounted to
forum shopping

The actual loss suffered by Ferro Chemicals amounted to ₱1,000,000.00 III. Whether Ferro Chemicals, Inc. was entitled to the awards
which correspondents to the bid value of the club shares at the time of given as civil liability ex delicto
the auction as evidenced by the Sheriff’s Certificate of Sale. 31 (Citations
omitted)
The Regional Trial Court did not have jurisdiction

Antonio Garcia filed a motion for reconsideration and Ferro Chemicals,

Inc. filed a partial motion for reconsideration of the decision of the
Court of Appeals.32 These motions were denied in the resolution 33 dated
April 27, 2006. Thus, Antonio Garcia filed this petition for review on
certiorari,34 assailing the decision and resolution of the Court of
Appeals.
Antonio Garcia argues that the factual findings of the Court of Appeals
were erroneous35 and insists that "[Ferro Chemicals, Inc.] was fully
aware that the shares covered by the Deed of Absolute Sale, including
the Subject Club Shares, were not free from liens and encumbrances
and that the Deed [of] Sale was executed [to] warehouse [Antonio
Garcia’s] assets based on, among other evidence, the affidavits executed
by Jaime Gonzales . . . and Rolando Navarro. . . ." 36
Antonio Garcia faults the Court of Appeals in disregarding the affidavits
executed by Jaime Gonzales and Rolando Navarro. Antonio Garcia
argues that even thiscourt in G.R. No. 130880 entitled People of the
Philippines and Ferro Chemicals, Inc. v. Hon. Dennis Villa Ignacio and
Antonio Garcia where the admissibility of the affidavits was put in issue
held that the trial court did not commit any grave abuse of discretion in
the challenged decision. 37 He then reasoned that "pursuant to the law of
Jurisdiction of a court over the subject matter is vested by law. 46 In
criminal cases, the imposable penalty of the crime charged in the
information determines the court that has jurisdiction over the case. 47
The information charged Antonio Garcia with violation of Article 318 of
the Revised Penal Code, which is punishable by arresto mayor, or
imprisonment for a period of one (1) month and one (1) day to six (6)
months. Article 318 states:
ART. 318: Other deceits. – The penalty of arresto mayor and a fine of
not less than the amount of the damage caused and not more than twice
such amount shall be imposed upon any person who shall defraud or
damage another by any other deceit not mentioned in the preceding
articles of this chapter.
Any person who, for profit or gain, shall interpret dreams, make
forecasts, tell fortunes, or take advantage of the credulity of the public
in any other similar manner, shall suffer the penalty of arresto mayoror
a fine not exceeding 200 pesos.
When the information was filed on September 3, 1990, the law in force
was Batas Pambansa Blg. 129 before it was amended by Republic Act
No. 7691. Under Section 32 of Batas Pambansa Blg. 129, the
Metropolitan Trial Court had jurisdiction over the case:
SEC. 32. Jurisdiction of Metropolitan Trial Courts, Municipal Trial
Courts and Municipal Circuit Trial Courts in criminal cases.–
....
2. Exclusive original jurisdiction over all offenses punishable with
imprisonment of not exceeding four years and two months, or a fine of
not more than four thousand pesos, or both such fine and
imprisonment, regardless of other imposable accessory or other
penalties, including the civil liability arising from such offenses or
predicated thereon, irrespective of kind, nature, value, or amount
thereof: Provided, however, That in offenses involving damage to
property through criminal negligence they shall have exclusive original
jurisdiction where the imposable fine does not exceed twenty thousand
pesos. (Emphasis supplied)
The Regional Trial Court did not have jurisdiction to hear and decide
the case. This lack of jurisdiction resulted in voiding all of the trial
court’s proceedings and the judgment rendered. 48 Although the trial
court’s lack of jurisdiction was never raised as an issue in any part of
the proceedings and even until it reached this court, we proceed with
resolving the matter.
49
In Pangilinan v. Court of Appeals,  this court held:
Thus, we apply the general rule thatjurisdiction is vested by law and
cannot be conferred or waived by the parties. Even on appeal and even
if the reviewing parties did not raise the issue of jurisdiction, the
reviewing court is not precluded fromruling that the lower court had no
jurisdiction over the case[.]
....
Having arrived at the conclusion that the Regional Trial Court did not
have jurisdiction to try the case against the appellant, it is no longer
necessary to consider the other issues raised as the decision of the
Regional Trial Court is null and void.50
The trial court’s lack of jurisdiction cannot be cured by the parties’
silence on the matter.51 The failure of the parties to raise the matter of
jurisdiction also cannot be construed as a waiver of the parties.
Jurisdiction is conferred by law and cannot be waived by the parties.
The assailed decision is void, considering that it originates from a void
decision of the Regional Trial Court for lack of jurisdiction over the
subject matter.
Ferro Chemicals, Inc. committed forum shopping
Forum shopping is defined as "theact of a litigant who ‘repetitively
availed of several judicial remedies in different courts, simultaneously
or successively, all substantially founded on the same transactions and
the same essential facts and circumstances, and all raising substantially
the same issues either pending in, or already resolved adversely by
some other court . . . to increase his chances of obtaining a favorable
decision if not in one court, then in another’." 52 Once clearly established
that forum shopping was committed willfully and deliberately by a
party or his or her counsel, the case may be summarily dismissed with
prejudice, and the act shall constitute direct contempt and a cause for
administrative sanctions.53
Forum shopping is prohibited, and sanctions are imposed on those who
commit forum shopping as "it trifles with the courts, abuses their
processes, degrades the administration of justice and adds to the
already congested court dockets."54 This court has said:
What is critical is the vexation brought upon the courts and the litigants
by a party who asks different courts to rule on the same or related
causes and grant the same or substantially the same reliefs and in the
process creates the possibility of conflicting decisions being rendered
by the different fora upon the same issues, regardless of whether the
court in which one of the suits was brought has no jurisdiction over the
action.55 (Citation omitted)
The test and requisites that must concur to establish when a litigant
commits forum shopping are the following:
The test for determining the existence of forum shopping is whether the
elements of litis pendentiaare present, or whether a final judgment in
one case amounts to res judicatain another. Thus, there is forum
shopping when the following elements are present: (a) identity of
parties, or at least such parties asrepresent the same interests in both
actions; (b) identity of rights asserted and relief prayed for, the relief
being founded on the same facts; and (c) the identity of the two
preceding particulars, such that any judgment rendered in the other
action will, regardless of which party is successful, amount to res
judicatain the action under consideration; said requisites are also
constitutive of the requisites for auter action pendant or lis
pendens.56 (Citation omitted)
There is no question that Ferro Chemicals, Inc. committed forum
shopping when it filed an appeal before the Court of Appeals and a
petition for certiorari before this court assailing the same trial court
decision. This is true even if Ferro Chemicals, Inc.’s notice of appeal to
the Court of Appeals was entitled "Notice of Appeal Ex Gratia Abudantia
Ad Cautelam (Of The Civil Aspect of the Case)."57 The "civil aspect of the
case" referred to by Ferro Chemicals, Inc. is for the recovery of civil
liability ex delicto. However, it failed to make a reservation before the
trial court to institute the civil action for the recovery of civil liability ex
delictoor institute a separate civil action prior to the filing of the
criminal case.
There is identity of parties. Petitioner, Antonio Garcia, and respondent,
Ferro Chemicals, Inc., are both parties in the appeal filed before the
Court of Appeals and the petition for certiorari before this court.
There is identity of the rights asserted and reliefs prayed for in both
actions. At a glance, it may appear that Ferro Chemicals, Inc. asserted
different rights: The appeal before the Court of Appeals is purely on the
civil aspect of the trial court’s decision while the petition for certiorari
before this court is allegedly only onthe criminal aspect of the case.
However, the civil liability asserted by Ferro Chemicals, Inc. before the
Court of Appeals arose from the criminal act. It is in the nature of civil
liability ex delicto. Ferro Chemicals, Inc. did not reserve the right to
institute the civil action for the recovery of civil liability ex delictoor
institute a separate civil action prior to the filing of the criminal
case.58 Thus, it is an adjunct of the criminalaspect of the case.1âwphi1 As
held in Lim v. Kou Co Ping:59
The civil liability arising from the offense or ex delictois based on the
acts or omissions that constitute the criminal offense; hence, its trial is
inherently intertwined with the criminal action.For this reason, the civil
liability ex delictois impliedly instituted with the criminal offense. If the
action for the civil liability ex delictois instituted prior to or subsequent
to the filing of the criminal action, its proceedings are suspended until
the final outcome of the criminal action. The civil liability based on
delict is extinguished when the court hearing the criminal action
declares that ‘the act or omission from which the civil liability may arise
did not exist’."60 (Emphasis supplied, citations omitted).
When the trial court’s decision was appealed as to its criminal aspect in
the petition for certiorari before thiscourt, the civil aspect thereof is
deemed included in the appeal. Thus, the relief prayed for by Ferro
Chemicals, Inc., that is, recovery of civil liability ex delicto, is asserted in
both actions before this court and the Court of Appeals.
Even the allegations in the notice of appeal readily show that Ferro
Chemicals, Inc. committedforum shopping, to wit:
denies his motion for reconsideration, the private complainant or
offended party may appeal or file a petition for certiorarior
mandamus,if grave abuse amounting to excess or lack of jurisdiction is
shown and the aggrieved party has no right of appeal or given an
adequate remedy in the ordinary course of law.67 (Citations omitted)

This is in consonance with the doctrine that:

5. This notice of appeal is without prejudice to the filing of an
appropriate petition for certiorari under Rule 65 of the Rules of Court
on the criminal aspect, upon the giving of due course thereto, private [T]he extinction of the penal action does not necessarily carry with it
complainant shall endeavor to seek the consolidation of this appeal the extinction ofthe civil action, whether the latter is instituted with or
with the said petition.61 separately from the criminal action. The offended party may still claim
civil liability ex delictoif there is a finding in the final judgment in the
criminal action that the act or omission from which the liability may
As to the third requisite, on the assumption that the trial court had
arise exists. Jurisprudence has enumerated three instances when,
jurisdiction over the case, this court’s decision in G.R. No. 130880
notwithstanding the accused’s acquittal, the offended party may still
affirming the trial court’s decision acquitting the accused for lack of an
claim civil liability ex delicto: (a) if the acquittal is based on reasonable
essential element of the crime charged amounts to res judicatato assert
doubt as only preponderance of evidence is required; (b) if the court
the recovery of civil liability arising from the offense. This court’s
declared that the liability of the accused is only civil;and (c) if the civil
resolution dismissing the petition for certiorari filed by Ferro
liability of the accused does not arise from or is not based upon the
Chemicals, Inc. states:
crime of which the accused is acquitted.68

In any event, petitioners failed to sufficiently show that any grave abuse
However, if the state pursues an appeal on the criminal aspect of a
of discretion was committed by the Regional Trial Court in rendering
decision of the trial court acquitting the accused and private
the challenged decision and order which, on the contrary, appear to be
complainant/s failed to reserve the right to institute a separate civil
in accord with the facts and the applicable law and jurisprudence. 62
action,the civil liability ex delictothat is inherently attached to the
offense is likewise appealed. The appeal of the civil liability ex delictois
Litigants cannot avail themselves of two separate remedies for the same impliedly instituted with the petition for certiorari assailing the
relief in the hope that in one forum, the relief prayed for will be granted. acquittal of the accused. Private complainant cannot anymore pursue a
This is the evil sought tobe averted by the doctrine of non-forum separate appeal from that of the state without violating the doctrine of
shopping, and this is the problem that has happened in this case. This non-forum shopping.
court denied the petition for certiorari filed byFerro Chemicals, Inc.
resulting in finality of the trial court’s decision.1awp++i1 The decision
On the other hand, the conclusion isdifferent if private complainant
found Antonio Garcia not guilty of the offense charged, and no civil
reserved the right to institute the civil action for the recovery of civil
liability was awarded to Ferro Chemicals, Inc. However, at present,there
liability ex delicto before the Regional Trial Court orinstitute a separate
is a conflicting decision from the Court of Appeals awarding Ferro
civil action prior to the filing of the criminal case in accordance with
Chemicals, Inc. civil indemnity arising from the offense charged.
Rule 111 of the Rules of Court. In these situations, the filing of an
appealas to the civil aspect of the case cannot be considered as forum
When the civil action for the recovery of civil liability ex delicto is shopping.1âwphi1 This is not the situation here.
instituted with the criminal action, whether by choice of private
complainant (i.e., no reservation is made or no prior filing of a separate
We see no more reason to discuss the issues presented by the parties in
civil action) or as required by the law or rules, the case will be
light of the foregoing discussion.
prosecuted under the direction and control of the public
prosecutor.63 The civil action cannot proceed independently of the
criminal case. This includes subsequent proceedings on the criminal Entry of judgment having been made on the resolution of the court in
action such as an appeal. In any case, Ferro Chemicals, Inc. joined the G.R. No. 130880 involving the same parties and issues and by virtue of
public prosecutor in filing the petition for certiorari before this court. the doctrine of finality of judgment, we reiterate the resolution of this
Ramon Garcia, President of Ferro Chemicals, Inc., signed the verification court.
and certification of non-forum shopping of the petition for certiorari. 64
WHEREFORE, the resolution in G.R. No. 130880 is reiterated. We grant
We must clarify, however, that private complainants in criminal cases the petition insofar as it prays for the setting aside of the Court of
are not precluded from filing a motion for reconsideration and Appeals' decision d~ted August 11, 2005 and resolution dated April 27,
subsequently an appeal on the civil aspect of a decision acquitting the 2006 as a final decision over the assailed Regional Trial Court decision
accused. An exception to the rule that only the Solicitor General can that was rendered on November 16, 1998 in G.R. No. 130880.
bring actions in criminal proceedings before the Court of Appeals or
this court is "when the private offended party questions the civil aspect
SO ORDERED.
of a decision of a lower court." 65 As discussed in Mobilia Products, Inc. v.
Hajime Umezawa:66

In a criminal case in which the offended party is the State, the interest
of the private complainant or the offended party is limited to the civil
liability arising there from. Hence, if a criminal case is dismissed by the
trial court or if there is an acquittal, a reconsideration of the order of
dismissal or acquittal may be undertaken, whenever legally feasible,
insofar as the criminal aspect there of is concerned and may be made
only by the public prosecutor; or in the case of an appeal, by the State
only, through the OSG. The private complainant or offended party may
not undertake such motion for reconsideration or appeal on the
criminal aspect of the case.However, the offended party or private
complainant may file a motion for reconsideration of such dismissal or
acquittal or appeal therefrom but only insofar as the civil aspect thereof
is concerned. In so doing, the private complainant or offended party
need not secure the conformity of the public prosecutor. If the court
 xxxx

In People v. Amistoso,6 the Court explained that the death of the accused

pending appeal of his conviction extinguishes his criminal liability, as
well as his civil liability ex delicto.7 Consequently, Renato's death on une
10, 2014 renders the Court's July 23, 2014 Resolution irrelevant and
ineffectual as to him, and is therefore set aside. Accordingly, the
criminal case against Renato is dismissed.

WHEREFORE, the Resolutions dated July 23, 2014 and September 24,

2014 of the Court are hereby SET ASIDE and Criminal Case No. C-68329
before the Regional Trial Court of Caloocan City, Branch 129
is DISMISSED insofar as accused-appellant RENATO
DIONALDO y EBRON is concerned, in view of his demise.
G.R. No. 207949
SO ORDERED.
PEOPLE OF THE PHILIPPINES, Plaintiff-Appellee, 
vs.
ARMANDO DIONALDO y EBRON, RENATO DIONALDO y EBRON,
MARIANO GARIGUEZ, JR. y RAMOS, and RODOLFO
LARIDO y EBRON, Accused-Appellants.

RESOLUTION

PERLAS-BERNABE, J.:

On July 23, 2014, the Court rendered its Resolution 1 in this case finding
accused-appellants Armando Dionaldo y Ebron, Renato
Dionaldo y Ebron (Renato), Mariano Gariguez, Jr. y Ramos, and Rodolfo
Lari do y Ebron (accused-appellants) guilty beyond reasonable doubt of
the special complex crime of Kidnapping for Ransom with Homicide, the
dispositive portion of which reads:

WHEREFORE, the appeal is DISMISSED. The Decision dated February

15, 2013 of the Court of Appeals in CA-G.R. CR-H.C. No. 02888 is hereby
AFFIRMED with the MODIFICATION that all the accused-appellants
herein are equally found GUILTY of the special complex crime of
Kidnapping for Ransom with Homicide, and are sentenced to each
suffer the penalty of reclusion perpetua, without eligibility for parole,
and to pay, jointly and severally, the family of the kidnap victim Edwin
Navarro the following amounts: (1) PI00,000.00 as civil indemnity; (2)
PI00,000.00 as moral damages; and (3) Pl00,000.00 as exemplary
damages, all with interest at the rate of six percent (6%) per annum
from the date of finality of judgment until fully paid.

SO ORDERED.

Accused-appellants collectively moved for reconsideration 2 thereof,

which the court denied with finality in it’s Resolution 3 dated September
24, 2014.

On even date, the Court received a letter 4 from the Bureau of

Corrections dated September 16, 2014 informing Us of the death of one
of the accused-appellants in this case, Renato, on June I 0, 2014, as
evidenced by the Certificate of Death 5 attached thereto.1âwphi1 As
Renato's death transpired before the promulgation of the Court's July
23, 2014 Resolution in this case, i.e., when his appeal before the Court
was still pending resolution, his criminal liability is totally extinguished
in view of the provisions of Article 89 of the Revised Penal Code which
states:

Art. 89. How criminal liability is totally extinguished. - Criminal liability

is totally extinguished:

1. By the death of the convict, as to the personal penalties;

and as to pecuniary penalties, liability therefor is
extinguished only when the death of the offender occurs
before final judgment;

5. Quasi-Delict, NCC 1162
EN BANC
G.R. No. L-48006             July 8, 1942
FAUSTO BARREDO, petitioner,
vs.
SEVERINO GARCIA and TIMOTEA ALMARIO, respondents.
Celedonio P. Gloria and Antonio Barredo for petitioner.
Jose G. Advincula for respondents.
BOCOBO, J.:
This case comes up from the Court of Appeals which held the petitioner
herein, Fausto Barredo, liable in damages for the death of Faustino
Garcia caused by the negligence of Pedro Fontanilla, a taxi driver
employed by said Fausto Barredo.
At about half past one in the morning of May 3, 1936, on the road
between Malabon and Navotas, Province of Rizal, there was a head-on
collision between a taxi of the Malate Taxicab driven by Pedro
Fontanilla and a carretela guided by Pedro Dimapalis. The carretela was
overturned, and one of its passengers, 16-year-old boy Faustino Garcia,
suffered injuries from which he died two days later. A criminal action
was filed against Fontanilla in the Court of First Instance of Rizal, and he
was convicted and sentenced to an indeterminate sentence of one year
and one day to two years of prision correccional. The court in the
criminal case granted the petition that the right to bring a separate civil
action be reserved. The Court of Appeals affirmed the sentence of the
lower court in the criminal case. Severino Garcia and Timotea Almario,
parents of the deceased on March 7, 1939, brought an action in the
Court of First Instance of Manila against Fausto Barredo as the sole
proprietor of the Malate Taxicab and employer of Pedro Fontanilla. On
July 8, 1939, the Court of First Instance of Manila awarded damages in
favor of the plaintiffs for P2,000 plus legal interest from the date of the
complaint. This decision was modified by the Court of Appeals by
reducing the damages to P1,000 with legal interest from the time the
action was instituted. It is undisputed that Fontanilla 's negligence was
the cause of the mishap, as he was driving on the wrong side of the
road, and at high speed. As to Barredo's responsibility, the Court of
Appeals found:
... It is admitted that defendant is Fontanilla's employer.
There is proof that he exercised the diligence of a good father
of a family to prevent damage. (See p. 22, appellant's brief.)
In fact it is shown he was careless in employing Fontanilla
who had been caught several times for violation of the
Automobile Law and speeding (Exhibit A) — violation which
appeared in the records of the Bureau of Public Works
available to be public and to himself. Therefore, he must
indemnify plaintiffs under the provisions of article 1903 of
the Civil Code.
The main theory of the defense is that the liability of Fausto Barredo is
governed by the Revised Penal Code; hence, his liability is only
subsidiary, and as there has been no civil action against Pedro
Fontanilla, the person criminally liable, Barredo cannot be held
responsible in the case. The petitioner's brief states on page 10:
... The Court of Appeals holds that the petitioner is being sued
for his failure to exercise all the diligence of a good father of a
family in the selection and supervision of Pedro Fontanilla to
prevent damages suffered by the respondents. In other
words, The Court of Appeals insists on applying in the case
article 1903 of the Civil Code. Article 1903 of the Civil Code is
found in Chapter II, Title 16, Book IV of the Civil Code. This
fact makes said article to a civil liability arising from a crime
as in the case at bar simply because Chapter II of Title 16 of
Book IV of the Civil Code, in the precise words of article 1903
of the Civil Code itself, is applicable only to "those
(obligations) arising from wrongful or negligent acts or
commission not punishable by law.
The gist of the decision of the Court of Appeals is expressed thus:
... We cannot agree to the defendant's contention. The
liability sought to be imposed upon him in this action is not a
civil obligation arising from a felony or a misdemeanor (the
crime of Pedro Fontanilla,), but an obligation imposed in
article 1903 of the Civil Code by reason of his negligence in
the selection or supervision of his servant or employee.
The pivotal question in this case is whether the plaintiffs may bring this
separate civil action against Fausto Barredo, thus making him primarily
and directly, responsible under article 1903 of the Civil Code as an
employer of Pedro Fontanilla. The defendant maintains that Fontanilla's
negligence being punishable by the Penal Code, his (defendant's)
liability as an employer is only subsidiary, according to said Penal code,
but Fontanilla has not been sued in a civil action and his property has
not been exhausted. To decide the main issue, we must cut through the
tangle that has, in the minds of many confused and jumbled together
delitos and cuasi delitos, or crimes under the Penal Code and fault or
negligence under articles 1902-1910 of the Civil Code. This should be
done, because justice may be lost in a labyrinth, unless principles and
remedies are distinctly envisaged. Fortunately, we are aided in our
inquiry by the luminous presentation of the perplexing subject by
renown jurists and we are likewise guided by the decisions of this Court
in previous cases as well as by the solemn clarity of the consideration in
several sentences of the Supreme Tribunal of Spain.
Authorities support the proposition that a quasi-delict or "culpa
aquiliana " is a separate legal institution under the Civil Code with a
substantivity all its own, and individuality that is entirely apart and
independent from delict or crime. Upon this principle and on the
wording and spirit article 1903 of the Civil Code, the primary and direct
responsibility of employers may be safely anchored.
The pertinent provisions of the Civil Code and Revised Penal Code are
as follows:
CIVIL CODE
ART. 1089 Obligations arise from law, from contracts and
quasi-contracts, and from acts and omissions which are
unlawful or in which any kind of fault or negligence
intervenes.
xxx     xxx     xxx
ART. 1092. Civil obligations arising from felonies or
misdemeanors shall be governed by the provisions of the
Penal Code.
 ART. 1093. Those which are derived from acts or omissions
in which fault or negligence, not punishable by law,
intervenes shall be subject to the provisions of Chapter II,
Title XVI of this book.
xxx     xxx     xxx
ART 1902. Any person who by an act or omission causes
damage to another by his fault or negligence shall be liable
for the damage so done.
ART. 1903. The obligation imposed by the next preceding
article is enforcible, 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.
Guardians are liable for damages done by minors or
incapacitated persons subject to their authority and living
with them.
Owners or directors of an establishment or business are
equally liable for any damages caused by their employees
while engaged in the branch of the service in which
employed, or on occasion of the performance of their duties.
The State is subject to the same liability when it acts through
a special agent, but not if the damage shall have been caused
by the official upon whom properly devolved the duty of
doing the act performed, in which case the provisions of the
next preceding article shall be applicable.
Finally, teachers or directors of arts trades are liable for any
damages caused by their pupils or apprentices while they are
under their custody.
The liability imposed by this article shall cease in case the
persons mentioned therein prove that they are exercised all
the diligence of a good father of a family to prevent the
damage.
ART. 1904. Any person who pays for damage caused by his
employees may recover from the latter what he may have
paid.
REVISED PENAL CODE
ART. 100. Civil liability of a person guilty of felony. — Every
person criminally liable for a felony is also civilly liable.
ART. 101. Rules regarding civil liability in certain cases. — The
exemption from criminal liability established in subdivisions
1, 2, 3, 5, and 6 of article 12 and in subdivision 4 of article 11
of this Code does not include exemption from civil liability,
which shall be enforced to the following rules:
First. In cases of subdivision, 1, 2 and 3 of article 12 the civil
liability for acts committed by any imbecile or insane person,
and by a person under nine years of age, or by one over nine
but under fifteen years of age, who has acted without
discernment shall devolve upon those having such person
under their legal authority or control, unless it appears that
there was no fault or negligence on their part.
Should there be no person having such insane, imbecile or
minor under his authority, legal guardianship, or control, or
if such person be insolvent, said insane, imbecile, or minor
shall respond with their own property, excepting property
exempt from execution, in accordance with the civil law.
Second. In cases falling within subdivision 4 of article 11, the
person for whose benefit the harm has been prevented shall
be civilly liable in proportion to the benefit which they may
have received.
The courts shall determine, in their sound discretion, the proportionate
amount for which each one shall be liable.
When the respective shares can not be equitably determined, even
approximately, or when the liability also attaches to the Government, or
to the majority of the inhabitants of the town, and, in all events,
whenever the damage has been caused with the consent of the
authorities or their agents, indemnification shall be made in the manner
prescribed by special laws or regulations.
Third. In cases falling within subdivisions 5 and 6 of article 12, the
persons using violence or causing the fear shall be primarily liable and
secondarily, or, if there be no such persons, those doing the act shall be
liable, saving always to the latter that part of their property exempt
from execution.
ART. 102. Subsidiary civil liability of innkeepers, tavern
keepers and proprietors of establishment. — In default of
persons criminally liable, innkeepers, tavern keepers, and
any other persons or corporation shall be civilly liable for
crimes committed in their establishments, in all cases where
a violation of municipal ordinances or some general or
special police regulation shall have been committed by them
or their employees.
Innkeepers are also subsidiarily liable for the restitution of
goods taken by robbery or theft within their houses lodging
therein, or the person, or for the payment of the value
thereof, provided that such guests shall have notified in
advance the innkeeper himself, or the person representing
him, of the deposit of such goods within the inn; and shall
furthermore have followed the directions which such
innkeeper or his representative may have given them with
respect to the care of and vigilance over such goods. No
liability shall attach in case of robbery with violence against
or intimidation against or intimidation of persons unless
committed by the innkeeper's employees.
ART. 103. Subsidiary civil liability of other persons. — The
subsidiary liability established in the next preceding article
shall also apply to employers, teachers, persons, and
corporations engaged in any kind of industry for felonies
committed by their servants, pupils, workmen, apprentices,
or employees in the discharge of their duties.
xxx     xxx     xxx
ART. 365. Imprudence and negligence. — Any person who,
by reckless imprudence, shall commit any act which, had it
been intentional, would constitute a grave felony, shall suffer
the penalty of arresto mayor in its maximum period to
prision correccional in its minimum period; if it would have
constituted a less grave felony, the penalty of arresto mayor
in its minimum and medium periods shall be imposed.
Any person who, by simple imprudence or negligence, shall
commit an act which would otherwise constitute a grave
felony, shall suffer the penalty of arresto mayor in its medium
and maximum periods; if it would have constituted a less
 serious felony, the penalty of arresto mayor in its minimum
period shall be imposed."
It will thus be seen that while the terms of articles 1902 of the Civil
Code seem to be broad enough to cover the driver's negligence in the
instant case, nevertheless article 1093 limits cuasi-delitos to acts or
omissions "not punishable by law." But inasmuch as article 365 of the
Revised Penal Code punishes not only reckless but even simple
imprudence or negligence, the fault or negligence under article 1902 of
the Civil Code has apparently been crowded out. It is this overlapping
that makes the "confusion worse confounded." However, a closer study
shows that such a concurrence of scope in regard to negligent acts does
not destroy the distinction between the civil liability arising from a
crime and the responsibility for cuasi-delitos or culpa extra-contractual.
The same negligent act causing damages may produce civil liability
arising from a crime under article 100 of the Revised Penal Code, or
create an action for cuasi-delito or culpa extra-contractual under
articles 1902-1910 of the Civil Code.
The individuality of cuasi-delito or culpa extra-contractual looms clear
and unmistakable. This legal institution is of ancient lineage, one of its
early ancestors being the Lex Aquilia in the Roman Law. In fact, in
Spanish legal terminology, this responsibility is often referred to as
culpa aquiliana. The Partidas also contributed to the genealogy of the
present fault or negligence under the Civil Code; for instance, Law 6,
Title 15, of Partida 7, says: "Tenudo es de fazer emienda, porque, como
quier que el non fizo a sabiendas en dañ o al otro, pero acaescio por su
culpa."
The distinctive nature of cuasi-delitos survives in the Civil Code.
According to article 1089, one of the five sources of obligations is this
legal institution of cuasi-delito or culpa extra-contractual: "los actos . . .
en que intervenga cualquier genero de culpa o negligencia." Then article
1093 provides that this kind of obligation shall be governed by Chapter
II of Title XVI of Book IV, meaning articles 1902-0910. This portion of
the Civil Code is exclusively devoted to the legal institution of culpa
aquiliana.
Some of the differences between crimes under the Penal Code and the
culpa aquiliana or cuasi-delito under the Civil Code are:
1. That crimes affect the public interest, while cuasi-delitos are only of
private concern.
2. That, consequently, the Penal Code punishes or corrects the criminal
act, while the Civil Code, by means of indemnification, merely repairs
the damage.
3. That delicts are not as broad as quasi-delicts, because the former are
punished only if there is a penal law clearly covering them, while the
latter, cuasi-delitos, include all acts in which "any king of fault or
negligence intervenes." However, it should be noted that not all
violations of the penal law produce civil responsibility, such as begging
in contravention of ordinances, violation of the game laws, infraction of
the rules of traffic when nobody is hurt. (See Colin and Capitant, "Curso
Elemental de Derecho Civil," Vol. 3, p. 728.)
Let us now ascertain what some jurists say on the separate existence of
quasi-delicts and the employer's primary and direct liability under
article 1903 of the Civil Code.
Dorado Montero in his essay on "Responsibilidad" in the "Enciclopedia
Juridica Españ ola" (Vol. XXVII, p. 414) says:
El concepto juridico de la responsabilidad civil abarca
diversos aspectos y comprende a diferentes personas. Asi,
existe una responsabilidad civil propiamente dicha, que en
ningun casl lleva aparejada responsabilidad criminal alguna,
y otra que es consecuencia indeclinable de la penal que nace
de todo delito o falta."
The juridical concept of civil responsibility has various
aspects and comprises different persons. Thus, there is a civil
responsibility, properly speaking, which in no case carries
with it any criminal responsibility, and another which is a
necessary consequence of the penal liability as a result of
every felony or misdemeanor."
Maura, an outstanding authority, was consulted on the following case:
There had been a collision between two trains belonging respectively to
the Ferrocarril Cantabrico and the Ferrocarril del Norte. An employee
of the latter had been prosecuted in a criminal case, in which the
company had been made a party as subsidiarily responsible in civil
damages. The employee had been acquitted in the criminal case, and the
employer, the Ferrocarril del Norte, had also been exonerated. The
question asked was whether the Ferrocarril Cantabrico could still bring
a civil action for damages against the Ferrocarril del Norte. Maura's
opinion was in the affirmative, stating in part (Maura, Dictamenes, Vol.
6, pp. 511-513):
Quedando las cosas asi, a proposito de la realidad pura y neta
de los hechos, todavia menos parece sostenible que exista
cosa juzgada acerca de la obligacion civil de indemnizar los
quebrantos y menoscabos inferidos por el choque de los
trenes. El titulo en que se funda la accion para demandar el
resarcimiento, no puede confundirse con las
responsabilidades civiles nacidas de delito, siquiera exista en
este, sea el cual sea, una culpa rodeada de notas agravatorias
que motivan sanciones penales, mas o menos severas. La
lesion causada por delito o falta en los derechos civiles,
requiere restituciones, reparaciones o indemnizaciones, que
cual la pena misma atañ en al orden publico; por tal motivo
vienen encomendadas, de ordinario, al Ministerio Fiscal; y
claro es que si por esta via se enmiendan los quebrantos y
menoscabos, el agraviado excusa procurar el ya conseguido
desagravio; pero esta eventual coincidencia de los efectos, no
borra la diversidad originaria de las acciones civiles para
pedir indemnizacion.
Estas, para el caso actual (prescindiendo de culpas
contractuales, que no vendrian a cuento y que tiene otro
regimen), dimanan, segun el articulo 1902 del Codigo Civil,
de toda accion u omision, causante de dañ os o perjuicios, en
que intervenga culpa o negligencia. Es trivial que acciones
semejantes son ejercitadas ante los Tribunales de lo civil
cotidianamente, sin que la Justicia punitiva tenga que
mezclarse en los asuntos. Los articulos 18 al 21 y 121 al 128
del Codigo Penal, atentos al espiritu y a los fines sociales y
politicos del mismo, desenvuelven y ordenan la materia de
responsabilidades civiles nacidas de delito, en terminos
separados del regimen por ley comun de la culpa que se
denomina aquiliana, por alusion a precedentes legislativos
del Corpus Juris. Seria intempestivo un paralelo entre
aquellas ordenaciones, y la de la obligacion de indemnizar a
titulo de culpa civil; pero viene al caso y es necesaria una de
las diferenciaciones que en el tal paralelo se notarian.
Los articulos 20 y 21 del Codigo Penal, despues de distribuir
a su modo las responsabilidades civiles, entre los que sean
por diversos conceptos culpables del delito o falta, las hacen
extensivas a las empresas y los establecimientos al servicio
de los cuales estan los delincuentes; pero con caracter
subsidiario, o sea, segun el texto literal, en defecto de los que
sean responsables criminalmente. No coincide en ello el
Codigo Civil, cuyo articulo 1903, dice; La obligacion que
impone el articulo anterior es exigible, no solo por los actos y
omisiones propios, sino por los de aquellas personas de
quienes se debe responder; personas en la enumeracion de las
cuales figuran los dependientes y empleados de los
establecimientos o empresas, sea por actos del servicio, sea
con ocasion de sus funciones. Por esto acontece, y se observa
en la jurisprudencia, que las empresas, despues de intervenir
en las causas criminales con el caracter subsidiario de su
responsabilidad civil por razon del delito, son demandadas y
condenadas directa y aisladamente, cuando se trata de la
obligacion, ante los tribunales civiles.
Siendo como se ve, diverso el titulo de esta obligacion, y
formando verdadero postulado de nuestro regimen judicial
la separacion entre justicia punitiva y tribunales de lo civil,
de suerte que tienen unos y otros normas de fondo en
distintos cuerpos legales, y diferentes modos de proceder,
habiendose, por añ adidura, abstenido de asistir al juicio
criminal la Compañ ia del Ferrocarril Cantabrico, que se
reservo ejercitar sus acciones, parece innegable que la de
indemnizacion por los dañ os y perjuicios que le irrogo el
choque, no estuvo sub judice ante el Tribunal del Jurado, ni
fue sentenciada, sino que permanecio intacta, al
pronunciarse el fallo de 21 de marzo. Aun cuando el
veredicto no hubiese sido de inculpabilidad, mostrose mas
arriba, que tal accion quedaba legitimamente reservada para
despues del proceso; pero al declararse que no existio delito,
ni responsabilidad dimanada de delito, materia unica sobre
que tenian jurisdiccion aquellos juzgadores, se redobla el
motivo para la obligacion civil ex lege, y se patentiza mas y
mas que la accion para pedir su cumplimiento permanece
incolume, extrañ a a la cosa juzgada.
As things are, apropos of the reality pure and simple of the
facts, it seems less tenable that there should be res judicata
with regard to the civil obligation for damages on account of
the losses caused by the collision of the trains. The title upon
which the action for reparation is based cannot be confused
with the civil responsibilities born of a crime, because there
exists in the latter, whatever each nature, a culpa surrounded
with aggravating aspects which give rise to penal measures
that are more or less severe. The injury caused by a felony or
misdemeanor upon civil rights requires restitutions,
reparations, or indemnifications which, like the penalty itself,
affect public order; for this reason, they are ordinarily
entrusted to the office of the prosecuting attorney; and it is
clear that if by this means the losses and damages are
repaired, the injured party no longer desires to seek another
relief; but this coincidence of effects does not eliminate the
peculiar nature of civil actions to ask for indemnity.
Such civil actions in the present case (without referring to
contractual faults which are not pertinent and belong to
another scope) are derived, according to article 1902 of the
Civil Code, from every act or omission causing losses and
damages in which culpa or negligence intervenes. It is
unimportant that such actions are every day filed before the
civil courts without the criminal courts interfering therewith.
Articles 18 to 21 and 121 to 128 of the Penal Code, bearing in
mind the spirit and the social and political purposes of that
Code, develop and regulate the matter of civil responsibilities
arising from a crime, separately from the regime under
common law, of culpa which is known as aquiliana, in
accordance with legislative precedent of the Corpus Juris. It
would be unwarranted to make a detailed comparison
between the former provisions and that regarding the
obligation to indemnify on account of civil culpa; but it is
pertinent and necessary to point out to one of such
differences.
Articles 20 and 21 of the Penal Code, after distriburing in
their own way the civil responsibilities among those who, for
different reasons, are guilty of felony or misdemeanor, make
such civil responsibilities applicable to enterprises and
establishments for which the guilty parties render service,
but with subsidiary character, that is to say, according to the
wording of the Penal Code, in default of those who are
criminally responsible. In this regard, the Civil Code does not
coincide because article 1903 says: "The obligation imposed
by the next preceding article is demandable, not only for
personal acts and omissions, but also for those of persons for
whom another is responsible." Among the persons
enumerated are the subordinates and employees of
establishments or enterprises, either for acts during their
service or on the occasion of their functions. It is for this
reason that it happens, and it is so observed in judicial
decisions, that the companies or enterprises, after taking part
in the criminal cases because of their subsidiary civil
responsibility by reason of the crime, are sued and sentenced
directly and separately with regard to the obligation, before
the civil courts.
Seeing that the title of this obligation is different, and the
separation between punitive justice and the civil courts being
a true postulate of our judicial system, so that they have
different fundamental norms in different codes, as well as
different modes of procedure, and inasmuch as the Compañ a
del Ferrocarril Cantabrico has abstained from taking part in
the criminal case and has reserved the right to exercise its
actions, it seems undeniable that the action for
indemnification for the losses and damages caused to it by
the collision was not sub judice before the Tribunal del
Jurado, nor was it the subject of a sentence, but it remained
intact when the decision of March 21 was rendered. Even if
the verdict had not been that of acquittal, it has already been
shown that such action had been legitimately reserved till
after the criminal prosecution; but because of the declaration
of the non-existence of the felony and the non-existence of
the responsibility arising from the crime, which was the sole
subject matter upon which the Tribunal del Jurado had
jurisdiction, there is greater reason for the civil obligation ex
lege, and it becomes clearer that the action for its
enforcement remain intact and is not res judicata.
Laurent, a jurist who has written a monumental work on the French
Civil Code, on which the Spanish Civil Code is largely based and whose
provisions on cuasi-delito or culpa extra-contractual are similar to those
of the Spanish Civil Code, says, referring to article 1384 of the French
Civil Code which corresponds to article 1903, Spanish Civil Code:
The action can be brought directly against the person
responsible (for another), without including the author of the
act. The action against the principal is accessory in the sense
that it implies the existence of a prejudicial act committed by
the employee, but it is not subsidiary in the sense that it can
not be instituted till after the judgment against the author of
the act or at least, that it is subsidiary to the principal action;
the action for responsibility (of the employer) is in itself a
principal action. (Laurent, Principles of French Civil Law,
Spanish translation, Vol. 20, pp. 734-735.)
Amandi, in his "Cuestionario del Codigo Civil Reformado" (Vol. 4, pp.
429, 430), declares that the responsibility of the employer is principal
and not subsidiary. He writes:
Cuestion 1. La responsabilidad declarada en el articulo 1903
por las acciones u omisiones de aquellas personas por las que
se debe responder, es subsidiaria? es principal? Para
contestar a esta pregunta es necesario saber, en primer lugar,
en que se funda el precepto legal. Es que realmente se
impone una responsabilidad por una falta ajena? Asi parece a
primera vista; pero semejante afirmacion seria contraria a la
justicia y a la maxima universal, segun la que las faltas son
personales, y cada uno responde de aquellas que le son
imputables. La responsabilidad de que tratamos se impone
con ocasion de un delito o culpa, pero no por causa de ellos,
sino por causa del causi delito, esto es, de la imprudencia o
de la negligencia del padre, del tutor, del dueñ o o director del
establecimiento, del maestro, etc. Cuando cualquiera de las
personas que enumera el articulo citado (menores de edad,
incapacitados, dependientes, aprendices) causan un dañ o, la
ley presume que el padre, el tutor, el maestro, etc., han
cometido una falta de negligencia para prevenir o evitar el
dañ o. Esta falta es la que la ley castiga. No hay, pues,
 responsabilidad por un hecho ajeno, sino en la apariencia; en
realidad la responsabilidad se exige por un hecho propio. La
idea de que esa responsabilidad sea subsidiaria es, por lo
tanto, completamente inadmisible.
Question No. 1. Is the responsibility declared in article 1903
for the acts or omissions of those persons for who one is
responsible, subsidiary or principal? In order to answer this
question it is necessary to know, in the first place, on what
the legal provision is based. Is it true that there is a
responsibility for the fault of another person? It seems so at
first sight; but such assertion would be contrary to justice
and to the universal maxim that all faults are personal, and
that everyone is liable for those faults that can be imputed to
him. The responsibility in question is imposed on the
occasion of a crime or fault, but not because of the same, but
because of the cuasi-delito, that is to say, the imprudence or
negligence of the father, guardian, proprietor or manager of
the establishment, of the teacher, etc. Whenever anyone of
the persons enumerated in the article referred to (minors,
incapacitated persons, employees, apprentices) causes any
damage, the law presumes that the father, guardian, teacher,
etc. have committed an act of negligence in not preventing or
avoiding the damage. It is this fault that is condemned by the
law. It is, therefore, only apparent that there is a
responsibility for the act of another; in reality the
responsibility exacted is for one's own act. The idea that such
responsibility is subsidiary is, therefore, completely
inadmissible.
Oyuelos, in his "Digesto: Principios, Doctrina y Jurisprudencia,
Referentes al Codigo Civil Españ ol," says in Vol. VII, p. 743:
Es decir, no responde de hechos ajenos, porque se responde
solo de su propia culpa, doctrina del articulo 1902; mas por
excepcion, se responde de la ajena respecto de aquellas
personas con las que media algun nexo o vinculo, que motiva
o razona la responsabilidad. Esta responsabilidad, es directa
o es subsidiaria? En el orden penal, el Codigo de esta clase
distingue entre menores e incapacitados y los demas,
declarando directa la primera (articulo 19) y subsidiaria la
segunda (articulos 20 y 21); pero en el orden civil, en el caso
del articulo 1903, ha de entenderse directa, por el tenor del
articulo que impone la responsabilidad precisamente "por
los actos de aquellas personas de quienes se deba
responder."
That is to say, one is not responsible for the acts of others,
because one is liable only for his own faults, this being the
doctrine of article 1902; but, by exception, one is liable for
the acts of those persons with whom there is a bond or tie
which gives rise to the responsibility. Is this responsibility
direct or subsidiary? In the order of the penal law, the Penal
Code distinguishes between minors and incapacitated
persons on the one hand, and other persons on the other,
declaring that the responsibility for the former is direct
(article 19), and for the latter, subsidiary (articles 20 and
21); but in the scheme of the civil law, in the case of article
1903, the responsibility should be understood as direct,
according to the tenor of that articles, for precisely it imposes
responsibility "for the acts of those persons for whom one
should be responsible."
Coming now to the sentences of the Supreme Tribunal of Spain, that
court has upheld the principles above set forth: that a quasi-delict or
culpa extra-contractual is a separate and distinct legal institution,
independent from the civil responsibility arising from criminal liability,
and that an employer is, under article 1903 of the Civil Code, primarily
and directly responsible for the negligent acts of his employee.
One of the most important of those Spanish decisions is that of October
21, 1910. In that case, Ramon Lafuente died as the result of having been
run over by a street car owned by the "compañ ia Electric Madrileñ a de
Traccion." The conductor was prosecuted in a criminal case but he was
acquitted. Thereupon, the widow filed a civil action against the street
car company, paying for damages in the amount of 15,000 pesetas. The
lower court awarded damages; so the company appealed to the
Supreme Tribunal, alleging violation of articles 1902 and 1903 of the
Civil Code because by final judgment the non-existence of fault or
negligence had been declared. The Supreme Court of Spain dismissed
the appeal, saying:
Considerando que el primer motivo del recurso se funda en
el equivocado supuesto de que el Tribunal a quo, al condonar
a la compañ ia Electrica Madrileñ a al pago del dañ o causado
con la muerte de Ramon La fuente Izquierdo, desconoce el
valor y efectos juridicos de la sentencia absolutoria deictada
en la causa criminal que se siguio por el mismo hecho,
cuando es lo cierto que de este han conocido las dos
jurisdicciones bajo diferentes as pectos, y como la de lo
criminal declrao dentro de los limites de su competencia que
el hecho de que se trata no era constitutivo de delito por no
haber mediado descuido o negligencia graves, lo que no
excluye, siendo este el unico fundamento del fallo
absolutorio, el concurso de la culpa o negligencia no
califacadas, fuente de obligaciones civiles segun el articulo
1902 del Codigo, y que alcanzan, segun el 1903, netre otras
perosnas, a los Directores de establecimientos o empresas
por los dañ os causados por sus dependientes en
determinadas condiciones, es manifesto que la de lo civil, al
conocer del mismo hehco baho este ultimo aspecto y al
condenar a la compañ ia recurrente a la indemnizacion del
dañ o causado por uno de sus empleados, lejos de infringer
los mencionados textos, en relacion con el articulo 116 de la
Ley de Enjuciamiento Criminal, se ha atenido estrictamente a
ellos, sin invadir atribuciones ajenas a su jurisdiccion propia,
ni contrariar en lo mas minimo el fallo recaido en la causa.
Considering that the first ground of the appeal is based on
the mistaken supposition that the trial court, in sentencing
the Compañia Madrileña to the payment of the damage
caused by the death of Ramon Lafuente Izquierdo, disregards
the value and juridical effects of the sentence of acquittal
rendered in the criminal case instituted on account of the
same act, when it is a fact that the two jurisdictions had taken
cognizance of the same act in its different aspects, and as the
criminal jurisdiction declared within the limits of its
authority that the act in question did not constitute a felony
because there was no grave carelessness or negligence, and
this being the only basis of acquittal, it does no exclude the
co-existence of fault or negligence which is not qualified, and
is a source of civil obligations according to article 1902 of the
Civil Code, affecting, in accordance with article 1903, among
other persons, the managers of establishments or enterprises
by reason of the damages caused by employees under certain
conditions, it is manifest that the civil jurisdiccion in taking
cognizance of the same act in this latter aspect and in ordering
the company, appellant herein, to pay an indemnity for the
damage caused by one of its employees, far from violating said
legal provisions, in relation with article 116 of the Law of
Criminal Procedure, strictly followed the same, without
invading attributes which are beyond its own jurisdiction, and
without in any way contradicting the decision in that cause.
(Emphasis supplied.)
It will be noted, as to the case just cited:
First. That the conductor was not sued in a civil case, either separately
or with the street car company. This is precisely what happens in the
present case: the driver, Fontanilla, has not been sued in a civil action,
either alone or with his employer.
Second. That the conductor had been acquitted of grave criminal
negligence, but the Supreme Tribunal of Spain said that this did not
exclude the co-existence of fault or negligence, which is not qualified, on Compañ ia demandada como ligada con el causante de
the part of the conductor, under article 1902 of the Civil Code. In the aquellos por relaciones de caracter economico y de jurarquia
present case, the taxi driver was found guilty of criminal negligence, so administrativa.
that if he had even sued for his civil responsibility arising from the
crime, he would have been held primarily liable for civil damages, and
Considering that the sentence, in question recognizes, in
Barredo would have been held subsidiarily liable for the same. But the
virtue of the facts which it declares, in relation to the
plaintiffs are directly suing Barredo, on his primary responsibility
evidence in the case: (1) that the invoice issued by the
because of his own presumed negligence — which he did not overcome
railroad company in favor of the plaintiff contemplated that
— under article 1903. Thus, there were two liabilities of Barredo: first,
the empty receptacles referred to in the complaint should be
the subsidiary one because of the civil liability of the taxi driver arising
returned to the consignors with wines and liquors; (2) that
from the latter's criminal negligence; and, second, Barredo's primary
when the said merchandise reached their destination, their
liability as an employer under article 1903. The plaintiffs were free to
delivery to the consignee was refused by the station agent
choose which course to take, and they preferred the second remedy. In
without justification and with fraudulent intent, and (3) that
so doing, they were acting within their rights. It might be observed in
the lack of delivery of these goods when they were
passing, that the plaintiff choose the more expeditious and effective
demanded by the plaintiff caused him losses and damages of
method of relief, because Fontanilla was either in prison, or had just
considerable importance, as he was a wholesale vendor of
been released, and besides, he was probably without property which
wines and liquors and he failed to realize the profits when he
might be seized in enforcing any judgment against him for damages.
was unable to fill the orders sent to him by the consignors of
the receptacles:
Third. That inasmuch as in the above sentence of October 21, 1910, the
employer was held liable civilly, notwithstanding the acquittal of the
Considering that upon this basis there is need of upholding
employee (the conductor) in a previous criminal case, with greater
the four assignments of error, as the original complaint did
reason should Barredo, the employer in the case at bar, be held liable
not contain any cause of action arising from non-fulfillment
for damages in a civil suit filed against him because his taxi driver had
of a contract of transportation, because the action was not
been convicted. The degree of negligence of the conductor in the
based on the delay of the goods nor on any contractual
Spanish case cited was less than that of the taxi driver, Fontanilla,
relation between the parties litigant and, therefore, article
because the former was acquitted in the previous criminal case while
371 of the Code of Commerce, on which the decision
the latter was found guilty of criminal negligence and was sentenced to
appealed from is based, is not applicable; but it limits to
an indeterminate sentence of one year and one day to two years of
asking for reparation for losses and damages produced on
prision correccional.
the patrimony of the plaintiff on account of the unjustified
and fraudulent refusal of the carrier to deliver the goods
(See also Sentence of February 19, 1902, which is similar to the one consigned to the plaintiff as stated by the sentence, and the
above quoted.) carrier's responsibility is clearly laid down in article 1902 of
the Civil Code which binds, in virtue of the next article, the
defendant company, because the latter is connected with the
In the Sentence of the Supreme Court of Spain, dated February 14, 1919,
person who caused the damage by relations of economic
an action was brought against a railroad company for damages because
character and by administrative hierarchy. (Emphasis
the station agent, employed by the company, had unjustly and
supplied.)
fraudulently, refused to deliver certain articles consigned to the
plaintiff. The Supreme Court of Spain held that this action was properly
under article 1902 of the Civil Code, the court saying: The above case is pertinent because it shows that the same act may
come under both the Penal Code and the Civil Code. In that case, the
action of the agent was unjustified and fraudulent and therefore could
Considerando que la sentencia discutida reconoce, en virtud
have been the subject of a criminal action. And yet, it was held to be also
de los hechos que consigna con relacion a las pruebas del
a proper subject of a civil action under article 1902 of the Civil Code. It
pleito: 1.º, que las expediciones facturadas por la compañ ia
is also to be noted that it was the employer and not the employee who
ferroviaria a la consignacion del actor de las vasijas vacias
was being sued.
que en su demanda relacionan tenian como fin el que este las
devolviera a sus remitentes con vinos y alcoholes; 2.º, que
llegadas a su destino tales mercanias no se quisieron Let us now examine the cases previously decided by this Court.
entregar a dicho consignatario por el jefe de la estacion sin
motivo justificado y con intencion dolosa, y 3.º, que la falta de
In the leading case of Rakes vs. Atlantic Gulf and Pacific Co. (7 Phil., 359,
entrega de estas expediciones al tiempo de reclamarlas el
362-365 [year 1907]), the trial court awarded damages to the plaintiff,
demandante le originaron dañ os y perjuicios en cantidad de
a laborer of the defendant, because the latter had negligently failed to
bastante importancia como expendedor al por mayor que era
repair a tramway in consequence of which the rails slid off while iron
de vinos y alcoholes por las ganancias que dejo de obtener al
was being transported, and caught the plaintiff whose leg was broken.
verse privado de servir los pedidos que se le habian hecho
This Court held:
por los remitentes en los envases:

It is contended by the defendant, as its first defense to the

Considerando que sobre esta base hay necesidad de estimar
action that the necessary conclusion from these collated laws
los cuatro motivos que integran este recurso, porque la
is that the remedy for injuries through negligence lies only in
demanda inicial del pleito a que se contrae no contiene
a criminal action in which the official criminally responsible
accion que nazca del incumplimiento del contrato de
must be made primarily liable and his employer held only
transporte, toda vez que no se funda en el retraso de la
subsidiarily to him. According to this theory the plaintiff
llegada de las mercancias ni de ningun otro vinculo
should have procured the arrest of the representative of the
contractual entre las partes contendientes, careciendo, por
company accountable for not repairing the track, and on his
tanto, de aplicacion el articulo 371 del Codigo de Comercio,
prosecution a suitable fine should have been imposed,
en que principalmente descansa el fallo recurrido, sino que
payable primarily by him and secondarily by his employer.
se limita a pedir la reparaction de los dañ os y perjuicios
producidos en el patrimonio del actor por la injustificada y
dolosa negativa del porteador a la entrega de las mercancias This reasoning misconceived the plan of the Spanish codes
a su nombre consignadas, segun lo reconoce la sentencia, y upon this subject. Article 1093 of the Civil Code makes
cuya responsabilidad esta claramente sancionada en el obligations arising from faults or negligence not punished by
articulo 1902 del Codigo Civil, que obliga por el siguiente a la
the law, subject to the provisions of Chapter II of Title XVI.
Section 1902 of that chapter reads:
"A person who by an act or omission causes
damage to another when there is fault or
negligence shall be obliged to repair the damage
so done.
"SEC. 1903. The obligation imposed by the
preceeding article is demandable, not only for
personal acts and omissions, but also for those of
the persons for whom they should be responsible.
"The father, and on his death or incapacity, the
mother, is liable for the damages caused by the
minors who live with them.
xxx     xxx     xxx
"Owners or directors of an establishment or
enterprise are equally liable for the damages
caused by their employees in the service of the
branches in which the latter may be employed or
in the performance of their duties.
xxx     xxx     xxx
"The liability referred to in this article shall cease
when the persons mentioned therein prove that
they employed all the diligence of a good father of
a family to avoid the damage."
As an answer to the argument urged in this particular action
it may be sufficient to point out that nowhere in our general
statutes is the employer penalized for failure to provide or
maintain safe appliances for his workmen. His obligation
therefore is one 'not punished by the laws' and falls under
civil rather than criminal jurisprudence. But the answer may
be a broader one. We should be reluctant, under any
conditions, to adopt a forced construction of these scientific
codes, such as is proposed by the defendant, that would rob
some of these articles of effect, would shut out litigants
against their will from the civil courts, would make the
assertion of their rights dependent upon the selection for
prosecution of the proper criminal offender, and render
In Manzanares vs. Moreta, 38 Phil., 821 (year 1918), the mother of the 8
recovery doubtful by reason of the strict rules of proof
of 9-year-old child Salvador Bona brought a civil action against Moreta
prevailing in criminal actions. Even if these articles had
to recover damages resulting from the death of the child, who had been
always stood alone, such a construction would be
run over by an automobile driven and managed by the defendant. The
unnecessary, but clear light is thrown upon their meaning by
trial court rendered judgment requiring the defendant to pay the
the provisions of the Law of Criminal Procedure of Spain (Ley
plaintiff the sum of P1,000 as indemnity: This Court in affirming the
de Enjuiciamiento Criminal), which, though never in actual
judgment, said in part:
force in these Islands, was formerly given a suppletory or
explanatory effect. Under article 111 of this law, both classes
of action, civil and criminal, might be prosecuted jointly or
separately, but while the penal action was pending the civil
was suspended. According to article 112, the penal action
once started, the civil remedy should be sought therewith,
unless it had been waived by the party injured or been
expressly reserved by him for civil proceedings for the
future. If the civil action alone was prosecuted, arising out of
a crime that could be enforced only on private complaint, the
penal action thereunder should be extinguished. These
provisions are in harmony with those of articles 23 and 133
of our Penal Code on the same subject.
An examination of this topic might be carried much further,
but the citation of these articles suffices to show that the civil
liability was not intended to be merged in the criminal nor
even to be suspended thereby, except as expressly provided
in the law. Where an individual is civilly liable for a negligent
act or omission, it is not required that the injured party
should seek out a third person criminally liable whose
prosecution must be a condition precedent to the
enforcement of the civil right.
Under article 20 of the Penal Code the responsibility of an
employer may be regarded as subsidiary in respect of
criminal actions against his employees only while they are in
process of prosecution, or in so far as they determine the
existence of the criminal act from which liability arises, and
his obligation under the civil law and its enforcement in the
civil courts is not barred thereby unless by the election of the
injured person. Inasmuch as no criminal proceeding had
been instituted, growing our of the accident in question, the
provisions of the Penal Code can not affect this action. This
construction renders it unnecessary to finally determine here
whether this subsidiary civil liability in penal actions has
survived the laws that fully regulated it or has been
abrogated by the American civil and criminal procedure now
in force in the Philippines.
The difficulty in construing the articles of the code above
cited in this case appears from the briefs before us to have
arisen from the interpretation of the words of article 1093,
"fault or negligence not punished by law," as applied to the
comprehensive definition of offenses in articles 568 and 590
of the Penal Code. It has been shown that the liability of an
employer arising out of his relation to his employee who is
the offender is not to be regarded as derived from negligence
punished by the law, within the meaning of articles 1902 and
1093. More than this, however, it cannot be said to fall within
the class of acts unpunished by the law, the consequence of
which are regulated by articles 1902 and 1903 of the Civil
Code. The acts to which these articles are applicable are
understood to be those not growing out of pre-existing duties
of the parties to one another. But where relations already
formed give rise to duties, whether springing from contract
or quasi contract, then breaches of those duties are subject to
articles 1101, 1103, and 1104 of the same code. A typical
application of this distinction may be found in the
consequences of a railway accident due to defective
machinery supplied by the employer. His liability to his
employee would arise out of the contract of employment,
that to the passengers out of the contract for passage, while
that to the injured bystander would originate in the negligent
act itself.
If it were true that the defendant, in coming from the
southern part of Solana Street, had to stop his auto before
crossing Real Street, because he had met vehicles which were
going along the latter street or were coming from the
opposite direction along Solana Street, it is to be believed
that, when he again started to run his auto across said Real
Street and to continue its way along Solana Street northward,
he should have adjusted the speed of the auto which he was
operating until he had fully crossed Real Street and had
completely reached a clear way on Solana Street. But, as the
child was run over by the auto precisely at the entrance of
Solana Street, this accident could not have occurred if the
auto had been running at a slow speed, aside from the fact
that the defendant, at the moment of crossing Real Street and
entering Solana Street, in a northward direction, could have
seen the child in the act of crossing the latter street from the
sidewalk on the right to that on the left, and if the accident
had occurred in such a way that after the automobile had run
 over the body of the child, and the child's body had already
been stretched out on the ground, the automobile still moved
along a distance of about 2 meters, this circumstance shows
the fact that the automobile entered Solana Street from Real
Street, at a high speed without the defendant having blown
the horn. If these precautions had been taken by the
defendant, the deplorable accident which caused the death of
the child would not have occurred.
It will be noticed that the defendant in the above case could have been
prosecuted in a criminal case because his negligence causing the death
of the child was punishable by the Penal Code. Here is therefore a clear
instance of the same act of negligence being a proper subject-matter
either of a criminal action with its consequent civil liability arising from
a crime or of an entirely separate and independent civil action for fault
or negligence under article 1902 of the Civil Code. Thus, in this
jurisdiction, the separate individually of a cuasi-delito or culpa
aquiliana under the Civil Code has been fully and clearly recognized,
even with regard to a negligent act for which the wrongdoer could have
been prosecuted and convicted in a criminal case and for which, after
such a conviction, he could have been sued for this civil liability arising
from his crime.
Years later (in 1930) this Court had another occasion to apply the same
doctrine. In Bernal and Enverso vs. House and Tacloban Electric & Ice
Plant, Ltd., 54 Phil., 327, the parents of the five-year-old child,
Purificacion Bernal, brought a civil action to recover damages for the
child's death as a result of burns caused by the fault and negligence of
the defendants. On the evening of April 10, 1925, the Good Friday
procession was held in Tacloban, Leyte. Fortunata Enverso with her
daughter Purificacion Bernal had come from another municipality to
attend the same. After the procession the mother and the daughter with
two others were passing along Gran Capitan Street in front of the offices
of the Tacloban Electric & Ice Plant, Ltd., owned by defendants J. V.
House, when an automobile appeared from the opposite direction. The
little girl, who was slightly ahead of the rest, was so frightened by the
automobile that she turned to run, but unfortunately she fell into the
street gutter where hot water from the electric plant was flowing. The
child died that same night from the burns. The trial courts dismissed
the action because of the contributory negligence of the plaintiffs. But
this Court held, on appeal, that there was no contributory negligence,
and allowed the parents P1,000 in damages from J. V. House who at the
time of the tragic occurrence was the holder of the franchise for the
electric plant. This Court said in part:
Although the trial judge made the findings of fact
hereinbefore outlined, he nevertheless was led to order the
dismissal of the action because of the contributory
negligence of the plaintiffs. It is from this point that a
majority of the court depart from the stand taken by the trial
judge. The mother and her child had a perfect right to be on
the principal street of Tacloban, Leyte, on the evening when
the religious procession was held. There was nothing
abnormal in allowing the child to run along a few paces in
advance of the mother. No one could foresee the coincidence
of an automobile appearing and of a frightened child running
and falling into a ditch filled with hot water. The doctrine
announced in the much debated case of Rakes vs. Atlantic
Gulf and Pacific Co. ([1907]), 7 Phil., 359), still rule. Article
1902 of the Civil Code must again be enforced. The
contributory negligence of the child and her mother, if any,
does not operate as a bar to recovery, but in its strictest
sense could only result in reduction of the damages.
It is most significant that in the case just cited, this Court specifically
applied article 1902 of the Civil Code. It is thus that although J. V. House
could have been criminally prosecuted for reckless or simple negligence
and not only punished but also made civilly liable because of his
criminal negligence, nevertheless this Court awarded damages in an
independent civil action for fault or negligence under article 1902 of the
Civil Code.
In Bahia vs. Litonjua and Leynes (30 Phil., 624 [year 1915), the action
was for damages for the death of the plaintiff's daughter alleged to have
been caused by the negligence of the servant in driving an automobile
over the child. It appeared that the cause of the mishap was a defect in
the steering gear. The defendant Leynes had rented the automobile
from the International Garage of Manila, to be used by him in carrying
passengers during the fiesta of Tuy, Batangas. Leynes was ordered by
the lower court to pay P1,000 as damages to the plaintiff. On appeal this
Court reversed the judgment as to Leynes on the ground that he had
shown that the exercised the care of a good father of a family, thus
overcoming the presumption of negligence under article 1903. This
Court said:
As to selection, the defendant has clearly shown that he
exercised the care and diligence of a good father of a family.
He obtained the machine from a reputable garage and it was,
so far as appeared, in good condition. The workmen were
likewise selected from a standard garage, were duly licensed
by the Government in their particular calling, and apparently
thoroughly competent. The machine had been used but a few
hours when the accident occurred and it is clear from the
evidence that the defendant had no notice, either actual or
constructive, of the defective condition of the steering gear.
The legal aspect of the case was discussed by this Court thus:
Article 1903 of the Civil Code not only establishes liability in
cases of negligence, but also provides when the liability shall
cease. It says:
"The liability referred to in this article shall cease
when the persons mentioned therein prove that
they employed all the diligence of a good father of
a family to avoid the damage."
From this article two things are apparent: (1) That when an
injury is caused by the negligence of a servant or employee
there instantly arises a presumption of law that there was
negligence on the part of the matter or employer either in the
selection of the servant or employee, or in supervision over
him after the selection, or both; and (2) that presumption is
juris tantum and not juris et de jure, and consequently, may
be rebutted. It follows necessarily that if the employer shows
to the satisfaction of the court that in selection and
supervision he has exercised the care and diligence of a good
father of a family, the presumption is overcome and he is
relieve from liability.
This theory bases the responsibility of the master ultimately
on his own negligence and not on that of his servant.
The doctrine of the case just cited was followed by this Court in Cerf vs.
Medel (33 Phil., 37 [year 1915]). In the latter case, the complaint alleged
that the defendant's servant had so negligently driven an automobile,
which was operated by defendant as a public vehicle, that said
automobile struck and damaged the plaintiff's motorcycle. This Court,
applying article 1903 and following the rule in Bahia vs. Litonjua and
Leynes, said in part (p. 41) that:
The master is liable for the negligent acts of his servant
where he is the owner or director of a business or enterprise
and the negligent acts are committed while the servant is
engaged in his master's employment as such owner.
Another case which followed the decision in Bahia vs. Litonjua and
Leynes was Cuison vs. Norton & Harrison Co., 55 Phil., 18 (year 1930).
The latter case was an action for damages brought by Cuison for the
death of his seven-year-old son Moises. The little boy was on his way to
school with his sister Marciana. Some large pieces of lumber fell from a
truck and pinned the boy underneath, instantly killing him. Two youths,
Telesforo Binoya and Francisco Bautista, who were working for Ora, an
employee of defendant Norton & Harrison Co., pleaded guilty to the
crime of homicide through reckless negligence and were sentenced
accordingly. This Court, applying articles 1902 and 1903, held:
The basis of civil law liability is not respondent superior but
the relationship of pater familias. This theory bases the
liability of the master ultimately on his own negligence and
not on that of his servant. (Bahia vs. Litonjua and Leynes
[1915], 30 Phil., 624; Cangco vs. Manila Railroad Co. [1918],
38 Phil., 768.)
In Walter A. Smith & Co. vs. Cadwallader Gibson Lumber Co., 55 Phil.,
517 (year 1930) the plaintiff brought an action for damages for the
demolition of its wharf, which had been struck by the steamer Helen C
belonging to the defendant. This Court held (p. 526):
The evidence shows that Captain Lasa at the time the
plaintiff's wharf collapsed was a duly licensed captain,
authorized to navigate and direct a vessel of any tonnage,
and that the appellee contracted his services because of his
reputation as a captain, according to F. C. Cadwallader. This
being so, we are of the opinion that the presumption of
liability against the defendant has been overcome by the
exercise of the care and diligence of a good father of a family
in selecting Captain Lasa, in accordance with the doctrines
laid down by this court in the cases cited above, and the
defendant is therefore absolved from all liability.
It is, therefore, seen that the defendant's theory about his secondary
liability is negatived by the six cases above set forth. He is, on the
authority of these cases, primarily and directly responsible in damages
under article 1903, in relation to article 1902, of the Civil Code.
Let us now take up the Philippine decisions relied upon by the
defendant. We study first, City of Manila vs. Manila Electric Co., 52 Phil.,
586 (year 1928). A collision between a truck of the City of Manila and a
street car of the Manila Electric Co. took place on June 8, 1925. The
truck was damaged in the amount of P1,788.27. Sixto Eustaquio, the
motorman, was prosecuted for the crime of damage to property and
slight injuries through reckless imprudence. He was found guilty and
sentenced to pay a fine of P900, to indemnify the City of Manila for
P1,788.27, with subsidiary imprisonment in case of insolvency. Unable
to collect the indemnity from Eustaquio, the City of Manila filed an
action against the Manila Electric Company to obtain payment, claiming
that the defendant was subsidiarily liable. The main defense was that
the defendant had exercised the diligence of a good father of a family to
prevent the damage. The lower court rendered judgment in favor of the
plaintiff. This Court held, in part, that this case was governed by the
Penal Code, saying:
With this preliminary point out of the way, there is no
escaping the conclusion that the provisions of the Penal Code
govern. The Penal Code in easily understandable language
authorizes the determination of subsidiary liability. The Civil
Code negatives its application by providing that civil
obligations arising from crimes or misdemeanors shall be
governed by the provisions of the Penal Code. The conviction
of the motorman was a misdemeanor falling under article
604 of the Penal Code. The act of the motorman was not a
wrongful or negligent act or omission not punishable by law.
Accordingly, the civil obligation connected up with the Penal
Code and not with article 1903 of the Civil Code. In other
words, the Penal Code affirms its jurisdiction while the Civil
Code negatives its jurisdiction. This is a case of criminal
negligence out of which civil liability arises and not a case of
civil negligence.
xxx     xxx     xxx
Our deduction, therefore, is that the case relates to the Penal
Code and not to the Civil Code. Indeed, as pointed out by the
trial judge, any different ruling would permit the master to
escape scot-free by simply alleging and proving that the
master had exercised all diligence in the selection and
training of its servants to prevent the damage. That would be
a good defense to a strictly civil action, but might or might
not be to a civil action either as a part of or predicated on
conviction for a crime or misdemeanor. (By way of
parenthesis, it may be said further that the statements here
made are offered to meet the argument advanced during our
deliberations to the effect that article 0902 of the Civil Code
should be disregarded and codal articles 1093 and 1903
applied.)
It is not clear how the above case could support the defendant's
proposition, because the Court of Appeals based its decision in the
present case on the defendant's primary responsibility under article
1903 of the Civil Code and not on his subsidiary liability arising from
Fontanilla's criminal negligence. In other words, the case of City of
Manila vs. Manila Electric Co., supra, is predicated on an entirely
different theory, which is the subsidiary liability of an employer arising
from a criminal act of his employee, whereas the foundation of the
decision of the Court of Appeals in the present case is the employer's
primary liability under article 1903 of the Civil Code. We have already
seen that this is a proper and independent remedy.
Arambulo vs. Manila Electric Co. (55 Phil., 75), is another case invoked
by the defendant. A motorman in the employ of the Manila Electric
Company had been convicted o homicide by simple negligence and
sentenced, among other things, to pay the heirs of the deceased the sum
of P1,000. An action was then brought to enforce the subsidiary liability
of the defendant as employer under the Penal Code. The defendant
attempted to show that it had exercised the diligence of a good father of
a family in selecting the motorman, and therefore claimed exemption
from civil liability. But this Court held:
In view of the foregoing considerations, we are of opinion
and so hold, (1) that the exemption from civil liability
established in article 1903 of the Civil Code for all who have
acted with the diligence of a good father of a family, is not
applicable to the subsidiary civil liability provided in article
20 of the Penal Code.
The above case is also extraneous to the theory of the defendant in the
instant case, because the action there had for its purpose the
enforcement of the defendant's subsidiary liability under the Penal
Code, while in the case at bar, the plaintiff's cause of action is based on
the defendant's primary and direct responsibility under article 1903 of
the Civil Code. In fact, the above case destroys the defendant's
contention because that decision illustrates the principle that the
employer's primary responsibility under article 1903 of the Civil Code
is different in character from his subsidiary liability under the Penal
Code.
In trying to apply the two cases just referred to, counsel for the
defendant has failed to recognize the distinction between civil liability
arising from a crime, which is governed by the Penal Code, and the
responsibility for cuasi-delito or culpa aquiliana under the Civil Code,
and has likewise failed to give the importance to the latter type of civil
action.
The defendant-petitioner also cites Francisco vs. Onrubia (46 Phil., 327).
That case need not be set forth. Suffice it to say that the question
involved was also civil liability arising from a crime. Hence, it is as
inapplicable as the two cases above discussed.
The foregoing authorities clearly demonstrate the separate
individuality of cuasi-delitos or culpa aquiliana under the Civil Code.
Specifically they show that there is a distinction between civil liability
arising from criminal negligence (governed by the Penal Code) and
responsibility for fault or negligence under articles 1902 to 1910 of the of his confidence in the principal or director." (Vol. 12, p. 622, 2nd Ed.)
Civil Code, and that the same negligent act may produce either a civil Many jurists also base this primary responsibility of the employer on
liability arising from a crime under the Penal Code, or a separate the principle of representation of the principal by the agent. Thus,
responsibility for fault or negligence under articles 1902 to 1910 of the Oyuelos says in the work already cited (Vol. 7, p. 747) that before third
Civil Code. Still more concretely, the authorities above cited render it persons the employer and employee "vienen a ser como una sola
inescapable to conclude that the employer — in this case the defendant- personalidad, por refundicion de la del dependiente en la de quien le
petitioner — is primarily and directly liable under article 1903 of the emplea y utiliza." ("become as one personality by the merging of the
Civil Code. person of the employee in that of him who employs and utilizes him.")
All these observations acquire a peculiar force and significance when it
comes to motor accidents, and there is need of stressing and
The legal provisions, authors, and cases already invoked should
accentuating the responsibility of owners of motor vehicles.
ordinarily be sufficient to dispose of this case. But inasmuch as we are
announcing doctrines that have been little understood in the past, it
might not be inappropriate to indicate their foundations. Fourthly, because of the broad sweep of the provisions of both the
Penal Code and the Civil Code on this subject, which has given rise to
the overlapping or concurrence of spheres already discussed, and for
Firstly, the Revised Penal Code in article 365 punishes not only reckless
lack of understanding of the character and efficacy of the action for
but also simple negligence. If we were to hold that articles 1902 to 1910
culpa aquiliana, there has grown up a common practice to seek
of the Civil Code refer only to fault or negligence not punished by law,
damages only by virtue of the civil responsibility arising from a crime,
according to the literal import of article 1093 of the Civil Code, the legal
forgetting that there is another remedy, which is by invoking articles
institution of culpa aquiliana would have very little scope and
1902-1910 of the Civil Code. Although this habitual method is allowed
application in actual life. Death or injury to persons and damage to
by our laws, it has nevertheless rendered practically useless and
property through any degree of negligence — even the slightest —
nugatory the more expeditious and effective remedy based on culpa
would have to be indemnified only through the principle of civil liability
aquiliana or culpa extra-contractual. In the present case, we are asked
arising from a crime. In such a state of affairs, what sphere would
to help perpetuate this usual course. But we believe it is high time we
remain for cuasi-delito or culpa aquiliana? We are loath to impute to the
pointed out to the harm done by such practice and to restore the
lawmaker any intention to bring about a situation so absurd and
principle of responsibility for fault or negligence under articles 1902 et
anomalous. Nor are we, in the interpretation of the laws, disposed to
seq. of the Civil Code to its full rigor. It is high time we caused the
uphold the letter that killeth rather than the spirit that giveth life. We
stream of quasi-delict or culpa aquiliana to flow on its own natural
will not use the literal meaning of the law to smother and render almost
channel, so that its waters may no longer be diverted into that of a
lifeless a principle of such ancient origin and such full-grown
crime under the Penal Code. This will, it is believed, make for the better
development as culpa aquiliana or cuasi-delito, which is conserved and
safeguarding of private rights because it re-establishes an ancient and
made enduring in articles 1902 to 1910 of the Spanish Civil Code.
additional remedy, and for the further reason that an independent civil
action, not depending on the issues, limitations and results of a criminal
Secondly, to find the accused guilty in a criminal case, proof of guilt prosecution, and entirely directed by the party wronged or his counsel,
beyond reasonable doubt is required, while in a civil case, is more likely to secure adequate and efficacious redress.
preponderance of evidence is sufficient to make the defendant pay in
damages. There are numerous cases of criminal negligence which can
In view of the foregoing, the judgment of the Court of Appeals should be
not be shown beyond reasonable doubt, but can be proved by a
and is hereby affirmed, with costs against the defendant-petitioner.
preponderance of evidence. In such cases, the defendant can and should
be made responsible in a civil action under articles 1902 to 1910 of the
Civil Code. Otherwise, there would be many instances of unvindicated Yulo, C.J., Moran, Ozaeta and Paras, JJ., concur.
civil wrongs. Ubi jus ibi remedium.

Thirdly, to hold that there is only one way to make defendant's liability
effective, and that is, to sue the driver and exhaust his (the latter's)
property first, would be tantamount to compelling the plaintiff to follow
a devious and cumbersome method of obtaining relief. True, there is
such a remedy under our laws, but there is also a more expeditious way,
which is based on the primary and direct responsibility of the
defendant under article 1903 of the Civil Code. Our view of the law is
more likely to facilitate remedy for civil wrongs, because the procedure
indicated by the defendant is wasteful and productive of delay, it being
a matter of common knowledge that professional drivers of taxis and
similar public conveyance usually do not have sufficient means with
which to pay damages. Why, then, should the plaintiff be required in all
cases to go through this roundabout, unnecessary, and probably useless
procedure? In construing the laws, courts have endeavored to shorten
and facilitate the pathways of right and justice.

At this juncture, it should be said that the primary and direct

responsibility of employers and their presumed negligence are
principles calculated to protect society. Workmen and employees
should be carefully chosen and supervised in order to avoid injury to
the public. It is the masters or employers who principally reap the
profits resulting from the services of these servants and employees. It is
but right that they should guarantee the latter's careful conduct for the
personnel and patrimonial safety of others. As Theilhard has said, "they
should reproach themselves, at least, some for their weakness, others
for their poor selection and all for their negligence." And according to
Manresa, "It is much more equitable and just that such responsibility
should fall upon the principal or director who could have chosen a
careful and prudent employee, and not upon the injured person who
could not exercise such selection and who used such employee because

G.R. No. 34840           September 23, 1931
NARCISO GUTIERREZ, plaintiff-appellee,  Saturnino Cortez, the owner of the truck, and of his chauffeur Abelardo
vs.
BONIFACIO GUTIERREZ, MARIA V. DE GUTIERREZ, MANUEL
GUTIERREZ, ABELARDO VELASCO, and SATURNINO
CORTEZ, defendants-appellants.
L.D. Lockwood for appellants Velasco and Cortez.
San Agustin and Roxas for other appellants.
Ramon Diokno for appellee.
MALCOLM, J.:
This is an action brought by the plaintiff in the Court of First Instance of
Manila against the five defendants, to recover damages in the amount of
P10,000, for physical injuries suffered as a result of an automobile
accident. On judgment being rendered as prayed for by the plaintiff,
both sets of defendants appealed.
On February 2, 1930, a passenger truck and an automobile of private
ownership collided while attempting to pass each other on the Talon
bridge on the Manila South Road in the municipality of Las Piñ as,
Province of Rizal. The truck was driven by the chauffeur Abelardo
Velasco, and was owned by Saturnino Cortez. The automobile was being
operated by Bonifacio Gutierrez, a lad 18 years of age, and was owned
by Bonifacio's father and mother, Mr. and Mrs. Manuel Gutierrez. At the
time of the collision, the father was not in the car, but the mother,
together will several other members of the Gutierrez family, seven in
all, were accommodated therein. A passenger in the autobus, by the
name of Narciso Gutierrez, was en route from San Pablo, Laguna, to
Manila. The collision between the bus and the automobile resulted in
Narciso Gutierrez suffering a fracture right leg which required medical
attendance for a considerable period of time, and which even at the date
of the trial appears not to have healed properly.
It is conceded that the collision was caused by negligence pure and
simple. The difference between the parties is that, while the plaintiff
blames both sets of defendants, the owner of the passenger truck
blames the automobile, and the owner of the automobile, in turn,
blames the truck. We have given close attention to these highly
debatable points, and having done so, a majority of the court are of the
opinion that the findings of the trial judge on all controversial questions
of fact find sufficient support in the record, and so should be
maintained. With this general statement set down, we turn to consider
the respective legal obligations of the defendants.
In amplification of so much of the above pronouncement as concerns
the Gutierrez family, it may be explained that the youth Bonifacio was in
incompetent chauffeur, that he was driving at an excessive rate of
speed, and that, on approaching the bridge and the truck, he lost his
head and so contributed by his negligence to the accident. The guaranty
given by the father at the time the son was granted a license to operate
motor vehicles made the father responsible for the acts of his son.
Based on these facts, pursuant to the provisions of article 1903 of the
Civil Code, the father alone and not the minor or the mother, would be
liable for the damages caused by the minor.
We are dealing with the civil law liability of parties for obligations
which arise from fault or negligence. At the same time, we believe that,
as has been done in other cases, we can take cognizance of the common
law rule on the same subject. In the United States, it is uniformly held
that the head of a house, the owner of an automobile, who maintains it
for the general use of his family is liable for its negligent operation by
one of his children, whom he designates or permits to run it, where the
car is occupied and being used at the time of the injury for the pleasure
of other members of the owner's family than the child driving it. The
theory of the law is that the running of the machine by a child to carry
other members of the family is within the scope of the owner's
business, so that he is liable for the negligence of the child because of
the relationship of master and servant. (Huddy On Automobiles, 6th ed.,
sec. 660; Missell vs. Hayes [1914], 91 Atl., 322.) The liability of
Velasco rests on a different basis, namely, that of contract which, we
think, has been sufficiently demonstrated by the allegations of the
complaint, not controverted, and the evidence. The reason for this
conclusion reaches to the findings of the trial court concerning the
position of the truck on the bridge, the speed in operating the machine,
and the lack of care employed by the chauffeur. While these facts are
not as clearly evidenced as are those which convict the other defendant,
we nevertheless hesitate to disregard the points emphasized by the trial
judge. In its broader aspects, the case is one of two drivers approaching
a narrow bridge from opposite directions, with neither being willing to
slow up and give the right of way to the other, with the inevitable result
of a collision and an accident.
The defendants Velasco and Cortez further contend that there existed
contributory negligence on the part of the plaintiff, consisting
principally of his keeping his foot outside the truck, which occasioned
his injury. In this connection, it is sufficient to state that, aside from the
fact that the defense of contributory negligence was not pleaded, the
evidence bearing out this theory of the case is contradictory in the
extreme and leads us far afield into speculative matters.
The last subject for consideration relates to the amount of the award.
The appellee suggests that the amount could justly be raised to
P16,517, but naturally is not serious in asking for this sum, since no
appeal was taken by him from the judgment. The other parties unite in
challenging the award of P10,000, as excessive. All facts considered,
including actual expenditures and damages for the injury to the leg of
the plaintiff, which may cause him permanent lameness, in connection
with other adjudications of this court, lead us to conclude that a total
sum for the plaintiff of P5,000 would be fair and reasonable. The
difficulty in approximating the damages by monetary compensation is
well elucidated by the divergence of opinion among the members of the
court, three of whom have inclined to the view that P3,000 would be
amply sufficient, while a fourth member has argued that P7,500 would
be none too much.
In consonance with the foregoing rulings, the judgment appealed from
will be modified, and the plaintiff will have judgment in his favor
against the defendants Manuel Gutierrez, Abelardo Velasco, and
Saturnino Cortez, jointly and severally, for the sum of P5,000, and the
costs of both instances.
Avanceña, C.J., Johnson, Street, Villamor, Ostrand, Romualdez, and
Imperial, JJ., concur.

G.R. No. 182356               December 4, 2013
DRA, LEILA A DELA LLANO, Petitioner,  vehicular accident and Dra. dela Llana’s injury. She pointed out that Dra.
vs.
REBECCA BIONG, doing business under the name and style of
Pongkay Trading, Respondent.
DECISION
BRION, J.:
Very case essentially turns on two basic questions: questions of fact and
questions of law. Questions of fact are the parties and their counsel to
respond to, based on what supporting facts the legal questions require;
the court can only draw conclusion from the facts or evidence adduced.
When the facts are lacking because of the deficiency of presented
evidence, then the court can only draw one conclusion: that the cause
must fail for lack of evidentiary support.
The present case is one such case as Dra. Leila A dela Llana’s(petitioner)
petition for review on certorari1challenging the February 11, 2008
Decision2 and the March 31, 2008 resolution3 of the Court of Appeals
(CA) in CA-G.R. CV No. 89163.
The Factual Antecedents
On March 30, 2000, at around 11:00 p.m., Juan dela Llana was driving a
1997 Toyota Corolla car along North Avenue, Quezon City. 4
His sister, Dra. dela Llana, was seated at the front passenger seat while
a certain Calimlim was at the backseat.5
Juan stopped the car across the Veterans Memorial Hospital when the
signal light turned red. A few seconds after the car halted, a dump truck
containing gravel and sand suddenly rammed the car’s rear end,
violently pushing the car forward. Due to the impact, the car’s rear end
collapsed and its rear windshield was shattered. Glass splinters flew,
puncturing Dra. dela Llana. Apart from these minor wounds, Dra. dela
Llana did not appear to have suffered from any other visible physical
injuries.6
The traffic investigation report dated March 30, 2000 identified the
truck driver as Joel Primero. It stated that Joel was recklessly
imprudent in driving the truck.7
Joel later revealed that his employer was respondent Rebecca Biong,
doing business under the name and style of "Pongkay Trading" and was
engaged in a gravel and sand business.8
In the first week of May 2000, Dra. dela Llana began to feel mild to
moderate pain on the left side of her neck and shoulder. The pain
became more intense as days passed by. Her injury became more
severe. Her health deteriorated to the extent that she could no longer
move her left arm. On June 9, 2000, she consulted with Dr. Rosalinda
Milla, a rehabilitation medicine specialist, to examine her condition. Dr.
Milla told her that she suffered from a whiplash injury, an injury caused
by the compression of the nerve running to her left arm and hand. Dr.
Milla required her to undergo physical therapy to alleviate her
condition. Dra. dela Llana’s condition did not improve despite three
months of extensive physical therapy.9
She then consulted other doctors, namely, Drs. Willie Lopez, Leonor
Cabral-Lim and Eric Flores, in search for a cure. Dr. Flores, a neuro-
surgeon, finally suggested that she undergo a cervical spine surgery to
release the compression of her nerve. On October 19, 2000, Dr. Flores
operated on her spine and neck, between the C5 and the C6 vertebrae. 10
The operation released the impingement of the nerve, but incapacitated
Dra. dela Llana from the practice of her profession since June 2000
despite the surgery.11
Dra. dela Llana, on October 16, 2000, demanded from Rebecca
compensation for her injuries, but Rebecca refused to pay. 12
Thus, on May 8, 2001, Dra. dela Llana sued Rebecca for damages before
the Regional Trial Court of Quezon City (RTC). She alleged that she lost
the mobility of her arm as a result of the vehicular accident and claimed
₱150,000.00 for her medical expenses (as of the filing of the complaint)
and an average monthly income of ₱30,000.00 since June 2000. She
further prayed for actual, moral, and exemplary damages as well as
attorney’s fees.13
In defense, Rebecca maintained that Dra. dela Llana had no cause of
action against her as no reasonable relation existed between the
dela Llana’s illness became manifest one month and one week from the
date of the vehicular accident. As a counterclaim, she demanded the
payment of attorney’s fees and costs of the suit. 14
At the trial, Dra. dela Llana presented herself as an ordinary
witness15 and Joel as a hostile witness. 16
Dra. dela Llana reiterated that she lost the mobility of her arm because
of the vehicular accident. To prove her claim, she identified and
authenticated a medical certificate dated November 20, 2000 issued by
Dr. Milla. The medical certificate stated that Dra. dela Llana suffered
from a whiplash injury. It also chronicled her clinical history and
physical examinations.17
Meanwhile, Joel testified that his truck hit the car because the truck’s
brakes got stuck.18
In defense, Rebecca testified that Dra. dela Llana was physically fit and
strong when they met several days after the vehicular accident. She also
asserted that she observed the diligence of a good father of a family in
the selection and supervision of Joel. She pointed out that she required
Joel to submit a certification of good moral character as well as
barangay, police, and NBI clearances prior to his employment. She also
stressed that she only hired Primero after he successfully passed the
driving skills test conducted by Alberto Marcelo, a licensed driver-
mechanic.19
Alberto also took the witness stand. He testified that he checked the
truck in the morning of March 30, 2000. He affirmed that the truck was
in good condition prior to the vehicular accident. He opined that the
cause of the vehicular accident was a damaged compressor. According
to him, the absence of air inside the tank damaged the compressor. 20
RTC Ruling
The RTC ruled in favor of Dra. dela Llana and held that the proximate
cause of Dra. dela Llana’s whiplash injury to be Joel’s reckless driving. 21
It found that a whiplash injury is an injury caused by the sudden jerking
of the spine in the neck area. It pointed out that the massive damage the
car suffered only meant that the truck was over-speeding. It maintained
that Joel should have driven at a slower pace because road visibility
diminishes at night. He should have blown his horn and warned the car
that his brake was stuck and could have prevented the collision by
swerving the truck off the road. It also concluded that Joel was probably
sleeping when the collision occurred as Joel had been driving for fifteen
hours on that fateful day. The RTC further declared that Joel’s
negligence gave rise to the presumption that Rebecca did not exercise
the diligence of a good father of a family in Joel's selection and
supervision of Joel. Rebecca was vicariously liable because she was the
employer and she personally chose him to drive the truck. On the day of
the collision, she ordered him to deliver gravel and sand to Muñ oz
Market, Quezon City. The Court concluded that the three elements
necessary to establish Rebecca’s liability were present: (1) that the
employee was chosen by the employer, personally or through another;
(2) that the services were to be rendered in accordance with orders
which the employer had the authority to give at all times; and (3) that
the illicit act of the employee was on the occasion or by reason of the
functions entrusted to him. The RTC thus awarded Dra. dela Llana the
amounts of ₱570,000.00 as actual damages, ₱250,000.00 as moral
damages, and the cost of the suit. 22
CA Ruling
In a decision dated February 11, 2008, the CA reversed the RTC ruling.
It held that Dra. dela Llana failed to establish a reasonable connection
between the vehicular accident and her whiplash injury by
preponderance of evidence. Citing Nutrimix Feeds Corp. v. Court of
Appeals,23 it declared that courts will not hesitate to rule in favor of the
other party if there is no evidence or the evidence is too slight to
warrant an inference establishing the fact in issue. It noted that the
interval between the date of the collision and the date when Dra. dela
Llana began to suffer the symptoms of her illness was lengthy. It
concluded that this interval raised doubts on whether Joel’s reckless
driving and the resulting collision in fact caused Dra. dela Llana’s injury.
It also declared that courts cannot take judicial notice that vehicular
accidents cause whiplash injuries. It observed that Dra. dela Llana did
not immediately visit a hospital to check if she sustained internal
injuries after the accident. Moreover, her failure to present expert
witnesses was fatal to her claim. It also gave no weight to the medical
certificate. The medical certificate did not explain how and why the
vehicular accident caused the injury.24
The Petition
Dra. dela Llana points out in her petition before this Court that Nutrimix
is inapplicable in the present case. She stresses that Nutrimix involved
the application of Article 1561 and 1566 of the Civil Code, provisions
governing hidden defects. Furthermore, there was absolutely no
evidence in Nutrimix that showed that poisonous animal feeds were
sold to the respondents in that case. As opposed to the respondents in
Nutrimix, Dra. dela Llana asserts that she has established by
preponderance of evidence that Joel’s egligent act was the proximate
cause of her whiplash injury. First, pictures of her damaged car show
that the collision was strong. She posits that it can be reasonably
inferred from these pictures that the massive impact resulted in her
whiplash injury. Second, Dr. Milla categorically stated in the medical
certificate that Dra. dela Llana suffered from whiplash injury. Third, her
testimony that the vehicular accident caused the injury is credible
because she was a surgeon.
Dra. dela Llana further asserts that the medical certificate has probative
value. Citing several cases, she posits that an uncorroborated medical
certificate is credible if uncontroverted. 25
She points out that expert opinion is unnecessary if the opinion merely
relates to matters of common knowledge. She maintains that a judge is
qualified as an expert to determine the causation between Joel’s
reckless driving and her whiplash injury. Trial judges are aware of the
fact that whiplash injuries are common in vehicular collisions.
The Respondent’s Position
In her Comment,26 Rebecca points out that Dra. dela Llana raises a
factual issue which is beyond the scope of a petition for review
on certiorari under Rule 45 of the Rules of Court. She maintains that the
CA’s findings of fact are final and conclusive. Moreover, she stresses
that Dra. dela Llana’s arguments are not substantial to merit this Court’s
consideration.
The Issue
The sole issue for our consideration in this case is whether Joel’s
reckless driving is the proximate cause of Dra. dela Llana’s whiplash
injury.
Our Ruling
We find the petition unmeritorious.
The Supreme Court may review questions of fact in a petition for review
on certiorari when the findings of fact by the lower courts are
conflicting
The issue before us involves a question of fact and this Court is not a
trier of facts. As a general rule, the CA’s findings of fact are final and
conclusive and this Court will not review them on appeal. It is not the
function of this Court to examine, review or evaluate the evidence in a
petition for review on certiorari under Rule 45 of the Rules of Court. We
can only review the presented evidence, by way of exception, when the
conflict exists in findings of the RTC and the CA.27
We see this exceptional situation here and thus accordingly examine the
relevant evidence presented before the trial court.
Dra. dela Llana failed to establish her case by preponderance of
evidence
Article 2176 of the Civil Code provides that "[w]hoever 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 a quasi-
delict." Under this provision, the elements necessary to establish a
quasi-delict case are:
(1) damages to the plaintiff;
(2) negligence, by act or omission, of the defendant or by some person
for whose acts the defendant must respond, was guilty; and
(3) the connection of cause and effect between such negligence and the
damages.28
These elements show that the source of obligation in a quasi-delict case
is the breach or omission of mutual duties that civilized society imposes
upon its members, or which arise from non-contractual relations of
certain members of society to others. 29
Based on these requisites, Dra. dela Llana must first establish by
preponderance of evidence the three elements of quasi-delict before we
determine Rebecca’s liability as Joel’s employer.
She should show the chain of causation between Joel’s reckless driving
and her whiplash injury.
Only after she has laid this foundation can the presumption - that
Rebecca did not exercise the diligence of a good father of a family in the
selection and supervision of Joel - arise.30
Once negligence, the damages and the proximate causation are
established, this Court can then proceed with the application and the
interpretation of the fifth paragraph of Article 2180 of the Civil Code. 31
Under Article 2176 of the Civil Code, in relation with the fifth paragraph
of Article 2180, "an action predicated on an employee’s act or omission
may be instituted against the employer who is held liable for the
negligent act or omission committed by his employee." 32
The rationale for these graduated levels of analyses is that it is
essentially the wrongful or negligent act or omission itself which
creates the vinculum juris in extra-contractual obligations. 33
In civil cases, a party who alleges a fact has the burden of proving it.
He who alleges has the burden of proving his allegation by
preponderance of evidence or greater weight of credible evidence. 34
The reason for this rule is that bare allegations, unsubstantiated by
evidence, are not equivalent to proof.
In short, mere allegations are not evidence. 35
In the present case, the burden of proving the proximate causation
between Joel’s negligence and Dra. dela Llana’s whiplash injury rests on
Dra. dela Llana. She must establish by preponderance of evidence that
Joel’s negligence, in its natural and continuous sequence, unbroken by
any efficient intervening cause, produced her whiplash injury, and
without which her whiplash injury would not have occurred. 36
Notably, Dra. dela Llana anchors her claim mainly on three pieces of
evidence:
(1) the pictures of her damaged car,
(2) the medical certificate dated November 20, 2000, and
(3) her testimonial evidence. However, none of these pieces of evidence
show the causal relation between the vehicular accident and the
whiplash injury. In other words,
Dra. dela Llana, during trial, did not adduce the factum probans or the
evidentiary facts by which the factum probandum or the ultimate fact
can be established, as fully discussed below.37
A.
The pictures of the damaged  between Joel’s reckless driving and Dra. dela Llana’s whiplash injury. It
car only demonstrate the  did not categorically state that the whiplash injury was a result of the
impact of the collision
Dra. dela Llana contends that the pictures of the damaged car show that
the massive impact of the collision caused her whiplash injury. We are
not persuaded by this bare claim. Her insistence that these pictures
show the causation grossly belies common logic. These pictures indeed
demonstrate the impact of the collision. However, it is a far-fetched
assumption that the whiplash injury can also be inferred from these
pictures.
B.
The medical certificate cannot be  Interestingly, the present case is peculiar in the sense that Dra. dela
considered because it was  Llana, as the plaintiff in this quasi-delict case, was the lone physician-
not admitted in evidence
Furthermore, the medical certificate, marked as Exhibit "H" during trial,
should not be considered in resolving this case for the reason that it
was not admitted in evidence by the RTC in an order dated September
23, 2004.38
Thus, the CA erred in even considering this documentary evidence in its
resolution of the case. It is a basic rule that evidence which has not been
admitted cannot be validly considered by the courts in arriving at their
judgments.
However, even if we consider the medical certificate in the disposition
of this case, the medical certificate has no probative value for being
hearsay. It is a basic rule that evidence, whether oral or documentary, is
hearsay if its probative value is not based on the personal knowledge of
the witness but on the knowledge of another person who is not on the
witness stand.39
Hearsay evidence, whether objected to or not, cannot be given
credence40 except in very unusual circumstance that is not found in the
present case. Furthermore, admissibility of evidence should not be
equated with weight of evidence. The admissibility of evidence depends
on its relevance and competence, while the weight of evidence pertains
to evidence already admitted and its tendency to convince and
persuade. Thus, a particular item of evidence may be admissible, but its
evidentiary weight depends on judicial evaluation within the guidelines
provided by the Rules of Court. 41
During trial, Dra. dela Llana testified:
"Q: Did your physician tell you, more or less, what was the reason why
you were feeling that pain in your left arm?
A: Well, I got a certificate from her and in that certificate, she stated that
my condition was due to a compression of the nerve, which supplied my
left arm and my left hand.
Court: By the way, what is the name of this physician, Dra.?
Witness: Her name is Dra. Rosalinda Milla. She is a Rehabilitation
Medicine Specialist. Atty. Yusingco: You mentioned that this Dra.
Rosalinda Milla made or issued a medical certificate. What relation does
this medical certificate, marked as Exhibit H have to do with that
certificate, you said was made by Dra. Milla?
Witness: This is the medical certificate that Dra. Milla made out for me.
Atty. Yusingco: Your Honor, this has been marked as Exhibit H.
Atty. Yusingco: What other medical services were done on you, Dra.
dela Llana, as a result of that feeling, that pain that you felt in your left
arm?
Witness: Well, aside from the medications and physical therapy, a re-
evaluation of my condition after three months indicated that I needed
surgery.
Atty. Yusingco: Did you undergo this surgery?
Witness: So, on October 19, I underwent surgery on my neck, on my
spine.
Atty. Yusingco: And, what was the result of that surgical operation?
Witness: Well, the operation was to relieve the compression on my
nerve, which did not resolve by the extensive and prolonged physical
therapy that I underwent for more than three months." 42(emphasis
ours)
Evidently, it was Dr. Milla who had personal knowledge of the contents
of the medical certificate.1âwphi1 However, she was not presented to
testify in court and was not even able to identify and affirm the contents
of the medical certificate. Furthermore, Rebecca was deprived of the
opportunity to cross-examine Dr. Milla on the accuracy and veracity of
her findings. We also point out in this respect that the medical
certificate nonetheless did not explain the chain of causation in fact
vehicular accident. A perusal of the medical certificate shows that it
only attested to her medical condition, i.e., that she was suffering from
whiplash injury. However, the medical certificate failed to substantially
relate the vehicular accident to Dra. dela Llana’s whiplash injury.
Rather, the medical certificate only chronicled her medical history and
physical examinations.
C.
Dra. dela Llana’s opinion that 
Joel’s negligence caused her 
whiplash injury has no probative value
witness during trial. Significantly, she merely testified as an ordinary
witness before the trial court. Dra. dela Llana essentially claimed in her
testimony that Joel’s reckless driving caused her whiplash injury.
Despite the fact that Dra. dela Llana is a physician and even assuming
that she is an expert in neurology, we cannot give weight to her opinion
that Joel’s reckless driving caused her whiplash injury without violating
the rules on evidence. Under the Rules of Court, there is a substantial
difference between an ordinary witness and an expert witness. The
opinion of an ordinary witness may be received in evidence regarding:
(a) the identity of a person about whom he has adequate knowledge;
(b) a handwriting with which he has sufficient familiarity; and
(c) the mental sanity of a person with whom he is sufficiently
acquainted.1âwphi1 Furthermore, the witness may also testify on his
impressions of the emotion, behavior, condition or appearance of a
person.43
On the other hand, the opinion of an expert witness may be received in
evidence on a matter requiring special knowledge, skill, experience or
training which he shown to possess.44
However, courts do not immediately accord probative value to an
admitted expert testimony, much less to an unobjected ordinary
testimony respecting special knowledge. The reason is that the
probative value of an expert testimony does not lie in a simple
exposition of the expert's opinion. Rather, its weight lies in the
assistance that the expert witness may afford the courts by
demonstrating the facts which serve as a basis for his opinion and the
reasons on which the logic of his conclusions is founded. 45
In the present case, Dra. dela Llana’s medical opinion cannot be given
probative value for the reason that she was not presented as an expert
witness. As an ordinary witness, she was not competent to testify on the
nature, and the cause and effects of whiplash injury. Furthermore, we
emphasize that Dra. dela Llana, during trial, nonetheless did not
provide a medical explanation on the nature as well as the cause and
effects of whiplash injury in her testimony.
The Supreme Court cannot take
judicial notice that vehicular 
accidents cause whiplash injuries.
Indeed, a perusal of the pieces of evidence presented by the parties
before the trial court shows that Dra. Dela Llana did not present any
testimonial or documentary evidence that directly shows the
causal relation between the vehicular accident and Dra. Dela
Llana’s injury. Her claim that Joel’s negligence causes her whiplash
injury was not established because of the deficiency of the presented
evidence during trial. We point out in this respect that courts cannot
take judicial notice that vehicular ccidents cause whiplash injuries. This
proportion is not public knowledge, or is capable of unquestionable
demonstration, or ought to be known to judges because of their judicial
functions.46 We have no expertise in the field of medicine. Justices and
judges are only tasked to apply and interpret the law on the basis of the
parties’ pieces of evidence and their corresponding legal arguments.
In sum, Dra. dela Llana miserably failed to establish her cause by
preponderance of evidence. While we commiserate with her, our
solemn duty to independently and impartially assess the merits of the
case binds us to rule against Dra. dela Llana’s favor. Her claim,
unsupported by prepondernace of evidence, is merely a bare assertion
and has no leg to stand on.
WHEREFORE, presmises considered, the assailed Decision dated
February 11, 2008 and Resolution dated March 31, 2008 of the Court of
Appeals are hereby AFFIRMED and the petition is hereby DENIED for
lack of merit.
SO ORDERED.
ARTURO D. BRION
Associate Justice
II. Nature and Effects of Obligations
A. Kinds of Prestations
Chavez vs Gonzales, 32 SCRA 547 (PDF)
[G.R. No. 117190. January 2, 1997]
JACINTO TANGUILIG doing business under the name and style
J.M.T. ENGINEERING AND GENERAL
MERCHANDISING, petitioner, vs. COURT OF APPEALS and
VICENTE HERCE JR., respondents.
DECISION
BELLOSILLO, J.:
This case involves the proper interpretation of the contract
entered into between the parties.
Sometime in April 1987 petitioner Jacinto M. Tanguilig doing
business under the name and style J. M. T. Engineering and General
Merchandising proposed to respondent Vicente Herce Jr. to construct a
windmill system for him. After some negotiations they agreed on the
construction of the windmill for a consideration of P60,000.00 with
a one-year guaranty from the date of completion and acceptance by
respondent Herce Jr. of the project. Pursuant to the agreement
respondent paid petitioner a down payment of P30,000.00 and an
installment payment of P15,000.00, leaving a balance of P15,000.00.
On 14 March 1988, due to the refusal and failure of respondent to
pay the balance, petitioner filed a complaint to collect the amount. In
his Answer before the trial court respondent denied the claim saying
that he had already paid this amount to the San Pedro General
Merchandising Inc. (SPGMI) which constructed the deep well to which
the windmill system was to be connected. According to respondent,
since the deep well formed part of the system the payment he tendered
to SPGMI should be credited to his account by petitioner. Moreover,
assuming that he owed petitioner a balance of P15,000.00, this should
be offset by the defects in the windmill system which caused the
structure to collapse after a strong wind hit their place. [1]
Petitioner denied that the construction of a deep well was
included in the agreement to build the windmill system, for the contract
price of P60,000.00 was solely for the windmill assembly and its
installation, exclusive of other incidental materials needed for the
project. He also disowned any obligation to repair or reconstruct the
system and insisted that he delivered it in good and working condition
to respondent who accepted the same without protest. Besides, its
collapse was attributable to a typhoon, a forcemajeure, which relieved
him of any liability.
In finding for plaintiff, the trial court held that the construction of
the deep well was not part of the windmill project as evidenced clearly
by the letter proposals submitted by petitioner to respondent. [2] It noted
that "[i]f the intention of the parties is to include the construction of the
deep well in the project, the same should be stated in the proposals. In
the absence of such an agreement, it could be safely concluded that the
construction of the deep well is not a part of the project undertaken by
the plaintiff."[3] With respect to the repair of the windmill, the trial court
found that "there is no clear and convincing proof that the windmill
system fell down due to the defect of the construction." [4]
The Court of Appeals reversed the trial court. It ruled that the
construction of the deep well was included in the agreement of the
parties because the term "deep well" was mentioned in both proposals.
It also gave credence to the testimony of respondent's witness
Guillermo Pili, the proprietor of SPGMI which installed the deep well,
that petitioner Tanguilig told him that the cost of constructing the deep
well would be deducted from the contract price of P60,000.00. Upon
these premises the appellate court concluded that respondent's
payment of P15,000.00 to SPGMI should be applied to his remaining
balance with petitioner thus effectively extinguishing his contractual
obligation. However, it rejected petitioner's claim of force majeure and
ordered the latter to reconstruct the windmill in accordance with the
stipulated one-year guaranty.
His motion for reconsideration having been denied by the Court
of Appeals, petitioner now seeks relief from this Court. He raises two
issues: firstly, whether the agreement to construct the windmill system
included the installation of a deep well and, secondly, whether
petitioner is under obligation to reconstruct the windmill after it
collapsed.
We reverse the appellate court on the first issue but sustain it on
the second.
The preponderance of evidence supports the finding of the trial
court that the installation of a deep well was not included in the
proposals of petitioner to construct a windmill system for
respondent. There were in fact two (2) proposals: one dated 19 May
1987 which pegged the contract price at P87,000.00 (Exh. "1"). This
was rejected by respondent.The other was submitted three days later,
i.e., on 22 May 1987 which contained more specifications but proposed
a lower contract price of P60,000.00 (Exh. "A"). The latter proposal was
accepted by respondent and the construction immediately
followed. The pertinent portions of the first letter-proposal (Exh. "1")
are reproduced hereunder -
In connection with your Windmill System and Installation, we would
like to quote to you as follows:
One (1) Set - Windmill suitable for 2 inches diameter deepwell, 2 HP,
capacity, 14 feet in diameter, with 20 pieces blade, Tower 40 feet high,
including mechanism which is not advisable to operate during extra-
intensity wind. Excluding cylinder pump.
UNIT CONTRACT PRICE P87,000.00
The second letter-proposal (Exh. "A") provides as follows:
In connection with your Windmill system Supply of Labor Materials and
Installation, operated water pump, we would like to quote to you as
follows -
One (1) set - Windmill assembly for 2 inches or 3 inches deep-well
pump, 6 Stroke, 14 feet diameter, 1-lot blade materials, 40 feet Tower
complete with standard appurtenances up to Cylinder pump, shafting
U.S. adjustable International Metal.
One (1) lot - Angle bar, G. I. pipe, Reducer Coupling, Elbow Gate valve,
cross Tee coupling.
One (1) lot - Float valve.
One (1) lot - Concreting materials foundation.
F. O. B. Laguna
Contract Price P60,000.00
Notably, nowhere in either proposal is the installation of a deep
well mentioned, even remotely. Neither is there an itemization or
description of the materials to be used in constructing the deep
well. There is absolutely no mention in the two (2) documents that a
deep well pump is a component of the proposed windmill system. The
contract prices fixed in both proposals cover only the features
specifically described therein and no other. While the words "deep
well" and "deep well pump" are mentioned in both, these do not indicate
that a deep well is part of the windmill system. They merely describe
the type of deep well pump for which the proposed windmill would be
suitable. As correctly pointed out by petitioner, the words "deep
well" preceded by the prepositions "for" and "suitable for" were meant
only to convey the idea that the proposed windmill would be
appropriate for a deep well pump with a diameter of 2 to 3 inches. For if
the real intent of petitioner was to include a deep well in the agreement
to construct a windmill, he would have used instead the
conjunctions "and" or "with." Since the terms of the instruments are
clear and leave no doubt as to their meaning they should not be
disturbed.
Moreover, it is a cardinal rule in the interpretation of contracts
that the intention of the parties shall be accorded primordial
consideration[5] and, in case of doubt, their contemporaneous and
subsequent acts shall be principally considered. [6] An examination of
such contemporaneous and subsequent acts of respondent as well as
the attendant circumstances does not persuade us to uphold him.
Respondent insists that petitioner verbally agreed that the
contract price of P60,000.00 covered the installation of a deep well
pump. He contends that since petitioner did not have the capacity to
install the pump the latter agreed to have a third party do the work the
cost of which was to be deducted from the contract price. To prove his
point, he presented Guillermo Pili of SPGMI who declared that
petitioner Tanguilig approached him with a letter from respondent
Herce Jr. asking him to build a deep well pump as "part of the
price/contract which Engineer (Herce) had with Mr. Tanguilig." [7]
We are disinclined to accept the version of respondent. The claim
of Pili that Herce Jr. wrote him a letter is unsubstantiated. The alleged
letter was never presented in court by private respondent for reasons
known only to him. But granting that this written communication
existed, it could not have simply contained a request for Pili to install a
deep well; it would have also mentioned the party who would pay for
the undertaking. It strains credulity that respondent would keep silent
on this matter and leave it all to petitioner Tanguilig to verbally convey
to Pili that the deep well was part of the windmill construction and that
its payment would come from the contract price of P60,000.00.
We find it also unusual that Pili would readily consent to build a
deep well the payment for which would come supposedly from the
windmill contract price on the mere representation of petitioner, whom
he had never met before, without a written commitment at least from
the former. For if indeed the deep well were part of the windmill
project, the contract for its installation would have been strictly a
matter between petitioner and Pili himself with the former assuming
the obligation to pay the price. That it was respondent Herce Jr. himself
who paid for the deep well by handing over to Pili the amount
of P15,000.00 clearly indicates that the contract for the deep well was
not part of the windmill project but a separate agreement between
respondent and Pili. Besides, if the price of P60,000.00 included the
deep well, the obligation of respondent was to pay the entire amount to
petitioner without prejudice to any action that Guillermo Pili or SPGMI
may take, if any, against the latter. Significantly, when asked why he
tendered payment directly to Pili and not to petitioner,
respondent explained, rather lamely, that he did it "because he has (sic)
the money, so (he) just paid the money in his possession." [8]
Can respondent claim that Pili accepted his payment on
behalf of petitioner? No. While the law is clear that "payment shall
be made to the person in
whose favor theobligation has been constituted, or his successor
in interest, or any person authorized to receive it,".[9] It does not
appear from the record that Pili and/or SPGMI was so authorized.
Respondent cannot claim the benefit of the law concerning
"payments made by a third person." [10] The Civil Code provisions do not
apply in the instant case because no creditor-debtor relationship
between petitioner and Guillermo Pili and/or SPGMI has been
established regarding the construction of the deep well. Specifically,
witness Pili did not testify that he entered into a contract with
petitioner for the construction of respondent's deep well. If SPGMI was
really commissioned by petitioner to construct the deep well, an
agreement particularly to this effect should have been entered into.
The contemporaneous and subsequent acts of the parties
concerned effectively belie respondent's assertions. These
circumstances only show that the construction of the well by SPGMI
was for the sole account of respondent and that petitioner merely
supervised the installation of the well because the windmill was to be
connected to it. There is no legal nor factual basis by which this Court
can impose upon petitioner an obligation he did not expressly assume
nor ratify.
The second issue is not a novel one. In a long line of cases [11] this
Court has consistently held that in order for a party to claim exemption
from liability by reason of fortuitous event under Art. 1174 of the Civil
Code the event should be the sole and proximate cause of the loss or
destruction of the object of the contract. In Nakpil vs. Court of Appeals,
[12]
four (4) requisites must concur: (a) the cause of the breach of the
obligation must be independent of the will of the debtor; (b) the event
must be either unforeseeable or unavoidable; (c) the event must be
such as to render it impossible for the debtor to fulfill his obligation in a
normal manner; and, (d) the debtor must be free from any participation
in or aggravation of the injury to the creditor.
Petitioner failed to show that the collapse of the windmill was
due solely to a fortuitous event. Interestingly, the evidence does not
disclose that there was actually a typhoon on the day the windmill
collapsed. Petitioner merely stated that there was a "strong wind." But a
strong wind in this case cannot be fortuitous - unforeseeable nor
unavoidable. On the contrary, a strong wind should be present in places
where windmills are constructed, otherwise the windmills will not turn.
The appellate court correctly observed that "given the newly-
constructed windmill system, the same would not have collapsed had
there been no inherent defect in it which could only be attributable to
the appellee."[13] It emphasized that respondent had in his favor the
presumption that "things have happened according to the ordinary
course of nature and the ordinary habits of life." [14] This presumption
has not been rebutted by petitioner.
Finally, petitioner's argument that private respondent was
already in default in the payment of his outstanding balance
of P15,000.00 and hence should bear his own loss, is untenable. In
reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is
incumbent upon him.[15]When the windmill failed to function properly it
became incumbent upon petitioner to institute the proper repairs in
accordance with the guaranty stated in the contract. Thus, respondent
cannot be said to have incurred in delay; instead, it is petitioner who
should bear the expenses for the reconstruction of the windmill. Article
1167 of the Civil Code is explicit on this point that if a person obliged to
do something fails to do it, the same shall be executed at his cost.
WHEREFORE, the appealed decision is MODIFIED. Respondent
VICENTE HERCE JR. is directed to pay petitioner JACINTO M.
TANGUILIG the balance of P15,000.00 with interest at the legal rate
from the date of the filing of the complaint. In return, petitioner is
ordered to "reconstruct subject defective windmill system, in
accordance with the one-year guaranty" [16]and to complete the same
within three (3) months from the finality of this decision.
SO ORDERED.
 d. Lack of clamp loop deadend materials

e. No locknuts on all bolts.

II. For A-2 construction

a. Improper use of materials for pole top pin

b. Lack of pole top pin

c. No guying

G.R. No. 183872               November 17, 2014 d. Improper use of materials for neutral line

OWEN PROSPER A. MACKAY, Petitioner,  e. Wrong phasing of pole top pin

vs.
SPOUSES DANA CASWELL and CERELINA CASWELL, Respondents.
f. Lack of armor rod (single & double support)

DECISION
III. For Grounding:

DEL CASTILLO, J.:
a. [Substandard] grounding wire
1
This Petition for Review on Certiorari  assails the April 30, 2008
b. Wrong installation of pole grounding wire
Decision2 of the Court of Appeals (CA) in CA-GR. SP No. 97146 which
granted the Petition for Review3 filed therewith, reversed and set aside
the October 31, 2006 Decision4 of the Regional Trial Court (RTC), c. Lack of grounding rods
Branch 70, Iba, Zambales in Civil Case No. RTC-2426-I, and reinstated
the June 29, 2006 Decision5 of the Municipal Trial Court (MTC), San
V. Tapping Point:
Narciso, Zambales in Civil Case No. 538. The MTC Decision dismissed
petitioner Owen Prosper A. Mackay's (Owen) claims against
respondents spouses Dana Caswell and Cerelina Caswell (the Caswells) Lack of fuse cut-out with lightning arrester
and ordered him to pay the latter ₱46,205.00 representing the expenses combination at the tapping point.
they incurred for the rectification of the defective work he did for them.
The Petition also assails the July 24, 2008 Resolution 6 of the CA denying
VI. For Transformer Installation:
Owen's Motion for Reconsideration 7 thereto.

Wrong distance of the transformer from the

Factual Antecedents
neutral line.10

In their search for someone who could provide electrical installation

service in their newly built home in San Narciso, Zambales, the Caswells
asked the sole distributor of electricity in the area, ZambalesII Electric
Cooperative (Zameco II), thru its sub-office manager, Engr. Victor
Pulangco (Engr. Pulangco), how much its service for the installation
would be. Engr. Pulangco quoted an estimate of ₱456,000.00.
However, the Caswells hired Owen who offered to do the job for only
₱250,000.00. With the help of Cesar Badua (Badua) and Albert Galeng,
Owen claimed that the installation was completed and ready for power
service connection as of August 1998. By then, the Caswells had paid
him ₱227,000.00.
At Cerelina Caswell’s (Cerelina) request, Zameco II inspected the
installation work and tested the distribution transformers. 8 The
inspection showed the following defects as specified in Engr. Pulangco’s
letter dated August 11, 1998: 9
I. For A-5 Construction
Because of the deficiencies and other incomplete requirements, Zameco
II refused to provide energization to the Caswell home. The Caswells
thus looked for Owen but he could not be found. Hence, they were
constrained to ask Zameco II to correct all the problems it found. After
the single phase distribution system was completed in accordance with
the standard specifications of Zameco II in January 1999, 11 only then did
the Caswells finally have electricity.
On September 4, 1998, the Caswells executed a Joint Affidavit 12 to
charge Owen and his group of swindling them of ₱227,000.00. The
Caswells alleged that Owen and his group misrepresented themselves
to be people from the National Power Corporation (NAPOCOR). By
reason of the misrepresentation, the Caswells suffered damage as the
electrical installation made were replete with deficiencies such that no
electricity can properly flow to their house. This led to the filing of an
Estafa case under Article 315 paragraph 2(a) of the Revised Penal
Code13 against Owen, docketed as Criminal Case No. RTC-2533-
I.14 However, on ground of reasonable doubt, Owen was acquitted
onMay 15, 2003.15

Still unpaid for the remaining ₱23,000.00 for his installation work,
a. No guying
Owen in turn filed a Complaint 16 for Collection of Sum of Money with
Damages against the Caswells before the MTC, docketed as Civil Case
b. Improper use of deadend materials for neutral No. 538.
line
Owen alleged that out of the ₱250,000.00 contract price for the
c. Lack of armor tape installation of an electrical line, the Caswells have only paid him
₱227,000.00. He thus wanted to recover from the Caswells the
remaining balance of ₱23,000.00, as well as damages on account of
sleepless nights, serious anxiety and social humiliation he suffered due
to the Caswells’ malicious filing of estafa case against him.
The Caswells, on the other hand, maintained that Owen is not entitled to
any money. They pointed out that Owen failed to finish the job and
walked out of the contract. Hence, they are the ones entitled to
reimbursement of expenses incurred to correct Owen’s defective work.
As proof of their expenses, the Caswells submitted as evidence a) Engr.
Pulangco’s handwritten receipt of ₱15,400.00 as partial payment for the
materials needed to correct the deficiencies in Owen’s installation
work;17 b) an undated Sales Invoice No. 2029 issued by Peter A. Eduria
Enterprises itemizing nine electrical materials Dana Caswell (Dana)
bought, their quantities, and the total price of ₱53,805.00.00 18 and; c) a
list of all the materials obtained for Zameco’s corrective work with the
corresponding unit prices, labor cost and the total price
charged.19 Owen and Badua testified that they rectified all the
discrepancies that Zameco II found. After the corrections, Owen
informed Engr. Pulangco that the Caswell home was ready for electrical
connection. Hedid not know what Engr. Pulangco did next. Owen
likewise asserted that he even reminded Cerelina to submit to Zameco
II all the documentary requirements for power connection. 20
Ruling of the Municipal Trial Court
Finding the contract entered into by the parties to be a contract for a
piece of work, the MTC relied upon Article 1715 of the Civil Code, viz:
The contractor shall execute the work in such a manner that it has the
qualities agreed upon and has no defects which destroy or lessen its
value or fitness for its ordinary or stipulated use. Should the work be
not of such quality, the employer may require that the contractor
remove the defect or execute another work. If the contractor fails or
refuses to comply with this obligation, the employer may have the
defect removed or another work executed, at the contractor’s cost. The
MTC held that since it was proven that the work of Owen suffers from
deficiencies, the Caswells, pursuant to the above-quoted provision, have
the right to require him to remove the defect or execute another work.
It did not give credence to Owen’s claim that he corrected the
deficiencies for lack of evidence to substantiate the same. The MTC
likewise held that the Caswells had no chance to demand from Owen
the removal of the defector the execution of another work as he was
then nowhere to be found. On the other hand, the Caswells’ evidence
clearly showed that they caused the Zameco II people to rectify the
defects for which they spent ₱69,205.00.
By virtue of Article 1167 21 of the Civil Code, the MTC ruled that the said
₱69,205.00 should be borne by Owen. From the ₱69,205.00, the said
court then deducted the ₱23,000.00 Owen was seeking to collect from
the Caswells. The dispositive portion of the MTC’s June 29, 2006
Decision22 reads:
WHEREFORE, viewed from all the foregoing, judgment is hereby
rendered in favor of the [Caswells] and against [Owen] as follows:
1. Dismissing [Owen’s] claims for lack of merit, and
2. Ordering [Owen] to pay the [Caswells] the amount of
₱46,205.00 representing the rectification cost.
SO ORDERED.23
Owen appealed to the RTC.
Ruling of the Regional Trial Court
In a Decision24 dated October 31, 2006, the RTC reversed and set aside
the MTC Decision. The RTC opined that the Caswells should have first
filed a judicial action for specific performance where there could have
been an exhaustive determination of the quality and acceptability of
Owen’s installation work. By immediately resorting to the service of
Zameco II, the Caswells never afforded Owen the opportunity to correct
the deficiencies in accordance with Article 1715 of the Civil Code. It
noted Cerelina’s testimony during the trial before the MTC where she
was asked if she confronted Owen about the unfinished work. She
answered that Owen did not come to her so she went to Zameco II when
she could no longer wait for electricity.25
Furthermore, the RTC was convinced that Owen kept up his end of the
bargain as shown by Engr. Pulangco’s testimony on cross-examination
that even without replacing the fuse cut-out connection, electricity will
still flow smoothly and will function in the Caswell home. 26
Opining that Owen must be given what is actually due him, the RTC
disposed of the case as follows:
WHEREFORE, the decision of the Municipal Trial Court of San Narciso is
reversed and set aside and judgment is hereby rendered as follows:
1. Ordering the defendants to pay unto the plaintiff the
amount of Twenty Three Thousand Pesos (₱23,000.00)
representing the balance of the price or consideration for his
services in the installation of electrical lines in the
defendants’ home, with legal interest at the rate of six (6%)
[per annum] from the time of the filing of the complaint until
it is fully paid;
2. Ordering the defendants to pay to the plaintiff moral
damages in the amount of TWENTY FIVE THOUSAND PESOS
(₱25,000.00) for their willful non-compliance with their
contractual obligation to the plaintiff, and exemplary
damages in the amount of TWENTYTHOUSAND PESOS
(₱20,000.00) by way of example or correction for the public
good;
3. Ordering the defendants[,] spouses DANA and CERELINA
CASWELL[,] to pay attorney’s fees to the plaintiff in the
amount of THIRTY THOUSAND PESOS (₱30,000.00), the
latter having been haled to court to enforce his contractual
rights;
[4.] Ordering the defendants to pay the costs of this suit.
SO ORDERED.27
Refusing to accept the RTC judgment and heavily relying on the MTC
Decision, the Caswells elevated the case to the CA by way of a Petition
for Review.28
Ruling of the Court of Appeals
In its Decision29 of April 30, 2008, the CA reinstated the MTC Decision. It
reasoned:
The RTC opined that [the Caswells] should have given the contractor
the chance to rectify the flaw in his work. To Our mind, however, the
effort to communicate with [Owen] effectively served as [the Caswells’]
request for the former to rectify the flaws in the contracted work. In
fact, [the Caswells’] act of demanding that [Owen] secure the permit and
to subject the transformer to testing can already be construed as a
substantial compliance with Article 1715. It must be emphasized that it
was [Owen’s]refusal to secure the necessary permits and to comply
with the requirements of Zameco [II] as well as his refusal to
communicate with [the Caswells] that impelled the latter to file a case
for estafa against him. Had he been willing to make good his obligation,
then it would not have been necessary for [the Caswells] to file the said
criminal case. Instead of complying with his end of the bargain, [Owen]
opted to file a case for collection of sum of money with damages. Thus,
any effort to require [Owen] either to rectify his flawed work or to
remove the same would have been futile since [Owen’s] act of
demanding payment through the said complaint showed his belief that
his work in the house was done.
Clearly, the RTC erred in stating that [the Caswells’] failure to file an
action for specific performance led to the presumption that [Owen]
performed his obligations in accordance with their agreement. Said
presumption could not have prevailed in view of the nature of the
contracted work, the ultimate goal of which was to have electricity
flowing into [the Caswell] house. Thus, the thing speaks for itself. Res
ipsa loquitur. This, the RTC failed to consider. Therefore, this Court
finds the decision of the MTC more in accord with law and
jurisprudence.30
His Motion for Reconsideration 31 having been denied by the CA, 32 Owen
argues in this Petition for Review on Certiorari that: 1) he has done the
installation job and that it was not his duty but that of the Caswells to
secure the necessary permits from Zameco II; 2) his acquittal in the
criminal case should have been considered; 3) there is no basis for the
award of the rectification costs as the sales receipt for the alleged
materials used is inadmissible and; 4) the Caswells never demanded
that he remove the defects or execute another work in accordance with
Article 1715 of the Civil Code.
Our Ruling
We deny the Petition.
Owen failed to execute his work in such
a manner that it has no defects which
destroy or lessen its value or fitness for
its ordinary or stipulated use.
Owen insists that as far as he is concerned, he had done what was
required of him. i.e., the installation of electrical materials in the
Caswell home. Anent the permits, he avers that securing the same is not
part of his work but is the responsibility of the Caswells.
Considering all the undisputed facts, the Court, however, finds that the
Caswells were not only after securing permits. They suffered other
major problems as shown by their narration in their Joint Affidavit, viz:
5. That we think they were done in three days, that same week. The
contact man, Owen Mackay, had told us that he would take care of all
permits. He asked us to get a paper done for the permission on one
piece of land. No permits were shown to us. No ZAMECO authorization
[was] ever shown to us. He went to ZAMECO, to tell them it was ready
[for connection]. ZAMECO did not connect because: (1) no permits
[were] requested or [were] given by ZAMECO; (2) transformer allegedly
brand new [and] had to run through testing laboratory. Owen[’s] group
[neither] did the testing nor caused a testing; (3) complete inspection of
installation was [yet] to be done x x x; (4) no installation layout was
provided or presented to ZAMECO; (5) nobody [from Owen’s group
was] around for 4-5 days to x x x talk about our problems. Owen called,
sent word to [us] and we have gone down (3) occasions at night to try
to find him. The three did [a] vanishing act. Finally, [they came] to take
the transformer for testing. [The] one day testing told us by Pulangco
turned into 1 ½ weeks x x x. I had to go pick it up myself at test
complex. Brought the transformer home from Castillejos, August [10,]
1998 with the test results. No response from the people who called
themselves NAPOCOR. After [chasing after] Owen Mackay x x x and
[after] empty promises we were referred to Atty. Pacis, [and] the rest is
still unsettled;33
These circumstances, together with the deficiencies enumerated in
Engr. Pulangco’s August 10, 1998letter, sufficiently explain the delay in
the energization of the Caswell home. Engr. Pulangco’s testimony that
electricity will still work without replacing the fuse cut-out connection
is not enough to negate the fact that Owen’s overall work is not
satisfactory.
Moreover, Owen, in contending that his acquittal in the estafa case
should have been a factor for a favorable decision in this civil case,
relied on a remark by the RTC that referred to an opinion mentioned in
the judgment in the estafa case, i.e., that the delay in supplying power to
the Caswell home could possibly be due to the resentment harbored by
certain employees of Zameco II as they were not chosen to do the
work.34 A perusal, however, of the judgment in Criminal Case No. RTC-
2533-I35 would show that this statement is only a mere obiter. The RTC
cannot hinge on this opinion as this is mere conjecture. Notably, the
Zameco II people were not even parties or witnesses in the estafa case.
Suffice it to say that Owen’s job was not only to finish the electrical
installation work. It was likewise his obligation to do quality work and
to provide quality materials to ensure that electricity would flow in the
Caswell home. For the Caswells to avail of this utility, it is definitely
expected that the electrical materials used should meet the technical
requirements for a service entrance as imposed by the only distributor
of the electricity in the area, Zameco II, so that the latter can supply
residential electric service efficiently and safely to the Caswells.
However, as shown above, Owen failed to execute his work in such a
manner that it has no defects which destroy or lessen its value or
fitness for its ordinary or stipulated use.
The CA correctly ruled that Caswells’
effort to communicate with Owen
effectively served as a demand to rectify
the latter’s work.
Under Article 1715 of the Civil Code, if the work of a contractor has
defects which destroy or lessen its value or fitness for its ordinary or
stipulated use, he may be required to remove the defect or execute
another work. If he fails to do so, he shall be liable for the expenses by
the employer for the correction of the work. The demand required of
the employer under the subject provision need not be in a particular
form. In the case at bar, we agree with the CA that Owen was given the
opportunity to rectify his work. Subsequent to Zameco II’s disapproval
to supply the Caswells electricity for several reasons, the Court gives
credence to the latter’s claim that they looked for Owen to demand a
rectification of the work, but Owen and his group were nowhere to be
found. Had Owen really been readily available to the Caswells to correct
any deficiency in the work, the latter would not have entertained the
thought that they were deceived and would not have been constrained
to undergo the rigors of filing a criminal complaint and testifying
therein. Without doubt, the Caswells exercised due diligence when they
demanded from Owen the proper rectification of his work. As correctly
held by the CA, the Caswells substantially complied with the
requirement of Article 1715 of the Civil Code, viz:
To Our mind, however, the effort to communicate with [Owen]
effectively served as [the Caswells’] request for the former to rectify the
flaws in the contracted work. In fact, [the Caswells’] act of demanding
that [Owen] secure the permit and to subject the transformer to testing
can already be construed as a substantial compliance with Article 1715.
It must be emphasized that it was [Owen’s] refusal to secure the
necessary permits and to comply with the requirements of Zameco [II]
as well as his refusal to communicate with [the Caswells] that impelled
the latter to file a case for estafa against him. Had he been willing to
make good his obligation, then it would not have been necessary for
[the Caswells] to file the said criminal case. Instead of complying with
his end of the bargain, [Owen] opted to file a case for collection of sum
of money with damages. Thus, any effort to require [Owen] either to
rectify his flawed work or to remove the same would have been futile
since [Owen’s] act of demanding payment through the said complaint
showed his belief that his work in the house was done. 36
Furthermore, to require the Caswells to file an action for specific
performance, as opined by the RTC, not only deprives them of hiring
someone else to rectify the work, but also defeats the very purpose of
the contracted work, i.e., to immediately have electricity in their home.
In this situation, time is of the essence.
For Owen’s failure to provide quality WHEREFORE, the instant petition is DENIED. The April 30, 2008
work, he is to reimburse the rectification Decision and July 24, 2008 Resolution of the Court of Appeals in CA-G.R.
costs the Caswells had shouldered as the SP No. 97146, which reinstated the June 29, 2006 Decision of the
latter’s actual damages; the unpaid Municipal Trial Court, San Narciso, Zambales, in Civil Case No. 538, are
compensation Owen is claiming shall be AFFIRMED in toto. No costs.
set-off from the Caswells’ monetary
claims supported by receipts.
SO ORDERED.

he Court recognizes that in view of the substandard work done, the

Caswells necessarily incurred expenses by purchasing materials to
finally get a supply of electricity in their home.

One is entitled to an adequate compensation only for such pecuniary

loss suffered by him as he has duly proved. 37"To justify an award of
actual damages, there must be competent proof of the actual amount of
loss, credence can be given only to claims which are duly supported by
receipts."38 The claimant must prove the actual amount of loss with a
reasonable degree of certainty premised upon competent proof and on
the best evidence obtainable.39 In the case at bar, we give credence to
the documents relied upon by the CA and the MTC in arriving at the
rectification cost, i.e., a) Engr. Pulangco’s handwritten receipt of
₱15,400.00, to which he had testified before the court that he had
indeed received such amount and b) the Sales Invoice No. 2029 issued
by Peter A. Eduria Enterprises reflecting the total cost of ₱53,805.00.00.

Notably, Owen assails the admissibility of the Sales Invoice, contending

that said document is insufficient to be a basis for computation of
damages as the respective unit price for each item enumerated therein
are lacking. Furthermore, he attempts to highlight that Peter A. Eduria
Enterprises is a non-existing business establishment by submitting the
negative certification of a business name issued by the Department of
Trade and Industry,40 the certification of no record issued by Business
Permit and License Office of Valenzuela City, 41 and the certification of
non-registration of corporation/partnership by the Securities and
Exchange Commission.42

The failure to indicate the unit price of each item in the sales invoice
does not defeat the claim of the Caswells for reimbursement.1âwphi1 In
most cases in the ordinary course of business, sellers issue handwritten
receipts that are perfunctorily filled out without completely stating all
the details of the purchase. This 'flaw' should not be taken against the
Caswells. Besides, if the unit price per

item is an issue, a perusal of Dana's separate list 43 will show the unit
prices of the items in the sales invoice.1âwphi1

With regard to the documentary evidence Owen adduced in his attempt

to show the alleged non-existence of Peter A. Eduria Enterprises, the
negative certifications presented however only highlight the probable
liability of the store with the government for non-compliance with
business registration. Regardless of whether the latter had registered
itself as a business entity with the proper authorities, the documents
Owen relies upon fail to overcome the point of the receipt: that a sale of
electrical items for installation had transpired between the Caswells
and the seller. With the relevant facts established that Zameco II
rejected the quality of Owen's work and that rectifications were made
by installing the necessary materials to meet the electric distributor's
specifications, the said invoice cannot be considered as bereft of
evidentiary value.

It must be noted en passant that Cerelina herself admitted that the

contract price agreed upon was the lump sum of ₱250,000.00, and that
she only paid Owen ₱227,000.00, 44 while the dispositive portion of the
MTC Decision stated that Owen's claims are dismissed, the lower court
implies that the ₱23,000.00 unpaid compensation he sought to recover
from the Caswells shall not be given directly to him, offsetting the said
amount from the rectification cost that the Caswells had prayed for. In
effect, under the circumstances, we deem this fair and just to measure
the actual damages due the Caswells by reducing the cost they
shouldered to repair the defects with the unpaid amount of the contract
price due Owen.
B. Irreglarity in Performance
G.R. No. L-4811             July 31, 1953
CHARLES F. WOODHOUSE, plaintiff-appellant,  he was the owner, or was about to become owner of an exclusive
vs.
FORTUNATO F. HALILI, defendant-appellant.
Tañada, Pelaez & Teehankee for defendant and appellant.
Gibbs, Gibbs, Chuidian & Quasha for plaintiff and appellant.
LABRADOR, J.:
On November 29, 1947, the plaintiff entered on a written agreement,
Exhibit A, with the defendant, the most important provisions of which
are (1) that they shall organize a partnership for the bottling and
distribution of Mision soft drinks, plaintiff to act as industrial partner or
manager, and the defendant as a capitalist, furnishing the capital
necessary therefor; (2) that the defendant was to decide matters of
general policy regarding the business, while the plaintiff was to attend
to the operation and development of the bottling plant; (3) that the
plaintiff was to secure the Mission Soft Drinks franchise for and in
behalf of the proposed partnership; and (4) that the plaintiff was to
receive 30 per cent of the net profits of the business. The above
agreement was arrived at after various conferences and consultations
by and between them, with the assistance of their respective attorneys.
Prior to entering into this agreement, plaintiff had informed the Mission
Dry Corporation of Los Angeles, California, U.S.A., manufacturers of the
bases and ingridients of the beverages bearing its name, that he had
interested a prominent financier (defendant herein) in the business,
who was willing to invest half a million dollars in the bottling and
distribution of the said beverages, and requested, in order that he may
close the deal with him, that the right to bottle and distribute be
granted him for a limited time under the condition that it will finally be
transferred to the corporation (Exhibit H). Pursuant for this request,
plaintiff was given "a thirty-days" option on exclusive bottling and
distribution rights for the Philippines" (Exhibit J). Formal negotiations
between plaintiff and defendant began at a meeting on November 27,
1947, at the Manila Hotel, with their lawyers attending. Before this
meeting plaintiff's lawyer had prepared the draft of the agreement,
Exhibit II or OO, but this was not satisfactory because a partnership,
instead of a corporation, was desired. Defendant's lawyer prepared
after the meeting his own draft, Exhibit HH. This last draft appears to be
the main basis of the agreement, Exhibit A.
The contract was finally signed by plaintiff on December 3, 1947.
Plaintiff did not like to go to the United States without the agreement
being not first signed. On that day plaintiff and defendant went to the
United States, and on December 10, 1947, a franchise agreement
(Exhibit V) was entered into the Mission Dry Corporation and Fortunato
F. Halili and/or Charles F. Woodhouse, granted defendant the exclusive
right, license, and authority to produce, bottle, distribute, and sell
Mision beverages in the Philippines. The plaintiff and the defendant
thereafter returned to the Philippines. Plaintiff reported for duty in
January, 1948, but operations were not begun until the first week of
February, 1948. In January plaintiff was given as advance, on account of
profits, the sum of P2,000, besides the use of a car; in February, 1948,
also P2,000, and in March only P1,000. The car was withdrawn from
plaintiff on March 9, 1948.
When the bottling plant was already on operation, plaintiff demanded
of defendant that the partnership papers be executed. At first defendant
executed himself, saying there was no hurry. Then he promised to do so
after the sales of the product had been increased to P50,000. As nothing
definite was forthcoming, after this condition was attained, and as
defendant refused to give further allowances to plaintiff, the latter
caused his attorneys to take up the matter with the defendant with a
view to a possible settlement. as none could be arrived at, the present
action was instituted.
In his complaint plaintiff asks for the execution of the contract of
partnership, an accounting of the profits, and a share thereof of 30 per
cent, as well as damages in the amount of P200,000. In his answer
defendant alleges by way of defense (1) that defendant's consent to the
agreement, Exhibit A, was secured by the representation of plaintiff that
bottling franchise, which representation was false, and plaintiff did not
secure the franchise, but was given to defendant himself; (2) that
defendant did not fail to carry out his undertakings, but that it was
plaintiff who failed; (3) that plaintiff agreed to contribute the exclusive
franchise to the partnership, but plaintiff failed to do so. He also
presented a counter-claim for P200,000 as damages. On these issues the
parties went to trial, and thereafter the Court of First Instance rendered
judgment ordering defendant to render an accounting of the profits of
the bottling and distribution business, subject of the action, and to pay
plaintiff 15 percent thereof. it held that the execution of the contract of
partnership could not be enforced upon the parties, but it also held that
the defense of fraud was not proved. Against this judgment both parties
have appealed.
The most important question of fact to be determined is whether
defendant had falsely represented that he had an exclusive franchise to
bottle Mission beverages, and whether this false representation or
fraud, if it existed, annuls the agreement to form the partnership. The
trial court found that it is improbable that defendant was never shown
the letter, Exhibit J, granting plaintiff had; that the drafts of the contract
prior to the final one can not be considered for the purpose of
determining the issue, as they are presumed to have been already
integrated into the final agreement; that fraud is never presumed and
must be proved; that the parties were represented by attorneys, and
that if any party thereto got the worse part of the bargain, this fact
alone would not invalidate the agreement. On this appeal the defendant,
as appellant, insists that plaintiff did represent to the defendant that he
had an exclusive franchise, when as a matter of fact, at the time of its
execution, he no longer had it as the same had expired, and that,
therefore, the consent of the defendant to the contract was vitiated by
fraud and it is, consequently, null and void.
Our study of the record and a consideration of all the surrounding
circumstances lead us to believe that defendant's contention is not
without merit. Plaintiff's attorney, Mr. Laurea, testified that Woodhouse
presented himself as being the exclusive grantee of a franchise, thus:
A. I don't recall any discussion about that matter. I took along
with me the file of the office with regards to this matter. I
notice from the first draft of the document which I prepared
which calls for the organization of a corporation, that the
manager, that is, Mr. Woodhouse, is represented as being the
exclusive grantee of a franchise from the Mission Dry
Corporation. . . . (t.s.n., p.518)
As a matter of fact, the first draft that Mr. Laurea prepared, which was
made before the Manila Hotel conference on November 27th, expressly
states that plaintiff had the exclusive franchise. Thus, the first
paragraph states:
Whereas, the manager is the exclusive grantee of a franchise
from the Mission Dry Corporation San Francisco, California, for
the bottling of Mission products and their sale to the public
throughout the Philippines; . . . .
3. The manager, upon the organization of the said
corporation, shall forthwith transfer to the said corporation
his exclusive right to bottle Mission products and to sell them
throughout the Philippines. . . . .
(Exhibit II; emphasis ours)
The trial court did not consider this draft on the principle of integration
of jural acts. We find that the principle invoked is inapplicable, since the
purpose of considering the prior draft is not to vary, alter, or modify the
agreement, but to discover the intent of the parties thereto and the
circumstances surrounding the execution of the contract. The issue of
fact is: Did plaintiff represent to defendant that he had an exclusive
franchise? Certainly, his acts or statements prior to the agreement are
essential and relevant to the determination of said issue. The act or
statement of the plaintiff was not sought to be introduced to change or
alter the terms of the agreement, but to prove how he induced the
defendant to enter into it — to prove the representations or
inducements, or fraud, with which or by which he secured the other
party's consent thereto. These are expressly excluded from the parol
evidence rule. (Bough and Bough vs. Cantiveros and Hanopol, 40 Phil.,
209; port Banga Lumber Co. vs. Export & Import Lumber Co., 26 Phil.,
602; III Moran 221,1952 rev. ed.) Fraud and false representation are an
incident to the creation of a jural act, not to its integration, and are not
governed by the rules on integration. Were parties prohibited from
proving said representations or inducements, on the ground that the
agreement had already been entered into, it would be impossible to
prove misrepresentation or fraud. Furthermore, the parol evidence rule
expressly allows the evidence to be introduced when the validity of an
instrument is put in issue by the pleadings (section 22, par. (a), Rule
123, Rules of Court),as in this case.
That plaintiff did make the representation can also be easily gleaned
from his own letters and his own testimony. In his letter to Mission Dry
Corporation, Exhibit H, he said:.
. . . He told me to come back to him when I was able to speak
with authority so that we could come to terms as far as he
and I were concerned. That is the reason why the cable was
sent. Without this authority, I am in a poor bargaining
position. . .
I would propose that you grant me the exclusive bottling and
distributing rights for a limited period of time, during which I
may consummate my plants. . . .
By virtue of this letter the option on exclusive bottling was given to the
plaintiff on October 14, 1947. (See Exhibit J.) If this option for an
exclusive franchise was intended by plaintiff as an instrument with
which to bargain with defendant and close the deal with him, he must
have used his said option for the above-indicated purpose, especially as
it appears that he was able to secure, through its use, what he wanted.
Plaintiff's own version of the preliminary conversation he had with
defendant is to the effect that when plaintiff called on the latter, the
latter answered, "Well, come back to me when you have the authority to
operate. I am definitely interested in the bottling business." (t. s. n., pp.
60-61.) When after the elections of 1949 plaintiff went to see the
defendant (and at that time he had already the option), he must have
exultantly told defendant that he had the authority already. It is
improbable and incredible for him to have disclosed the fact that he
had only an option to the exclusive franchise, which was to last thirty
days only, and still more improbable for him to have disclosed that, at
the time of the signing of the formal agreement, his option had already
expired. Had he done so, he would have destroyed all his bargaining
power and authority, and in all probability lost the deal itself.
The trial court reasoned, and the plaintiff on this appeal argues, that
plaintiff only undertook in the agreement "to secure the Mission Dry
franchise for and in behalf of the proposed partnership." The existence
of this provision in the final agreement does not militate against
plaintiff having represented that he had the exclusive franchise; it
rather strengthens belief that he did actually make the representation.
How could plaintiff assure defendant that he would get the franchise for
the latter if he had not actually obtained it for himself? Defendant would
not have gone into the business unless the franchise was raised in his
name, or at least in the name of the partnership. Plaintiff assured
defendant he could get the franchise. Thus, in the draft prepared by
defendant's attorney, Exhibit HH, the above provision is inserted, with
the difference that instead of securing the franchise for the defendant,
plaintiff was to secure it for the partnership. To show that the insertion
of the above provision does not eliminate the probability of plaintiff
representing himself as the exclusive grantee of the franchise, the final
agreement contains in its third paragraph the following:
. . . and the manager is ready and willing to allow the
capitalists to use the exclusive franchise . . .
and in paragraph 11 it also expressly states:
1. In the event of the dissolution or termination of the
partnership, . . . the franchise from Mission Dry Corporation
shall be reassigned to the manager.
These statements confirm the conclusion that defendant believed, or
was made to believe, that plaintiff was the grantee of an exclusive
franchise. Thus it is that it was also agreed upon that the franchise was
to be transferred to the name of the partnership, and that, upon its
dissolution or termination, the same shall be reassigned to the plaintiff.
Again, the immediate reaction of defendant, when in California he
learned that plaintiff did not have the exclusive franchise, was to
reduce, as he himself testified, plaintiff's participation in the net profits
to one half of that agreed upon. He could not have had such a feeling
had not plaintiff actually made him believe that he (plaintiff) was the
exclusive grantee of the franchise.
The learned trial judge reasons in his decision that the assistance of
counsel in the making of the contract made fraud improbable. Not
necessarily, because the alleged representation took place before the
conferences were had, in other words, plaintiff had already represented
to defendant, and the latter had already believed in, the existence of
plaintiff's exclusive franchise before the formal negotiations, and they
were assisted by their lawyers only when said formal negotiations
actually took place. Furthermore, plaintiff's attorney testified that
plaintiff had said that he had the exclusive franchise; and defendant's
lawyer testified that plaintiff explained to him, upon being asked for the
franchise, that he had left the papers evidencing it.(t.s.n., p. 266.)
We conclude from all the foregoing that plaintiff did actually represent
to defendant that he was the holder of the exclusive franchise. The
defendant was made to believe, and he actually believed, that plaintiff
had the exclusive franchise. Defendant would not perhaps have gone to
California and incurred expenses for the trip, unless he believed that
plaintiff did have that exclusive privilege, and that the latter would be
able to get the same from the Mission Dry Corporation itself. Plaintiff
knew what defendant believed about his (plaintiff's) exclusive
franchise, as he induced him to that belief, and he may not be allowed to
deny that defendant was induced by that belief. (IX Wigmore, sec. 2423;
Sec. 65, Rule 123, Rules of Court.)
We now come to the legal aspect of the false representation. Does it
amount to a fraud that would vitiate the contract? It must be noted that
fraud is manifested in illimitable number of degrees or gradations, from
the innocent praises of a salesman about the excellence of his wares to
those malicious machinations and representations that the law
punishes as a crime. In consequence, article 1270 of the Spanish Civil
Code distinguishes two kinds of (civil) fraud, the causal fraud, which
may be a ground for the annulment of a contract, and the incidental
deceit, which only renders the party who employs it liable for damages.
This Court had held that in order that fraud may vitiate consent, it must
be the causal (dolo causante), not merely the incidental (dolo causante),
inducement to the making of the contract. (Article 1270, Spanish Civil
Code; Hill vs. Veloso, 31 Phil. 160.) The record abounds with
circumstances indicative that the fact that the principal consideration,
the main cause that induced defendant to enter into the partnership
agreement with plaintiff, was the ability of plaintiff to get the exclusive
franchise to bottle and distribute for the defendant or for the
partnership. The original draft prepared by defendant's counsel was to
the effect that plaintiff obligated himself to secure a franchise for the
defendant. Correction appears in this same original draft, but the
change is made not as to the said obligation but as to the grantee. In the
corrected draft the word "capitalist"(grantee) is changed to
"partnership." The contract in its final form retains the substituted term
"partnership." The defendant was, therefore, led to the belief that
plaintiff had the exclusive franchise, but that the same was to be
secured for or transferred to the partnership. The plaintiff no longer
had the exclusive franchise, or the option thereto, at the time the
contract was perfected. But while he had already lost his option thereto
(when the contract was entered into), the principal obligation that he
assumed or undertook was to secure said franchise for the partnership,
as the bottler and distributor for the Mission Dry Corporation. We
declare, therefore, that if he was guilty of a false representation, this
was not the causal consideration, or the principal inducement, that led
plaintiff to enter into the partnership agreement.
But, on the other hand, this supposed ownership of an exclusive
franchise was actually the consideration or price plaintiff gave in
exchange for the share of 30 percent granted him in the net profits of
the partnership business. Defendant agreed to give plaintiff 30 per cent
share in the net profits because he was transferring his exclusive
franchise to the partnership. Thus, in the draft prepared by plaintiff's
lawyer, Exhibit II, the following provision exists:
3. That the MANAGER, upon the organization of the said
corporation, shall forthwith transfer to the said
corporation his exclusive right to bottle Mission products and
to sell them throughout the Philippines. As a consideration
for such transfer, the CAPITALIST shall transfer to the
Manager fully paid non assessable shares of the said
corporation . . . twenty-five per centum of the capital stock of
the said corporation. (Par. 3, Exhibit II; emphasis ours.)
Plaintiff had never been a bottler or a chemist; he never had experience
in the production or distribution of beverages. As a matter of fact, when
the bottling plant being built, all that he suggested was about the toilet
facilities for the laborers.
We conclude from the above that while the representation that plaintiff
had the exclusive franchise did not vitiate defendant's consent to the
contract, it was used by plaintiff to get from defendant a share of 30 per
cent of the net profits; in other words, by pretending that he had the
exclusive franchise and promising to transfer it to defendant, he
obtained the consent of the latter to give him (plaintiff) a big slice in the
net profits. This is the dolo incidente defined in article 1270 of the
Spanish Civil Code, because it was used to get the other party's consent
to a big share in the profits, an incidental matter in the agreement.
El dolo incidental no es el que puede producirse en el
cumplimiento del contrato sino que significa aqui, el que
concurriendoen el consentimiento, o precediendolo, no
influyo para arrancar porsi solo el consentimiento ni en la
totalidad de la obligacion, sinoen algun extremo o accidente
de esta, dando lugar tan solo a una accion para reclamar
indemnizacion de perjuicios. (8 Manresa 602.)
Having arrived at the conclusion that the agreement may not be
declared null and void, the question that next comes before us is, May
the agreement be carried out or executed? We find no merit in the claim
of plaintiff that the partnership was already a fait accompli from the
time of the operation of the plant, as it is evident from the very language
of the agreement that the parties intended that the execution of the
agreement to form a partnership was to be carried out at a later date.
They expressly agreed that they shall form a partnership. (Par. No. 1,
Exhibit A.) As a matter of fact, from the time that the franchise from the
Mission Dry Corporation was obtained in California, plaintiff himself
had been demanding that defendant comply with the agreement. And
plaintiff's present action seeks the enforcement of this agreement.
Plaintiff's claim, therefore, is both inconsistent with their intention and
incompatible with his own conduct and suit.
As the trial court correctly concluded, the defendant may not be
compelled against his will to carry out the agreement nor execute the
partnership papers. Under the Spanish Civil Code, the defendant has an
obligation to do, not to give. The law recognizes the individual's
freedom or liberty to do an act he has promised to do, or not to do it, as
he pleases. It falls within what Spanish commentators call a very
personal act (acto personalismo), of which courts may not compel
compliance, as it is considered an act of violence to do so.
Efectos de las obligaciones consistentes en hechos
personalismo.—Tratamos de la ejecucion de las obligaciones
de hacer en el solocaso de su incumplimiento por parte del
deudor, ya sean los hechos personalisimos, ya se hallen en la
facultad de un tercero; porque el complimiento espontaneo
de las mismas esta regido por los preceptos relativos al pago,
y en nada les afectan las disposiciones del art. 1.098.
Esto supuesto, la primera dificultad del asunto consiste en
resolver si el deudor puede ser precisado a realizar el hecho
y porque medios.
Se tiene por corriente entre los autores, y se traslada
generalmente sin observacion el principio romano nemo
potest precise cogi ad factum. Nadie puede ser obligado
violentamente a haceruna cosa. Los que perciben la
posibilidad de la destruccion deeste principio, añ aden que,
aun cuando se pudiera obligar al deudor, no deberia hacerse,
porque esto constituiria una violencia, y noes la
violenciamodo propio de cumplir las obligaciones (Bigot,
Rolland, etc.). El maestro Antonio Gomez opinaba lo mismo
cuandodecia que obligar por la violencia seria infrigir la
libertad eimponer una especie de esclavitud.
xxx     xxx     xxx
En efecto; las obligaciones contractuales no se acomodan
biencon el empleo de la fuerza fisica, no ya precisamente
porque seconstituya de este modo una especie de esclavitud,
segun el dichode Antonio Gomez, sino porque se supone que
el acreedor tuvo encuenta el caracter personalisimo del
hecho ofrecido, y calculo sobre laposibilidad de que por
alguna razon no se realizase. Repugna,ademas, a la
conciencia social el empleo de la fuerza publica, mediante
coaccion sobre las personas, en las relaciones puramente
particulares; porque la evolucion de las ideas ha ido
poniendo masde relieve cada dia el respeto a la personalidad
humana, y nose admite bien la violencia sobre el individuo la
cual tiene caracter visiblemente penal, sino por motivos que
interesen a la colectividad de ciudadanos. Es, pues, posible y
licita esta violencia cuando setrata de las obligaciones que
hemos llamado ex lege, que afectanal orden social y a la
entidad de Estado, y aparecen impuestas sinconsideracion a
las conveniencias particulares, y sin que por estemotivo
puedan tampoco ser modificadas; pero no debe serlo
cuandola obligacion reviste un interes puramente particular,
como sucedeen las contractuales, y cuando, por
consecuencia, paraceria salirseel Estado de su esfera propia,
entrado a dirimir, con apoyo dela fuerza colectiva, las
diferencias producidas entre los ciudadanos. (19 Scaevola
428, 431-432.)
The last question for us to decide is that of damages,damages that
plaintiff is entitled to receive because of defendant's refusal to form the
partnership, and damages that defendant is also entitled to collect
because of the falsity of plaintiff's representation. (Article 1101, Spanish
Civil Code.) Under article 1106 of the Spanish Civil Code the measure of
damages is the actual loss suffered and the profits reasonably expected
to be received, embraced in the terms daño emergente and lucro
cesante. Plaintiff is entitled under the terms of the agreement to 30 per
cent of the net profits of the business. Against this amount of damages,
we must set off the damage defendant suffered by plaintiff's
misrepresentation that he had obtained a very high percentage of share
in the profits. We can do no better than follow the appraisal that the
parties themselves had adopted.
When defendant learned in Los Angeles that plaintiff did not have the
exclusive franchise which he pretended he had and which he had
agreed to transfer to the partnership, his spontaneous reaction was to
reduce plaintiff's share form 30 per cent to 15 per cent only, to which
reduction defendant appears to have readily given his assent. It was
under this understanding, which amounts to a virtual modification of
the contract, that the bottling plant was established and plaintiff
worked as Manager for the first three months. If the contract may not
be considered modified as to plaintiff's share in the profits, by the
decision of defendant to reduce the same to one-half and the assent
thereto of plaintiff, then we may consider the said amount as a fair
estimate of the damages plaintiff is entitled to under the principle
enunciated in the case of Varadero de Manila vs. Insular Lumber Co., 46
Phil. 176. Defendant's decision to reduce plaintiff's share and plaintiff's
consent thereto amount to an admission on the part of each of the
reasonableness of this amount as plaintiff's share. This same amount
was fixed by the trial court. The agreement contains the stipulation that
upon the termination of the partnership, defendant was to convey the
franchise back to plaintiff (Par. 11, Exhibit A). The judgment of the trial
court does not fix the period within which these damages shall be paid
to plaintiff. In view of paragraph 11 of Exhibit A, we declare that
plaintiff's share of 15 per cent of the net profits shall continue to be paid
while defendant uses the franchise from the Mission Dry Corporation.
With the modification above indicated, the judgment appealed from is
hereby affirmed. Without costs.
Paras, C.J., Pablo, Bengzon, Tuason, Montemayor, Reyes, Jugo and
Bautista Angelo, JJ., concur.
G.R. No. 108253 February 23, 1994
LYDIA L. GERALDEZ, petitioner, 
vs.
HON. COURT OF APPEALS and KENSTAR TRAVEL
CORPORATION, respondents.
Natividad T. Perez for petitioner.
Bito, Lozada, Ortega & Castillo for private respondent.
REGALADO, J.:
Our tourism industry is not only big business; it is a revenue support of
the nation's economy. It has become a matter of public interest as to call
for its promotion and regulation on a cabinet level. We have special
laws and policies for visiting tourists, but such protective concern has
not been equally extended to Filipino tourists going abroad. Thus, with
the limited judicial relief available within the ambit of present laws, our
tourists often prefer who fail to deliver on their undertakings. This case
illustrates the recourse of one such tourist who refused to forget.
An action for damages by reason of contractual breach was filed by
petitioner Lydia L. Geraldez against private respondent Kenstar Travel
Corporation, docketed as Civil Case No. Q-90-4649 of the Regional Trial
Court of Quezon City, Branch 80. 1 After the parties failed to arrive at an
amicable settlement, trial on the merits ensued.
Culling from the records thereof, we find that sometime in October,
1989, Petitioner came to know about private respondent from
numerous advertisements in newspapers of general circulation
regarding tours in Europe. She then contacted private respondent by
phone and the latter sent its representative, Alberto Vito Cruz, who
gave her the brochure for the tour and later discussed its highlights.
The European tours offered were classified into four, and petitioner
chose the classification denominated as "VOLARE 3" covering a 22-day
tour of Europe for $2,990.00. She paid the total equivalent amount of
P190,000.00 charged by private respondent for her and her sister,
Dolores.
Petitioner claimed that, during the tour, she was very uneasy and
disappointed when it turned out that, contrary to what was stated in
the brochure, there was no European tour manager for their group of
tourists, the hotels in which she and the group were bullited were not
first-class, the UGC Leather Factory which was specifically added as a
highlight of the tour was not visited, and the Filipino lady tour guide by
private respondent was a first timer, that is, she was performing her
duties and responsibilities as such for the first time.2
In said action before the Regional Trial Court of Quezon City, petitioner
likewise moved for the issuance of a writ of preliminary attachment
against private respondent on the ground that it committed fraud in
contracting an obligation, as contemplated in Section 1(d), Rule 57 of
the Rules of Court, to which no opposition by the latter appears on the
record. This was granted by the court a quo3 but the preliminary
attachment was subsequently lifted upon the filing by private
respondent of a counterbond amounting to P990,000.00.4
During the pendency of said civil case for damages, petitioner also filed
other complaints before the Department of Tourism in DOT Case No.
90-121 and the Securities and Exchange Commission in PED Case No.
90-3738,5wherein, according to petitioner, herein private respondent
was meted out a fine of P10,000.00 by the Commission and P5,000.00
by the Department,6 which facts are not disputed by private respondent
in its comment on the present petition.
On July 9, 1991, the court a quo rendered its decision 7 ordering private
respondent to pay petitioner P500.000.00 as moral damages,
P200,000.00 as nominal damages, P300,000.00 as exemplary damages,
P50,000.00 as and for attorney's fees, and the costs of the suit. 8 On
appeal, respondent court 9 deleted the award for moral and exemplary
damages, and reduced the awards for nominal damages and attorney's
fees to P30,000.00 and P10,000.00, respectively. 10
Hence, the instant petition from which, after sifting through the blades
of contentions alternately thrust and parried in the exchanges of the
parties, the pivotal issue that emerges is whether or not private
respondent acted in bad faith or with gross negligence in discharging its
obligations under the contract.
Both the respondent court and the court a quo agree that private
respondent failed to comply faithfully with its commitments under the
Volare 3 tour program, more particularly in not providing the members
of the tour group with a European tour manger whose duty, inter alia,
was to explain the points of interest of and familiarize the tour group
with the places they would visit in Europe, and in assigning instead a
first timer Filipino tour guide, in the person of Rowena Zapanta, 11 to
perform that role which definitely requires experience and knowledge
of such places. It is likewise undisputed that while the group was able to
pay a visit to the site of the UGC Leather Factory, they were brought
there at a very late hour such that the factory was already closed and
they were unable to make purchases at supposedly discounted
prices. 12 As to the first-class hotels, however, while the court a
quo found that the hotels were not fist-class, respondent court believed
otherwise, or that, at least, there was substantial compliance with such
a representation.
While clearly there was therefore a violation of the rights of petitioner
under the aforementioned circumstances, respondent court, contrary to
the findings of the trial court, ruled that no malice or bad faith could be
imputed to private respondent, hence there is no justification for the
award of moral and exemplary damages. Furthermore, it held that
while petitioner is entitled to nominal damages, the amount awarded by
the trial court was unconscionable since petitioner did not suffer actual
or substantial damage from the breach of contract, 13 hence its
reduction of such award as hereinbefore stated.
After thorough and painstaking scrutiny of the case records of both the
trial and appellate courts, we are satisfactorily convinced, and so hold,
that private respondent did commit fraudulent misrepresentations
amounting to bad faith, to the prejudice of petitioner and the members
of the tour group.
By providing the Volare 3 tourist group, of which petitioner was a
member, with an inexperienced and a first timer tour escort, private
respondent manifested its indifference to the convenience, satisfaction
and peace of mind of its clients during the trip, despite its express
commitment to provide such facilities under the Volare 3 Tour Program
which had the grandiose slogan "Let your heart sing. 14
Evidently, an inexperienced tour escort, who admittedly had not even
theretofore been to Europe, 15 cannot effectively acquaint the tourists
with the interesting areas in the cities and places included in the
program, or to promptly render necessary assistance, especially where
the latter are complete strangers thereto, like witnesses Luz Sui Haw
and her husband who went to Europe for their honeymoon. 16
We agree with petitioner that the selection of Zapanta as the group's
tour guide was deliberate and conscious choice on the part of private
respondent in order to afford her an on-the-job training and equip her
with the proper opportunities so as to later qualify her as an
"experienced" tour guide and eventually be an asset of respondent
corporation. 17 Unfortunately, this resulted in a virtual project
experimentation with petitioner and the members of the tour as the
unwitting participants.
We are, therefore, one with respondent court in faulting private
respondent's choice of Zapanta as a qualified tour guide for the Volare 3
tour package. It brooks no argument that to be true to its undertakings,
private respondent should have selected an experienced European tour
guide, or it could have allowed Zapanta to go merely as an understudy
under the guidance, control and supervision of an experienced and
competent European or Filipino tour guide, 18 who could give her the
desired training.
Moreover, a tour guide is supposed to attend to the routinary needs of
the tourists, not only when the latter ask for assistance but at the
moment such need becomes apparent. In other words, the tour guide,
especially by reason of her experience in previous tours, must be able to
anticipate the possible needs and problems of the tourists instead of
waiting for them to bring it to her attention. While this is stating the
obvious, it is her duty to see to it that basic personal necessities such as
soap, towels and other daily amenities are provided by the hotels. It is
also expected of her to see to it that the tourists are provided with
sanitary surroundings and to actively arrange for medical attention in
case of accidents, as what befell petitioner's sister and wherein the
siblings had to practically fend for themselves since, after merely calling
for an ambulance, Zapanta left with the other tour participants. 19
Zapanta fell far short of the performance expected by the tour group,
her testimony in open court being revelatory of her inexperience even
on the basic function of a tour guide, to wit:
Q Now, are you aware that
there were times that the
tourists under the "Volare 3"
were not provided with soap
and towels?
A They did not tell me that
but I was able to ask them
later on but then nobody is
complaining. 20 . . . .
The inability of the group to visit the leather factory is likewise
reflective of the neglect and ineptness of Zapanta in attentively
following the itinerary of the day. This incompetence must necessarily
be traced to the lack of due diligence on the part of private respondent
in the selection of its employees. It is true that among the thirty-two
destinations, which included twenty-three cities and special visits to
nine tourist spots, this was the only place that was not visited. 21 It must
be noted, however, that the visit to the UGC Leather Factory was one of
the highlights 22 of the Volare 3 program which even had to be
specifically inserted in the itinerary, hence it was incumbent upon the
organizers of the tour to take special efforts to ensure the same.
Besides, petitioner did expect much from the visit to that factory since it
was represented by private respondent that quality leather goods could
be bought there at lower prices. 23
Private respondent represents Zapanta's act of making daily overseas
calls to Manila as an exercise of prudence and diligence on the latter's
part as a tour guide. 24 It further claims that these calls were needed so
that it could monitor the progress of the tour and respond to any
problem immediately. 25 We are not persuaded. The truth of the matter
is that Zapanta, as an inexperienced trainee-on-the-job, was required to
make these calls to private respondent for the latter to gauge her ability
in coping with her first assignment and to provide instructions to her. 26
Clearly, therefore, private respondent's choice of Zapanta as the tour
guide is a manifest disregard of its specific assurances to the tour group,
resulting in agitation and anxiety on their part, and which deliberate
omission is contrary to the elementary rules of good faith and fair play.
It is extremely doubtful if any group of Filipino tourists would
knowingly agree to be used in effect as guinea pigs in an employees'
training program of a travel agency, to be conducted in unfamiliar
European countries with their diverse cultures, lifestyles and languages.
On the matter of the European tour manager, private respondent's
advertisement in its tour contract declares and represents as follows:
FILIPINO TOUR ESCORT!
He will accompany you throughout Europe. He
speaks your language, shares your culture and
feels your excitement.
He won't be alone because you will also be
accompanied by a . . .
EUROPEAN TOUR MANAGER!
You get the best of both worlds. Having done so
may tours in the past with people like you, he
knows your sentiments, too. So knowledgeable
about Europe, there is hardly a question he can't
answer. 27
Private respondent contends that the term "European Tour Manager"
does not refer to an individual but to an organization, allegedly the
Kuoni Travel of Switzerland which supposedly prepared the itinerary
for its "Volare Europe Tour," negotiated with all the hotels in Europe,
selected tourist spots and historical places to visit, and appointed
experienced local tour guides for the tour group. 28
We regret this unseemly quibbling which perforce cannot be allowed to
pass judicial muster.
A cursory reading of said advertisement will readily reveal the express
representation that the contemplated European tour manager is a
natural person, and not a juridical one as private respondent asserts. A
corporate entity could not possibly accompany the members of the tour
group to places in Europe; neither can it answer questions from the
tourists during the tour. Of course, it is absurd that if a tourist would
want to know how he could possibly go to the nearest store or
supermarket, he would still have to call Kuoni Travel of Switzerland.
Furthermore, both lower courts observed, and we uphold their
observations, that indeed private respondent had the obligation to
provide the tour group not only with a European tour manger, but also
with local European tour guides. The latter, parenthetically, were
likewise never made available. 29 Zapanta claims that she was
accompanied by a European local tour guide in most of the major cities
in Europe. We entertain serious doubts on, and accordingly reject, this
pretension for she could not even remember the name of said European
tour guide. 30 If such a guide really existed, it is incredible why she could
not even identify the former when she testified a year later, despite the
length of their sojourn and the duration of their association.
As to why the word "he" was used in the aforequoted advertisement,
private respondent maintains that the pronoun "he" also includes the
word "it," as where it is used as a "nominative case form in general
statements (as in statutes) to include females, fictitious persons (as
corporations)." 31 We are constrained to reject this submission as
patently strained and untenable. As already demonstrated, it is
incredible that the word "he" was used by private respondent to denote
an artificial or corporate being. From its advertisement, it is beyond
cavil that the import of the word "he" is a natural and not a juridical
person. There is no need for further interpretation when the wordings
are clear. The meaning that will determine the legal effect of a contract
is that which is arrived at by objective standards; one is bound, not by
what he subjectively intends, but by what he leads others reasonably to
think he intends. 32
In an obvious but hopeless attempt to arrive at a possible justification,
private respondent further contends that it explained the concept of a
European tour manager to its clients at the pre-departure briefing,
which petitioner did not attend. 33 Significantly, however, private
respondent failed to present even one member of the tour group to
substantiate its claim. It is a basic rule of evidence that a party must
prove his own affirmative allegations. 34Besides, if it was really its
intention to provide a juridical European tour manager, it could not
have kept on promising its tourists during the tour that a European tour
manager would come, 35 supposedly to join and assist them.
Veering to another line of defense, private respondent seeks sanctuary
in the delimitation of its responsibility as printed on the face of its
brochure on the Volare 3 program, to wit:
RESPONSIBILITIES: KENSTAR TRAVEL
CORPORATION, YOUR TRAVEL AGENT, THEIR
EMPLOYEES OR SUB-AGENTS SHALL BE
RESPONSIBLE ONLY FOR BOOKING AND MAKING
ARRANGEMENTS AS YOUR AGENTS. Kenstar Travel
Corporation, your travel Agent, their employees or
sub-agents assume no responsibility or liability
arising out of or in connection with the services or
lack of services, of any train, vessel, other
conveyance or station whatsoever in the
performance of their duty to the passengers or
guests, neither will they be responsible for any act,
error or omission, or of any damages, injury, loss,
accident, delay or irregularity which may be
occasioned by reason (of) or any defect
in . . . lodging place or any facilities . . . . (Emphasis
by private respondent.) 36
While, generally, the terms of a contract result from the mutual
formulation thereof by the parties thereto, it is of common knowledge
that there are certain contracts almost all the provisions of which have
been drafted by only one party, usually a corporation. Such contracts
are called contracts of adhesion, because the only participation of the
party is the affixing of his signature or his "adhesion" thereto. 37 In
situations like these, when a party imposes upon another a ready-made
form of contract, 38 and the other is reduced to the alternative of taking
it or leaving it, giving no room for negotiation and depriving the latter
of the opportunity to bargain on equal footing, a contract of adhesion
results. While it is true that an adhesion contract is not necessarily void,
it must nevertheless be construed strictly against the one who drafted
the same. 39 This is especially true where the stipulations are printed in
fine letters and are hardly legible as is the case of the tour
contract 40 involved in the present controversy.
Yet, even assuming arguendo that the contractual limitation
aforequoted is enforceable, private respondent still cannot be
exculpated for the reason that responsibility arising from fraudulent
acts, as in the instant case, cannot be stipulated against by reason of
public policy. Consequently, for the foregoing reasons, private
respondent cannot rely on its defense of "substantial compliance" with
the contract.
Private respondent submits likewise that the tour was satisfactory,
considering that only petitioner, out of eighteen participants in the
Volare 3 Tour Program, actually complained. 41 We cannot accept this
argument. Section 28, Rule 130 of the Rules of Court declares that the
rights of a party cannot be prejudiced by an act, declaration,
or omissionof another, a statutory adaptation of the first branch of the
hornbook rule of res inter alios acta  42 which we do not have to belabor
here.
Besides, it is a commonly known fact that there are tourists who,
although the tour was far from what the tour operator undertook under
the contract, choose to remain silent and forego recourse to a suit just
to avoid the expenses, hassle and rancor of litigation, and not because
the tour was in accord with was promised. One does not relish adding
to the bitter memory of a misadventure the unpleasantness of another
extended confrontation. Furthermore, contrary to private respondent's
assertion, not only petitioner but two other members of the tour group,
Luz Sui Haw and Ercilla Ampil, confirmed petitioner's complaints when
they testified as witnesses for her as plaintiff in the court below. 43
Private respondent likewise committed a grave misrepresentation
when it assured in its Volare 3 tour package that the hotels it had
chosen would provide the tourists complete amenities and were
conveniently located along the way for the daily itineraries. 44 It turned
out that some of the hotels were not sufficiently equipped with even the
basic facilities and were at a distance from the cities covered by the
projected tour. Petitioner testified on her disgust with the conditions
and locations of the hotels, thus:
Q And that these bathrooms
ha(ve) bath tub(s) and hot
and cold shower(s)?
A Not all, sir.
Q Did they also provide soap
and towels?
A Not all, sir, some (had) no
toilet paper. 45
Q Which one?
A The 2 stars, the 3 stars and
some 4 stars (sic) hotels.
Q What I am saying . . .
A You are asking a question? I
am answering you. 2 stars, 3
stars and some 4 stars (sic)
hotels, no soap, toilet paper
and (the) bowl 
stinks. . . .
 xxx xxx xxx like to emphasize that we
should enjoy that day of our
life and it seems my feet kept
Q And that except for the fact
on itching because of the
that some of these four star
condition of the hotel. And I
hotels were outside the city
was so dissatisfied because
they provided you with the
the European Tour Manager
comfort?
was not around there (were)
beautiful promises. They kept
A Not all, sir. on telling us that a European
Tour Manager will come
over; until our Paris tour was
Q Can you mention some
ended there was no
which did not provide you
European tour manager. 49
that comfort?

xxx xxx xxx

A For example, if Ramada
Hotel Venezia is in Quezon
City, our hotel is in Q You will file an action
Meycauayan. And if Florence against the defendant
or Ferenze is in manila, our because there was a
hotel is in Muntinlupa. 46 disruption of your happiness,
in your honeymoon, is that
correct?
xxx xxx xxx

A That is one of my causes of

A One more hotel, sir, in
(sic) coming up here.
Barcelona, Hotel Saint
Secondly, i was very
Jacques is also outside the
dissatisfied (with) the
city. Suppose Barcelona is in
condition. Thirdly, that
Quezon City, our hotel is in
Volare 89 it says it will let
Marilao. We looked for this
your heart sing. That is not
hotel inside the city of
true. There was no European
Barcelona for three (3) hours.
tour (manager) and the
We wasted our time looking
highlights of the tour (were)
for almost all the hotels and
very poor. The hotels were
places where to eat. That is
worse (sic) hotels. 50
the kind of tour that you
have. 47
Q All the conditions of the
hotels as you . . .
Luz Sui Haw, who availed of the Volare 3 tour package with her
husband for their honeymoon, shared the sentiments of petitioner and
testified as follows: A Not all but as stated in the
brochure that it is first class
hotel. The first class hotels
Q . . . Will you kindly tell us
state that all things are
why the hotels where you
beautiful and it is neat and
stayed are not considered
clean with complete
first class hotels?
amenities and I encountered
the Luxembourg hotel which
A Because the hotels where is quite very dilapidated
we went, sir, (are) far from because of the flooring when
the City and the materials you step on the side
used are not first class and at "kumikiring" and the
times there were no towels cabinets (are) antiques and
and soap. And the two (2) as honeymooners we don't
hotels in Nevers and Florence want to be disturbed or
the conditions (are) very seen. 51
worse (sic). 48
xxx xxx xxx
Q Considering that you are
honeymooners together with
Q None of these are first class
your husband, what (were)
hotels?
your feelings when you found
out that the condition were
not fulfilled by the A Yes, sir.
defendant?
Q So, for example Ramada
A I would like to be very Hotel Venezia which
honest. I got sick when I according to Miss Geraldez is
reached Florence and half of first class hotel is not first
my body got itch (sic). I think class hotel?
for a honeymooner I would
 A Yes, sir.
Q You share the opinion of
Miss Geraldez?
A Yes, sir.
Q The same is true with
Grand Hotel Palatino which is
not a first class hotel?
A Yes, sir.
Q And Hotel Delta Florence is
not first class hotel?
A That is how I got my itch,
sir. Seven (7) days of itch.
Q How about Hotel Saint-
Jacquez, Paris?
A It is far from the city. It is
not first class hotel.
Q So with Hotel Le Prieure Du
Coeur de Jesus neither a first
class hotel?
A Yes, sir.
Q Hotel De Nevers is not a
first class hotel?
A Yes, sir.
Q Hotel Roc Blanc Andorra is
not a first class hotel?
A Yes, sir.
Q Saint Just Hotel, Barcelona
is not a first class hotel?
A Yes, sir.
Q Hotel Pullman Nice neither
is not a first class hotel?
A Yes, sir.
Q Hotel Prinz Eugen and
Austrotel are not first class
hotels?
A Yes, sir. 52
Private respondent cannot escape responsibility by seeking refuge
under the listing of first-class hotels in publications like the "Official
Hotel and Resort Guide" and Worldwide Hotel Guide." 53 Kuoni Travel,
its tour operator, 54 which prepared the hotel listings, is a European-
based travel agency 55 and, as such, could have easily verified the matter
of first-class accommodations. Nor can it logically claim that the first-
class hotels in Europe may not necessarily be the first-class hotels here
in the Philippines. 56 It is reasonable for petitioner to assume that the
promised first-class hotels are equivalent to what are considered first-
class hotels in Manila. Even assuming arguendo that there is indeed a
difference in classifications, it cannot be gainsaid that a first-class hotel
could at the very least provide basic necessities and sanitary
accommodations. We are accordingly not at all impressed by private
respondent's attempts to trivialize the complaints thereon by petitioner
and her companions.
In a last ditch effort to justify its choice of the hotels, private respondent
contends that it merely provided such "first class" hotels which are
commensurate to the tourists budget, or which were, under the given
circumstances, the "best for their money." It postulated that it could not
have offered better hostelry when the consideration paid for hotel
accommodations by the tour participants was only so much, 57 and the
tour price of $2,990.00 covers a European tour for 22 days inclusive of
lower room rates and meals. 58 this is implausible, self-serving and
borders on sophistry.
The fact that the tourists were to pay a supposedly lower amount, such
that private respondent allegedly retained hardly enough as reasonable
profit, 59 does not justify a substandard form of service in return. It was
private respondent, in the first place, which fixed the charges for the
package tour and determined the services that could be availed of
corresponding to such price. Hence, it cannot now be heard to complain
that it only made a putative marginal profit out of the transaction. if it
could not provide the tour participants with first-class lodgings on the
basis of the amount that they paid, it could and should have instead
increased the price to enable it to arrange for the promised first-class
accommodations.
On the foregoing considerations, respondent court erred in deleting the
award for moral and exemplary damages. Moral damages may be
awarded in breaches of contract where the obligor acted fraudulently
or in bad faith. 60 From the facts earlier narrated, private respondent
can be faulted with fraud in the inducement, which is employed by a
party to a contract in securing the consent of the other.
This fraud or dolo which is present or employed at the time of birth or
perfection of a contract may either be dolocausante or dolo
incidente. The first, or causal fraud referred to in Article 1338, are those
deceptions or misrepresentations of a serious character employed by
one party and without which the other party would not have entered
into the contract. Dolo incidente, or incidental fraud which is referred to
in Article 1344, are those which are not serious in character and
without which the other party would still have entered into the
contract. 61 Dolo causantedetermines or is the essential cause of the
consent, while dolo incidente refers only to some particular or accident
of the 
obligations. 62 The effects of dolo causante are the nullity of the contract
and the indemnification of damages, 63 and dolo incidente also obliges
the person employing it to pay damages. 64
In either case, whether private respondent has committed dolo
causante or dolo incidente by making misrepresentations in its
contracts with petitioner and other members of the tour group, which
deceptions became patent in the light of after-events when, contrary to
its representations, it employed an inexperienced tour guide, housed
the tourist group in substandard hotels, and reneged on its promise of a
European tour manager and the visit to the leather factory, it is
indubitably liable for damages to petitioner.
In the belief that an experienced tour escort and a European tour
manager would accompany them, with the concomitant reassuring and
comforting thought of having security and assistance readily at hand,
petitioner was induced to join the Volare 3 tourists, instead of travelling
alone 65 She likewise suffered serious anxiety and distress when the
group was unable to visit the leather factory and when she did not
receive first-class accommodations in their lodgings which were
misrepresented as first-class hotels. These, to our mind, justify the
award for moral damages, which are in the category of an award
designed to compensate the claimant for that injury which she had
suffered, and not as a penalty on the wrongdoer, 66 we believe that an
award of P100,000.00 is sufficient and reasonable.

When moral damages are awarded, especially for fraudulent conduct,

exemplary damages may also be decreed. Exemplary damages are
imposed by way of example or correction for the public good, in
addition to moral, temperate, liquidated or compensatory damages.
According to the code Commission, exemplary damages are required by
public policy, for wanton acts must be suppressed. 67 An award,
therefore, of P50,000.00 is called for to deter travel agencies from
resorting to advertisements and enticements with the intention of
realizing considerable profit at the expense of the public, without
ensuring compliance with their express commitments. While, under the
present state of the law, extraordinary diligence is not required in
travel or tour contracts, such as that in the case at bar, the travel agency
acting as tour operator must nevertheless be held to strict accounting
for contracted services, considering the public interest in tourism,
whether in the local or in the international scene. Consequently, we
have to likewise reject the theory of private respondent that the
promise it made in the tour brochure may be regarded only as
"commendatory trade talk." 68

With regard to the honorarium for counsel as an item of damages, since

we are awarding moral and exemplary damages, 69 and considering the
legal importance of the instant litigation and the efforts of counsel
evident from the records of three levels of the judicial hierarchy, we
favorably consider the amount of P20,000.00 therefor.

WHEREFORE, premises considered, the decision of respondent Court of

Appeals is hereby SET ASIDE, and another one rendered, ordering
private respondent Kenstar Travel Corporation to pay petitioner Lydia
L. Geraldez the sums of P100,000.00 by way of moral damages,
P50,000.00 as exemplary damages, and P20,000.00 as and for
attorney's fees, with costs against private respondent. The award for
nominal damages is hereby deleted.

Padilla, Nocon and Puno, JJ., concur.

Narvasa, C.J., took no part.

SECOND DIVISION  
  Upon signing the Deed of Absolute Sale, Napala paid P200,000 in cash
  to the Spouses Tongson and issued a postdated Philippine National
SPOUSES CARMEN S. TONGSON G.R. No. 167874 Bank (PNB) check in the amount of P2,800,000,[9] representing the
and JOSE C. TONGSON remaining balance of the purchase price of the subject
substituted by his children namely: Present: property. Thereafter, TCT No. 143020 was cancelled and TCT No. T-
JOSE TONGSON, JR., 186128 was issued in the name of EPBI.[10]
RAUL TONGSON, CARPIO, J., Chairperson,  
TITA TONGSON, BRION, When presented for payment, the PNB check was dishonored for the
GLORIA TONGSON DEL CASTILLO, reason Drawn Against Insufficient Funds. Despite the Spouses
ALMA TONGSON, ABAD, and Tongson's repeated demands to either pay the full value of the check or
Petitioners, PEREZ, JJ. to return the subject parcel of land, Napala failed to do either. Left with
  no other recourse, the Spouses Tongson filed with the Regional Trial
- versus - Court, Branch 16, Davao City a Complaint for Annulment of Contract
  and Damages with a Prayer for the Issuance of a Temporary Restraining
  Order and a Writ of Preliminary Injunction.[11]
EMERGENCY PAWNSHOP BULA, Promulgated:  
INC. and DANILO R. NAPALA, In their Answer, respondents countered that Napala had already
Respondents. January 15, 2010 delivered to the Spouses Tongson the amount of P2,800,000
x----------------------------------------------------------------------------------------- representing the face value of the PNB check, as evidenced by a receipt
x issued by the Spouses Tongson. Respondents pointed out that the
  Spouses Tongson never returned the PNB check claiming that it was
  misplaced. Respondents asserted that the payment they made rendered
DECISION the filing of the complaint baseless.[12]
   
  At the pre-trial, Napala admitted, among others, issuing the postdated
CARPIO, J.: PNB check in the sum of P2,800,000.[13] The Spouses Tongson, on the
  other hand, admitted issuing a receipt which showed that they received
The Case the PNB check from Napala. Thereafter, trial ensued.
   
  The Ruling of the Trial Court
 
Before the Court is a petition for review [1] of the 31 August 2004  

Decision[2] and 10 March 2005 Resolution [3] of the Court of Appeals in The trial court found that the purchase price of the subject property has

CA-G.R. CV No. 58242. In the 31 August 2004 Decision, the Court of not been fully paid and that Napalas assurance to the Spouses Tongson

Appeals partially granted the appeal filed by Emergency Pawnshop that the PNB check would not bounce constituted fraud that induced

Bula, Inc. (EPBI) and Danilo R. Napala (Napala) by modifying the the Spouses Tongson to enter into the sale. Without such assurance, the

decision of the trial court. In the 10 March 2005 Resolution, the Court of Spouses Tongson would not have agreed to the contract of sale.

Appeals denied the motion for partial reconsideration filed by the Accordingly, there was fraud within the ambit of Article 1338 of the

Spouses Jose C. Tongson and Carmen S. Tongson (Spouses Tongson). Civil Code,[14] justifying the annulment of the contract of sale, the award

  of damages and attorneys fees, and payment of costs.

The Facts  
 
  The dispositive portion of the 9 December 1996 Decision of the trial

In May 1992, Napala offered to purchase from the Spouses Tongson court reads:
 
their 364-square meter parcel of land, situated in Davao City and WHEREFORE, judgment is hereby rendered
 
covered by Transfer Certificate of Title (TCT) No. 143020, I Annulling the contract entered into by the plaintiffs
with the defendants;
for P3,000,000. Finding the offer acceptable, the Spouses Tongson II Declaring the writs of preliminary
injunctions issued permanent;
executed with Napala a Memorandum of Agreement [4] dated 8 May III Ordering defendants to:
 
1992. 1)      reco
  nvey the
On 2 December 1992, respondents lawyer Atty. Petronilo A. Raganas, Jr. property
prepared a Deed of Absolute Sale[5] indicating the consideration as subject
only P400,000. When Carmen Tongson noticed that the consideration matter of
was very low, she [complained] and called the attention of Napala but the case
the latter told her not to worry as he would be the one to pay for the to the
taxes and she would receive the net amount of P3,000,000.[6] plaintiffs;
  2)      pay plaintiffs:
To conform with the consideration stated in the Deed of Absolute Sale, ;
the parties executed another Memorandum of Agreement, which b) P50,000 as exemplary damages;
allegedly replaced the first Memorandum of Agreement, [7] showing that c) P20,000 as attorneys fees; and
the selling price of the land was only P400,000.[8] d) P35,602.50 cost of suit broken down as follows:
 P70.00 bond fee 6% per annum computed
P60.00 lis pendens fee from the date of filing of the
P902.00 docket fee complaint on 11 February
P390.00 docket fee 1993, until the finality of the
P8.00 summons fee assailed decision; thereafter,
P12.00 SDF the interest due shall be at
P178.50 Xerox the legal rate of 12% per
P9,000 Sidcor Insurance Bond fee annum until fully paid;
P25,000 Sidcor Insurance Bond fee  
  b) P50,000 as moral damages;
or the total sum of P205,602.50. c) P25,000 as exemplary damages;
  d) P20,000 as attorneys fees; and
It is further ordered that the monetary award be offsetted [sic] to e) The costs of suit in the total amount of P35,602.50.
defendants downpayment of P200,000 thereby leaving a balance  
of P5,602.50.[15] It is understood, however, that plaintiffs entitlement to items a to d, is
  subject to the condition that they have not received the same or
  equivalent amounts in criminal case for Violation of Batas Pambansa
Bilang 22, docketed as Criminal Case No. 30508-93, before the Regional
Respondents appealed to the Court of Appeals. Trial Court of Davao City, Branch 12, instituted against the defendant
Danilo R. Napala by plaintiff Carmen S. Tongson.
   
The Ruling of the Court of Appeals SO ORDERED.[16]
   
   
 
The Court of Appeals agreed with the trial courts finding that
The Spouses Tongson filed a partial motion for reconsideration which
Napala employed fraud when he misrepresented to the Spouses
was denied by the Court of Appeals in its Resolution dated 10 March
Tongson that the PNB check in the amount of P2,800,000 would be
2005.
properly funded at its maturity. However, the Court of Appeals found  
The Issues
that the issuance and delivery of the PNB check and fraudulent  
 
representation made by Napala could not be considered as the The Spouses Tongson raise the following issues:
 
determining cause for the sale of the subject parcel of land. Hence, such
 
fraud could not be made the basis for annulling the contract of 1.     WHETHER THE CONTRACT OF SALE CAN BE
ANNULLED BASED ON THE FRAUD
sale. Nevertheless, the fraud employed by Napala is a proper and EMPLOYED BY NAPALA; and
 
valid basis for the entitlement of the Spouses Tongson to the balance of  
2.     WHETHER THE COURT OF APPEALS ERRED
the purchase price in the amount of P2,800,000 plus interest at the IN REDUCING THE AMOUNT OF DAMAGES
AWARDED BY THE TRIAL COURT.
legal rate of 6% per annum computed from the date of filing of the  
 
complaint on 11 February 1993.  
  The Ruling of the Court
Finding the trial courts award of damages unconscionable, the Court of  
Appeals reduced the moral damages from P100,000 to P50,000 and the  
exemplary damages from P50,000 to P25,000. The petition has merit.
   
 
The dispositive portion of the 31 August 2004 Decision of the Court of On the existence of fraud
 
Appeals reads:  
 
  A contract is a meeting of the minds between two persons, whereby
WHEREFORE, the instant appeal is PARTIALLY
GRANTED. The assailed decision of the Regional one is bound to give something or to render some service to the other.
Trial Court, 11th Judicial Region, Branch 16, Davao
[17]
City, in Civil Case No. 21,858-93, is hereby  A valid contract requires the concurrence of the following essential
MODIFIED, to read:
  elements: (1) consent or meeting of the minds, that is, consent to
WHEREFORE, judgment is hereby
rendered ordering defendants to pay transfer ownership in exchange for the price; (2) determinate subject
plaintiffs:
  matter; and (3) price certain in money or its equivalent. [18]
a) the sum of P2,800,000.00
representing the balance of  
the purchase price of the  
subject parcel of land, plus
interest at the legal rate of
In the present case, there is no question that the subject matter of the
sale is the 364-square meter Davao lot owned by the Spouses Tongson
and the selling price agreed upon by the parties is P3,000,000. Thus,
there is no dispute as regards the presence of the two requisites for a
valid sales contract, namely, (1) a determinate subject matter and (2) a
price certain in money.
 
The problem lies with the existence of the remaining element, which is
consent of the contracting parties, specifically, the consent of the
Spouses Tongson to sell the property to Napala. Claiming that their
consent was vitiated, the Spouses Tongson point out that Napalas
fraudulent representations of sufficient funds to pay for the property
induced them into signing the contract of sale. Such fraud, according to
the Spouses Tongson, renders the contract of sale void.
 
On the contrary, Napala insists that the Spouses Tongson willingly
consented to the sale of the subject property making the contract of sale
valid. Napala maintains that no fraud attended the execution of the
sales contract.
 
The trial and appellate courts had conflicting findings on the question
of whether the consent of the Spouses Tongson was vitiated by fraud.
While the Court of Appeals agreed with the trial courts finding that
Napala employed fraud when he assured the Spouses Tongson that the
postdated PNB check was fully funded when it fact it was not, the Court
of Appeals disagreed with the trial courts ruling that such fraud could
be the basis for the annulment of the contract of sale between the
parties.
 
 
Under Article 1338 of the Civil Code, there is fraud when, through
insidious words or machinations of one of the contracting parties, the
other is induced to enter into a contract which, without them, he would
not have agreed to. In order that fraud may vitiate consent, it must be
the causal (dolo causante), not merely the incidental (dolo incidente),
inducement to the making of the contract. [19] Additionally, the fraud
must be serious.[20]
 
We find no causal fraud in this case to justify the annulment of the
contract of sale between the parties. It is clear from the records that the
Spouses Tongson agreed to sell their 364-square meter Davao property
to Napala who offered to pay P3,000,000 as purchase price
therefor. Contrary to the Spouses Tongsons belief that the fraud
employed by Napala was already operational at the time of the
perfection of the contract of sale, the misrepresentation by Napala that
the postdated PNB check would not bounce on its maturity hardly
equates to dolo causante. Napalas assurance that the check he issued
was fully funded was not the principal inducement for the Spouses
Tongson to sign the Deed of Absolute Sale. Even before Napala issued
the check, the parties had already consented and agreed to the sale
transaction. The Spouses Tongson were never tricked into selling their
property to Napala. On the contrary, they willingly accepted Napalas
offer to purchase the property at P3,000,000. In short, there was a
meeting of the minds as to the object of the sale as well as the
consideration therefor.
Some of the instances where this Court found the existence of causal
fraud include: (1) when the seller, who had no intention to part with
her property, was tricked into believing that what she signed were
papers pertinent to her application for the reconstitution of her burned
certificate of title, not a deed of sale; [21] (2) when the signature of the
authorized corporate officer was forged;[22] or (3) when the seller was
seriously ill, and died a week after signing the deed of sale raising
doubts on whether the seller could have read, or fully understood, the
contents of the documents he signed or of the consequences of his act.
[23]
 Suffice it to state that nothing analogous to these badges of causal
fraud exists in this case.
However, while no causal fraud attended the execution of the sales
contract, there is fraud in its general sense, which involves a false
representation of a fact, [24] when Napala inveigled the Spouses Tongson
to accept the postdated PNB check on the representation that the check
would be sufficiently funded at its maturity. In other words, the fraud
surfaced when Napala issued the worthless check to the Spouses
Tongson, which is definitely not during the negotiation and perfection
stages of the sale. Rather, the fraud existed in the consummation stage
of the sale when the parties are in the process of performing their
respective obligations under the perfected contract of sale. In Swedish
Match, AB v. Court of Appeals,[25] the Court explained the three stages of
a contract, thus:
 
I n general, contracts undergo three distinct stages,
to wit: negotiation; perfection or birth; and
consummation. Negotiation begins from the time
the prospective contracting parties manifest their
interest in the contract and ends at the moment of
agreement of the parties. Perfection or birth of the
contract takes place when the parties agree upon
the essential elements of the contract.
Consummation occurs when the parties fulfill or
perform the terms agreed upon in the contract,
culminating in the extinguishment thereof.
 
 
Indisputably, the Spouses Tongson as the sellers had already performed
their obligation of executing the Deed of Sale, which led to the
cancellation of their title in favor of EPBI. Respondents as the buyers, on
the other hand, failed to perform their correlative obligation of paying
the full amount of the contract price. While Napala paid P200,000 cash
to the Spouses Tongson as partial payment, Napala issued an
insufficiently funded PNB check to pay the remaining balance of P2.8
million. Despite repeated demands and the filing of the complaint,
Napala failed to pay the P2.8 million until the present. Clearly,
respondents committed a substantial breach of their reciprocal
obligation, entitling the Spouses Tongson to the rescission of the sales
contract. The law grants this relief to the aggrieved party, thus:
Article 1191 of the Civil Code provides:
 
Article 1191. The power to rescind obligations is
implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent
upon him.
The injured party may choose between the fulfillment and the
rescission of the obligation, with payment of damages in either case.  He
may also seek rescission, even after he has chosen fulfillment, if the
latter should become impossible.
Article 1385 of the Civil Code provides the effects of rescission, viz:
 
ART. 1385. Rescission creates the obligation to
return the things which were the object of the
contract, together with their fruits, and the price
with its interest; consequently, it can be carried
out only when he who demands rescission can
return whatever he may be obliged to restore.
Neither shall rescission take place when the things which are the object
of the contract are legally in the possession of third persons who did
not act in bad faith.
While they did not file an action for the rescission of the sales contract,
the Spouses Tongson specifically prayed in their complaint for the
annulment of the sales contract, for the immediate execution of a deed
of reconveyance, and for the return of the subject property to them.
[26]
 The Spouses Tongson likewise prayed for such other reliefs which
may be deemed just and equitable in the premises. In view of such
prayer, and considering respondents substantial breach of their
obligation under the sales contract, the rescission of the sales contract
is but proper and justified. Accordingly, respondents must reconvey the
subject property to the Spouses Tongson, who in turn shall refund the
initial payment of P200,000 less the costs of suit.
Napalas claims that rescission is not proper and that he should be given
more time to pay for the unpaid remaining balance of P2,800,000
cannot be countenanced. Having acted fraudulently in performing his
obligation, Napala is not entitled to more time to pay the remaining
balance of P2,800,000, and thereby erase the default or breach that he
had deliberately incurred.[27] To do otherwise would be to sanction a
deliberate and reiterated infringement of the contractual obligations
incurred by Napala, an attitude repugnant to the stability and
obligatory force of contracts. [28]
 
The Court notes that the selling price indicated in the Deed of Absolute
Sale was only P400,000, instead of the true purchase price
of P3,000,000. The undervaluation of the selling price operates to
defraud the government of the taxes due on the basis of the correct
purchase price. Under the law,[29] the sellers have the obligation to pay
the capital gains tax. In this case, Napala undertook to advance the
capital gains tax, among other fees, under the Memorandum of
Agreement, thus:
ATTY. ALABASTRO:
Q Is it not a fact that you were the one who paid for the capital
gains tax?
A No, I only advanced the money.
 
Q To whom?
A To BIR.
 
COURT:
 
Q You were the one who went to the BIR to pay the capital gains tax?
A It is embodied in the memorandum agreement.
[30]
While Carmen Tongson protested against the very low consideration,
she eventually agreed to the reduced selling price indicated in the Deed
of Absolute since Napala assured her not to worry about the taxes and
expenses, as he had allegedly made arrangements with the Bureau of
Internal Revenue (BIR) regarding the payment of the taxes, thus:
 
Q What is the amount in the Deed of Absolute
Sale?
A It was only Four Hundred Thousand. And he told me not to worry
because x x x the BIR and not to worry because he will pay me what was
agreed the amount of Three Million and he will be paying all these
expenses so I was thinking, if that is the case, anyway he paid me the
Two Hundred Thousand cash and a subsequent Two Point Eight Million
downpayment check so I really thought that he was paying the whole
amount.
 
COURT:
Proceed.
ATTY. LIZA:
Q So you eventually agreed that this consideration be reduced to Four
Hundred Thousand Pesos and to be reflected in the Deed of Absolute
Sale?
A Yes, but when I was complaining to him why it is so because I was
worried why that was like that but Mr. Napala told me dont worry
because [he] can remedy this. And I asked him how can [he] remedy
this? And he told me we can make another Memorandum of Agreement.
  such liquidated damages may be recovered,
COURT: nevertheless, before the court may consider the
  question of granting exemplary in addition to the
Q Before you signed the Deed of Absolute Sale, you found out the liquidated damages, the plaintiff must show that
amount? he would be entitled to moral, temperate or
A Yes, sir. compensatory damages were it not for the
  stipulation for liquidated damages. (Emphasis
Q And you complained? supplied)
 
A Yes.[31]  

  Accordingly, we affirm the Court of Appeals awards of moral and

Considering that the undervaluation of the selling price of the subject exemplary damages, which we find equitable under the circumstances

property, initiated by Napala, operates to defraud the government of in this case.

the correct amount of taxes due on the sale, the BIR must therefore be  

informed of this Decision for its appropriate action. WHEREFORE, we PARTIALLY GRANT the petition. We SET
 
ASIDE the 31 August 2004 Decision and 10 March 2005 Resolution of
On the award of damages
the Court of Appeals in CA-G.R. CV No. 58242, except as to the award of
 
moral and exemplary damages, and ORDER the rescission of the
Citing Article 1338 of the Civil Code, the trial court awarded P100,000
contract of sale between the Spouses Tongson and Emergency
moral damages and P50,000 exemplary damages to the Spouses
Pawnshop Bula, Inc.
Tongson. While agreeing with the trial court on the Spouses Tongsons
 
entitlement to moral and exemplary damages, the Court of Appeals  
 
reduced such awards for being unconscionable. Thus, the moral  
 
damages was reduced from P100,000 to P50,000, and the exemplary Let a copy of this Decision be forwarded to the Bureau of Internal
Revenue for its appropriate action.
damages was reduced from P50,000 to P25,000.  
  SO ORDERED.
As discussed above, Napala defrauded the Spouses Tongson in his acts
of issuing a worthless check and representing to the Spouses Tongson
that the check was funded, committing in the process a substantial
breach of his obligation as a buyer. For such fraudulent acts, the law,
specifically the Civil Code, awards moral damages to the injured party,
thus:
 
 
ART. 2220. Willful injury to property may be a
legal ground for awarding moral damages if the
court should find that, under the circumstances,
such damages are justly due. The same rule
applies to breaches of contract where the
defendant acted fraudulently or in bad
faith. (Emphasis supplied)
 
 

Considering that the Spouses Tongson are entitled to moral damages,

the Court may also award exemplary damages, thus:

 
ART. 2232. In contracts and quasi-contracts, the
court may award exemplary damages if the
defendant acted in a wanton, fraudulent, reckless,
oppressive, or malevolent manner.
 
Article 2234. When the amount of the exemplary
damages need not be proved, the plaintiff must
show that he is entitled to moral, temperate or
compensatory damages before the court may
consider the question of whether or not
exemplary damages would be awarded. In case
liquidated damages have been agreed upon,
although no proof of loss is necessary in order that
G.R. No. 154390
METROPOLITAN FABRICS, INC. and ENRIQUE ANG, Petitioners, 
vs.
PROSPERITY CREDIT RESOURCES INC., DOMINGO ANG and CALEB
ANG, Respondents.
DECISION
BERSAMIN, J.:
The genuineness and due execution of a deed of real estate mortgage
that has been acknowledged before a notary public are presumed. Any
allegation of fraud and forgery against the deed must be established by
clear and competent evidence.
The Case
In this appeal, the mortgagors, who were the plaintiffs in the trial court,
seek to reverse and undo the judgment promulgated on July 23,
2002,1 whereby the Court of Appeals (CA) reversed and set aside the
decision rendered in their favor on July 6, 1999 by the Regional Trial
Court (RTC), Branch 107, in Quezon City (declaring the real estate
mortgage and the foreclosure by respondents null and void; and
ordering the reconveyance of the foreclosed properties to
petitioners),2 and dismissed their complaint as well as the counterclaim
of respondents.
Antecedents
The CAsummarized the antecedents as follows:
Metropolitan Fabrics, Incorporated, a family corporation, owned a 5.8
hectare industrial compound at No. 685 Tandang Sora Avenue,
Novaliches, Quezon City which was covered by TCT No. 241597.
Pursuant to a P2 million, 10-year 14% per annum loan agreement with
Manphil Investment Corporation (Manphil) dated April 6, 1983, the
said lot was subdivided into 11 lots, with Manphil retaining four lots as
mortgage security. The other seven lots, now covered by TCT Nos.
317699 and 317702 to 317707, were released to MFI.
In July 1984, MFI sought from PCRI a loan in the amount of
P3,443,330.52, the balance of the cost of its boiler machine, to prevent
its repossession by the seller. PCRI, also a family-owned corporation
licensed since 1980 to engage in money lending, was represented by
Domingo Ang ("Domingo") its president, and his son Caleb, vice-
president. The parties knew each other because they belonged to the
same family association, the Lioc Kui Tong Fraternity.
The decision noted that on the basis only of his interview with Enrique,
feedback from the stockholders and the Chinese community, as well as
information given by his own father Domingo, and without further
checking on the background of Enrique and his business and requiring
him to submit a company profile and a feasibility study of MFI, Caleb
recommended the approval of the P3.44 million with an interest
ranging from 24% to 26% per annum and a term of between five and
ten years (Decision, p. 5). According to the court, it sufficed for Caleb
that Enrique was a well-respected Chinese businessman, that he was
the president of their Chinese family association, and that he had other
personal businesses aside from MFI, such as theAfrica Trading.
The court gave credence to the uncorroborated lone testimony of
Enrique’s daughter Vicky that on August 3, 1984, even before the
signing of the mortgage and loan documents, PCRI released the P3.5
million loan to MFI. It found that the blank loan forms, consisting of the
real estate mortgage contract, promissory note, comprehensive surety
agreement and disclosure statement, which Domingo himself handed to
Enrique, "had no entries specifying the rate of interest and schedules of
amortization." On the same day, to reciprocate the gesture of PCRI,
Enrique, together with his wife Natividad Africa, vice-president, and son
Edmundo signed the blank forms "at their office at 685 Tandang Sora
Avenue, Novaliches, Quezon City." The signing was allegedly witnessed
by Vicky, Ellen and Alice, all surnamed Ang, without any PCRI
representative present. Immediately thereafter, Enrique and Vicky
proceeded to the PCRI office at 1020 Soler St., Binondo.
The court a quo also accepted Vicky’s account that it was in order to
return the trust of Domingo and Caleb and their gesture of the early
release of the loan that Enrique and Vicky entrusted to them their seven
(7) titles, with an aggregate area of 3.3665 hectares, to wit: TCT Nos.
317699, 317702, 317703, 317704, 317705, 317706 and 1317707. She
testified that they left it to defendants to choose from among the 7 titles
those which would be sufficient to secure the P3.5 million. She also
admitted, however, that they had an appraisal report dated June, 1984
of the said properties made by the Integrated Appraisal Corporation
which put the value of four (4) of the said properties at P6.8 million,
now the subject of the action for reconveyance, while the aggregate
value of all seven lots was P11 million.
Vicky further stated that it was agreed that once PCRI had chosen the
lots to be covered by the mortgage, the defendants would return the
remaining titles to the plaintiffs. Plaintiffs also secured an additional
loan of about P199,000.00 to pay for real estate taxes and other
expenses. Significantly, Vicky testified that the plaintiffs delivered to
PCRI twenty- four (24) checks, bearing no dates and amounts, to cover
the amortization payments, all signed in blank by Enrique and
Natividad.
In September 1984, the first amortization check bounced for
insufficient fund due to MFI’s continuing business losses. It was then
that the appellees allegedly learned that PCRI had filled up the 24 blank
checks with dates and amounts that reflected a 35% interest rate per
annum, instead of just 24%, and a two-year repayment period, instead
of 10 years. Vicky avers that her strong protest caused PCRI to desist
from depositing the other 23 checks (TSN, April 21, 1998, p. 15), and
that it was about this time that PCRI finally furnished MFI with its copy
of the promissory note and the disclosure statement.
Vicky asserted that plaintiffs-appellees found the terms reflected in the
loan documents to be prohibitive, burdensome and unconscionable, and
that had they known them when they took out the loan on August 3,
1984, they could either have (1) negotiated/bargained or (2) rejected
the terms of the loan and withdrawn the loan application. Plaintiffs
thereafter repeatedly asked the defendants to return the rest of the
titles in excess of the required collateral to which defendants allegedly
routinely responded that their committee was still studying the matter.
Vicky even added that Caleb assured Vicky that PCRI would also lower
the rate of interest to conform to prevailing commercial rate.
Meanwhile, due to losses plaintiffs’business operations stopped.
Vicky also testified that talks were held in earnest in 1985 between
Domingo and Enrique as well as between Vicky and Caleb concerning
the possible offsetting of the loan by ceding some of their properties to
PCRI. On February 28, 1986, Vicky wrote to defendants, referring to a
meeting held on February 11, 1986 and reiterating her request for the
offsetting. The letter stated that since August, 1985, she had been
asking for the offsetting of their properties against the loan. Caleb had
sought a report on the fair market value of the seven lots. Also, he
sought the assignment to PCRI of the rentals payable of plaintiffs’
tenant, Bethlehem Knitting Company up to 1987. Vicky admitted that
plaintiffs furnished Caleb on March 11, 1986 a copy of the 1984
Appraisal Report prepared by the IntegratedAppraisal Corporation for
the offsetting agreement.
PCRI’s account statement dated February 12, 1986 showed that MFI’s
total loan obligation amounted to P4,167,472.71 (Exh. "G"). The March
25, 1986 statement from PCRI, however, showed that all seven (7) titles
were placed as collateral for their P3.5 million loan. MFI maintained
that per their appraisal report, four of the properties were already
worth P6.5 million while the three other lots were valued around P4.6
million.
Vicky also claimed that Domingo and Caleb tried to appease the
plaintiffs by assuring them that they would return the rest of the titles
anytime they would need them, and that they could use them to secure
another loan from them or from another financing company. They
would also reconsider the 35% interest rate, but when the discussion
shifted to the offsetting of the properties to pay the loan, the
defendants’ standard answer was that they were still awaiting the
feedback of their committee.
1987, and after several more discussions, the defendants finally agreed
to accept the P3 million from Winston Wang, but under these
conditions: a) MFI must pay the P300,000.00 attorney’s fees paid for
the foreclosure proceedings and the P190,000.00 for real estate taxes;
b) PCRI shall issue the certificate of redemption over the three lots; c)
plaintiffs shall execute a Memorandum of Undertaking concerning their
right of way over the other properties, the lots being redeemed being
situated along Tandang Sora Street.
Vicky also testified that although Wang would pay directly to Caleb, the
plaintiffs pursued the transaction because of PCRI’s promised to release
the four (4) other remaining properties after the payment of P3.5
million loan principal as well as the interest in arrears computed at P3
million, or a total of P6.5 (TSN, January 10, 1996, p. 11).

On September 4, 1986, Enrique received a Notice of Sheriff’s Sale dated MFI paid to PCRI P490,000.00 as agreed, and likewise complied with
August 29, 1986, announcing the auction of the seven lots on September the required documentation. Winston Wang also paid the balance of P3
24, 1986 due to unpaid indebtedness of P10.5 million. After Vicky million for the three lots he was buying. The discussion then turned to
explained to her father Enrique in Chinese that the defendants were how the plaintiffs’ P3 million interest arrearages would be settled,
auctioning all their seven lots, he became frantic, was unable to take his which they agreed to be payable over a period of one year, from
lunch, and remained silent the whole afternoon. Later that night he fell October 26, 1987 to October 26, 1988.
ill and became delirious. His blood pressure shot up to 200/100 and he
was rushed to the Metropolitan Hospital where he fell into a coma and
In October, 1988, however, plaintiffs were able to raise only P2 million.
stayed in the intensive care unit for four (4) days. Vicky claimed that
After a meeting at defendants’ office, the period to pay was extended to
during moments of consciousness, her father would mutter the names
October 26, 1989, but subject to 18% interest per annum, which Caleb
of Domingo and Caleb and that they were unprofessional and dishonest
however allegedly refused to put in writing. Plaintiffs were later able to
people. He was discharged after 6 days.
raise P3 million plus P540,000.00 representing the 18% interest per
annum. On October 26, 1989, Vicky and Enrique tendered the same to
Vicky insisted that prior to the auction notice, they never received any Caleb at his office. Caleb however became furious, and now insisted that
statement or demand letter from the defendants to pay P10.5 million, the interest due since 1984 was already P7 million computed at 35%
nor did the defendants inform them of the intended foreclosure. The per annum.
last statement they received was dated February 12, 1986, and showed
amount due of only P4,167,472.71. Vicky recalled that from June 1,
On January 16, 1990 and again on March 5, 1990, PCRI sent the
1986 to July 1986, they held several meetings to discuss the options
plaintiffs a letter demanding that they vacate the four remaining lots.
available to them to repay their loan, such as the offsetting of their rent
Caleb was also now asking for P10.5 million. On March 19, 1990, Caleb
collectibles and properties to cover the amortizations and the loan
executed an affidavit of non-redemption of TCT Nos. 317699, 317702,
balance.
317703 and 317704. On June 7, 1990, S.G. del Rosario, PCRI’s vice-
president, wrote Vicky reiterating their demand to vacate the premises
MFI protested the foreclosure, and the auction was reset to October 6, and remove pieces of machinery, equipment and persons therein, which
1986, then to October 16, 1986, and finally October 27, 1986 after they MFI eventually heeded.
assured PCRI that they had found a serious buyer for three of the lots.
In the meeting held on October 15, 1986 at defendants’ office, the buyer,
Vicky also testified that the news of plaintiffs’ predicament spread
Winston Wang of Asia Cotton and his lawyer, Atty. Ismael Andres were
around the Chinese community and brought the family great
present. It was agreed to release the mortgage over TCT Nos. 317705,
humiliation. Enrique’s health deteriorated rapidly and he was
317706, and 317707 upon payment of P3.5 million. Winston Wang
hospitalized. On October 9, 1991, they filed the case below. Meanwhile,
would pay to MFI P500,000.00 as down-payment, which MFI would in
Enrique died on November 15, 1993 after one year and one month at
turn pay to PCRI as partial settlement of the P3.5 million loan. Winston
the Metropolitan Hospital. The family spent P300,000 - P400,000 for his
Wang was given 15 days from October 16, 1986 to pay the P500,000.00.
funeral and burial expenses.
Vicky claims that these agreements were made verbally, although she
kept notes and scribbles of them.
Plaintiffs now insist that P1 million in moral damages was not enough
for the humiliation they suffered before the Chinese community,
On January 19, 1987, Winston Wang confronted Vicky about their sale
considering that Enrique was then the president of the Lioc Kui Tong
agreement and PCRI’s refusal to accept their P3 million payment,
Fraternity while Domingo and Caleb were members thereof. Plaintiffs
because according to Caleb, the three lots had been foreclosed. Vicky
were also deprived of the rental income of P10,000.00 per month and
was shocked, because the agreed 60-day period to pay the P3 million
the 10% rental increases from 1987 to present of their said properties.
was to lapse on January 13, 1987 yet. Caleb himself put the particulars
of the P500,000.00 payment in the cash voucher as partial settlement of
the loan. In arguing that the 35% interest rate imposed by PCRI was exorbitant
and without their consent, the plaintiffs cited the promissory note and
amortization schedule in their loan agreement with Manphil dated April
At the auction sale on October 27, 1986, PCRI was the sole bidder for
6, 1983 and with IBAA on April 21, 1983 which both showed a rate of
P6.5 million. Vicky however also admitted that discussions continued
interest of only 14% and a ten-year term with two years grace period. 3
on the agreement to release three lots for P3.5 million. The reduction of
interest rate and charges and the condonation of the attorney’s fees of
P300,000.00 for the foreclosure proceedings were also sought. Present Ruling of the RTC
in these conferences were Enrique and Vicky, Domingo and Caleb,
Winston Wang and his lawyer,Atty. IsmaelAndres.
In the order of May 23, 1994, the trial judge listed the following issues
for resolution, namely:
Upon defendants’ continued failure to honor their agreement, Atty.
Ismael Andres threatened to sue PCRI in a letter dated February 17,
1.Whether or not the mortgage contract and its foreclosure
1987 if they would not accept the P3 million payment of his client.
should be declared null and void;
Atty.Andres also sent them similar letters dated May 15, August 5 and 7,
 2.Whether or not either or both parties is/are entitled to
damages from the other, and, if so, how much.
3.Whether or not plaintiffs’cause of action has prescribed;
4.Whether or not the estoppel had attached against the
plaintiff.4
As stated, the RTC rendered its decision in favor of
petitioners,5 disposing:
WHEREFORE, IN VIEW OF THE FOREGOING, judgment is hereby
rendered, to wit:
1. Declaring the real estate mortgage and the subsequent
foreclosure made by the defendants on the plaintiffs’
properties covered by Transfer Certificate of Title Nos.
317699, 317702, 317703, 317704 of the Register of Deeds of
Quezon City null and void and the titles issued in favor of the
defendants canceled and ordered reconveyed to the
plaintiffs;
2. The defendants are hereby ordered solidarily liable to pay
plaintiff, Metropolitan Fabrics, Inc. and the family of Enrique
Ang the following:
a.The amount of ONE MILLION PESOS
(P1,000,000.00) for moral damages;
b.The amount of P10,000.00 per month with an
interest of 10% per annum from January 1987 up
to the time that the plaintiffs take repossession of
the said parcels of land as actual damages;
c.ONE HUNDRED THOUSAND PESOS
(P100,000.00) for attorney's fees; and
d.Costs of suit.
3. The defendants’ counterclaim for deficiency judgment, in
the amount of P107,876,171.82 as actual damages;
P1,000,000.00 for moral damages and P500,000.00 for
attorney's fees is hereby DISMISSED.
Let a copy of this DECISION be furnished the Register of Deeds, Quezon
City relative to the aforementioned parcels of land. Anticipating an
appeal in this case, to protect the rights of the plaintiffs, the Register of
Deeds of Quezon City is hereby ordered to annotate this DECISION in
the aforementioned Certificates of Title.
SO ORDERED.6
Judgment of the CA
Respondents appealed, assigning the following errors, to wit:
1.THE TRIAL COURT GRAVELY ERRED WHEN IT RULED
THAT THE ACTION TO ANNUL THE MORTGAGE CONTRACT
DID NOT PRESCRIBE.
2.THE TRIAL COURT GRAVELY ERRED WHEN IT ANNULLED
THE MORTGAGE CONTRACT, AND THE FORECLOSURE SALE
ON THE GROUND OF FRAUD, NOTWITHSTANDING THE
TWELVE (12) DOCUMEN-TARY EVIDENCE RATIFYING THE
MORTGAGE AND FORECLOSURE SALE, AND THE FAILURE
OF THE SIGNATORIES TO IMPUGN THE VALIDITY OF THE
SAME FROM THE TIME THEY SIGNED UP TO THE PRESENT
OR FORAPERIOD OF 14 YEARS.
3.THE TRIAL COURT GRAVELY ERRED WHEN IT RULED
THERE WAS FRAUD IN THE EXECUTION OF THE MORTGAGE
CONTRACT BASED ON THE LONE TESTIMONY OF VICKY
ANG GAPIDO, WHO WAS NOT A SIGNATORY TO THE
MORTGAGE CONTRACT AND WHOSE TESTIMONY WAS NOT
EVEN CORROBORATED BYTHE SIGNATORIES TO THE SAME.
4.THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT
THE PLAINTIFFS-APPELLEES DID NOT AGREE TO THE LOAN
AND/OR THE MORTGAGE DESPITE THE NUMEROUS ACTS
OF THE PLAINTIFFS-APPELLEES RECOGNIZING THE
VALIDITY OF THE MORTGAGE AND ITS FORECLOSURE AND
ULTIMATELY VOLUNTARILY SURRENDERING THE FOUR (4)
UNREDEEMED LOTS TO THE DEFENDANTS-APPELLANTS,
RESULTING IN ESTOPPEL.
5.THE TRIAL COURT GRAVELY ERRED IN FINDING THE
DEFENDANTS-APPELLANTS GUILTY OF PREDATORY
LENDING PRACTICESAND INIQUITOUS CONDUCT.
6.THE TRIAL COURT GRAVELY ERRED WHEN ITAWARDED
DAMAGES AND ATTORNEY’S FEES TO PLAINTIFFS-
APPELLEES NOTWITHSTANDING ITS ADMITTED FAILURE
TO PAY ITS LOAN OBLIGATIONS TO DEFENDANTS-
APPELLANTS, AND FILING OF THIS BASELESSAND
MALICIOUS SUIT.
7.THE TRIAL COURT GRAVELY ERRED IN FAILING TO
AWARD DAMAGES AND ATTORNEY’S FEES TO
DEFENDANTS- APPELLANTS.7
On July 23, 2002, the CA promulgated its assailed judgment, 8 reversing
and setting aside the decision of the RTC, and dismissing the complaint
and the counterclaim upon the following ratiocination:
We find the appeal to be partially meritorious.
The action for annulment of title and reconveyance was based on the
allegation of fraud which attended the mortgage contract between the
parties. Article 1391 of the Civil Code provides that actions to annul a
contract based on fraud should be brought within four years from
discovery of the fraud (Asuncion vs. CA, 150 SCRA 353). If the
transaction involves registered land, the four-year period is computed
from the registration of the conveyance/transaction on account of
constructive notice and not on actual knowledge. In the instant case, the
mortgage over the seven lots was annotated on the back of their
respective titles on September 05, 1984, so that the action to annul the
mortgage should have been commenced before September 05, 1988.
The case below was filed only in 1991.
Even if the prescription period is counted from actual notice, the
plaintiffs had until October 25, 1989, or four years after the foreclosure
sale, to file the action to annul. Indeed, pursuant to the cases of
Armentia vs. Patriarca, 18 SCRA 1253 and Gatiaon vs. Gaffud, 27
SCRA706, if the annulment of the mortgage contract is merely a
condition precedent for the annulment or reconveyance of the title, the
prescriptive period is only four years.
Moreover, assuming the defendants were guilty of continuing fraud, the
plaintiffs’inaction for seven years is contrary to human experience and
thus estoppel may have already set in. Nor is it at all clear just how the
continuing fraud was committed by PCRI. Instead, what is more readily
apparent from the findings of fact of the trial court is that upon the
incessant importuning of the plaintiffs, the defendants gave them every
reasonable chance to pay their loan and recover their properties. While
it is settled that the findings of fact of the trial court which heard the
case are not to be disturbed on appeal, if, however, the conclusions are
not borne out by the facts or if substantial facts bearing upon the result
of the case are overlooked, the same may be overturned. We find no
clear and convincing evidence, nor even preponderant evidence, to
defeat the presumption of regularity of the mortgage contract and
promissory note. The plaintiffs relied mainly on the lone testimony of
Vicky Ang Gapido, certainly a biased witness, who was not even a
signatory to the questioned documents. There was no proof that she
was an officer of MFI back in 1984. She appeared on the scene only in
1986.
The appealed decision appears to have brushed aside several
documents which clearly tended to prove the voluntary and free
consent of the appellees to the mortgage. The promissory note and
mortgage contract are public documents that enjoy the presumption of
regularity which can be overcome only by clear and convincing
evidence. Against these, the trial court accepted the sole testimony of
VickyAng.
Absent proof that Vicky Ang was a responsible officer of MFI at the time
of the execution of the mortgage documents and was in fact present
when the loan was negotiated and the documents were executed, Vicky
Ang cannot be considered a competent witness. Exh. "22", the list of
officers of MFI, did not include Vicky. Her elaborate testimony was not
corroborated by another testimony or supported by any document.
Vicky claimed that other family members named Ellen and Alice were
present at the signing, together with Enrique, Natividad, and Edmund,
but it is highly unusual and rather curious that none of them was
presented. It was the duty of the appellees to establish the fact of the
alleged fraud, yet none of the signatories to the mortgage documents,
who alone could have testified on said claim, were presented. Neither
the father, Enrique Ang, who was allegedly shocked and deeply hurt,
nor the mother Natividad Africa-Ang and brother EdmundAng testified.
Even Vicky’s letters to PCRI were clearly conciliatory and recognized
their loan obligation. One could not divine a tone of protest against the
so-called continuing fraud committed against her family. Viewed from
the common experience of mankind, it was simply incredible that
appellants and appellees would enter into a mortgage contract for P3.5
million where the material terms were indefinite and left to the sole
discretion of the lender, all protestations of trust and the so-called
Chinese way of doing business notwithstanding. It was incredible that
the appellees, long-time businessmen, would sign a promissory note
and a real estate mortgage contract in blank. It was incredible that MFI
would issue 24 blank checks for the monthly amortizations, and this
without even knowing that the interest rate applied was 35% per
annum. One needs only note that the signing of the loan documents and
the release of the loan were done on the same day, which then strongly
connotes simultaneous consensual and reciprocal acts where both
parties were present. We note that the MOA for the accessory loan for
P199,072.255 made on December 06, 1984 to pay the real estate taxes
and registration fees clearly carried an interest rate of 35%, not 24% as
claimed by appellees. The delay in the execution of the mortgage
contract was because the real estate taxes had yet to be paid.
It was incredible too that MFI would have entrusted all seven titles to
PCRI and yet also borrowed P199,072.255 for registration fee of the
deed of mortgage for all seven titles if they did not know that these
seven titles were covered by the mortgage. That this was part of the
"Chinese way of doing business" was also not established as a custom in
the manner provided by Article 12 of the Civil Code. This claimed
custom is easily negated by the execution of the now-contested
mortgage documents as well as the comprehensive surety agreement.
MFI should have known that the interest rate was 35% when its checks
started bouncing. If indeed the agreed interest rate was 24%, it was
incredible that they waited so long before asking for a recomputation of
the interest rate. Also, MFI claimed it had an appraisal report in 1984
showing that the value of its lots was more than P11million, yet it
submitted the same only in 1986. What clearly appears from the
testimony of Vicky Ang is that MFI had difficulty finding buyers for their
lots at their asking price, and that Caleb Ang repeatedly gave the
appellees time to pay their loan, met them to accommodate their
proposals for possible settlement, agreed to postpone the foreclosure
sale several times to allow MFI to raise the money to pay, even agreed
to a partial redemption and further gave MFI more time to fully redeem
the rest of the lots.
Vicky Ang’s lone and uncorroborated testimony contradicts the written
documents, which should be deemed to possess superior evidentiary
weight unless overcome by more weighty and convincing evidence.
Even her letters tend to show that MFI was merely seeking to be
allowed more time to settle its loan.
There is no dispute that the officers of plaintiff-appellee corporation
signed the following documents: promissory note (Exh. "1); Real Estate
Mortgage (Exh. "2"); MFI’s P199,000 loan to pay real estate mortgage
fees of seven titles (Exh. "7"); twenty-four (24) post-dated checks (Exhs.
"8" to "8-V"; MFI’s request not to deposit post-dated checks (Exh. "10");
MFI’s letter informing PCRI of a buyer in order to stay foreclosure (Exh.
"11); MFI’s letters seeking to postpone foreclosure (Exh. "O", "P", "Q");
MFI Board resolution dated August 10, 1987 authorizing partial
redemption for P3.5million of three lots (Exh. "12"); Secretary’s
Certificate (Exh. "13"); Certificate of Redemption (Exh. "16");
Memorandum of Undertaking on the right of way dated September 18,
1987 (Exh. "18"); June 21, 1990 letter (Exh. "20").
The tenor of Vicky Ang’s letter dated February 28, 1986 (Exh. "10") is
cordial and makes no mention or reference whatsoever to the error in
the interest rate imposed and the filling of the 24 blank checks with
erroneous figures, which would have been estafa. This silence negates
Vicky’s testimony to the contrary. Instead, the letter contains a litany of
financial distress, blaming the country’s lingering economic slump for
causing the shut-down of their company and its failure to keep up with
the loan amortizations. The letter sought the sympathy of PCRI. It asked
that the post-dated checks be not deposited. It pleaded for an offsetting
of some of their lots against their loan obligation, but obviously based
on their 3-year old appraisal of the worth of the lots. Yet it had taken
them considerable time to find a buyer like Mr. Wang. She even
mentions that Caleb suggested to her that they sell the properties so
they could pay their debt but that they have not been able to find
buyers.
The appealed decision admits that the foreclosure sale was postponed
several times upon the request of the appellees. Moreover, instead of
filing an action to annul the foreclosure mortgage, MFI even authorized
the partial redemption of three lots per Board Resolution dated August
10, 1987. The certificate of redemption (Exh. "16") acknowledged that
the agreed interest rate was 35% and the total loan payable to date was
P6.5million. Then, when they were asked to leave the premises whose
titles had been eventually consolidated in PCRI, MFI after a requested
brief extension during which it expressly agreed to stay as lessee,
peacefully vacated the same (Exh. "20").
The claim of events undeniably prove that the appellees are estopped
from denying the validity of the mortgage contract. The trial court’s
findings concerning the defects of the mortgage documents are not
sufficient to overcome the presumption of its validity.
That the "List of Mortgaged Properties" was visibly typewritten in small
characters to fit into whatever available space remained below the
notarial acknowledgment, or that the first line of the "List of Mortgaged
Properties" occupied the same line as the last line of the notarial
acknowledgment, cannot per se be taken as proof of fraudulent
incorporation of the seven titles therein. This conclusion is speculative,
because this same situation can result when one uses a form documents
and the list happens to be long.
There is also no requirement that where the signatories from the
plaintiffs have signed elsewhere in the mortgage document, the said
signatories should also conform to the "List of Mortgaged Properties" as
fully indicative of the parties’ consent to the inclusion of the property as
mortgage security. To hold otherwise would render invalid the practice
of incorporating annexes into the main mortgage documents.
The trial court observed that the body of the real estate mortgage did
not contain any indication as to what properties were covered, and that
the rubber stamp made by the Registry of Deeds of Quezon City on page
3 thereof is only for one property, TCT No. 317702. Is the court
therefore saying that only the mortgage covering TCT No. 317702 was
valid? The rubber-stamping per se is not the operative act to establish
the mortgage encumbrance, but rather the fact that the mortgage was
annotated on all seven titles.
The trial court stated that "Plaintiffs believe that Caleb showed deep
interest in their properties. Although they wanted to settle the loan as
early as 1985, defendants gave them false hopes, encouraging plaintiffs
to continue to confer with them, which resulted in the inflated
indebtedness until they foreclosed the mortgage. Plaintiffs believe that
they did it intentionally so they would not be able to get them back."
Subsequent events belie this conclusion, as shown in the sale of three
lots to Winston Wang for P3.5 million.

The trial court also believed that since the Notarial Acknowledgment As to the defendants-appellants’ claim for loan deficiency of
did not indicate the number of lots covered by the mortgage, this P107,876,171.82, in addition to P1,000,000 in moral damages and
violated the Notarial Act and thus destroyed any presumption of P500,000 in attorney’s fees, their Exhibits "30" and "31" show that in
regularity in the execution of the document. Let it suffice to say that this addition to the 35% simple interest per annum, a compounded penalty
is the sole act of the notary public, not the signatories, for which he of 1% per month as well as compounded liquidated damages of 3% per
should be taken to account personally. month were also imposed, for a total of 95% percent in charges per
annum. This is clearly exorbitant, iniquitous and unconscionable.
Furthermore, while the Central Bank’s interest rates for 1984, averaged
The trial court also found that "evidence indubitably disclose that the
34% (Exh. "33"), there is no showing that this situation continued to
real estate mortgage was not signed before the Notary Public (TSN, July
prevail for ten years thereafter and after the massive street
5, 1994, pp. 28-29)," it being mandatory that the party acknowledging
demonstrations had ceased. Thus, even the 35% annual simple interest
the instrument must personally appear before the Notary Public. Yet
rate could not be countenanced, at least not beyond February 1986.
how did the court come to its conclusion without any of the signatories
Even defendants’ Exh. "31" showed that they realized that the 3%
being presented to prove this fact? Even the Certificate of Redemption
monthly liquidated damages were unjustified and they were thus
(Exh. "16") for the three lots sold to Mr. Wang, signed by Vicky,
willing to waive the same.
admitted that the real estate mortgage was acknowledged before
Notary Public Noemi E. Ferrer, per her Notarial Register No. 139, Book
No. VI, Page No. 29, Series of 1994. We conclude that due to estoppel and prescription of the action to
annul the mortgage contract, the complaint for annulment of title and
reconveyance should be dismissed. On the other hand, we find no basis
The same certification even expressly mentioned that the agreed loan
to award to defendants-appellants P1,000,000 in moral damages and
interest was 35% per cent, citing the terms of Promissory Note No.
P500,000 in attorney’s fees, even as we must dismiss their counterclaim
840804 datedAugust 03, 1984. That certain entries therein were left
for deficiency judgment of P107,876,171.82 for being unconscionably
blank, such as the position of the signatories and their tax account
excessive, unreasonable and iniquitous.
numbers, cannot lead to the conclusion that it was signed in blank and
thus operate to invalidate the note, at least as concerns MFI itself which
signed it. If these facts can be established separately, then the factual WHEREFORE, premises considered, the appealed judgment is
requirements are satisfied. That there were no witnesses to attest to the REVERSED and SET ASIDE and a new one is entered DISMISSING the
due execution of the promissory note also will not operate to render it complaint below as well as the defendants-appellants’ counterclaim for
void, such being not a prerequisite to its validity. Nor is there a deficiency judgment of P107,876,171.82, moral damages of P1,000,000
requirement that the Schedule of Amortization which appears at the and P500,000 in attorney’s fees. No costs.
back thereof should also be signed by MFI to show its conformity.
SO ORDERED.9
The trial court noted that "the Disclosure Statement (Exh. "B-1")
mentioned only the amount of the loan. It did not mention other
Issues
details." It did not bother to say what these other details are. It also
erred in saying that there was no signature of Edmundo Ang on the
comprehensive surety agreement (Exh. "28"). It further commented The petitioners now submit for consideration by the Court:
that "It is also surprising why the Comprehensive Agreement which
appears to have been allegedly required of the plaintiffs to secure the
WHETHER OR NOT THE HONORABLE COURT OF APPEALS
payment of the loan was not even availed of by the defendants." That
COMMITTEDAREVERSIBLE ERROR IN:
the defendants did not utilize it was their sole option and privilege.

A.DISREGARDING THR FACTUAL FINDINGS OF THE TRIAL

The above discussion notwithstanding, the trial court’s conclusion that
COURT;
the "defendants were patently guilty of predatory lending practices and
iniquitous conduct," may not be far off the truth at all, considering the
excessive penalties and charges imposed for missed amortizations. It is B.NOT HOLDING THAT THE ABSENCE OF CONSENT MAKESA
of common knowledge that the country was in the grip of tumultuous CONTRACT VOID, NOT MERELYVOIDABLE;
political uncertainties when the mortgage contract was executed in
August 1984, owing to the unsolved assassination of Senator Benigno S.
C.NOT HOLDING THAT AN ACTION TO DECLARE A
Aquino, Jr. But while interest rates shot up to unfamiliar heights, it is
CONTRACT VOID DOES NOT PRESCRIBE; and
also known that after the 1986 EDSA revolution, things settled down,
and interest rates receded to levels obtaining before August 21, 1983.
Defendants would therefore be hard put to justify continuing to charge D.NOT HOLDING THAT PETITIONERS ARE NOT GUILTY OF
35% interest after February 1986. ESTOPPELAND LACHES.10

On the question of the improper publication of the Notice of Sheriff’s Ruling

Sale, Vicky testified that had the notice been made in a newspaper of
general circulation other than the "Listening Post," they could have The appeal has no merit.
obtained a very good price for their lots. This is self-serving, as shown
by their subsequent less than successful efforts to find buyers for their
lots. They even admitted to publishing notices in the papers for this 1.
purpose. As to the alleged lack of notice to plaintiffs of the foreclosure
sale, it suffices to say that ACT 3135 does not require such notice to the The CA did not disregard the factual findings of the RTC
mortgagor.
It is settled that the appellate court will not disturb the factual findings
of the lower court unless there is a showing that the trial court
overlooked, misunderstood or misapplied some fact or circumstance of
weight and substance that would have affected the result of the
case.11 Indeed, the trial court’s findings are always presumed correct.
Nonetheless, the CA is not precluded from making its own
determination and appreciation of facts if it considers the conclusions
arrived at by the trial court not borne out by the evidence, or if
substantial facts bearing upon the result of the case were overlooked,
misunderstood or misapplied.12 As an appellate court, the CA is not
necessarily bound by the conclusions of the trial court, but holds the
exclusive authority to review the assessment of the credibility of
witnesses and the weighing of conflicting evidence. 13
In view of the conflicting findings and appreciation of facts by the RTC
and the CA, we have to revisit the evidence of the parties.
Petitioners insist that respondents committed fraud when the officers
of Metropolitan were made to sign the deed of real estate mortgage in
blank.
According to Article 1338 of the Civil Code, there is fraud when one of
the contracting parties, through insidious words or machinations,
induces the other to enter into the contract that, without the
inducement, he would not have agreed to. Yet, fraud, to vitiate consent,
must be the causal (dolo causante), not merely the incidental (dolo
incidente), inducement to the
making of the contract.14 In Samson v. Court of Appeals, 15 causal fraud is
defined as "a deception employed by one party prior to or simultaneous
to the contract in order to secure the consent of the other." 16
Fraud cannot be presumed but must be proved by clear and convincing
evidence.17 Whoever alleges fraud affecting a transaction must
substantiate his allegation, because a person is always presumed to
take ordinary care of his concerns, and private transactions are
similarly presumed to have been fair and regular. 18 To be remembered
is that mere allegation is definitely not evidence; hence, it must be
proved by sufficient evidence.19
Did petitioners clearly and convincingly establish their allegation of
fraud in the execution of the deed of real estate mortgage?
The contested deed of real estate mortgage was a public document by
virtue of its being acknowledged before notary public Atty. Noemi
Ferrer.20 As a notarized document, the deed carried the evidentiary
weight conferred upon it with respect to its due execution, 21 and had in
its favor the presumption of regularity.22 Hence, it was admissible in
evidence without further proof of its authenticity, and was entitled to
full faith and credit upon its face.23 To rebut its authenticity and
genuineness, the contrary evidence must be clear, convincing and more
than merely preponderant; otherwise, the deed should be upheld. 24
Petitioners undeniably failed to adduce clear and convincing evidence
against the genuineness and authenticity of the deed.1âwphi1 Instead,
their actuations even demonstrated that their transaction with
respondents had been regular and at arms-length, thereby belying the
intervention of fraud.
To start with, the evidence adduced by VickyAng, the lone witness for
petitioners, tried to cast doubt on the contents and due execution of the
deed of real estate mortgage by pointing to certain irregularities. But
she could not be effective for the purpose because she had not been
among the signatories of the deed. The signatories were her late father
Enrique Ang, her mother Natividad Africa, and her brother Edmundo
Ang, none of whom came forward to testify against the deed, or
otherwise to assail the genuineness and due execution of the deed by
any other means. They would have been in the better position than
Vicky Ang to substantiate the allegation of fraud if that was the case.
Their silence reflected the inanity of the allegation of fraud by Vicky
Ang.It does seem that the three signatories did not join Vicky Ang in
impugning the authenticity and genuineness of the deed of real estate
mortgage. As Vicky Ang admitted during her cross-examination, she had
no evidence to show that the signatories ever assailed the deed, to wit:
Q The signatory to this document, one of the signatory to this document
is Enrique Ang, will you be able to show us a letter personally prepared
and signed by Enrique Ang during his lifetime from 1984 assailing the
validity of this document?
A From 1984?
Q Up to the present.
A I cannot recall actually, but if you will permit me I will try to look at
the files.
Q But now, you do not have in your possession a letter personally
prepared and signed by Enrique Ang and duly received by Prosperity,
you will still look for it, is that correct, if it still exists?
A As I said I still have to go over the files because it has been eleven (11)
years ago.
Q Can you state definitely that there is such a document as to this point
in time?
A Because there were documents, there were letters, there were
correspondences also signed by Enrique Ang, prepared and signed by
EnriqueAng, its just that I still have to look for it.
Q Another signatory here in this Promissory Note and Real Estate
Mortgage is Edmundo Ang will you be able to show us a letter signed by
him and received by Prosperity in which he assailed the validity of this
document?
A I cannot recall.
Q How about Natividad Africa, who is also a signatory to this document,
will you be able to produce a letter signed by her assailing the validity
of this document duly received by Prosperity?
A I cannot recall.25
Secondly, petitioners freely and voluntarily surrendered to respondents
the seven transfer certificates of title (TCTs) of their lots. Such
surrender of the TCTs evinced their intention to offer the lots as
collateral for the performance of their obligations contracted with
respondents. They thereby confirmed the genuineness and due
execution of the deed of real estate mortgage. Surely, they would not
have surrendered the TCTs had their intention been otherwise.
Thirdly, another circumstance belying the commission of fraud by
respondents was petitioners’ pleading with respondents for the
resetting of foreclosure sale of the properties after receiving the notice
of the impending sale. As a result, the sale was reset thrice. Had the
mortgage and its foreclosure been unreasonable or fraudulent,
petitioners should have instead resolutely contested respondents’move
to foreclose.
Fourthly, even after their properties were eventually sold as the
consequence of the foreclosure, petitioners negotiated with
respondents on the partial redemption of three of the seven lots. They
also took the trouble of finding a buyer (Mr. Winston Wang of Asia
Cotton) of some of the lots. Had the mortgage been fraudulent, they
could have instead instituted a complaint to nullify the real estate
mortgage and the foreclosure sale.
And, lastly, Vicky Ang’s own letters to respondents had an apologetic
tenor, and was seeking leniency from them. Such tenor and tone of her
communications were antithetical to her allegation of having been the
victim of their fraudulent acts.
These circumstances tended to indicate that fraud was not attendant
during the transactions between the parties. Verily, as between the duly
executed real estate mortgage and the unsubstantiated allegations of
fraud, the Court affords greater weight to the former.
2.
the fraud.31 The discovery of fraud is reckoned from the time the
document was registered in the Register of Deeds in view of the rule
that registration was notice to the whole world. 32 Thus, because the
mortgage involving the seven lots was registered on September 5, 1984,
they had until September 5, 1988 within which to assail the validity of
the mortgage. But their complaint was instituted in the RTC only on
October 10, 1991.33 Hence, the action, being by then already prescribed,
should be dismissed.
WHEREFORE, the Court DENIES the petition for review on certiorari;
AFFIRMS the decision promulgated by the Court of Appeals on July 23,
2002; and ORDERS petitioners to pay the costs of suit.

Action to assail the mortgage already prescribed

SO ORDERED.

The next issue to address is whether the action to assail the real estate
LUCAS P. BERSAMIN
mortgage already prescribed.
Associate Justice

To resolve the issue of prescription, it is decisive to determine if the

mortgage was void or merely voidable.

It appears that the original stance of petitioners was that the deed of
real estate mortgage was voidable. In their complaint, they averred that
the deed, albeit in printed form, was incomplete in essential details, and
that Metropolitan, through Enrique Ang as its president, signed it in
good faith and in absolute confidence. 26 They confirmed their original
stance in their pre-trial brief, 27 wherein they raised the following issues,
to wit:

1.Whether or not the mortgage and foreclosure of the subject

four (4) parcels of land should be declared null and void; and

2.Whether or not defendants should be held liable to pay

damages and attorney’s fees to plaintiffs, and for how much?
28

Yet, petitioners now claim that the CA committed a reversible error in

not holding that the absence of consent made the deed of real estate
mortgage void, not merely voidable. In effect, they are now advancing
that their consent was not merely vitiated by means of fraud, but that
there was complete absence of consent. Although they should be
estopped from raising this issue for the first time on appeal, the Court
nonetheless opts to consider it because its resolution is necessary to
arrive at a just and complete resolution of the case.

As the records show, petitioners really agreed to mortgage their

properties as security for their loan, and signed the deed of mortgage
for the purpose. Thereafter, they delivered the TCTs of the properties
subject of the mortgage to respondents.

Consequently, petitioners' contention of absence of consent had no firm

moorings.1âwphi1 It remained unproved. To begin with, they neither
alleged nor established that they had been forced or coerced to enter
into the mortgage. Also, they had freely and voluntarily applied for the
loan, executed the mortgage contract and turned over the TCTs of their
properties. And, lastly, contrary to their modified defense of absence of
consent, Vicky Ang's testimony tended at best to prove the vitiation of
their consent through insidious words, machinations or
misrepresentations amounting to fraud, which showed that the contract
was voidable. Where the consent was given through fraud, the contract
was voidable, not void ab initio. 29 This is because a voidable or
annullable contract is existent, valid and binding, although it can be
annulled due to want of capacity or because of the vitiated consent of
one of the parties.30

With the contract being voidable, petitioners' action to annul the real
estate mortgage already prescribed. Article 1390, in relation to Article
1391 of the Civil Code, provides that if the consent of the contracting
parties was obtained through fraud, the contract is considered voidable
and may be annulled within four years from the time of the discovery of
SECOND DIVISION balance of the second loan plus accrued penalties and
interest.15redarclaw
G.R. No. 194642, April 06, 2015
Before the petitioner could file an answer, the respondent applied for
the issuance of a writ of replevin. The MTC issued the writ and by virtue
NUNELON R. MARQUEZ, Petitioner, v. ELISAN CREDIT of which, the motor vehicle covered by the chattel mortgage was seized
CORPORATION, Respondents. from the petitioner and delivered to the respondent. 16redarclaw

Trial on the merits thereafter ensued.

DECISION

The MTC Ruling17

BRION, J.:
The MTC found for the petitioner and held that the second loan was
We resolve the present petition for review on certiorari1 assailing the fully extinguished as of September 1994.
May 17, 2010 decision 2 and the November 25, 2010 resolution 3 of the
Court of Appeals (CA) in CA-G.R. SP No. 102144. 4redarclaw It held that when an obligee accepts the performance or payment of an
obligation, knowing its incompleteness or irregularity and without
expressing any protest or objection, the obligation is deemed fully
The Factual Antecedents
complied with.18 The MTC noted that the respondent accepted the daily
payments made by the petitioner without protest. The second loan
On December 16, 1991, Nunelon R. Marquez (petitioner) obtained a
having been fully extinguished, the MTC ruled that respondent's claim
(first loan) from Elisan Credit Corporation (respondent) for fifty-three
for interests and penalties plus the alleged unpaid portion of the
thousand pesos (Php 53,000.00) payable in one-hundred eighty (180)
principal is without legal basis.
days.5redarclaw
The MTC ordered:LawlibraryofCRAlaw
The petitioner signed a promissory note which provided that it is
payable in weekly installments and subject to twenty-six percent (26%)
annual interest. In case of non-payment, the petitioner agreed to pay 1. "the plaintiff Elisan Credit Corporation to
ten percent (10%) monthly penalty based on the total amount unpaid return/deliver the seized motor vehicle with Plate
and another twenty-five percent (25%) of such amount for attorney's No. UV-TDF-193 to the possession of the
fees exclusive of costs, and judicial and extrajudicial defendant and in the event its delivery is no longer
expenses.6redarclaw possible, to pay the defendant the amount of
P30,000.00 corresponding to the value of the said
To further secure payment of the loan, the petitioner executed a chattel vehicle;"
mortgage7 over a motor vehicle. The contract of chattel mortgage
provided among others, that the motor vehicle shall stand as a security 2. "the bonding company People's Trans-East Asia
for the first loan and "all other obligations of every kind already Insurance Corporation to pay the defendant the
incurred or which may hereafter be incurred."8redarclaw amounts of P20,000.00 and P5,000.00
representing the damages and attorney's fees
Both the petitioner and respondent acknowledged the full payment of under P.T.E.A.LC Bond No. JCL (13)-00984;"
the first loan.9redarclaw

Subsequently, the petitioner obtained another loan (second loan) from
the respondent for fifty-five thousand pesos (P55,000.00) evidenced by
a promissory note10 and a cash voucher11 both dated June 15, 1992.
The promissory note covering the second loan contained exactly the
same terms and conditions as the first promissory note.
When the second loan matured on December 15, 1992, the petitioner
had only paid twenty-nine thousand nine hundred sixty pesos
(P29,960.00), leaving an unpaid balance of twenty five thousand forty
pesos (P25,040.00).12redarclaw
Due to liquidity problems, the petitioner asked the respondent if he
could pay in daily installments (daily payments) until the second loan is
paid. The respondent granted the petitioner's request. Thus, as of
September 1994 or twenty-one (21) months after the second loan's
maturity, the petitioner had already paid a total of fifty-six thousand
four-hundred forty pesos (P56,440.00), an amount greater than the
principal.13redarclaw
Despite the receipt of more than the amount of the principal, the
respondent filed a complaint for judicial foreclosure of the chattel
mortgage because the petitioner allegedly failed to settle the balance of
the second loan despite demand.14redarclaw
The respondent further alleged that pursuant to the terms of the
promissory note, the petitioner's failure to fully pay upon maturity
triggered the imposition of the ten percent (10%) monthly penalty and
twenty-five percent (25%) attorney's fees.
3. "the plaintiff is likewise directed to surrender to
the defendant the originals of the documents
evidencing indebtedness in this case so as to
prevent further use of the same in another
proceeding."
The RTC Ruling19
Except for the MTC's order directed to the bonding company, the RTC
initially affirmed the ruling of the MTC.
Acting on the respondent's motion for reconsideration, the RTC
reversed itself. Citing Article 1253 of the Civil Code, it held that "if the
debt produces interest, payment of the principal shall not be deemed to
have been made until the interests have been covered." It also sustained
the contention of the respondent that the chattel mortgage was revived
when the petitioner executed the promissory note covering the second
loan.
The RTC ordered:LawlibraryofCRAlaw
1. "the defendant to pay the plaintiff the following: a)
P25,040.00, plus interest thereon at the rate of
26% per annum and penalties of 10% per month
thereon from due date of the second promissory
note until fully paid, b) 25% of the defendant's
outstanding obligation as and for attorney's fees,
c) costs of this suit;"

The respondent prayed that the petitioner be ordered to pay the 2. "the foreclosure of the chattel mortgage dated
December 16, 1991 and the sale of the mortgaged
 property at a public auction, with the proceeds
thereof to be applied as and in payment of the The respondent claims that the daily payments were properly credited
amounts awarded in a and b above." against the interest and not against the principal because the petitioner
incurred delay in the full payment of the second loan.
The CA Ruling20
It argues that pursuant to the terms and conditions of the promissory
note, the interest and penalties became due and demandable when the
The CA affirmed the RTC's ruling with modification.
petitioner failed to pay in full upon maturity. The respondent relies on
Article 1253 of the Civil Code which provides that if the debt produces
The CA observed that the disparity in the amount loaned and the
interest, payment of the principal shall not be deemed to have been
amount paid by the petitioner supports the respondent's view that the
made until the interests have been covered.
daily payments were properly applied first for the payment of interests
and not for the principal.
The respondent likewise maintains that the chattel mortgage could
validly secure the second loan invoking its provision which provided
According to the CA, if the respondent truly condoned the payment of
that it covers "obligations...which may hereafter be incurred."
interests as claimed by the petitioner, the latter did not have to pay an
amount in excess of the principal. The CA believed the petitioner knew
his payments were first applied to the interests due. Issues

The CA held that Article 1253 of the Civil Code is clear that if debt The petitioner raises the following issues for our
produces interest, payment of the principal shall not be deemed made resolution:LawlibraryofCRAlaw
until the interests have been covered. It ruled that even if the official
receipts issued by the respondent did not mention that the payments I. "WHETHER THE HONORABLE COURT OF
were for the interests, the omission is irrelevant as it is deemed by law APPEALS ERRED IN AFFIRMING THE DECISION
to be for the payment of interests first, if any, and then for the payment OF THE REGIONAL TRIAL COURT ORDERING THE
of the principal amount. PETITIONER TO PAY THE RESPONDENT THE
AMOUNT OF PHP24,040.00 PLUS INTEREST AND
The CA, however, reduced the monthly penalty from ten percent (10%) PENALTY FROM DUE DATE UNTIL FULLY PAID;
to two percent (2%) pursuant to Article 1229 of the Civil Code which AND
gives the courts the power to decrease the penalty when the principal
obligation has been partly or irregularly complied with by the debtor.
II. "WHETHER THE HONORABLE COURT OF
APPEALS ERRED IN AFFIRMING THE DECISION
The dispositive portion of the CA decision
OF THE REGIONAL TRIAL COURT ORDERING THE
provides:LawlibraryofCRAlaw
FORECLOSURE AND SALE OF THE MORTGAGED
"WHEREFORE, premises considered, the Petition is hereby DENIED for
PROPERTY."22
lack of merit. The Order dated 07 May 2007 of the Regional Trial Court,
Branch 222, Quezon City is
hereby AFFIRMED with MODIFICATION that the penalty charge In simpler terms, did the respondent act lawfully when it credited the
should only be two (2%) per month until fully paid." daily payments against the interest instead of the principal? Could the
The CA denied the petitioner's Motion for Reconsideration dated May chattel mortgage cover the second loan?
17, 2010 on November 25, 2010 for failing to raise new matters. Hence,
this present petition. The Court's Ruling

The Petition We find the petition partly meritorious.

The petitioner seeks the reversal of the CA's decision and resolution. He We rule that: (1) the respondent acted pursuant to law and
argues that he has fully paid his obligation. Thus, the respondent has no jurisprudence when it credited the daily payments against the interest
right to foreclose the chattel mortgage. instead of the principal; and (2) the chattel mortgage could not cover
the second loan.
The petitioner insists that his daily payments should be deemed to have
been credited against the principal, as the official receipts issued by the Rebuttable presumptions; Article 1176 vis-a-vis Article 1253
respondent were silent with respect to the payment of interest and
penalties. He cites Article 1176 of the Civil Code which ordains that There is a need to analyze and harmonize Article 1176 and Article 1253
[t]he receipt of the principal by the creditor without reservation with of the Civil Code to determine whether the daily payments made after
respect to the interest, shall give rise to the presumption that the the second loan's maturity should be credited against the interest or
interest has been paid. The petitioner invokes Article 1235 of the Civil against the principal.
Code which states that "[w]hen the obligee accepts the performance of
an obligation, knowing its incompleteness or irregularity, and without Article 1176 provides that:LawlibraryofCRAlaw
expressing any protest or objection, the obligation is deemed fully "The receipt of the principal by the creditor, without reservation
complied with." with respect to the interest, shall give rise to the presumption that
said interest has been paid.
The petitioner denies having stipulated upon and consented to the
twenty-six per cent (26%) per annum interest charge, ten percent xxx."
(10%) monthly penalty and twenty-five percent (25%) attorney's fees. On the other hand, Article 1253 states:LawlibraryofCRAlaw
According to the petitioner, he signed the promissory note in blank. "If the debt produces interest, payment of the principal shall not
be deemed to have been made until the interests have been
The petitioner likewise disclaims receiving any demand letter from the covered."
respondent for the alleged balance of the second loan after he had paid The above provisions appear to be contradictory but they in fact
fifty-six thousand four-hundred forty pesos (Php56,440.00) as of support, and are in conformity with, each other. Both provisions are
September 1994, and further argues that the chattel mortgage could not also presumptions and, as such, lose their legal efficacy in the face of
cover the second loan as it was annulled and voided upon full payment proof or evidence to the contrary.
of the first loan.
Thus, the settlement of the first issue depends on which of these
The Respondent's Case21 presumptions prevails under the given facts of the case.
There are two undisputed facts crucial in resolving the first issue: (1)
the petitioner failed to pay the full amount of the second loan upon
maturity; and (2) the second loan was subject to interest, and in case of
default, to penalty and attorney's fees.
But before proceeding any further, we first tackle the petitioner's denial
of the genuineness and due execution of the second promissory note.
He denies that he stipulated upon and consented to the interest, penalty
and attorney's fees because he purportedly signed the promissory note
in blank.23redarclaw
This allegation deserves scant consideration. It is self-serving and
unsupported by evidence.
As aptly observed by the RTC and the CA, the promissory notes securing
the first and second loan contained exactly the same terms and
conditions. They were mirror-image of each other except for the date
and amount of principal Thus, we see sufficient basis to believe that the
petitioner knew or was aware of such terms and conditions even
assuming that the entries on the interest and penalty charges were in
blank when he signed the promissory note.
Moreover, we find it significant that the petitioner does not deny the
genuineness and due execution of the first promissory note. Only when
he failed to pay the second loan did he impugn the validity of the
interest, penalty and attorney's fees. The CA and the RTC also noted that
the petitioner is a schooled individual, an engineer by profession, who,
because of these credentials, will not just sign a document in blank
without appreciating the import of his action. 24redarclaw
These considerations strongly militate against the petitioner's claim
that he did not consent to and stipulated on the interest and penalty
charges of the second loan. Thus, he did not only fail to fully pay the
second loan upon maturity; the loan was also subject to interest,
penalty and attorney's fees.
Article 1176 in relation to Article 1253
Article 1176 falls under Chapter I (Nature and Effect of Obligations)
while Article 1253 falls under Subsection I (Application of Payments),
Chapter IV (Extinguishment of Obligations) of Book IV (Obligations
and Contracts) of the Civil Code.
The structuring of these provisions, properly taken into account, means
that Article 1176 should be treated as a general presumption subject to
the more specific presumption under Article 1253. Article 1176 is
relevant on questions pertaining to the effects and nature of obligations
in general, while Article 1253 is specifically pertinent on questions
involving application of payments and extinguishment of obligations.
A textual analysis of the above provisions yields the results we discuss
at length below:LawlibraryofCRAlaw
The presumption under Article 1176 does not resolve the question of
whether the amount received by the creditor is a payment for the
principal or interest. Under this article the amount received by the
creditor is the payment for the principal, but a doubt arises on whether
or not the interest is waived because the creditor accepts the payment
for the principal without reservation with respect to the interest. Article
1176 resolves this doubt by presuming that the creditor waives the
payment of interest because he accepts payment for the principal
without any reservation.
On the other hand, the presumption under Article 1253 resolves doubts
involving payment of interest-bearing debts. It is a given under this
Article that the debt produces interest. The doubt pertains to the
application of payment; the uncertainty is on whether the amount
received by the creditor is payment for the principal or the interest.
Article 1253 resolves this doubt by providing a hierarchy: payments
shall first be applied to the interest; payment shall then be applied to
the principal only after the interest has been fully-paid.
Correlating the two provisions, the rule under Article 1253 that
payments shall first be applied to the interest and not to the principal
shall govern if two facts exist: (1) the debt produces interest (e.g., the
payment of interest is expressly stipulated) and (2) the principal
remains unpaid.
The exception is a situation covered under Article 1176, i.e., when the
creditor waives payment of the interest despite the presence of (1) and
(2) above. In such case, the payments shall obviously be credited to the
principal.
Since the doubt in the present case pertains to the application of the
daily payments, Article 1253 shall apply. Only when there is a waiver of
interest shall Article 1176 become relevant.
Under this analysis, we rule that the respondent properly credited the
daily payments to the interest and not to the principal because: (1) the
debt produces interest, i.e., the promissory note securing the second
loan provided for payment of interest; (2) a portion of the second loan
remained unpaid upon maturity; and (3) the respondent did not waive
the payment of interest.
There was no waiver of interest
The fact that the official receipts did not indicate whether the payments
were made for the principal or the interest does not prove that the
respondent waived the interest.
We reiterate that the petitioner made the daily payments after the
second loan had already matured and a portion of the principal
remained unpaid. As stipulated, the principal is subject to 26% annual
interest.
All these show that the petitioner was already in default of the principal
when he started making the daily payments. The stipulations providing
for the 10% monthly penalty and the additional 25% attorney's fees on
the unpaid amount also became effective as a result of the petitioner's
failure to pay in full upon maturity.
In other words, the so-called interest for default25 (as distinguished from
the stipulated monetary interest of 26% per annum) in the form of the
10% monthly penalty accrued and became due and demandable. Thus,
when the petitioner started making the daily payments, two types of
interest were at the same time accruing, the 26% stipulated monetary
interest and the interest for default in the form of the 10% monthly
penalty.
Article 1253 covers both types of interest. As noted by learned civilist,
Arturo M. Tolentino, no distinction should be made because the law
makes no such distinction. He explained:LawlibraryofCRAlaw
"Furthermore, the interest for default arises because of non-
performance by the debtor, and to allow him to apply payment to the
capital without first satisfying such interest, would be to place him
in a better position than a debtor who has not incurred in delay.
The delay should worsen, not improve, the position of a
debtor."26[Emphasis supplied.]
The petitioner failed to specify which of the two types of interest the
respondent allegedly waived. The respondent waived neither.
In Swagman Hotels and Travel Inc. v. Court of Appeals,27 we applied
Article 1253 of the Civil Code in resolving whether the debtor has
waived the payments of interest when he issued receipts describing the
payments as "capital repayment." We held that,
"Under Article 1253 of the Civil Code, if the debt produces interest,
payment of the principal shall not be deemed to have been made until
the interest has been covered. In this case, the private respondent
would not have signed the receipts describing the payments made
by the petitioner as "capital repayment" if the obligation to pay the
interest was still subsisting.
"There was therefore a novation of the terms of the three promissory
notes in that the interest was waived..."28 [Emphasis supplied.]
The same ruling was made in an older case 29 where the creditor issued
a receipt which specifically identified the payment as referring to the
principal. We held that the interest allegedly due cannot be recovered,
in conformity with Article 1110 of the Old Civil Code, a receipt from the
creditor for the principal, that contains no stipulation regarding interest,
extinguishes the obligation of the debtor with regard thereto when the
receipt issued by the creditor showed that no reservation whatever was ceiling on interest rates for both secured and unsecured loans,
made with respect to the interest. regardless of maturity, nothing in the said circular could possibly be
read as granting carte blancheauthority to lenders to raise interest rates
In both of these cases, it was clearly established that the creditors to levels that would be unduly burdensome, to the point of oppression
accepted the payment of the principal. The creditors were deemed to on their borrowers.34redarclaw
have waived the payment of interest because they issued receipts
expressly referring to the payment of the principal without any In exercising this power to determine what is iniquitous and
reservation with respect to the interest. As a result, the interests due unconscionable, courts must consider the circumstances of each case
were deemed waived. It was immaterial whether the creditors intended since what may be iniquitous and unconscionable in one may be totally
to waive the interest or not. The law presumed such waiver because the just and equitable in another. 35redarclaw
creditors accepted the payment of the principal without reservation with
respect to the interest. In the recent case of MCMP Construction Corp. v. Monark Equipment
Corp.,36 we reduced the interest rate of twenty-four percent (24%) per
In the present case, it was not proven that the respondent accepted the annum to twelve percent (12%) per annum; the penalty and collection
payment of the principal. The silence of the receipts on whether the charge of three percent (3%) per month, or thirty-six percent (36%)
daily payments were credited against the unpaid balance of the per annum, to six percent (6%) per annum; and the amount of
principal or the accrued interest does not mean that the respondent attorney's fees from twenty-five percent (25%) of the total amount due
waived the payment of interest. There is no presumption of waiver of to five percent (5%).
interest without any evidence showing that the respondent accepted
the daily installments as payments for the principal. Applying the foregoing principles, we hereby reduce the stipulated
rates as follows: the interest of twenty-six percent (26%) per annum is
Ideally, the respondent could have been more specific by indicating on reduced to two percent (2%) per annum; the penalty charge of ten
the receipts that the daily payments were being credited against the percent (10%) per month, or one-hundred twenty percent (120%) per
interest. Its failure to do so, however, should not be taken against it. The annum is reduced to two percent (2%) per annum; and the amount of
respondent had the right to credit the daily payments against the attorney's fees from twenty-five percent (25%) of the total amount due
interest applying Article 1253. to two percent (2%) of the total amount due.

It bears stressing that the petitioner was already in default. Under the
promissory note, the petitioner waived demand in case of non-payment
upon due date.30 The stipulated interest and interest for default have
both accrued. The only logical result, following Article 1253 of the Civil
Code, is that the daily payments were first applied against either or
both the stipulated interest and interest for default.
Moreover, Article 1253 is viewed as having an obligatory character and
not merely suppletory. It cannot be dispensed with except by mutual
agreement. The creditor may oppose an application of payment made
by the debtor contrary to this rule. 31redarclaw
In any case, the promissory note provided that "interest not paid when
due shall be added to, and become part of the principal and shall
likewise bear interest at the same rate, compounded
monthly."32redarclaw
Hence, even if we assume that the daily payments were applied against
the principal, the principal had also increased by the amount of unpaid
interest and the interest on such unpaid interest. Even under this
assumption, it is doubtful whether the petitioner had indeed fully paid
the second loan.
Excessive interest, penalty and attorney's fees
Notwithstanding the foregoing, we find the stipulated rates of interest,
penalty and attorney's fees to be exorbitant, iniquitous, unconscionable
and excessive. The courts can and should reduce such astronomical
rates as reason and equity demand.
Article 1229 of the Civil Code provides:LawlibraryofCRAlaw
"The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor.
Even if there has been no performance, the penalty may also be reduced
by the courts if it is iniquitous or unconscionable."
Article 2227 of the Civil Code ordains:LawlibraryofCRAlaw
"Liquidated damages, whether intended as an indemnity or a penalty,
shall be equitably reduced if they are iniquitous or unconscionable.
More importantly, Article 1306 of the Civil Code is
emphatic:LawlibraryofCRAlaw
"The contracting parties may establish such stipulations, clauses, terms
and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public policy."
Thus, stipulations imposing excessive rates of interest and penalty are
void for being contrary to morals, if not against the law. 33redarclaw
Further, we have repeatedly held that while Central Bank Circular No.
905-82, which took effect on January 1, 1983, effectively removed the
We believe the markedly reduced rates are reasonable, equitable and
just under the circumstances.
It is not entirely the petitioner's fault that he honestly, albeit wrongly,
believed that the second loan had been fully paid. The respondent is
partly to blame for issuing receipts not indicating that the daily
payments were being applied against the interest.
Moreover, the reduction of the rates is justified in the context of its
computation period. In Trade & Investment Dev't Corp. of the Phil. v.
Roblett Industrial Construction Corp.,37 we equitably reduced the
interest rate because the case was decided with finality sixteen years
after the filing of the complaint. We noted that the amount of the loan
swelled to a considerably disproportionate sum, far exceeding the
principal debt.
It is the same in the present case where the complaint was filed almost
twenty-years ago.38redarclaw
The Chattel Mortgage could not cover the second loan.
The chattel mortgage could not validly cover the second loan. The order
for foreclosure was without legal and factual basis.
In Acme Shoe, Rubber and Plastic Corp. v. Court of Appeals,39 the debtor
executed a chattel mortgage, which had a provision to this
effect:LawlibraryofCRAlaw
"In case the MORTGAGOR executes subsequent promissory note or
notes either as a renewal of the former note, as an extension thereof, or
as a new loan, or is given any other kind of accommodations such as
overdrafts, letters of credit, acceptances and bills of exchange, releases
of import shipments on Trust Receipts, etc., this mortgage shall also
stand as security for the payment of the said promissory note or notes
and/or accommodations without the necessity of executing a new
contract and this mortgage shall have the same force and effect as if
the said promissory note or notes and/or accommodations were
existing on the date thereof."40 [Emphasis supplied.]
In due time, the debtor settled the loan covered by the chattel mortgage.
Subsequently, the debtor again borrowed from the creditor. Due to
financial constraints, the subsequent loan was not settled at maturity.
On the issue whether the chattel mortgage could be foreclosed due to
the debtor's failure to settle the subsequent loan, we held that,
"[c]ontracts of security are either personal or real, x x x In contracts of
real security, such as a pledge, a mortgage or an antichresis, that
fulfillment is secured by an encumbrance of property — in pledge, the
placing of movable property in the possession of the creditor; in chattel
mortgage, by the execution of the corresponding deed substantially in
the form prescribed by law; x x x — upon the essential condition that if 3. Penalty of two percent (2%) per annum on the unpaid
the principal obligation becomes due and the debtor defaults, then the balance to be computed from December 15,
property encumbered can be alienated for the payment of the 1992;chanRoblesvirtualLawlibrary
obligation, but that should the obligation be duly paid, then the
contract is automatically extinguished proceeding from the 4. Attorney's Fees of two percent (2%) of the total amount to be
accessory character of the agreement. As the law so puts it, once recovered.
the obligation is complied with, then the contract of security
becomes, ipso facto, null and void."41redarclaw
The total amount to be recovered shall further be subject to the legal
While a pledge, real estate mortgage, or antichresis may exceptionally interest rate of six percent (6 %) per annum from the finality of this
secure after-incurred obligations so long as these future debts are Decision until fully paid. 49redarclaw
accurately described, a chattel mortgage, however, can only cover
obligations existing at the time the mortgage is constituted. Although Respondent Elisan Credit Corporation, on the other hand,
a promise expressed in a chattel mortgage to include debts that is ORDERED to return/deliver the seized motor vehicle with Plate No.
are yet to be contracted can be a binding commitment that can be UV-TDF-193, subject of the chattel mortgage, to the possession of the
compelled upon, the security itself, however, does not come into petitioner; in the event its delivery is no longer possible, to pay the
existence or arise until after a chattel mortgage agreement petitioner the amount of P30,000.00 corresponding to the value of the
covering the newly contracted debt is executed either by said vehicle.
concluding a fresh chattel mortgage or by amending the old
contract conformably with the form prescribed by the Chattel No pronouncement as to costs.
Mortgage Law.Refusal on the part of the borrower to execute the
agreement so as to cover the after-incurred obligation can constitute an SO ORDERED.cralawlawlibrary
act of default on the part of the borrower of the financing agreement
whereon the promise is written but, of course, the remedy of
foreclosure can only cover the debts extant at the time of constitution
and during the life of the chattel mortgage sought to be
foreclosed."42 [Emphasis supplied.]
We noted that the Chattel Mortgage Law43 requires the parties to the
contract to attach an affidavit of good faith and execute an oath that -
" x x x (the) mortgage is made for the purpose of securing
the obligation specified in the conditions thereof, and for no other
purposes, and that the same is a just and valid obligation, and one not
entered into for the purposes of fraud."44
It is obvious therefore that the debt referred in the law is a current, not
an obligation that is yet merely contemplated.45
"x x x in consideration of the credit accommodation granted by the
MORTGAGEE to the MORTGAGOR(S) in the amount of FIFTY-THREE
THOUSAND ONLY PESOS (P53,000.00) xxx and all other obligations of
every kind already incurred or which may hereafter be incurred, for
or accommodation of the MORTGAGOR(S), as well as the faithful
performance of the terms and conditions of this mortgage x x
x."46 [Emphasis supplied.]
The only obligation specified in the chattel mortgage contract was the
first loan which the petitioner later fully paid. By virtue of Section 3 of
the Chattel Mortgage Law,47 the payment of the obligation automatically
rendered the chattel mortgage terminated; the chattel mortgage had
ceased to exist upon full payment of the first loan. Being merely an
accessory in nature, it cannot exist independently of the principal
obligation.

The parties did not execute a fresh chattel mortgage nor did they
amend the chattel mortgage to comply with the Chattel Mortgage Law
which requires that the obligation must be specified in the affidavit of
good faith. Simply put, there no longer was any chattel mortgage that
could cover the second loan upon full payment of the first loan. The
order to foreclose the motor vehicle therefore had no legal basis.

WHEREFORE, in view of the foregoing findings and legal premises,

we PARTIALLY GRANT the petition. We MODIFY the May 17, 2010
Decision and the November 25, 2010 Resolution of the Court of Appeals
in CA G.R. SP No. 102144.

ACCORDINGLY, petitioner Nunelon R. Marquez is ORDERED to

pay:LawlibraryofCRAlaw

1. Twenty-five thousand forty pesos (P25,040.00) representing

the amount of the unpaid balance of the second
loan;chanRoblesvirtualLawlibrary

2. Interest of two percent (2%) per annum on the unpaid

balance to be computed from December 15, 1992 48 until full
payment;

G.R. No. 208232               March 10, 2014
SURVIVING HEIRS OF ALFREDO R. BAUTISTA, namely: EPIFANIA G.
BAUTISTA and ZOEY G. BAUTISTA,Petitioners, 
vs.
FRANCISCO LINDO and WELHILMINA LINDO; and HEIRS OF
FILIPINA DAQUIGAN, namely: MA. LOURDES DAQUIGAN, IMELDA
CATHERINE DAQUIGAN, IMELDA DAQUIGAN and CORSINO
DAQUIGAN, REBECCA QUIAMCO and ANDRES QUIAMCO, ROMULO
LORICA and DELIA LORICA, GEORGE CAJES and LAURA CAJES,
MELIDA BANEZ and FRANCISCO BANEZ, MELANIE GOFREDO, GERV
ACIO CAJES and ISABEL CAJES, EGMEDIO SEGOVIA and VERGINIA
SEGOVIA, ELSA N. SAM, PEDRO M. SAM and LINA SAM, SANTIAGO
MENDEZ and MINA MENDEZ, HELEN M. BURTON and LEONARDO
BURTON, JOSE JACINTO and BIENVENIDA JACINTO, IMELDA
DAQUIGAN, LEO MA TIGA and ALICIA MATIGA, FLORENCIO ACEDO
JR., and LYLA VALERIO, Respondents.
DECISION
VELASCO, JR., J.:
The Case
This is a Petition for Review on Certiorari under Rule 45 assailing the
April 25, 2013 Order of the Regional Trial Court (RTC) in Civil Case No.
(1798)-021 as well as its Order of July 3, 2013 denying reconsideration.
The Facts
Alfredo R. Bautista (Bautista), petitioner’s predecessor, inherited in
1983 a free-patent land located in Poblacion, Lupon, Davao Oriental and
covered by Original Certificate of Title (OCT) No. (1572) P-6144. A few
years later, he subdivided the property and sold it to several vendees,
herein respondents, via a notarized deed of absolute sale dated May 30,
1991. Two months later, OCT No. (1572) P-6144 was canceled and
Transfer Certificates of Title (TCTs) were issued in favor of the
vendees.1
Three years after the sale, or on August 5, 1994, Bautista filed a
complaint for repurchase against respondents before the RTC, Branch
32, Lupon, Davao Oriental, docketed as Civil Case No. 1798, 2 anchoring
his cause of action on Section 119 of Commonwealth Act No. (CA) 141,
otherwise known as the "Public Land Act," which reads:
SECTION 119. Every conveyance of land acquired under the free patent
or homestead provisions, when proper, shall be subject to repurchase
by the applicant, his widow, or legal heirs, within a period of five years
from the date of the conveyance.
Respondents, in their Answer, raised lack of cause of action, estoppel,
prescription, and laches, as defenses.
Meanwhile, during the pendency of the case, Bautista died and was
substituted by petitioner Epifania G. Bautista (Epifania).
Respondents Francisco and Welhilmina Lindo later entered into a
compromise agreement with petitioners, whereby they agreed to cede
to Epifania a three thousand two hundred and thirty square meter
(3,230 sq.m.)-portion of the property as well as to waive, abandon,
surrender, and withdraw all claims and counterclaims against each
other. The compromise was approved by the RTC in its Decision dated
January 27, 2011, the fallo of which reads:
WHEREFORE, a DECISION is hereby rendered based on the above-
quoted Compromise Agreement and the parties are enjoined to strictly
comply with the terms and conditions of the same.
SO ORDERED.3
Other respondents, however, filed a Motion to Dismiss 4 dated February
4, 2013, alleging that the complaint failed to state the value of the
property sought to be recovered. Moreover, they asserted that the total
selling price of all the properties is only sixteen thousand five hundred
pesos (PhP 16,500), and the selling price or market value of a property
is always higher than its assessed value. Since Batas Pambansa Blg. (BP)
129, as amended, grants jurisdiction to the RTCs over civil actions
involving title to or possession of real property or interest therein
where the assessed value is more than PhP 20,000, then the RTC has no
jurisdiction over the complaint in question since the property which
Bautista seeks to repurchase is below the PhP 20,000 jurisdictional
ceiling.
RTC Ruling5
Acting on the motion, the RTC issued the assailed order dismissing the
complaint for lack of jurisdiction. The trial court found that Bautista
failed to allege in his complaint that the value of the subject property
exceeds 20 thousand pesos. Furthermore, what was only stated therein
was that the total and full refund of the purchase price of the property
is PhP 16,500. This omission was considered by the RTC as fatal to the
case considering that in real actions, jurisdictional amount is
determinative of whether it is the municipal trial court or the RTC that
has jurisdiction over the case.
With respect to the belated filing of the motion, the RTC, citing Cosco
Philippines Shipping, Inc. v. Kemper Insurance Company, 6 held that a
motion to dismiss for lack of jurisdiction may be filed at any stage of the
proceedings, even on appeal, and is not lost by waiver or by estoppel.
The dispositive portion of the assailed Order reads:
WHEREFORE, the complaint for Repurchase, Consignation, with
Preliminary Injunction and Damages is hereby dismissed for lack of
jurisdiction.
SO ORDERED.7
Assignment of Errors
Their motion for reconsideration having been denied, petitioners now
seek recourse before this Court with the following assigned errors:
I
THE PUBLIC RESPONDENT RTC ERRED IN ADMITTING THE MOTION
TO DISMISS DATED FEBRUARY 4, 2013, BELATEDLY FILED BY THE
PRIVATE RESPONDENTS IN THE CASE.
II
THE PUBLIC RESPONDENT RTC ERRED IN HOLDING THAT THE
INSTANT CASE FOR REPURCHASE IS A REAL ACTION. 8
The Issue
Stated differently, the issue for the Court’s resolution is: whether or not
the RTC erred in granting the motion for the dismissal of the case on the
ground of lack of jurisdiction over the subject matter.
Arguments
Manila, where such assessed value does not exceed Fifty thousand
pesos (₱50,000.00) exclusive of interest, damages of whatever kind,
attorney’s fees, litigation expenses and costs: Provided, That in cases of
land not declared for taxation purposes, the value of such property shall
be determined by the assessed value of the adjacent lots.

The core issue is whether the action filed by petitioners is one involving
Petitioners argue that respondents belatedly filed their Motion to
title to or possession of real property or any interest therein or one
Dismiss and are now estopped from seeking the dismissal of the case, it
incapable of pecuniary estimation.
having been filed nine (9) years after the filing of the complaint and
after they have actively participated in the proceedings. Additionally,
they allege that an action for repurchase is not a real action, but one The course of action embodied in the complaint by the present
incapable of pecuniary estimation, it being founded on privity of petitioners’ predecessor, Alfredo R. Bautista, is to enforce his right to
contract between the parties. According to petitioners, what they seek repurchase the lots he formerly owned pursuant to the right of a free-
is the enforcement of their right to repurchase the subject property patent holder under Sec. 119 of CA 141 or the Public Land Act.
under Section 119 of CA 141.
The Court rules that the complaint to redeem a land subject of a free
Respondents, for their part, maintain that since the land is no longer patent is a civil action incapable of pecuniary estimation.
devoted to agriculture, the right of repurchase under said law can no
longer be availed of, citing Santana v. Mariñ as. 9 Furthermore, they
It is a well-settled rule that jurisdiction of the court is determined by
suggest that petitioners intend to resell the property for a higher profit,
the allegations in the complaint and the character of the relief
thus, the attempt to repurchase. This, according to respondents, goes
sought.10 In this regard, the Court, in Russell v. Vestil, 11 wrote that "in
against the policy and is not in keeping with the spirit of CA 141 which
determining whether an action is one the subject matter of which is not
is the preservation of the land gratuitously given to patentees by the
capable of pecuniary estimation this Court has adopted the criterion of
State as a reward for their labor in cultivating the property. Also, the
first ascertaining the nature of the principal action or remedy sought. If
Deed of Absolute Sale presented in evidence by Bautista was
it is primarily for the recovery of a sum of money, the claim is
unilaterally executed by him and was not signed by respondents. Lastly,
considered capable of pecuniary estimation, and whether jurisdiction is
respondents argue that repurchase is a real action capable of pecuniary
in the municipal courts or in the RTCs would depend on the amount of
estimation.
the claim." But where the basic issue is something other than the right
to recover a sum of money, where the money claim is purely incidental
Our Ruling to, or a consequence of, the principal relief sought, this Court has
considered such actions as cases where the subject of the litigation may
not be estimated in terms of money, and, hence, are incapable of
The petition is meritorious.
pecuniary estimation. These cases are cognizable exclusively by RTCs. 12

Jurisdiction of courts is granted by the Constitution and pertinent laws.

Settled jurisprudence considers some civil actions as incapable of
pecuniary estimation, viz:
Jurisdiction of RTCs, as may be relevant to the instant petition, is
provided in Sec. 19 of BP 129, which reads:
1. Actions for specific performance;

Sec. 19. Jurisdiction in civil cases.―Regional Trial Courts shall exercise

2. Actions for support which will require the determination
exclusive original jurisdiction:
of the civil status;

1) In all civil actions in which the subject of the litigation is

3. The right to support of the plaintiff;
incapable of pecuniary estimation;

4. Those for the annulment of decisions of lower courts;

2) In all civil actions which involve the title to, or possession
of, real property, or any interest therein, where the assessed
value of the property involved exceeds Twenty thousand 5. Those for the rescission or reformation of contracts; 13
pesos (₱20,000.00) or, for civil actions in Metro Manila,
where such value exceeds Fifty thousand pesos (₱50,000.00)
6. Interpretation of a contractual stipulation. 14
except actions for forcible entry into and unlawful detainer of
lands or buildings, original jurisdiction over which is
conferred upon the Metropolitan Trial Courts, Municipal The Court finds that the instant cause of action to redeem the land is
Trial Courts, and Municipal Circuit Trial Courts. one for specific performance.

On the other hand, jurisdiction of first level courts is prescribed in Sec.
33 of BP 129, which provides:
Sec. 33. Jurisdiction of Metropolitan Trial Courts, Municipal Trial Courts
and Municipal Circuit Trial Courts in civil cases.―Metropolitan Trial
Courts, Municipal Trial Courts, and Municipal Circuit Trial Courts shall
exercise:
xxxx
3) Exclusive original jurisdiction in all civil actions which involve title
to, or possession of, real property, or any interest therein where the
assessed value of the property or interest therein does not exceed
Twenty thousand pesos (₱20,000.00) or, in civil actions in Metro
The facts are clear that Bautista sold to respondents his lots which were
covered by a free patent. While the deeds of sale do not explicitly
contain the stipulation that the sale is subject to repurchase by the
applicant within a period of five (5) years from the date of conveyance
pursuant to Sec. 119 of CA 141, still, such legal provision is deemed
integrated and made part of the deed of sale as prescribed by law. It is
basic that the law is deemed written into every contract. 15 Although a
contract is the law between the parties, the provisions of positive law
which regulate contracts are deemed written therein and shall limit and
govern the relations between the parties. 16 Thus, it is a binding
prestation in favor of Bautista which he may seek to enforce. That is
precisely what he did. He filed a complaint to enforce his right granted
by law to recover the lot subject of free patent. Ergo, it is clear that his
action is for specific performance, or if not strictly such action, then it is
akin or analogous to one of specific performance. Such being the case,
his action for specific performance is incapable of pecuniary estimation
and cognizable by the RTC.
Respondents argue that Bautista’s action is one involving title to or
possession of real property or any interests therein and since the selling
price is less than PhP 20,000, then jurisdiction is lodged with the MTC.
They rely on Sec. 33 of BP 129.
Republic Act No. 7691 17 amended Sec. 33 of BP 129 and gave
Metropolitan Trial Courts, Municipal Trial Courts, and Municipal Circuit
Trial Courts exclusive original jurisdiction in all civil actions which
involve title to, or possession of, real property, or any interest therein
where the assessed value of the property or interest therein does not
exceed twenty thousand pesos (PhP 20,000) or, in civil actions in Metro
Manila, where such assessed value does not exceed fifty thousand pesos
(PhP 50,000) exclusive of interest, damages of whatever kind,
attorney’s fees, litigation expenses and costs.
5. By submitting the compromise agreement for approval.22
Having fully participated in all stages of the case, and even invoking the
RTC’s authority by asking for affirmative reliefs, respondents can no
longer assail the jurisdiction of the said trial court. Simply put,
considering the extent of their participation in the case, they are, as
they should be, considered estopped from raising lack of jurisdiction as
a ground for the dismissal of the action.1âwphi1
WHEREFORE, premises considered, the instant petition is hereby
GRANTED. The April 25, 2013 and July 3, 2013 Orders of the Regional
Trial Court in Civil Case No. (1798)-021 are hereby REVERSED and SET
ASIDE.
The Regional Trial Court, Branch 32 in Lupon, Davao Oriental is
ORDERED to proceed with dispatch in resolving Civil Case No. (1798)-
021.

At first blush, it appears that the action filed by Bautista involves title to
No pronouncement as to costs.
or possession of the lots he sold to respondents. Since the total selling
price is less than PhP 20,000, then the MTC, not the RTC, has
jurisdiction over the case. This proposition is incorrect for the re- SO ORDERED.
acquisition of the lots by Bautista or herein successors-in-interests, the
present petitioners, is but incidental to and an offshoot of the exercise
of the right by the latter to redeem said lots pursuant to Sec. 119 of CA
141. The reconveyance of the title to petitioners is solely dependent on
the exercise of such right to repurchase the lots in question and is not
the principal or main relief or remedy sought. Thus, the action of
petitioners is, in reality, incapable of pecuniary estimation, and the
reconveyance of the lot is merely the outcome of the performance of the
obligation to return the property conformably to the express provision
of CA 141.

Even if we treat the present action as one involving title to real property
or an interest therein which falls under the jurisdiction of the first level
court under Sec. 33 of BP 129, as the total selling price is only PhP
16,000 way below the PhP 20,000 ceiling, still, the postulation of
respondents that MTC has jurisdiction will not hold water. This is
because respondents have actually participated in the proceedings
before the RTC and aggressively defended their position, and by virtue
of which they are already barred to question the jurisdiction of the RTC
following the principle of jurisdiction by estoppel.

In Heirs of Jose Fernando v. De Belen, it was held that the party raising
defenses to the complaint, actively participating in the proceedings by
filing pleadings, presenting his evidence, and invoking its authority by
asking for an affirmative relief is deemed estopped from questioning
the jurisdiction of the court.18

Here, we note that aside from the belated filing of the motion to
dismiss––it having been filed nine (9) years from the filing of the
complaint––respondents actively participated in the proceedings
through the following acts:

1. By filing their Answer and Opposition to the Prayer for

Injunction19 dated September 29, 1994 whereby they even
interposed counterclaims, specifically: PhP 501,000 for
unpaid survey accounts, PhP 100,000 each as litigation
expenses, PhP 200,000 and PhP 3,000 per daily appearance
by way of attorney’s fees, PhP 500,000 as moral damages,
PhP 100,000 by way of exemplary damages, and costs of suit;

2. By participating in Pre-trial;

3. By moving for the postponement of their presentation of

evidence;20

4. By presenting their witness;21 and

G.R. No. L-22590 March 20, 1987
SOLOMON BOYSAW and ALFREDO M. YULO, JR., plaintiffs-
appellants, 
vs.
INTERPHIL PROMOTIONS, INC., LOPE SARREAL, SR., and MANUEL
NIETO, JR., defendants-appellees.
Felipe Torres and Associates for plaintiffs-appellants.
V.E. Del Rosario & Associates for defendant-appellee M. Nieto, Jr.
A.R. Naravasa & Pol Tiglao, Jr. for defendant-appellee Interphil
Promotions, Inc.
RESOLUTION
FERNAN, J.:
This is an appeal interposed by Solomon Boysaw and Alfredo Yulo, Jr.,
from the decision dated July 25, 1963 and other rulings and orders of
the then Court of First Instance [CFI] of Rizal, Quezon City, Branch V in
Civil Case No. Q-5063, entitled "Solomon Boysaw and Alfredo M. Yulo,
Jr., Plaintiffs versus Interphil Promotions, Inc., Lope Sarreal, Sr. and
Manuel Nieto, Jr., Defendants," which, among others, ordered them to
jointly and severally pay defendant-appellee Manuel Nieto, Jr., the total
sum of P25,000.00, broken down into P20,000.00 as moral damages
and P5,000.00 as attorney's fees; the defendants-appellees Interphil
Promotions, Inc. and Lope Sarreal, Sr., P250,000.00 as unrealized
profits, P33,369.72 as actual damages and P5,000.00 as attorney's fees;
and defendant-appellee Lope Sarreal, Sr., the additional amount of
P20,000.00 as moral damages aside from costs.
The antecedent facts of the case are as follows:
On May 1, 1961, Solomon Boysaw and his then Manager, Willie
Ketchum, signed with Interphil Promotions, Inc. represented by Lope
Sarreal, Sr., a contract to engage Gabriel "Flash" Elorde in a boxing
contest for the junior lightweight championship of the world.
It was stipulated that the bout would be held at the Rizal Memorial
Stadium in Manila on September 30, 1961 or not later than thirty [30]
days thereafter should a postponement be mutually agreed upon, and
that Boysaw would not, prior to the date of the boxing contest, engage
in any other such contest without the written consent of Interphil
Promotions, Inc.
On May 3, 1961, a supplemental agreement on certain details not
covered by the principal contract was entered into by Ketchum and
Interphil. Thereafter, Interphil signed Gabriel "Flash" Elorde to a similar
agreement, that is, to engage Boysaw in a title fight at the Rizal
Memorial Stadium on September 30, 1961.
On June 19, 1961, Boysaw fought and defeated Louis Avila in a ten-
round non-title bout held in Las Vegas, Nevada, U.S.A. [pp. 26-27, t.s.n.,
session of March 14, 1963].
On July 2, 1961, Ketchum on his own behalf and on behalf of his
associate Frank Ruskay, assigned to J. Amado Araneta the managerial
rights over Solomon Boysaw.
Presumably in preparation for his engagement with Interphil, Solomon
Boysaw arrived in the Philippines on July 31, 1961.
On September 1, 1961, J. Amado Araneta assigned to Alfredo J. Yulo, Jr.
the managerial rights over Boysaw that he earlier acquired from
Ketchum and Ruskay. The next day, September 2, 1961, Boysaw wrote
Lope Sarreal, Sr. informing him of his arrival and presence in the
Philippines.
On September 5, 1961, Alfredo Yulo, Jr. wrote to Sarreal informing him
of his acquisition of the managerial rights over Boysaw and indicating
his and Boysaw's readiness to comply with the boxing contract of May
1, 1961. On the same date, on behalf of Interphil Sarreal wrote a letter
to the Games and Amusement Board [GAB] expressing concern over
reports that there had been a switch of managers in the case of Boysaw,
of which he had not been formally notified, and requesting that Boysaw
be called to an inquiry to clarify the situation.
The GAB called a series of conferences of the parties concerned
culminating in the issuance of its decision to schedule the Elorde-
Boysaw fight for November 4, 1961. The USA National Boxing
Association which has supervisory control of all world title fights
approved the date set by the GAB
Yulo, Jr. refused to accept the change in the fight date, maintaining his
refusal even after Sarreal on September 26, 1961, offered to advance
the fight date to October 28, 1961 which was within the 30-day period
of allowable postponements provided in the principal boxing contract
of May 1, 1961.
Early in October 1961, Yulo, Jr. exchanged communications with one
Mamerto Besa, a local boxing promoter, for a possible promotion of the
projected Elorde-Boysaw title bout. In one of such communications
dated October 6, 1961, Yulo informed Besa that he was willing to
approve the fight date of November 4,1961 provided the same was
promoted by Besa.
While an Elorde-Boysaw fight was eventually staged, the fight
contemplated in the May 1, 1961 boxing contract never materialized.
As a result of the foregoing occurrences, on October 12, 1961, Boysaw
and Yulo, Jr. sued Interphil, Sarreal, Sr. and Manuel Nieto, Jr. in the CFI
of Rizal [Quezon City Branch] for damages allegedly occasioned by the
refusal of Interphil and Sarreal, aided and abetted by Nieto, Jr., then
GAB Chairman, to honor their commitments under the boxing contract
of May 1,1961.
On the first scheduled date of trial, plaintiff moved to disqualify
Solicitor Jorge Coquia of the Solicitor General's Office and Atty. Romeo
Edu of the GAB Legal Department from appearing for defendant Nieto,
Jr. on the ground that the latter had been sued in his personal capacity
and, therefore, was not entitled to be represented by government
counsel. The motion was denied insofar as Solicitor General Coquia was
concerned, but was granted as regards the disqualification of Atty. Edu.
The case dragged into 1963 when sometime in the early part of said
year, plaintiff Boysaw left the country without informing the court and,
as alleged, his counsel. He was still abroad when, on May 13, 1963, he
was scheduled to take the witness stand. Thus, the lower court reset the
trial for June 20, 1963. Since Boysaw was still abroad on the later date,
another postponement was granted by the lower court for July 23, 1963
upon assurance of Boysaw's counsel that should Boysaw fail to appear
on said date, plaintiff's case would be deemed submitted on the
evidence thus far presented.
On or about July 16, 1963, plaintiffs represented by a new counsel, filed
an urgent motion for postponement of the July 23, 1963 trial, pleading
anew Boysaw's inability to return to the country on time. The motion
was denied; so was the motion for reconsideration filed by plaintiffs on
July 22, 1963.
The trial proceeded as scheduled on July 23, 1963 with plaintiff's case
being deemed submitted after the plaintiffs declined to submit
documentary evidence when they had no other witnesses to present.
When defendant's counsel was about to present their case, plaintiff's
counsel after asking the court's permission, took no further part in the
proceedings.
After the lower court rendered its judgment dismissing the plaintiffs'
complaint, the plaintiffs moved for a new trial. The motion was denied,
hence, this appeal taken directly to this Court by reason of the amount
involved.
From the errors assigned by the plaintiffs, as having been committed by
the lower court, the following principal issues can be deduced:
1. Whether or not there was a violation of the fight
contract of May 1, 1961; and if there was, who was
guilty of such violation.
2. Whether or not there was legal ground for the
postponement of the fight date from September 1,
1961, as stipulated in the May 1, 1961 boxing
contract, to November 4,1961,
3. Whether or not the lower court erred in the
refusing a postponement of the July 23, 1963 trial.
4. Whether or not the lower court erred in denying
the appellant's motion for a new trial.
5. Whether or not the lower court, on the basis of
the evidence adduced, erred in awarding the
appellees damages of the character and amount
stated in the decision.
On the issue pertaining to the violation of the May 1, 1961 fight
contract, the evidence established that the contract was violated by
appellant Boysaw himself when, without the approval or consent of
Interphil, he fought Louis Avila on June 19, 1961 in Las Vegas Nevada.
Appellant Yulo admitted this fact during the trial. [pp. 26-27, t.s.n.,
March 14, 1963].
While the contract imposed no penalty for such violation, this does not
grant any of the parties the unbridled liberty to breach it with impunity.
Our law on contracts recognizes the principle that actionable injury
inheres in every contractual breach. Thus:
Those who in the performance of their obligations
are guilty of fraud, negligence or delay, and those
who in any manner contravene the terms thereof,
are liable for damages. [Art. 1170, Civil Code].
Also:
The power to rescind obligations is implied, in
reciprocal ones, in case one of the obligors should
not comply with what is incumbent upon him.
[Part 1, Art. 1191, Civil Code].
There is no doubt that the contract in question gave rise to reciprocal
obligations. "Reciprocal obligations are those which arise from the
same cause, and in which each party is a debtor and a creditor of the
other, such that the obligation of one is dependent upon the obligation
of the other. They are to be performed simultaneously, so that the
performance of one is conditioned upon the simultaneous fulfillment of
the other" [Tolentino, Civil Code of the Philippines, Vol. IV, p. 175.1
The power to rescind is given to the injured party. "Where the plaintiff
is the party who did not perform the undertaking which he was bound by
the terms of the agreement to perform 4 he is not entitled to insist upon
the performance of the contract by the defendant, or recover damages by
reason of his own breach " [Seva vs. Alfredo Berwin 48 Phil. 581,
Emphasis supplied].
Another violation of the contract in question was the assignment and
transfer, first to J. Amado Araneta, and subsequently, to appellant Yulo,
Jr., of the managerial rights over Boysaw without the knowledge or
consent of Interphil.
The assignments, from Ketchum to Araneta, and from Araneta to Yulo,
were in fact novations of the original contract which, to be valid, should
have been consented to by Interphil.
Novation which consists in substituting a new
debtor in the place of the original one, may be
made even without the knowledge or against the
will of the latter, but not without the consent of the
creditor.[Art. 1293, Civil Code, emphasis supplied].
That appellant Yulo, Jr., through a letter, advised Interphil on
September 5, 1961 of his acquisition of the managerial rights over
Boysaw cannot change the fact that such acquisition, and the prior
acquisition of such rights by Araneta were done without the consent of
Interphil. There is no showing that Interphil, upon receipt of Yulo's
letter, acceded to the "substitution" by Yulo of the original principal
obligor, who is Ketchum. The logical presumption can only be that, with
Interphil's letter to the GAB expressing concern over reported
managerial changes and requesting for clarification on the matter, the
appellees were not reliably informed of the changes of managers. Not
being reliably informed, appellees cannot be deemed to have consented
to such changes.
Under the law when a contract is unlawfully novated by an applicable
and unilateral substitution of the obligor by another, the aggrieved
creditor is not bound to deal with the substitute.
The consent of the creditor to the change of
debtors, whether in expromision or delegacion is
an, indispensable requirement . . . Substitution of
one debtor for another may delay or prevent the
fulfillment of the obligation by reason of the
inability or insolvency of the new debtor, hence,
the creditor should agree to accept the
substitution in order that it may be binding on
him.
Thus, in a contract where x is the creditor and y is
the debtor, if y enters into a contract with z, under
which he transfers to z all his rights under the first
contract, together with the obligations thereunder,
but such transfer is not consented to or approved
by x, there is no novation. X can still bring his
action against y for performance of their contract
or damages in case of breach. [Tolentino, Civil
Code of the Philippines, Vol. IV, p. 3611.
From the evidence, it is clear that the appellees, instead of availing
themselves of the options given to them by law of rescission or refusal
to recognize the substitute obligor Yulo, really wanted to postpone the
fight date owing to an injury that Elorde sustained in a recent bout. That
the appellees had the justification to renegotiate the original contract,
particularly the fight date is undeniable from the facts aforestated.
Under the circumstances, the appellees' desire to postpone the fight
date could neither be unlawful nor unreasonable.
We uphold the appellees' contention that since all the rights on the
matter rested with the appellees, and appellants' claims, if any, to the
enforcement of the contract hung entirely upon the former's pleasure
and sufferance, the GAB did not act arbitrarily in acceding to the
appellee's request to reset the fight date to November 4, 1961. It must
be noted that appellant Yulo had earlier agreed to abide by the GAB
ruling.
In a show of accommodation, the appellees offered to advance the
November 4, 1961 fight to October 28, 1961 just to place it within the
30- day limit of allowable postponements stipulated in the original
boxing contract.
The refusal of appellants to accept a postponement without any other
reason but the implementation of the terms of the original boxing
contract entirely overlooks the fact that by virtue of the violations they
have committed of the terms thereof, they have forfeited any right to its
enforcement.
On the validity of the fight postponement, the violations of the terms of
the original contract by appellants vested the appellees with the right to
rescind and repudiate such contract altogether. That they sought to
seek an adjustment of one particular covenant of the contract, is under
the circumstances, within the appellee's rights.
While the appellants concede to the GAB's authority to regulate boxing
contests, including the setting of dates thereof, [pp. 44-49, t.s.n., Jan. 17,
1963], it is their contention that only Manuel Nieto, Jr. made the
decision for postponement, thereby arrogating to himself the
prerogatives of the whole GAB Board.
The records do not support appellants' contention. Appellant Yulo
himself admitted that it was the GAB Board that set the questioned fight
date. [pp. 32-42, t.s.n., Jan. 17, 1963]. Also, it must be stated that one of
the strongest presumptions of law is that official duty has been
regularly performed. In this case, the absence of evidence to the
contrary, warrants the full application of said presumption that the
decision to set the Elorde-Boysaw fight on November 4, 1961 was a
GAB Board decision and not of Manuel Nieto, Jr. alone.
Anent the lower court's refusal to postpone the July 23, 1963 trial,
suffice it to say that the same issue had been raised before Us by
appellants in a petition for certiorari and prohibition docketed as G.R.
No. L-21506. The dismissal by the Court of said petition had laid this
issue to rest, and appellants cannot now hope to resurrect the said issue
in this appeal.
On the denial of appellant's motion for a new trial, we find that the
lower court did not commit any reversible error.
The alleged newly discovered evidence, upon which the motion for new
trial was made to rest, consists merely of clearances which Boysaw
secured from the clerk of court prior to his departure for abroad. Such
evidence cannot alter the result of the case even if admitted for they can
only prove that Boysaw did not leave the country without notice to the
court or his counsel.
The argument of appellants is that if the clearances were admitted to
support the motion for a new trial, the lower court would have allowed
the postponement of the trial, it being convinced that Boysaw did not
leave without notice to the court or to his counsel. Boysaw's testimony
upon his return would, then, have altered the results of the case.
We find the argument without merit because it confuses the evidence of
the clearances and the testimony of Boysaw. We uphold the lower
court's ruling that:
The said documents [clearances] are not evidence
to offset the evidence adduced during the hearing
of the defendants. In fact, the clearances are not
even material to the issues raised. It is the opinion
of the Court that the 'newly discovered evidence'
contemplated in Rule 37 of the Rules of Court, is
such kind of evidence which has reference to the
merits of the case, of such a nature and kind, that if
it were presented, it would alter the result of the
judgment. As admitted by the counsel in their
pleadings, such clearances might have impelled
the Court to grant the postponement prayed for by
them had they been presented on time. The
question of the denial of the postponement sought
for by counsel for plaintiffs is a moot issue . . . The
denial of the petition for certiorari and prohibition
filed by them, had he effect of sustaining such
ruling of the court . . . [pp. 296-297, Record on
Appeal].
The testimony of Boysaw cannot be considered newly discovered
evidence for as appellees rightly contend, such evidence has been in
existence waiting only to be elicited from him by questioning.
We cite with approval appellee's contention that "the two qualities that
ought to concur or dwell on each and every of evidence that is invoked
as a ground for new trial in order to warrant the reopening . . . inhered
separately on two unrelated species of proof" which "creates a legal
monstrosity that deserves no recognition."
On the issue pertaining to the award of excessive damages, it must be
noted that because the appellants wilfully refused to participate in the
final hearing and refused to present documentary evidence after they
no longer had witnesses to present, they, by their own acts prevented
themselves from objecting to or presenting proof contrary to those
adduced for the appellees.
On the actual damages awarded to appellees, the appellants contend
that a conclusion or finding based upon the uncorroborated testimony
of a lone witness cannot be sufficient. We hold that in civil cases, there
is no rule requiring more than one witness or declaring that the
testimony of a single witness will not suffice to establish facts,
especially where such testimony has not been contradicted or rebutted.
Thus, we find no reason to disturb the award of P250,000.00 as and for
unrealized profits to the appellees.
On the award of actual damages to Interphil and Sarreal, the records
bear sufficient evidence presented by appellees of actual damages
which were neither objected to nor rebutted by appellants, again
because they adamantly refused to participate in the court proceedings.
The award of attorney's fees in the amount of P5,000.00 in favor of
defendant-appellee Manuel Nieto, Jr. and another P5,000.00 in favor of
defendants-appellees Interphil Promotions, Inc. and Lope Sarreal, Sr.,
jointly, cannot also be regarded as excessive considering the extent and
nature of defensecounsels' services which involved legal work for
sixteen [16] months.
However, in the matter of moral damages, we are inclined to uphold the
appellant's contention that the award is not sanctioned by law and well-
settled authorities. Art. 2219 of the Civil Code provides:
Art. 2219. Moral damages may be recovered in the
following analogous cases:
1) A criminal offense resulting in physical injuries;
2) Quasi-delict causing physical injuries;
3) Seduction, abduction, rape or other lascivious
acts;
4) Adultery or concubinage;
 5) Illegal or arbitrary detention or arrest;

6) Illegal search;

7) Libel, slander or any other form of defamation;

8) Malicious prosecution;

9) Acts mentioned in Art. 309.

10) Acts and actions referred to in Arts., 21, 26, 27,

28, 29, 30, 32, 34 and 35.

The award of moral damages in the instant case is not based on any of
the cases enumerated in Art. 2219 of the Civil Code. The action herein
brought by plaintiffs-appellants is based on a perceived breach
committed by the defendants-appellees of the contract of May 1, 1961,
and cannot, as such, be arbitrarily considered as a case of malicious
prosecution.

Moral damages cannot be imposed on a party litigant although such

litigant exercises it erroneously because if the action has been
erroneously filed, such litigant may be penalized for costs.

The grant of moral damages is not subject to the

whims and caprices of judges or courts. The
court's discretion in granting or refusing it is
governed by reason and justice. In order that a
person may be made liable to the payment of
moral damages, the law requires that his act be
wrongful. The adverse result of an action does not
per se make the act wrongful and subject the actor
to the payment of moral damages. The law could
not have meant to impose a penalty on the right to
litigate; such right is so precious that moral
damages may not be charged on those who may
exercise it erroneously. For these the law taxes
costs. [Barreto vs. Arevalo, et. al. No. L-7748, Aug.
27, 1956, 52 O.G., No. 13, p. 5818.]

WHEREFORE, except for the award of moral damages which is herein

deleted, the decision of the lower court is hereby affirmed.

SO ORDERED.
G.R. No. L-28602 September 29, 1970
UNIVERSITY OF THE PHILIPPINES, petitioner, 
vs.
WALFRIDO DE LOS ANGELES, in his capacity as JUDGE of the COURT
OF FIRST INSTANCE IN QUEZON CITY, et al., respondents.
Office of the Solicitor General Antonio P. Barredo, Solicitor Augusto M.
Amores and Special Counsel Perfecto V. Fernandez for petitioner.
Norberto J. Quisumbing for private respondents.
REYES, J.B.L., J.:
Three (3) orders of the Court of First Instance of Rizal (Quezon City),
issued in its Civil Case No. 9435, are sought to be annulled in this
petition for certiorari and prohibition, filed by herein petitioner
University of the Philippines (or UP) against the above-named
respondent judge and the Associated Lumber Manufacturing Company,
Inc. (or ALUMCO). The first order, dated 25 February 1966, enjoined UP
from awarding logging rights over its timber concession (or Land
Grant), situated at the Lubayat areas in the provinces of Laguna and
Quezon; the second order, dated 14 January 1967, adjudged UP in
contempt of court, and directed Sta. Clara Lumber Company, Inc. to
refrain from exercising logging rights or conducting logging operations
on the concession; and the third order, dated 12 December 1967,
denied reconsideration of the order of contempt.
As prayed for in the petition, a writ of preliminary injunction against
the enforcement or implementation of the three (3) questioned orders
was issued by this Court, per its resolution on 9 February 1968.
The petition alleged the following:
That the above-mentioned Land Grant was segregated from the public
domain and given as an endowment to UP, an institution of higher
learning, to be operated and developed for the purpose of raising
additional income for its support, pursuant to Act 3608;
That on or about 2 November 1960, UP and ALUMCO entered into a
logging agreement under which the latter was granted exclusive
authority, for a period starting from the date of the agreement to 31
December 1965, extendible for a further period of five (5) years by
mutual agreement, to cut, collect and remove timber from the Land
Grant, in consideration of payment to UP of royalties, forest fees, etc.;
that ALUMCO cut and removed timber therefrom but, as of 8 December
1964, it had incurred an unpaid account of P219,362.94, which, despite
repeated demands, it had failed to pay; that after it had received notice
that UP would rescind or terminate the logging agreement, ALUMCO
executed an instrument, entitled "Acknowledgment of Debt and
Proposed Manner of Payments," dated 9 December 1964, which was
approved by the president of UP, and which stipulated the following:
3. In the event that the payments called for in Nos.
1 and 2 of this paragraph are not sufficient to
liquidate the foregoing indebtedness of the
DEBTOR in favor of the CREDITOR, the balance
outstanding after the said payments have been
applied shall be paid by the DEBTOR in full no
later than June 30, 1965;
xxx xxx xxx
5. In the event that the DEBTOR fails to comply
with any of its promises or undertakings in this
document, the DEBTOR agrees without
reservation that the CREDITOR shall have the right
and the power to consider the Logging Agreement
dated December 2, 1960 as rescinded without the
necessity of any judicial suit, and the CREDITOR
shall be entitled as a matter of right to Fifty
Thousand Pesos (P50,000.00) by way of and for
liquidated damages;
ALUMCO continued its logging operations, but again incurred an unpaid
account, for the period from 9 December 1964 to 15 July 1965, in the
amount of P61,133.74, in addition to the indebtedness that it had
previously acknowledged.
That on 19 July 1965, petitioner UP informed respondent ALUMCO that
it had, as of that date, considered as rescinded and of no further legal
effect the logging agreement that they had entered in 1960; and on 7
September 1965, UP filed a complaint against ALUMCO, which was
docketed as Civil Case No. 9435 of the Court of First Instance of Rizal
(Quezon City), for the collection or payment of the herein before stated
sums of money and alleging the facts hereinbefore specified, together
with other allegations; it prayed for and obtained an order, dated 30
September 1965, for preliminary attachment and preliminary
injunction restraining ALUMCO from continuing its logging operations
in the Land Grant.
That before the issuance of the aforesaid preliminary injunction UP had
taken steps to have another concessionaire take over the logging
operation, by advertising an invitation to bid; that bidding was
conducted, and the concession was awarded to Sta. Clara Lumber
Company, Inc.; the logging contract was signed on 16 February 1966.
That, meantime, ALUMCO had filed several motions to discharge the
writs of attachment and preliminary injunction but were denied by the
court;
That on 12 November 1965, ALUMCO filed a petition to enjoin
petitioner University from conducting the bidding; on 27 November
1965, it filed a second petition for preliminary injunction; and, on 25
February 1966, respondent judge issued the first of the questioned
orders, enjoining UP from awarding logging rights over the concession
to any other party.
That UP received the order of 25 February 1966 after it had concluded
its contract with Sta. Clara Lumber Company, Inc., and said company
had started logging operations.
That, on motion dated 12 April 1966 by ALUMCO and one Jose Rico, the
court, in an order dated 14 January 1967, declared petitioner UP in
contempt of court and, in the same order, directed Sta. Clara Lumber
Company, Inc., to refrain from exercising logging rights or conducting
logging operations in the concession.
The UP moved for reconsideration of the aforesaid order, but the
motion was denied on 12 December 1967.
Except that it denied knowledge of the purpose of the Land Grant,
which purpose, anyway, is embodied in Act 3608 and, therefore,
conclusively known, respondent ALUMCO did not deny the foregoing
allegations in the petition. In its answer, respondent corrected itself by
stating that the period of the logging agreement is five (5) years - not
seven (7) years, as it had alleged in its second amended answer to the
complaint in Civil Case No. 9435. It reiterated, however, its defenses in
the court below, which maybe boiled down to: blaming its former
general manager, Cesar Guy, in not turning over management of
ALUMCO, thereby rendering it unable to pay the sum of P219,382.94;
that it failed to pursue the manner of payments, as stipulated in the
"Acknowledgment of Debt and Proposed Manner of Payments" because
the logs that it had cut turned out to be rotten and could not be sold to
Sta. Clara Lumber Company, Inc., under its contract "to buy and sell" the resolution was proper or not. It is in this sense that judicial action
with said firm, and which contract was referred and annexed to the will be necessary, as without it, the extrajudicial resolution will remain
"Acknowledgment of Debt and Proposed Manner of Payments"; that contestable and subject to judicial invalidation, unless attack thereon
UP's unilateral rescission of the logging contract, without a court order, should become barred by acquiescence, estoppel or prescription.
was invalid; that petitioner's supervisor refused to allow respondent to
cut new logs unless the logs previously cut during the management of
Fears have been expressed that a stipulation providing for a unilateral
Cesar Guy be first sold; that respondent was permitted to cut logs in the
rescission in case of breach of contract may render nugatory the
middle of June 1965 but petitioner's supervisor stopped all logging
general rule requiring judicial action (v. Footnote, Padilla, Civil Law,
operations on 15 July 1965; that it had made several offers to petitioner
Civil Code Anno., 1967 ed. Vol. IV, page 140) but, as already observed, in
for respondent to resume logging operations but respondent received
case of abuse or error by the rescinder the other party is not barred
no reply.
from questioning in court such abuse or error, the practical effect of the
stipulation being merely to transfer to the defaulter the initiative of
The basic issue in this case is whether petitioner U.P. can treat its instituting suit, instead of the rescinder.
contract with ALUMCO rescinded, and may disregard the same before
any judicial pronouncement to that effect. Respondent ALUMCO
In fact, even without express provision conferring the power of
contended, and the lower court, in issuing the injunction order of 25
cancellation upon one contracting party, the Supreme Court of Spain, in
February 1966, apparently sustained it (although the order expresses
construing the effect of Article 1124 of the Spanish Civil Code (of which
no specific findings in this regard), that it is only after a final court
Article 1191 of our own Civil; Code is practically a reproduction), has
decree declaring the contract rescinded for violation of its terms that
repeatedly held that, a resolution of reciprocal or synallagmatic
U.P. could disregard ALUMCO's rights under the contract and treat the
contracts may be made extrajudicially unless successfully impugned in
agreement as breached and of no force or effect.
court.

We find that position untenable.

El articulo 1124 del Codigo Civil establece la
facultad de resolver las obligaciones reciprocas
In the first place, UP and ALUMCO had expressly stipulated in the para el caso de que uno de los obligados no
"Acknowledgment of Debt and Proposed Manner of Payments" that, cumpliese lo que le incumbe, facultad que, segun
upon default by the debtor ALUMCO, the creditor (UP) has "the right jurisprudencia de este Tribunal, surge
and the power to consider, the Logging Agreement dated 2 December immediatamente despuesque la otra parte
1960 as rescinded without the necessity of any judicial suit." As to such incumplio su deber, sin necesidad de una
special stipulation, and in connection with Article 1191 of the Civil declaracion previa de los Tribunales. (Sent. of the
Code, this Court stated in Froilan vs. Pan Oriental Shipping Co., et al., L- Tr. Sup. of Spain, of 10 April 1929; 106 Jur. Civ.
11897, 31 October 1964, 12 SCRA 276: 897).

there is nothing in the law that prohibits the Segun reiterada doctrina de esta Sala, el Art. 1124
parties from entering into agreement that regula la resolucioncomo una "facultad" atribuida
violation of the terms of the contract would cause a la parte perjudicada por el incumplimiento del
cancellation thereof, even without court contrato, la cual tiene derecho do opcion entre
intervention. In other words, it is not always exigir el cumplimientoo la resolucion de lo
necessary for the injured party to resort to court convenido, que puede ejercitarse, ya en la via
for rescission of the contract. judicial, ya fuera de ella, por declaracion del
acreedor, a reserva, claro es, que si la declaracion
de resolucion hecha por una de las partes se
Of course, it must be understood that the act of party in treating a
impugna por la otra, queda aquella sometida el
contract as cancelled or resolved on account of infractions by the other
examen y sancion de los Tribunale, que habran de
contracting party must be made known to the other and is always
declarar, en definitiva, bien hecha la resolucion o
provisional, being ever subject to scrutiny and review by the proper
por el contrario, no ajustada a Derecho. (Sent. TS
court. If the other party denies that rescission is justified, it is free to
of Spain, 16 November 1956; Jurisp. Aranzadi, 3,
resort to judicial action in its own behalf, and bring the matter to court.
447).
Then, should the court, after due hearing, decide that the resolution of
the contract was not warranted, the responsible party will be sentenced
to damages; in the contrary case, the resolution will be affirmed, and La resolucion de los contratos sinalagmaticos,
the consequent indemnity awarded to the party prejudiced. fundada en el incumplimiento por una de las
partes de su respectiva prestacion, puedetener
lugar con eficacia" 1. o Por la declaracion de
In other words, the party who deems the contract violated may
voluntad de la otra hecha extraprocesalmente, si
consider it resolved or rescinded, and act accordingly, without previous
no es impugnada en juicio luego con exito. y
court action, but it proceeds at its own risk. For it is only the final
2. 0 Por la demanda de la perjudicada, cuando no
judgment of the corresponding court that will conclusively and finally
opta por el cumplimientocon la indemnizacion de
settle whether the action taken was or was not correct in law. But the
danos y perjuicios realmente causados, siempre
law definitely does not require that the contracting party who believes
quese acredite, ademas, una actitud o conducta
itself injured must first file suit and wait for a judgment before taking
persistente y rebelde de laadversa o la satisfaccion
extrajudicial steps to protect its interest. Otherwise, the party injured
de lo pactado, a un hecho obstativo que de un
by the other's breach will have to passively sit and watch its damages
modoabsoluto, definitivo o irreformable lo impida,
accumulate during the pendency of the suit until the final judgment of
segun el art. 1.124, interpretado por la
rescission is rendered when the law itself requires that he should
jurisprudencia de esta Sala, contenida en las Ss. de
exercise due diligence to minimize its own damages (Civil Code, Article
12 mayo 1955 y 16 Nov. 1956, entre otras,
2203).
inspiradas por el principio del Derecho
intermedio, recogido del Canonico, por el
We see no conflict between this ruling and the previous jurisprudence cual fragenti fidem, fides non est servanda. (Ss. de 4
of this Court invoked by respondent declaring that judicial action is Nov. 1958 y 22 Jun. 1959.) (Emphasis supplied).
necessary for the resolution of a reciprocal obligation, 1 since in every
case where the extrajudicial resolution is contested only the final award
In the light of the foregoing principles, and considering that the
of the court of competent jurisdiction can conclusively settle whether
complaint of petitioner University made out a prima facie case of
breach of contract and defaults in payment by respondent ALUMCO, to
the extent that the court below issued a writ of preliminary injunction
stopping ALUMCO's logging operations, and repeatedly denied its
motions to lift the injunction; that it is not denied that the respondent
company had profited from its operations previous to the agreement of
5 December 1964 ("Acknowledgment of Debt and Proposed Manner of
Payment"); that the excuses offered in the second amended answer,
such as the misconduct of its former manager Cesar Guy, and the rotten
condition of the logs in private respondent's pond, which said
respondent was in a better position to know when it executed the
acknowledgment of indebtedness, do not constitute on their face
sufficient excuse for non-payment; and considering that whatever
prejudice may be suffered by respondent ALUMCO is susceptibility of
compensation in damages, it becomes plain that the acts of the court a
quo in enjoining petitioner's measures to protect its interest without
first receiving evidence on the issues tendered by the parties, and in
subsequently refusing to dissolve the injunction, were in grave abuse of
discretion, correctible by certiorari, since appeal was not available or
adequate. Such injunction, therefore, must be set aside.

For the reason that the order finding the petitioner UP in contempt of
court has open appealed to the Court of Appeals, and the case is
pending therein, this Court abstains from making any pronouncement
thereon.

WHEREFORE, the writ of certiorari applied for is granted, and the order

of the respondent court of 25 February 1966, granting the Associated
Lumber Company's petition for injunction, is hereby set aside. Let the
records be remanded for further proceedings conformably to this
opinion.

Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee, Barredo,

Villamor and Makasiar, JJ., concur.

Reyes, J.B.L., Actg. C.J., is on leave.

[G.R. No. 137909. December 11, 2003]
FIDELA DEL CASTILLO Vda. DE MISTICA, petitioner, vs. Spouses
BERNARDINO NAGUIAT and MARIA PAULINA GERONA-
NAGUIAT, respondents.
DECISION
PANGANIBAN, J.:
The failure to pay in full the purchase price stipulated in a deed of
sale does not ipso facto grant the seller the right to rescind the
agreement. Unless otherwise stipulated by the parties, rescission is
allowed only when the breach of the contract is substantial and
fundamental to the fulfillment of the obligation.
The Case
Before us is a Petition for Review [1] under Rule 45 of the Rules of
Court, seeking to nullify the October 31, 1997Decision[2] and
the February 23, 1999 Resolution[3] of the Court of Appeals (CA) in CA-
GR CV No. 51067. The assailed Decision disposed as follows:
WHEREFORE, modified as indicated above, the decision of the Regional
Trial Court is hereby AFFIRMED.[4]
The assailed Resolution denied petitioners Motion for
Reconsideration.
The Facts
The facts of the case are summarized by the CA as follows:
Eulalio Mistica, predecessor-in-interest of herein [petitioner], is the
owner of a parcel of land located at Malhacan, Meycauayan, Bulacan. A
portion thereof was leased to [Respondent Bernardino Naguiat]
sometime in 1970.
On 5 April 1979, Eulalio Mistica entered into a contract to sell with
[Respondent Bernardino Naguiat] over a portion of the aforementioned
lot containing an area of 200 square meters. This agreement was
reduced to writing in a document entitled Kasulatan sa Pagbibilihan
which reads as follows:
NAGSASALAYSAY:
Na ang NAGBIBILI ay nagmamay-aring tunay at naghahawak ng isang
lagay na lupa na nasa Nayon ng Malhacan, Bayan ng Meycauayan,
Lalawigan ng Bulacan, na ang kabuuan sukat at mga kahangga
nito gaya ng sumusunod:
x x x x x x x x x
Na alang-alang sa halagang DALAWANG PUNG LIBONG PISO
(P20,000.00) Kualtang Pilipino, ang NAGBIBILI ay nakipagkasundo ng
kanyang ipagbibili ang isang bahagi o sukat na DALAWANG DAAN (200)
METROS PARISUKAT, sa lupang nabanggit sa itaas, na ang mga
kahangga nito ay gaya ng sumusunod:
x x x x x x x x x
Na magbibigay ng paunang bayad ang BUMIBILI SA NAGBIBILI na
halagang DALAWANG LIBONG PISO (P2,000.00) Kualtang Pilipino, sa
sandaling lagdaan ang kasulatang ito.
Na ang natitirang halagang LABING WALONG LIBONG PISO
(P18,000.00) Kualtang Pilipino, ay babayaran ng BUM[I]BILI sa loob ng
Sampung (10) taon, na magsisimula sa araw din ng lagdaan ang
kasulatang ito.
Sakaling hindi makakabayad ang Bumibili sa loob ng panahon
pinagkasunduan, an[g] BUMIBILI ay magbabayad ng pakinabang o
interes ng 12% isang taon, sa taon nilakaran hanggang sa itoy
mabayaran tuluyan ng Bumibili:
Sa katunayan ng lahat ay nilagdaan ng Magkabilang Panig ang
kasulatang ito, ngayon ika 5 ng Abril, 1979, sa Bayan ng
Meycauayan. Lalawigan ng Bulacan, Pilipinas.
(signed) (signed)
BERNARDINO NAGUIAT EULALIO MISTICA
Bumibili Nagbibili
Pursuant to said agreement, [Respondent Bernardino Naguiat] gave a
downpayment of P2,000.00. He made another partial payment
of P1,000.00 on 7 February 1980. He failed to make any payments
thereafter. Eulalio Mistica died sometime in October 1986.
On 4 December 1991, [petitioner] filed a complaint for rescission
alleging inter alia: that the failure and refusal of [respondents] to pay
the balance of the purchase price constitutes a violation of the contract
which entitles her to rescind the same; that [respondents] have been in
possession of the subject portion and they should be ordered to vacate
and surrender possession of the same to [petitioner] ; that the
reasonable amount of rental for the subject land is P200.00 a month;
that on account of the unjustified actuations of [respondents],
[petitioner] has been constrained to litigate where she incurred
expenses for attorneys fees and litigation expenses in the sum
of P20,000.00.
In their answer and amended answer, [respondents] contended that the
contract cannot be rescinded on the ground that it clearly stipulates
that in case of failure to pay the balance as stipulated, a yearly interest
of 12% is to be paid. [Respondent Bernardino Naguiat] likewise alleged
that sometime in October 1986, during the wake of the late Eulalio
Mistica, he offered to pay the remaining balance to [petitioner] but the
latter refused and hence, there is no breach or violation committed by
them and no damages could yet be incurred by the late Eulalio Mistica,
his heirs or assigns pursuant to the said document; that he is presently
the owner in fee simple of the subject lot having acquired the same by
virtue of a Free Patent Title duly awarded to him by the Bureau of
Lands; and that his title and ownership had already become
indefeasible and incontrovertible. As counterclaim, [respondents] pray
for moral damages in the amount of P50,000.00; exemplary damages in
the amount of P30,000.00; attorneys fees in the amount of P10,000.00
and other litigation expenses.
On 8 July 1992, [respondents] also filed a motion to dismiss which was
denied by the court on 29 July 1992. The motion for reconsideration
was likewise denied per its Order of 17 March 1993.
After the presentation of evidence, the court on 27 January
1995 rendered the now assailed judgment, the dispositive portion of
which reads:
WHEREFORE, premises considered, judgment is hereby rendered:
1. Dismissing the complaint and ordering the [petitioner] to pay the
[respondents] attorneys fee in the amount of P10,000.00 and costs of
the suit;
2. Ordering the [respondents]:
a. To pay [petitioner] and the heirs of Eulalio
Mistica the balance of the purchase
price in the amount of P17,000.00, with
interest thereon at the rate of 12% per
annum computed from April 5, 1989
until full payment is made, subject to
the application of the consigned amount
to such payment;
b. To return to [petitioner] and the heirs of
Eulalio Mistica the extra area of 58
square meters from the land covered by
OCT No. 4917 (M), the corresponding
price therefor based on the prevailing
market price thereof.[5] (Citations
omitted)
CAs Decision
Disallowing rescission, the CA held that respondents did not
breach the Contract of Sale. It explained that the conclusion of the ten-
year period was not a resolutory term, because the Contract had
stipulated that payment -- with interest of 12 percent -- could still be
made if respondents failed to pay within the period. According to the
appellate court, petitioner did not disprove the allegation of
respondents that they had tendered payment of the balance of the
purchase price during her husbands funeral, which was well within the
ten-year period.
Moreover, rescission would be unjust to respondents, because
they had already transferred the land title to their names. The proper
recourse, the CA held, was to order them to pay the balance of the
purchase price, with 12 percent interest.
As to the matter of the extra 58 square meters, the CA held that
its reconveyance was no longer feasible, because it had been included in
the title issued to them. The appellate court ruled that the only remedy
available was to order them to pay petitioner the fair market value of
the usurped portion.
Hence, this Petition.[6]
Issues
In her Memorandum,[7] petitioner raises the following issues:
1. Whether or not the Honorable Court of Appeals erred in
the application of Art. 1191 of the New Civil Code,
as it ruled that there is no breach of obligation
inspite of the lapse of the stipulated period and the
failure of the private respondents to pay.
2. Whether or not the Honorable Court of Appeals [e]rred
in ruling that rescission of the contract is no longer
feasible considering that a certificate of title had
been issued in favor of the private respondents.
3. Whether or not the Honorable Court of Appeals erred in
ruling that since the 58 sq. m. portion in question
is covered by a certificate of title in the names of
private respondents reconveyance is no longer
feasible and proper.[8]
The Courts Ruling
The Petition is without merit.
First Issue:
Rescission in Article 1191
Petitioner claims that she is entitled to rescind the Contract
under Article 1191 of the Civil Code, because respondents committed a
substantial breach when they did not pay the balance of the purchase
price within the ten-year period. She further avers that the proviso on
the payment of interest did not extend the period to pay. To interpret it
in that way would make the obligation purely potestative and, thus,
void under Article 1182 of the Civil Code.
We disagree. The transaction between Eulalio Mistica and
respondents, as evidenced by the Kasulatan, was clearly a Contract of
Sale. A deed of sale is considered absolute in nature when there is
neither a stipulation in the deed that title to the property sold is
reserved to the seller until the full payment of the price; nor a
stipulation giving the vendor the right to unilaterally resolve the
contract the moment the buyer fails to pay within a fixed period. [9]
In a contract of sale, the remedy of an unpaid seller is either
specific performance or rescission. [10] Under Article 1191 of the Civil
Code, the right to rescind an obligation is predicated on the violation of
the reciprocity between parties, brought about by a breach of faith by
one of them.[11] Rescission, however, is allowed only where the breach is
substantial and fundamental to the fulfillment of the obligation. [12]
In the present case, the failure of respondents to pay the balance
of the purchase price within ten years from the execution of the Deed
did not amount to a substantial breach. In the Kasulatan, it was
stipulated that payment could be made even after ten years from the
execution of the Contract, provided the vendee paid 12 percent
interest. The stipulations of the contract constitute the law between the
parties; thus, courts have no alternative but to enforce them as agreed
upon and written.[13]
Moreover, it is undisputed that during the ten-year period,
petitioner and her deceased husband never made any demand for the
balance of the purchase price. Petitioner even refused the payment
tendered by respondents during her husbands funeral, thus showing
that she was not exactly blameless for the lapse of the ten-year
period. Had she accepted the tender, payment would have been made
well within the agreed period.
If petitioner would like to impress upon this Court that the
parties intended otherwise, she has to show competent proof to
support her contention. Instead, she argues that the period cannot be
extended beyond ten years, because to do so would convert the buyers
obligation to a purely potestative obligation that would annul the
contract under Article 1182 of the Civil Code.
This contention is likewise untenable. The Code prohibits purely
potestative, suspensive, conditional obligations that depend on the
whims of the debtor, because such obligations are usually not meant to
be fulfilled.[14] Indeed, to allow the fulfillment of conditions to
depend exclusively on the debtors will would be to sanction
illusory obligations. [15] The Kasulatan does not allow such
thing. First, nowhere is it stated in the Deed that payment of the
purchase price is dependent upon whether respondents want to pay it
or not. Second, the fact that they already made partial payment thereof
only shows that the parties intended to be bound by the Kasulatan.
WHEREFORE, the assailed Decision and Resolution
are AFFIRMED with the MODIFICATION that the payment for the extra
58-square meter lot included in respondents title is DELETED.
SO ORDERED.

Both the trial and the appellate courts arrived at this

finding. Well-settled is the rule that findings of fact by the CA are
generally binding upon this Court and will not be disturbed on appeal,
especially when they are the same as those of the trial court.
[16]
 Petitioner has not given us sufficient reasons to depart from this
rule.

Second Issue:
Rescission Unrelated to Registration

The CA further ruled that rescission in this case would be unjust

to respondents, because a certificate of title had already been issued in
their names. Petitioner nonetheless argues that the Court is still
empowered to order rescission.

We clarify. The issuance of a certificate of title in favor of

respondents does not determine whether petitioner is entitled to
rescission. It is a fundamental principle in land registration that such
title serves merely as an evidence of an indefeasible and
incontrovertible title to the property in favor of the person whose name
appears therein.[17]

While a review of the decree of registration is no longer possible

after the expiration of the one-year period from entry, an equitable
remedy is still available to those wrongfully deprived of their property.
[18]
 A certificate of title cannot be subject to collateral attack and can
only be altered, modified or canceled in direct proceedings in
accordance with law.[19] Hence, the CA correctly held that the propriety
of the issuance of title in the name of respondents was an issue that was
not determinable in these proceedings.

Third Issue:
Reconveyance of the Portion Importunately Included

Petitioner argues that it would be reasonable for respondents to

pay her the value of the lot, because the CA erred in ruling that the
reconveyance of the extra 58-square meter lot, which had been
included in the certificate of title issued to them, was no longer feasible.

In principle, we agree with petitioner. Registration has never

been a mode of acquiring ownership over immovable property, because
it does not create or vest title, but merely confirms one already created
or vested.[20] Registration does not give holders any better title than
what they actually have.[21] Land erroneously included in the certificate
of title of another must be reconveyed in favor of its true and actual
owner.[22]

Section 48 of Presidential Decree 1529, however, provides that

the certificate of title shall not be subject to collateral attack, alteration,
modification, or cancellation except in a direct proceeding. [23] The
cancellation or removal of the extra portion from the title of
respondents is not permissible in an action for rescission of the
contract of sale between them and petitioners late husband, because
such action is tantamount to allowing a collateral attack on the title.

It appears that an action for cancellation/annulment of patent

and title and for reversion was already filed by the State in favor of
petitioner and the heirs of her husband. [24] Hence, there is no need in
this case to pass upon the right of respondents to the registration of the
subject land under their names. For the same reason, there is no
necessity to order them to pay petitioner the fair market value of the
extra 58-square meter lot importunately included in the title.
G.R. No. 202079               June 10, 2013 Vertex appealed the dismissal of its complaint. In its decision, the CA
reversed the RTC and rescinded the sale of the share. Citing Section 63
of the Corporation Code, the CA held that there can be no valid transfer
FIL-ESTATE GOLF AND DEVELOPMENT, INC. and FILESTATE LAND,
of shares where there is no delivery of the stock certificate. It
INC., Petitioners, 
considered the prolonged issuance of the stock certificate a substantial
vs.
breach that served as basis for Vertex to rescind the sale. 7 The CA
VERTEX SALES AND TRADING, INC., Respondent.
ordered the petitioners to return the amounts paid by Vertex by reason
of the sale.
DECISION
THE PARTIES’ ARGUMENTS
BRION, J.:
FEGDI and FELI filed the present petition for review on certiorari to
Before the Court is the petition for review on certiorari 1 under Rule 45 assail the CA rulings. They contend that the CA erred when it reversed
of the Rules of Court, filed by petitioners Fil-Estate Golf and the RTC’s dismissal of Vertex’s complaint, declaring that the delay in the
Development, Inc. (FEGDI) and Fil-Estate Land, Inc. (FELl), assailing the issuance of a stock certificate constituted as substantial breach that
decision 2 dated February 22, 2012 and the resolution 3 dated May 31, warranted a rescission.
2012 of the Court of Appeals (CA) in CA-G.R. CV No. 89296. The assailed
CA rulings reversed the decision dated March 1, 2007 of the Regional
FEGDI argued that the delay cannot be considered a substantial breach
Trial Court (RTC) of Pasig City, Branch 161, in Civil Case No. 68791. 4
because Vertex was unequivocally recognized as a shareholder of
Forest Hills. In fact, Vertex’s nominees became members of Forest Hills
THE FACTS and fully enjoyed and utilized all its facilities. It added that RSACC also
used its shareholder rights and eventually sold its share to Vertex
despite the absence of a stock certificate. In light of these
FEGDI is a stock corporation whose primary business is the
circumstances, delay in the issuance of a stock certificate cannot be
development of golf courses. FELI is also a stock corporation, but is
considered a substantial breach.
engaged in real estate development. FEGDI was the developer of the
Forest Hills Golf and Country Club (Forest Hills) and, in consideration
for its financing support and construction efforts, was issued several For its part, FELI stated that it is not a party to the contract sought to be
shares of stock of Forest Hills. rescinded. It argued that it was just recklessly dragged into the action
due to a mistake committed by FEGDI’s staff on two instances. The first
was when their counsel used the letterhead of FELI instead of FEGDI in
Sometime in August 1997, FEGDI sold, on installment, to RS Asuncion
its reply-letter to Vertex; the second was when they used the receipt of
Construction Corporation (RSACC) one Class "C" Common Share of
FELI for receipt of the documentary stamp tax paid by Vertex.
Forest Hills for ₱1,100,000.00. Prior to the full payment of the purchase
price, RSACC sold, on February 11, 1999, 5 the Class "C" Common Share
to respondent Vertex Sales and Trading, Inc. (Vertex). RSACC advised In its comment to the petition, 8 Vertex alleged that the fulfillment of its
FEGDI of the sale to Vertex and FEGDI, in turn, instructed Forest Hills to obligation to pay the purchase price called into action the petitioners’
recognize Vertex as a shareholder. For this reason, Vertex enjoyed reciprocal obligation to deliver the stock certificate. Since there was
membership privileges in Forest Hills. delay in the issuance of a certificate for more than three years, then it
should be considered a substantial breach warranting the rescission of
the sale. Vertex further alleged that its use and enjoyment of Forest
Despite Vertex’s full payment, the share remained in the name of FEGDI.
Hills’ facilities cannot be considered delivery and transfer of ownership.
Seventeen (17) months after the sale (or on July 28, 2000), Vertex
wrote FEDGI a letter demanding the issuance of a stock certificate in its
name. FELI replied, initially requested Vertex to first pay the necessary THE ISSUE
fees for the transfer. Although Vertex complied with the request, no
certificate was issued. This prompted Vertex to make a final demand on
Given the parties’ arguments, the sole issue for the Court to resolve is
March 17, 2001. As the demand went unheeded, Vertex filed on January
whether the delay in the issuance of a stock certificate can be
7, 2002 a Complaint for Rescission with Damages and Attachment
considered a substantial breach as to warrant rescission of the contract
against FEGDI, FELI and Forest Hills. It averred that the petitioners
of sale.
defaulted in their obligation as sellers when they failed and refused to
issue the stock certificate covering the subject share despite repeated
demands. On the basis of its rights under Article 1191 of the Civil Code, THE COURT’S RULING
Vertex prayed for the rescission of the sale and demanded the
reimbursement of the amount it paid (or ₱1,100,000.00), plus interest.
The petition lacks merit.
During the pendency of the rescission action (or on January 23, 2002), a
certificate of stock was issued in Vertex’s name, but Vertex refused to
accept it. Physical delivery is necessary to
transfer ownership of stocks
RULING OF THE RTC
The factual backdrop of this case is similar to that of Raquel-Santos v.
Court of Appeals,9 where the Court held that in "a sale of shares of stock,
The RTC dismissed the complaint for insufficiency of evidence. It ruled
physical delivery of a stock certificate is one of the essential requisites
that delay in the issuance of stock certificates does not warrant
for the transfer of ownership of the stocks purchased."
rescission of the contract as this constituted a mere casual or slight
breach. It also observed that notwithstanding the delay in the issuance
of the stock certificate, the sale had already been consummated; the In that case, Trans-Phil Marine Ent., Inc. (Trans-Phil) and Roland Garcia
issuance of the stock certificate is just a collateral matter to the sale and bought Piltel shares from Finvest Securities Co., Inc. (Finvest Securities)
the stock certificate is not essential to "the creation of the relation of in February 1997. Since Finvest Securities failed to deliver the stock
shareholder."6 certificates, Trans-Phil and Garcia filed an action first for specific
performance, which was later on amended to an action for rescission.
The Court ruled that Finvest Securities’ failure to deliver the shares of
RULING OF THE CA
stock constituted substantial breach of their contract which gave rise to
a right on the part of Trans-Phil and Garcia to rescind the sale.

Section 63 of the Corporation Code provides:

SEC. 63. Certificate of stock and transfer of shares. – The capital stock of
stock corporations shall be divided into shares for which certificates
signed by the president or vice-president, countersigned by the
secretary or assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the by-laws. Shares of
stock so issued are personal property and may be transferred by
delivery of the certificate or certificates indorsed by the owner or his
attorney-in-fact or other person legally authorized to make the
transfer.1âwphi1 No transfer, however, shall be valid, except as
between the parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the transaction, the
date of the transfer, the number of the certificate or certificates and the
number of shares transferred.

No shares of stock against which the corporation holds any unpaid

claim shall be transferable in the books of the corporation.

In this case, Vertex fully paid the purchase price by February 11, 1999
but the stock certificate was only delivered on January 23, 2002 after
Vertex filed an action for rescission against FEGDI.

Under these facts, considered in relation to the governing law, FEGDI

clearly failed to deliver the stock certificates, representing the shares of
stock purchased by Vertex, within a reasonable time from the point the
shares should have been delivered. This was a substantial breach of
their contract that entitles Vertex the right to rescind the sale under
Article 1191 of the Civil Code. It is not entirely correct to say that a sale
had already been consummated as Vertex already enjoyed the rights a
shareholder can exercise. The enjoyment of these rights cannot suffice
where the law, by its express terms, requires a specific form to transfer
ownership.

"Mutual restitution is required in cases involving rescission under

Article 1191" of the Civil Code; such restitution is necessary to bring
back the parties to their original situation prior to the inception of the
contract.10 Accordingly, the amount paid to FEGDI by reason of the sale
should be returned to Vertex. On the amount of damages, the CA is
correct in not awarding damages since Vertex failed to prove by
sufficient evidence that it suffered actual damage due to the delay in the
issuance of the certificate of stock.

Regarding the involvement of FELI in this case, no privity of contract

exists between Vertex and FELI. "As a general rule, a contract is a
meeting of minds between two persons.1âwphi1 The Civil Code upholds
the spirit over the form; thus, it deems an agreement to exist, provided
the essential requisites are present. A contract is upheld as long as
there is proof of consent, subject matter and cause. Moreover, it is
generally obligatory in whatever form it may have been entered into.
From the moment there is a meeting of minds between the parties, [the
contract] is perfected."11

In the sale of the Class "C" Common Share, the parties are only FEGDI, as
seller, and Vertex, as buyer. As can be seen from the records, FELl was
only dragged into the action when its staff used the wrong letterhead in
replying to Vertex and issued the wrong receipt for the payment of
transfer taxes. Thus FELl should be absolved from any liability.

WHEREFORE, we hereby DENY the petition. The decision dated

February 22, 2012 and the resolution dated May 31, 2012 of the Court
of Appeals in CA-G.R. CV No. 89296 are AFFIRMED with the
MODIFICATION that Fil-Estate Land, Inc. is ABSOLVED from any
liability.

SO ORDERED.
G.R. No. 179518               November 19, 2014 Following are my basic terms and conditions in buying the
abovementioned property:
BANK OF THE PHILIPPINE ISLANDS, Petitioner, 
vs. 1. ₱50,000.00 - Reservation/earnest money to be paid upon
VICENTE VICTOR C. SANCHEZ, HEIRS OF KENNETH NEREO execution of reservation agreement
SANCHEZ, represented by FELISA GARCIA YAP, and HEIRS OF
IMELDA C. VDA. DE SANCHEZ, represented by VICENTE VICTOR C.
2. ₱1,750,000.00 - To be paid to seller as soon as all pertinent
SANCHEZ,Respondents.
sales documents, including a Deed of Absolute Sale are
prepared and executed in my favor.
x-----------------------x
3. As per standard practice, the capital gain [sic] tax,
G.R. No. 179835 documentary stamps, brokers commission of 5% and Deed of
Sale documents shall be in the account of the Seller.
GENEROSO TULAGAN, HEIRS OF ARTURO MARQUEZ, represented
by ROMMEL MARQUEZ, and VARIED TRADERS CONCEPT, INC., 4. Registration expenses and transfer tax shall be my
represented by its President and General Manager, ANTHONY obligations [sic].4
QUINA, Petitioners,
vs.
The offer was good for only seven (7) days. The period elapsed with the
VICENTE VICTOR C. SANCHEZ, HEIRS OF KENNETH NEREO
parties failing to come to an agreement.
SANCHEZ, represented by FELISA GARCIA YAP, and HEIRS OF
IMELDA C. VDA. DE SANCHEZ, represented by VICENTE VICTOR C.
SANCHEZ, JESUS V. GARCIA, and TRANSAMERICAN SALES & Sometime in the third week of October 1988, Felisa Yap (Yap), the
EXPOSITION, INC., Respondents. widow of Kenneth Nereo Sanchez, and Garcia had a meeting at the
Quezon City Sports Club wherein the parties agreed to the sale of the
subject property under the following terms and conditions:
x-----------------------x

1.7.1. Garcia shall buy the property for ₱1.850 million

G.R. No. 179954
payable in cash immediately after the occupants thereof shall
have vacated the property.
REYNALDO V. MANIWANG, Petitioner, 
vs.
1.7.2. Garcia shall immediately pay (the) amount of
VICENTE VICTOR C. SANCHEZ and FELISA GARCIA
₱50,000.00 creditable against the total purchase.
YAP, Respondents.

1.7.3. Garcia shall take care of all documentation necessary

DECISION
VELASCO, JR., J.:
The Case
These are consolidated Petitions for Review on Certiorari under Rule 45
of the Rules of Court assailing the November 6, 2006 Decision 1 and
August 31, 2007 Resolution of the Court of Appeals in CA-G.R. No.
83236 entitled Vicente Victor C. Sanchez, Heirs of Kenneth Nereo
Sanchez represented by Felisa Garcia Yap, and Heirs of Imelda C. Vda.
de Sanchez represented by Vicente Victor C. Sanchez v. Jesus V Garcia
and TransAmerican Sales and Exposition, Inc. The assailed Decision
affirmed with modification the Decision dated July 14, 2004 of the
Regional Trial Court, Branch 89 in Quezon City, in Civil Case No. Q-90-
4690.
for the transfer of the title in his favor, including the
reconstitution of the original title x x x and the extra judicial
settlement of the property, considering that, as stated, the
title is still registered in the names of plaintiff Sanchez, the
late Kenneth Nereo Sanchez and the lateImelda C. Vda. De
Sanchez. For this purpose, the original owner’s copy of
Transfer Certificate of Title, the copy of the application for
the reconstitution of title of the property, and copies of
receipts of real estate taxes were to be entrusted to
defendant Garcia;
1.7.4. Garcia shall cause the demolition of the old house
standing on the property and shall sell the scrap materials
thereof for not less than ₱50,000.00. All proceeds to be
realized on account of said demolition shall be turned over to
the [Sanchezes].5

Pursuant to this agreement, Yap turned over to Garcia the original

The Facts
The facts of the case are as follows:
Vicente Victor C. Sanchez (Vicente), Kenneth Nereo Sanchez and Imelda
C. V da. De Sanchez owned a parcel of land located at No. 10 Panay A
venue, Quezon City consisting of 900 square meters. The property was
registered under Transfer Certificate of Title No. (TCT) 156254 of the
Registry of Deeds of Quezon City (the Subject Property). 2
On October 10, 1988, Jesus V. Garcia (Garcia), doing business under the
name TransAmerican Sales and Exposition, Inc. (TSEI), wrote a
letter3 to Vicente offering to buy the Subject Property for One Million
Eight Hundred Thousand Pesos (₱1,800,000) under the following terms
and conditions:
owner’s copy of TCT 156254, the copy of the filed Application for
Restitution of Title to the property, and copies of all receipts for the
payment of real estate taxes on the property,while Garcia paid Yap
50,000 as earnest money.6
Afterwards, Yap required the occupants of the subject property to
vacate the same. Immediately after it was vacated, Garcia, without Yap’s
knowledge and consent, took possession of the lot and installed his own
caretaker thereon with strict instructions not to allow anyone to enter
the property. Yap later learned that Garcia had also demolished the
house on the property and advertised the construction and sale of
"Trans American Townhouse V" thereon. The foregoing developments
notwithstanding and despite numerous demands, Garcia failed to pay
the balance of the purchase price as agreed upon. 7
Then, on December 5, 1988, Yap was informed that the checks building therein and that whatever then remain as proceeds of the
representing the purchase price of the subject property were ready but aforestated checks shall be returned to the Third Party.
that Vicente must pick up his checks personally. On December 8, 1988,
Vicente came to Manila from Laguna and proceeded to Garcia’s office to
7. It is also agreed that after the delivery of the EXTRAJUDICIAL
get the checks. However, out of the six (6) checks that were presented
SETTLEMENT OF ESTATE WITH SALE by the First and Second Parties
to them, four (4) of them were post-dated, further delaying their
after the encashment of the last check, the Third Party shall also pay the
overdue payment.8 In order to properly document such check
balance of the demolition proceeds in the amount of ₱20,000.00.
payments, the parties executed an Agreement dated December 8,
1988,9 paragraphs 3 to 8 of which relevantly provide:
8. That after the delivery of the EXTRA-JUDICIAL SETTLEMENT OF
ESTATE WITH SALE to the Third Party, the First and Second Parties
3. That the total consideration of sale of the rights, interest,
shall, except those stipulated above, then have only the remaining
participation and title of the First (Yap) and Second (Vicente) Parties of
obligation to deliver to the Third Party any document in their
the aforestated parcel of land to the Third Party (Garcia) shall be One
possession or what they can lawfully and validly execute in accordance
Million Eight Hundred Fifty Thousand Pesos (₱1,850,000.00),
with their rights as aforestated and/or shown in the aforementioned
Philippine Currency, payable in check, as follows:
title.10

a) RBC Check No. 290258 to be drawn in favor of

Felisa G. Yap and dated December 8, 1988 for the
sum of ₱250,000.00;
b) RBC Check No. 290257 to be drawn in favor of
Vicente Victor Sanchez and dated December 8,
1988 for the sum of ₱250,000.00;
c) RBC Check No. 290261 to be drawn in favor of
Felisa G. Yap and dated December 14, 1988 for the
sum of ₱250,000.00;
d) RBC Check No. 290260 to be drawn in favor of
Vicente Victor Sanchez and dated December 14,
1988 for the sum of ₱250,000.00;
e) RBC Check No. 290263 to be drawn in favor of
Felisa G. Yap and dated December 22, 1988 for the
sum of ₱400,000.00; and
f) RBC Check No. 290262 to be drawn in favor of
Vicente Victor Sanchez and dated December 22,
1988 for the sum of ₱400,000.00.
4. That the parties hereto agree that once the aforestated checks are
honored by the bank and encashed by the payees thereof, the First and
Second Parties shall execute an EXTRA-JUDICIAL SETTLEMENT OF
ESTATE WITH SALE distributing and dividing among themselves the
aforestated parcelof land and conveying in the said instrument all their
rights, interest, share, title and participation in the said property to the
Third Party for the consideration stated in the preceding paragraph.
5. That once the aforestated EXTRA-JUDICIAL SETTLEMENT OF
ESTATE WITH SALE is executed, the First and Second Parties shall
immediately deliver the said document to the Third Party who, on the
strength of the same, shall reconstitute the burned Title of the aforesaid
Transfer Certificate of Title No. 156254, copy attached, in the Registry
of Deed of Quezon City and thereafter effect the transfer and
registration of the said property inhis name; it being understood
however that all necessary expenses necessary for such reconstitution
of title, transfer and registration, shall beborne by the Third Party while
the inheritance tax, capital gains tax and documentary stamps required
to be paid therefor shall be borne by the First and Second Parties, but in
no case shall it exceed the combined amount of P____________.
6. That it is agreed by the parties hereof that if at any time one of the
aforestated checks is dishonored by the bank, the First and Second
Parties may opt to rescind this contract and that in the event of
rescission, the First and Second Parties shall forfeit the earnest money
of ₱50,000.00 and retain or withhold the amount representing the value
of damage effected by way of demolition by the Third Party on the
property standing and situated on the aforestated parcel of land, which
value shall not exceed the sum of ₱290,000 -- depreciated cost of the
Subsequently, the first four (4) checks were deposited with no issue.
However, the last two (2) checks, amounting to ₱400,000 each, were
dishonored for the reason of "DAIF" or drawn against insufficient
funds.11
Thus, Yap wrote a letter dated December 26, 1988 12 to Garcia informing
him that the two (2) checks were dishonored and asking that the checks
be replaced within five (5) days from receipt of the letter. Such request
was left unheeded.
On January 10, 1989, Yap informed Garcia in a letter 13 that she and
Vicente were rescinding the Agreement while demanding the return of
the original owner’s copy of TCT 156254. This prompted Garcia to offer
two (2) manager’s checks in the aggregate amount of ₱300,000 which
Yap flatly refused, reiterating the rescission of their Agreement and
demanding for the return of all documents entrusted to Garcia through
a January 21, 1989 letter.14
However, in a letter dated January 27, 1989,15 Garcia’s counsel, Atty.
Francisco Beato, Jr. (Beato), informed Yap that they (Garcia, Vicente and
Yap) had an agreement that the ₱800,000 balance of the purchase price
was due to be paid by Garciaonly upon Yap and Vicente’s payment of
the realty, inheritance and capital gains taxes due onthe transfer of the
property. Thus, Garcia effectively refused to return the documents and
to vacate the subject property. Yap referred Beato’s letter to her own
counsel, Atty. Julian S. Yap, who wrote back in a letter dated February
16, 1989, refuting the claim of Garcia that the ₱800,000 was not yet
dueand reiterating their decision to rescind the Agreement and
demanding that Garcia vacate the property and return the documents
that were surrendered to him by Yap.16
In the meantime, on February 19, 1989, Yap and Vicente discovered
that Garcia posted an advertisement inthe classified ads of the Manila
Bulletin offering to sell units at the Trans American Townhouse V
situated at the subject property. 17
Thus, on February 27, 1989, Atty. Yap wrote the Housing and Land Use
Regulatory Board (HLURB) informing the latter of the existing public
advertisement of TSEI offering for sale townhouses illegally constructed
on the subject property and urging the HLURB to cancel any existing
permit or license to sell the said townhouse unitsor to deny any
application therefor.18
On March 17, 1989, the HLURB issued a Cease and Desist Order 19 (CDO)
enjoining TSEI and Garcia from further developing and selling the
townhouses. In the said order, Commissioner Amado B. Celoria of the
HLURB certified that respondents Garcia and TSEI have not been issued
any permit by said Board for the townhouse Project on the subject lot.
Respondents Garcia and TSEI were directed to immediately stop from
further developing the project. Additionally, such cease and desist order
as well as warnings to possible buyers of the townhouses were
published with the Philippine Daily Inquirer on April 16, 1989, and with
the Manila Bulletin on April 19, 1989. 20 On May 5, 1989, the HLURB
issued another letter to TSEI reiterating its previous directive for it to
cease and desist from selling the townhouse units.21 In compliance,
Garcia and TSEI stopped construction of the townhouses units on
March 30, 1989.22
In a delayed response to the CDO, TSEI wrote a letter to the HLURB
alleging that only ground leveling works were being undertaken on the
project. This was rebuffed by the HLURB in a letter dated May 8,
198923 stating that ocular inspections of the project revealed that 2nd
floor construction on the townhouses were already being undertaken.
Thus, the HLURB ordered TSEI to explain in writing why administrative
sanctions should not be meted out against it and reiterating its earlier
cease and desist order. Undeterred, TSEI continued its construction and
selling activities for the townhouses. Thus, the HLURB issued an Order
dated June 1, 198924 fining TSEI in the amount of ₱10,000.
To further protect their interests, Yap and Vicente also inquired from
the City Building Official of Quezon City, whether a building permit had
been issued for the construction on the Subject Property. In a letter
dated March 14, 1989, the office found that the construction on the
subject property was indeed illegal and at its 5% initial
stage.25Additionally, Yap also wrote a letter dated April 3, 1989 26 to the
Register of Deeds in Quezon City informing it that TCT 156254 was no
longer in their possession and requesting that the office clear the
matter with them first before acting on any transaction pertaining to
the subject property.
In the meantime, the HLURB issued another letter dated June 22,
198927 denying TSEI’s proposed compromise penalty of ₱2,500 and
directing TSEI to pay the ₱10,000 fine. And on June 23, 1989, it issued
another letter28 to TSEI refuting the latter’s claim that they were not
selling townhouses by citing advertisements of TransAmerican
Townhouse V units at No. 10, Panay Avenue in the Philippine Daily
Inquirer (PDI) and the Manila Bulletin (MB).
Then, on August 21, 1989, Yap filed a formal complaint 29 with the Office
of the City Building Official of Quezon City. The complaint was set for
hearing on August 30, 1989 with an order for Garcia and TSEI to
produce their building permit. 30 However, both Garciaand TSEI failed to
attend the said hearing.
Thereafter, on February 15, 1990, Yap and Vicente, in his own behalf
and representing the heirs of Imelda C.Vda. De Sanchez, filed before the
Regional Trial Court (RTC) in Quezon City, Branch 89 a Complaint dated
February 14, 199031 for the rescission of contract, restitution and
damages with prayer for TRO/preliminary injunction against TSEI and
Garcia, docketed as Civil Case No. Q-90-4690.
Meanwhile, Garcia managed to cause the cancellation of TCT 156254
and its replacement with TCT 383697 in the name of TSEI. 32 TCT
383697, however, bore the date of issuance as June 9, 1988,way before
the parties agreed on the sale sometimein October 1988. Garcia
apparently used TCT 383697 to entice several buyers tobuy the
townhouse units being constructed by TSEI on the subject lot. Claiming
to have bought townhouse units sometime in early 1989, the following
intervened in the instant case: the spouses Jose and Visitacion Caminas
(Caminas), Reynaldo V. Maniwang (Maniwang), Generoso C. Tulagan
(Tulagan), Varied Traders Concept, Inc. (VTCI), and Arturo Marquez
(Marquez).
The records reveal that on January 31, 1989, TSEI sold to Tulagan a 52-
square meter portion of TCT 156254 and the townhouse unit that was
going to be built upon it for the amount of ₱800,000 as evidenced by a
Conditional Deed of Sale of even date.33 Later, Tulagan bought another
unit from TSEI this time for ₱600,000 as shown by a Contract to Sell
dated February 21, 1989. 34 Then, Maniwang bought a unit from TSEI for
₱700,000 through an Absolute Deed of Sale dated February 22,
1989.35 Later, Marquez purchased a townhouse unit from TSEI for
₱800,000 in a Contract to Sell dated March 13, 1989. 36 Afterwards, TSEI
sold to Caminas a townhouse unit for ₱650,000 through an Absolute
Deed of Sale dated March 21, 1989. 37 Thereafter, VTCI bought three (3)
townhouses from TSEI for ₱700,000 each in three (3) separate Absolute
Deeds of Sale all dated October 30, 1989. 38 TSEI left the townhouse
units unfinished, leaving these intervenors to finish their townhouses
by themselves.
Notably, except for the Absolute Deeds of Sale executed between TSEI
and VTCI, all the other intervenors’ contracts conveying townhouses in
their favor identified their purchased lots as covered by TCT 156254
(the title of the Sanchezes). As culled fromthe transcripts, the
intervenors Caminas,39 Maniwang,40 Tulagan,41 and Marquez42asserted
that they were all shown TCT 383697 in the name of TSEI but
nevertheless signed their respective contracts with TSEI indicating the
subject property as covered by TCT 156254. Subsequently, they all got a
photocopy of TCT 383697 and verified the same with the Registry of
Deeds of Quezon City, which confirmed that the title was clean. Onthe
other hand, only the Absolute Deed of Sale in favor of VTCI, dated
October 30, 1987, reflected that the property sold was covered by TCT
383697.43
Far East Bank and Trust Company (FEBTC) entered into a Loan
Agreement 44 dated May 22, 1989 with TSEIsecured by a Real Estate
Mortgage over TCT 156254.FEBTC later merged with the Bank of the
Philippine Islands (BPI) with the latter as the surviving bank. Garcia
purportedly explained to FEBTC that the parties were still in the
process of transferring the title. Afterwards, Garcia submitted a copy of
TCT 383697 in TSEI’s name. Upon default, FEBTC (now BPI) foreclosed
the subject lot and had the Foreclosure Certificate of Sale annotated on
TCT 383697. The Ruling of the Regional Trial Court
On July 14, 2004, the RTC rendered a Decision in favor of the Sanchezes
as plaintiffs, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered as follows:
1. Declaring the legality and validity of the Extrajudicial
Rescission effected by the plaintiffs on the Contract to Sell on
the subject property, covered by TCT No. 156254 in their
names;
2. Ordering the defendants and all persons acting on their
behalf to return to the plaintiffs the Owner’s Copy of TCT No.
156254, including all the documents entrusted to them in
consideration of their Contract to Sell;
3. Ordering defendants and all persons, including the
intervenors and all persons claiming rights under them to
return and surrender to the plaintiffs the peaceful possession
of the subject property covered by TCT No. 156254 located at
No. 10 Panay Avenue, Quezon City;
4. Ordering the defendants jointly and severally to pay the
plaintiffs the sum of One Hundred Thousand (₱100,000.00)
Pesos, Philippine Currency as and by way of attorney’s fees;
5. Ordering the defendants jointly and severally to pay the
plaintiffs the sum of Two Hundred Thousand (₱200,000.00)
Pesos, Philippine Currency as and by way of moral damages;
6. Ordering the defendants jointly and severally to pay the
plaintiffs the sum of Two Hundred Thousand (₱200,000.00)
Pesos, Philippine Currency as and by way ofexemplary
damages to serve as correction or example for the public
good;
7. Ordering the defendants jointly and severally to pay the
plaintiffs the sum of Two Hundred Ninety Thousand
(₱290,000.00) Pesos, representing the depreciated cost of
the plaintiffs’ demolished building per their Agreement
(Exhibit "D");
 8. Dismissing defendants’ counterclaim as well as
intervenors’ counterclaims/complaints and answers in
intervention against the plaintiffs;
9. Ordering the plaintiffs to return to the defendants, after
deducting the damages herein awarded, the remaining
amount on the sum paid by the defendants on the subject
property;
10. Dismissing the counterclaim of plaintiffs against all
intervenors;
11. Ordering the defendants to return to intervenors, Jose
and Visitacion Caminas, Reynaldo Maniwang, Generoso
"Gener" Tulagan, and VTCI, and Arturo Marquez, the
following sum to wit:
1. CAMINAS - ₱650,000.00 (Absolute Deed of Sale
dated 14 March 1989);
2. MANIWANG - ₱700,000.00 (Absolute Deed of
Sale dated 22 February 1989);
3. TULAGAN - ₱1.4 Million, representing the
following:
3.1 ₱600,000.00 – (Contract To Sell
dated 21 February 1989);
3.2 ₱800,000.00 – (Conditional Deed of
Sale dated 31 January 1989);
4. VTCI - ₱2.1 Million, representing the following:
4.1 ₱700,000.00 – (Absolute Deed of
Sale dated 30 October 1989 – Lot 1-K);
4.2 ₱700,000.00 – (Absolute Deed of
Sale dated 30 October 1989 – Lot 1-I);
4.3 ₱700,000.00 – (Absolute Deed of
Sale dated 30 October 1989 – Lot 1-F);
5. MARQUEZ - ₱600,000.00 (Contract To Sell dated
8 March 1989);
6. BPI - Declaring the intervention of the Bank
without merit. respectively, representing the full
and/or partial purchase price of their respective
units, all with six (6) percent interest per annum
counted from the time of their filing of their
intervention of judicial demand, and twelve (12)
percent per annum upon the finality of this
decision.
With costs against defendants.
SO ORDERED.45
The RTC declared that the Sanchezes have the right to rescind the
Agreement they entered into with Garcia and TSEI under proviso no.
646 of the Agreement. In fact, the RTC enunciated that because the
Agreement is in the nature of a contract to sell, the ownership over the
subject property remained with the Sanchezes as the suspensive
condition––that the check payments shall be honored––was not
complied with. Thus, the RTC concluded that there was not even any
need for rescission in this case. Moreover, the RTC found that TSEI and
Garcia were builders in bad faith as the Sanchezes never consented to
the construction of the townhouses. Furthermore, the presentation by
Garcia and TSEI to the intervenors of TCT 383697 in TSEI’s name
sufficiently shows their bad faith. Anent the rights of intervenors, the
RTC found the Sanchezes to have a better right over the subject
property considering that the transactions between Garcia/TSEI and
the intervenors suffered from several irregularities, which they, the
intervenors, in bad faith, ignored.
The Ruling of the Court of Appeals
Upon appeal by the intervenors-appellants, the CA rendered, on
November 6, 2006, the assailed Decision affirming the RTC Decision
with modifications, the decretal portion of which reads: WHEREFORE,
the judgment appealed from is hereby AFFIRMED with
MODIFICATIONS in that (1) the Register of Deeds of Quezon City is
hereby directed to cancel the Transfer Certificate of Title No. 383697 in
the name of Trans American Sales and Exposition, Inc. and to reinstate
Transfer Certificate of Title No. 156254 in the name of the [sic] Kenneth
Nereo Sanchez, Vicente Victor Sanchez and Imelda C. Vda. de Sanchez in
its original status prior to the claim of the intervenors-appellants; and
(2) the plaintiffs and the defendants are ordered to follow the
provisions of Article 448 of the Civil Code of the Philippines as regards
the improvements constructed on the subject property. The questioned
decision is affirmed in all other respects. SO ORDERED. 47
Thus, the CA ordered the cancellation of TCT 383697 in TSEI’s name
and the reinstatement of TCT 156254 in the names of the Sanchezes.
However, the appellate court found the Sanchezes equally inbad faith
with TSEI and Garcia, and gave the Sanchezes the option either to
appropriate the townhouses by paying for them or to oblige TSEI and
Garcia to pay the price of the land, unless the subject lot’s value is
considerably more than that of the structures built thereon in which
case TSEI and Garcia would have to pay the Sanchezes reasonable rent
for the use of the subject property. Hence, these petitions under Rule 45
separately interposed by the intervenors.
The Issues
In G.R. No. 179518, BPI raises the following issues:
V.
Grounds for this Appeal
A. The Court of Appeals erred in decreeing the rescission of the
Agreement between plaintiffs Sanchez, et al. and defendants TSE and
Garcia.
i. Sanchez, et al. had no intention of rescinding
their Agreement.
ii. Rescission cannot take place because the
property was already acquired by third person
who acted in good faith.
iii. Sanchez, et al. should bear all the losses arising
from their own negligence.
B. The Court of Appeals erred in ordering the annulment of TCT No.
383697 in a collateral action.
C. The Court of Appeals erred in ordering the annulment of TCT No.
383697 notwithstanding that it had no jurisdiction to do so, since such
relief was never prayed for in the complaint.
D. The Court of Appeals erred in decreeing rescission, notwithstanding
that it would result in the unjust enrichment of plaintiffs Sanchez, et al.,
at the expense of BPI.
E. Assuming that Article 448 of the Civil Code is applicable, the Court of
Appeals erred in not ruling that BPI already acquired the rights of
defendants under the said article.48
In G.R. No. 179835, Tulagan, the heirs of Marquez and VTCI raise the
following issue:
Whether or not the herein petitioners, as buyers and possessors of their
respective units that were constructed by respondent Garcia in the
subject property, are entitled, to the same benefit granted to the latter
(who was subsequently declared by the Court of Appeals as a builder in
good faith of the improvements he introduced in the subject property),
under the provision of Article 448 of the Civil Code of the Philippines. 49
While in G.R. No. 179954, Maniwang raises the following issues:
Grounds for the Petition
With all due respect, the Honorable Court of Appeals failed to apply the
pertinent provisions of law and utterly failed to consider prevailing
jurisprudence when it totally disregarded the perfected Contract of Sale
under the nomenclature "Contract to Sell" entered into by respondents
and defendants prior to the "Agreement" entered into by them.
With all due respect, the Honorable Court of Appeals utterly neglected
to apply pertinent provisions of the Civil Code and prevailing
jurisprudence on the matter when it affirmed the trial court’s decision
granting the respondents’ prayer for rescission.
With all due respect, it is respectfully submitted that the Honorable
Court of Appeals erred in not finding that petitioner Reynaldo
Maniwang is an innocent purchaser in good faith, thus resulting in the
total disregard of his rights over the subject property when it applied to
the instant case the provisions of Article 448 of the Civil Code of the
Philippines.50
The essential common issues presented by intervenors-petitioners are:
first, whether the parties all acted in bad faith; second, whether there
was a valid rescission of the Agreement between the Sanchezes and
TSEI/Garcia; and third, whether TCT 383697 in the name of TSEI may
be cancelled.
The Court’s Ruling
The petitions in these consolidated cases must be denied.
The Sanchezes are not guilty of negligence
Petitioners would lay the blame on the Sanchezes and argue that there
was negligence on the latter’s part when they turned over the owner’s
original duplicate copy of TCT 156254 despite receiving only the
₱50,000 earnest money, which led tothe fraudulent transfer oftitle over
the subject lot by Garcia and the issuance of TCT 383697 in the name of
TSEI. They also argue that the Sanchezes werealso negligent for
surrendering possession of the subject property to Garcia and TSEI, and
for failing to stop the construction of the townhouses on the subject
property.
It must be stated that the CA already ruled that the issue of the
Sanchezes’ negligence was never raised at the pre-trial. As such, it can
no longer be raised on appeal. Nevertheless, even if such issue were to
be passed upon, the Sanchezes cannot be considered negligent, much
less in bad faith.
As explained by the CA:
It must be noted that defendant Garcia committed himself that, upon
full payment of the purchase price, he would personally undertake the
preparation and execution of the Extrajudicial Settlement with Sale as
well as the reconstitution of the original copy of TCT No. 156254 on file
with the Register of Deeds of Quezon City. Thus, it was inevitably for
plaintiff-appellant/appellee Felisa Yap to surrender to defendant Garcia
the owner’s duplicate copy of the aforesaid title as well as the other
documents pertinent for such documentation and reconstitution. To
Our mind, this does not constitute negligence on the part of the
plaintiffs appellants/appellees as the surrender was purely to comply
with and in pursuance to their earlier agreement with the defendants.
As regards the alleged relinquishment of possession of the subject
property, We also do not find any negligence on the part of the plaintiffs
appellants/appellees. The records would disclose that the plaintiffs
appellants/appellees did not voluntarily surrender possession thereof
to defendants. On the contrary, it was defendant Garcia who took
possession of the subject property, without plaintiffs-
appellants/appellees knowledge, posted his own caretaker therein with
strict instructions not to allow anyone to enter the same. The latter also
caused the demolition of the old house standing thereon and advertised
the same for sale by placing a large billboard in front of the subject
property. In fact, had it not been for persistent efforts of plaintiffs-
appellants/appellees, the Agreement which eventually protected the
latter’s rights over the subject property, could not have been executed. 51
Negligence is the omission of that diligence required by the nature of
the obligation and corresponds to the circumstances of the persons, of
the time and of the place.52 The Sanchezes could not be found negligent
as they relied upon the assurances of Garcia after their oral agreement
to sell was negotiated. The Sanchezes trusted Garcia and entrusted to
him—per their oral agreement—the owner’s original duplicate of TCT
156254 in order to facilitate the documentation required under the
terms of agreement for the sale of the subject lot. It must be pointed out
that the parties in this case were not dealing on equal terms.The
Sanchezes had insufficient knowledge in the legalities of transacting
with real estate. This is evidenced by the fact that they already
considered an oral agreement for the sale of real property as sufficient.
Had they been knowledgeable in such matters, they would have known
that such oral agreement is unenforceable and instead sought the
production of a written agreement. Moreover, the facts show that the
Sanchezes did not simply surrender possession of the property to TSEI
and Garcia, but that such possession was taken from them without their
consent.
The Sanchezes did not act in bad faith
Contrary to the finding of the CA, the Sanchezes cannot be considered to
be in bad faith for failing to file an action for injunction against the
construction of the townhouses on the subject property. The CA stated:
x x x However, it appears that plaintiffs/appellants/appellees did not
take any step to forestall the continued construction of the townhouses.
The records do no [sic] show that the plaintiffs/appellants/appellees
filed any case for injunction to at least restrain the defendants from
continuing with the construction. Conversely, they allowed the same to
continue despite the fact that they were not asyet fully paid of the
purchase price on the subject property and no contract of sale has been
executed by them in defendants’ favor. Under these circumstances, the
provision of Article 453 of the Civil Code should have been applied by
the trial court.53
Such ruling is erroneous.
Article 453 of the Civil Code relevantly states:
Article 453. If there was bad faith, not only on the part of the person
who built, planted or sowed on the land of another, but also on the part
of the owner of such land, the rights of one and the other shall be the
same as though both had acted in good faith.
It is understood that there is bad faith on the part of the landowner
whenever the act was done with his knowledge and without opposition
on his part. (emphasis supplied)
The second paragraph of the provision clearly reads that a landowner is
considered in bad faith if he does not oppose the unauthorized
construction thereon despite knowledge of the same. It does not,
however, state what form such opposition should take. The fact of the
matter is that the Sanchezes did take action to oppose the construction
on their property by writing the HLURB and the City Building Official of
Quezon City. As a result, the HLURB issued two (2) Cease and Desist
Orders and several directives against Garcia/TSEI which, however,
were left unheeded. In addition, the Sanchezes could not be faulted for
not having been able to enjoin the sale of the townhouses by Garcia and
TSEI to the intervenors Sps. Caminas, Maniwang, Tulagan, and Marquez
who bought their townhouse units during the sameperiod that the
Sanchezes were demanding the full payment of the subject lot and were
exercising their right of extrajudicial rescission of the Agreement. As
the intervenors asserted having bought the townhouse units in early
1989, it can be seen that the preselling was done almost immediately
after the Sanchezes and Garcia/TSEI agreed on the terms of the sale of
the subject lot, or shortly after Garcia and TSEI had taken over the
property and demolished the old house built thereon. In either case, the
pre-selling already commenced and was continuing when the two
postdated checks amounting to the remaining balance of ₱800,000
bounced. And whenthe Sanchezes informed Garcia and TSEI that they
were rescinding the Agreement in early 1989, the intervenors
apparently werealready in the process of closing their deals with TSEI
for the purchase of townhouse units. As to the transactions between
FEBTC and Garcia/TSEI and that between VTCI and Garcia/TSEI, it is
suffice to state that the Sanchezes, despite the actions they undertook,
were not aware of the said dealings.
Garcia, TSEI, BPI, and the intervenors acted in bad faith
a. Garcia and TSEI acted in bad faith
The Court agrees with both the RTC and the CA that Garcia and/or TSEI
are builders in bad faith. They knew for a fact that the property still
belonged to the Sanchezes and yet proceeded to build the townhouses
not just without the authority of the landowners, but also against their
will. Thus, the CA wrote:
Anent the improvements constructed on the subject property, the
defendants were undoubtedly builders in bad faith. As borne out by the
evidence, the defendants took possession of the subject property and
constructed the 20-unit townhouses thereon without prior consent of
the plaintiffs-appellants/appellees. On top of this, defendant Garcia was
aware that the defendants have not as yet fully paid the purchase price
thereof and therefore are not yet owner/s of the subject property. In
fact, no contract of sale over the subject property has been executed by
the plaintiffs/appellants/appellees in defendants’ favor. 54 x x x
The next query: are the intervenors purchasers in good faith?
The Court rules otherwise.
b. Intervenors Sps. Caminas,
Maniwang, Tulagan, and
Marquez acted in bad faith
Prevailing jurisprudence reveals the following established rules:
1. Well settled is the rule that all persons dealing with
property covered by a torrens certificate of title are not
required to go beyond what appears on the face of the title.
Whenthere is nothing on the certificate of title to indicate any
cloud or vice in the ownership of the property, or any
encumbrance thereon, the purchaser is not required to
explore further than what the torrens title upon its face
indicates in quest for any hidden defect or inchoate right that
may subsequently defeat his right thereto. 55
2. This rule, however, admits of an exception as where the
purchaser or mortgagee has knowledge of a defect or lack of
title in the vendor, or that he was aware ofsufficient facts to
induce a reasonably prudent man to inquire into the status of
the property in litigation.56 (emphasis supplied)
3. Likewise, one who buys property withfull knowledge of
the flaws and defects in the title of the vendor is enough
proof of his bad faith and estopped from claiming that he
acquired the property in good faith against the owners. 57
4. To prove good faith, the following conditions must be
present: (a) the seller is the registered owner of the land; (b)
the owner is in possession thereof; and (3) at the time of the
sale, the buyer was not aware of any claim or interest of
some other personin the property, or of any defect or
restriction in the titleof the seller or in his capacity to convey
title to the property. All these conditions must be present,
otherwise, the buyer is under obligation to exercise extra
ordinary diligence by scrutinizing the certificates of title and
examining all factual circumstances to enable him to
ascertain the seller’s title and capacity to transfer any
interest in the property.58
The factual milieu of the case reveals that intervenors are buyers in bad
faith for the following reasons, viz:
Firstly, they admitted that they executed either contracts of sale or
contracts to sell indicating that the lot is covered by TCT No. 156254
registered under the name of the respondent Sanchezes. While the
established rule is that persons dealing with property covered by a
Torrens certificate of title are not required togo beyond what appears
on the face of the title, intervenors cannot seek haven from such
doctrine as the title of the lot does not pertain to the vendor (Garcia or
TSEI) they dealt with. The fact that the lot being sold to them belonged
to persons other than TSEI or Garcia should have driven the
intervenors, as prudence would dictate, to investigate the true status of
the property. They should have gone to the Register of Deeds of Quezon
City (RD) to verifyif in fact TCT No. 156254 had already been cancelled
and a new title has been issued to TSEI or Garcia. They should have
asked for the deed of absolute sale filed and registered with the RD to
find out if the Sanchezes indeedsold the lot in question to TSEI. They
could have verified from the primary entry book of said office if the
deed of absolute sale from the Sanchezes in favor of TSEI was registered
in said book, which, under the Property Registration Decree (PD No.
1529), is considered as an effective and legal notice to third persons
and the whole world of such transfer. Evidently, the intervenors failed
to do so.
Secondly, the intervenors know, based on the contract of sale or
contract to sell, that the property isregistered under TCT No. 156254 in
the name of the Sanchezes. As such, they should have insisted that they
talk to the Sanchezes before executing said conveyances. Had they done
so, they would have known that the Sanchezes have not executed a
written deed of absolute sale in favor of TSEI for the latter’s failure to
pay the consideration in full. Having failed to ferret out the truth from
the Sanchezes, intervenors cannot be considered innocent purchasers
for failure to exercise utmost caution and extra diligence in determining
the true owner of the property.
Thirdly, the intervenors should havebeen suspicious of the explanation
of Garcia that TCT No. 383697, reflecting TSEI as the owner of the
property, has been burned and that he is in the process of
reconstituting the title. Before signing the contract of sale or contract to of the irregularities in the proposed sale of townhouses by Garcia and
sell, they should have asked Garcia where the reconstitution case has TSEI. The failure of VTCI to heed the warnings and prohibition to buy
been filed or is pending and proceeded to verify with the said court the said townhouses tends to show that said respondent is not a purchaser
status of the reconstitution. Had they done so, they would have known in good faith.
that neither Garcia nor TSEI had a deed of absolute sale executed in
their favor over the lot in question. The truth of the matter is that it is
Fourthly, with the issuance of the CDO by the HLURB and the notices in
the duplicate certificate of title of TCT No. 156254 that has been lost or
the major dailies, VTCI should have inquired with the said HLURB if
misplaced, and is being sought to be reconstituted, not TCT No. 383697.
Garcia and TSEI have a permit to sell the townhouses. Had it done so, it
Had intervenors been prudent enough to verify with the court the
would have discovered that the project, as it lacks the necessary
status of the alleged TCT No. 383697, they would have known that
permits, is unauthorized and that the title over the townhouses is
Garcia planned to deceive them in the sale of the subject property.
questionable.

Fourthly, the intervenors knew that they were buying a townhouse over
Fifthly, a buyer of a townhouse will ordinarily visit the project site and
a subdivision lot from TSEI and Garcia. Such being the case, they should
look at and investigate the lot, the title and the townhouses being sold.
have verified with the HLURB whether said project is registered with
If it inspected the site of the construction project, it would have known
said housing agency and if a license to sell has been issued to TSEI or
from the other purchasers that the project has no permit from the
Garcia. Had they made such an inquiry, they would have known that
HLURB and that construction has been stopped because of the CDO. Had
instead of a permit for the project and a license to sell the property, a
VTCI done the inspection and investigation, then it would not have
cease and desist order was issued by the HLURB precisely to enjoin
entered into the deeds of absolute sale with Garcia and TSEI. Thus,
TSEI and Garcia from selling said property to the public. Similarly, they
respondent VTCI cannot be considered as a purchaser in good faith.
could have inquired from the City Building Official of Quezon City if a
building permit was issued to TSEI and Garcia for the construction of
the townhouses, which would have yielded the same negative result. From the foregoing, the fact that all the intervenors turned a blind eye
to the flaws and defects in the ownership of TSEI over the property and
miserably failed to undertake measures required of a reasonably
c. VCTI acted in bad faith
prudent man to investigate the title of the pseudo owner and the
legality of the townhouse project constitutes bad faith for which there is
As compared to the other purchasers,the Deeds of Absolute Sale of no available relief under the law.
intervenor VTCI cited TCT 383697 inthe name of VTCI and not TCT
156254. Nevertheless, the Court finds that respondent VTCI is a
d. BPI cannot be considered a mortgagee in good faith
purchaser in bad faith for the following reasons:

Even as the intervenors have been found to be in bad faith, BPI, the
Firstly, respondent VTCI has not shown that it verified with the RD if
successor of FEBTC, cannot be considered a mortgagee in good faith,
the alleged TCT 383697 of respondent TSEI is valid and genuine. It did
considering the glaring anomalies in the loan transaction between TSEI
not present any certified true copy of said TCT 383697 to demonstrate
and FEBTC. This can be gleaned from several undisputed factual
that based on the RD’s records, said title exists and that it is genuine
circumstances:
and valid. It should be remembered that the duplicate certificate of TCT
156254 was lost and subject of reconstitution. Yet respondents Garcia
and TSEI were not able to show that it was already reconstituted. In Firstly, when Garcia gave TCT 156254 to FEBTC for the processing of a
addition, there was no deed of absolute sale executed by the Sanchezes loan secured by a mortgage, it indubitably showed that Garcia/TSEI did
in favor of TSEI as the latter failed to pay the last two (2) installments not yet own the subject property as said title was in the name of the
and subsequently, the agreement to sell was rescinded by the Sanchezes. But FEBTC did not require Garcia/TSEI to submit a Special
Sanchezes for non-payment.There being no deed of absolute sale, there Power of Attorney (SPA) in their favor authorizing them to mortgage
is, consequently, no ground for the RD to cancel TCT No. 156254 and the subject property covered by TCT 156254.
subsequently issue TCT 383697 in the name of TSEI. This goes to show
that TCT 383697 of TSEI appears to be spurious and a fake title. This is
Secondly, considering that Garcia/TSEI were already selling the
buttressed by the fact that the date of the issuance of TCT 383697 is
townhouse units to the public as early as January 1989, FEBTC was also
June 9, l988, pre-dating the execution of the Agreement between the
remiss in not requiring Garcia/TSEI to submit a written approval from
Sanchezes and TSEI on December 8, l988. With the failure of VTCI to
the HLURB for the mortgage of the subject property where the
exert earnest efforts to verify the authenticity of TCT 383697, then it is
townhouse units were being constructed as required under Sec. 1859 of
not a purchaser in good faith.
Presidential Decree No. (PD) 957. 60 Thirdly, considering further that
Garcia presented the Agreement between the Sanchezes and
Secondly, Garcia and TSEI stopped the construction of the townhouses Garcia/TSEI asbasis for ownership of the subject property covered by
on March 30, l989 pursuant to the CDO of the HLURB. Thus, the TCT 156254, FEBTC was remiss in neither ascertaining whether the full
townhouses were not fully finished and completed. Yet on December payment of the ₱1.8 million covered by six (6) checks in view of the
27, l989 (date of notarization), VTCI entered into three (3) Deeds of proviso number 6 of the Agreement nor requiring the presentment of
Absolute sale over three (3) townhouses on three (3) lots covered by the EXTRA-JUDICIAL SETTLEMENT OF ESTATE WITH SALE from the
TCT 383697 and despite the non-completion of the townhouses, it still Sanchezes in favor of Garcia/TSEI.
fully paid the uniform price of ₱700,000 for the townhouse on each of
the 3 lots – 1st lot with an area of 52.5 square meters; 2nd lot with an
Fourthly, FEBTC was again negligent in not scrutinizing the TCT
area of 72.5 square meters; and 3rd lot with an area of 42.5 square
383697 considering that the title has the purported issuance date of
meters. The price of ₱700,000 was even applied to all lots even if
June 9, 1988 way before the December Agreement was executed and
ordinarily a bigger lot will commend a higher price. These are doubtful
when the loan was negotiated. More, the purported issuance of TCT
transactions since a man of average intellect will not fully pay the price
383697 was made more than six (6) months before Garcia/TSEI
of a townhouse which has not yet been completed. The alleged
approached the bank for the loan. Thus, FEBTC should have been placed
purchases are not in accord with the normal business practice and
on guard as to why Garcia/TSEI initially gave it TCT 156254 in the
common behavior of an ordinary human being. These circumstances
name of the Sanchezes when TCTC 383697 was purportedly already
sway the Court to believe that said alleged conveyances are not genuine
issued and in Garcia’s possession way before the bank loan was
and that VTCI is not a purchaser in good faith.
negotiated. Again, FEBTC did not exercise the due diligence required of
banks.
Thirdly, with the CDO and the warnings to the public and prospective
buyers published in the Philippine Daily Inquirer on April 16, 1989 and
in the Manila Bulletin on April 19, 2014, VTCI should have been aware
Fifthly, the Court notes that FEBTC released portions of the loan Moreover, bad faith on the part of TSEI, Garcia and the intervenors
proceeds in April even before it approved the loan secured by a real leads to the application of Articles 449-450 of the New Civil Code, which
estate mortgage on May 22, 1989. And more anomalous is the fact that provide:
FEBTC had TCT 383697 verified for its veracity and genuineness way
after it approved the loan to Garcia/TSEI. The Certification 61 from the
Article 449. He who builds, plants or sows in bad faith on the land of
Register of Deeds was issued only on June 13,1989 upon the request of
another, loses what is built, planted or sown without right to indemnity.
Garcia.

Article 450. The owner of the land on which anything has been built,
Verily, given the foregoing anomalies, the general rule that a mortgagee
planted or sown in bad faith may demand the demolition of the work, or
need not look beyond the titledoes not apply tobanks and other
that the planting or sowing be removed, in order to replace things in
financial institutions as greater care and due diligence are required of
their former condition at the expense of the person who built, planted
them,62 and FEBTC should have exercised the appropriate due diligence
or sowed; or he may compel the builder or planter to pay the price of
review and made the requisite inquiries about the subject property
the land, and the sower the proper rent.
which was offered to secure the loan applied for by Garcia/TSEI under a
real estate mortgage. FEBTC (now BPI) was negligent and cannot be
considered as a mortgagee in good faith. Consequently, the Sanchezes have the following options: (1) acquire the
property with the townhouses and other buildings and improvements
that may be thereon without indemnifying TSEI or the
The effects of attributing bad
intervenors;63 (2) demand from TSEI or the intervenors to demolish
faith to the intervenors, BPI,
what has been built on the property at the expense of TSEI or the
TSEI, and Garcia
intervenors; or (3) ask the intervenors to pay the price of the land. 64 As
such, the Sanchezes must choose from among these options within
a. Rescission of the Agreement thirty (30) days from finality of this Decision. Should the Sanchezes opt
was not barred by the to ask from the intervenors the value of the land, the case shall be
subsequent transfer remanded to the RTC for the sole purpose of determining the fair
market value of the lot at the time the same were taken from the
Sanchezes in 1988.
Article 1191 of the Civil Code states that rescission is available to a
party in a reciprocal obligation where one party fails to comply
therewith: If the Sanchezes decide to appropriate the townhouses, other structures
and improvements as their own pursuant to Article 449 of the Civil
Code, then the intervenors-purchasers Caminas, Maniwang, Tulagan,
Article 1191. The power to rescind obligations is implied in reciprocal
Marquez and VCTI shall be ordered to vacate said premises within a
ones, in case one of the obligors should not comply with what is
reasonable time from notice of the finality of the decision by the
incumbent upon him.
Sanchezes. They have a right to recover their investment in the
townhouses from Garcia and TSEI. If the Sanchezes do not want to make
The injured party may choose between the fulfillment and the use of the townhouses and improvements on the subject lot, thenthe
rescission of the obligation, with the payment of damages in either case. purchasers can be ordered to demolish said townhouses or if theydon’t
He may also seek rescission, even after he has chosen fulfillment, if the demolish the same within a reasonable time, then it can be demolished
latter should become impossible. at their expense. On the 3rd option, if the Sanchezes do not want
toappropriate the townhouses or have the same demolished, then they
can ask that the townhouse purchasers pay to them the fair market
The court shall decree the rescission claimed, unless there be just cause
value of the respective areas allotted to their respective townhouses
authorizing the fixing of a period.
subject of their deeds of sale.

This is understood to be without prejudice to the rights of third persons

The suit is not a collateral
who have acquired the thing, in accordance with Articles 1385 and
attack on TSEI’s title
1388 and the Mortgage Law. (emphasis supplied) Article 1385 of the
Civil Code does provide that rescission shall not take place if the subject
matter of the prior agreement is already in the hands of a third party Finally, BPI argues that the CA erred in ordering the cancellation of TCT
who did not act in bad faith, to wit: 383697 considering that Section 48 of Presidential Decree No. 1529, or
the Property Registration Decree, states that a Torrens certificate of
title cannot be cancelled except in a direct attack thereon. The provision
Article 1385. Rescission creates the obligation to return the things
reads:
which were the object of the contract, together with their fruits, and the
price with its interest; consequently, it can be carried out only when he
who demands rescission can return whatever he may be obliged to Section 48. Certificate not subject to collateral attack. A certificate of
restore. Neither shall rescission take place when the things which are title shall not be subjectto collateral attack. It cannot be altered,
the object of the contract are legally in the possession of third persons modified, or canceled except ina direct proceeding in accordance with
who did not act in bad faith. law.

In this case, indemnity for damages may be demanded from the person In Sarmiento v. Court of Appeals, 65 the Court differentiated a direct and
causing the loss. (emphasis added) a collateral attack in this wise:

In the extant case, the failure of TSEI to pay the consideration for the An action is deemed an attack on a title when the object of the action or
sale of the subject property entitled the Sanchezes to rescind the proceeding is to nullify the title, and thus challenge the judgment
Agreement. And in view of the finding that the intervenors acted in bad pursuant to which the title was decreed. The attack is direct when the
faith in purchasing the property, the subsequent transfer in their favor object of the action is to annul or set aside such judgment, or enjoin its
did not and cannot bar rescission. enforcement. On the other hand, the attack is indirect or collateral
when, in an action to obtain a different relief, an attack on the judgment
is nevertheless made as an incident thereof.
b. The Sanchezes are to elect
their option under the Arts.
449-450 of the New Civil Code In the instant case, contrary tothe contention of BPI, although the case
was originally an action for rescission, it became a direct attack on TCT
383697. To be sure, there is no indication that when the Sanchezes filed 3. Declaring the legality and validity of the Extrajudicial
their complaint with the RTC they already knew of the existence of TCT Rescission effected by the plaintiffs on the Contract to Sell on
383697. However, when they were confronted with the title through the subject property, covered by TCT No. 156254 in their
the filing of the various Answers of the intervenors, the Sanchezes names;
directly stated that the title was a fake. Thus, in their Answer with
Counter claims to Complaint in Intervention filed by Varied Traders
4. Ordering the defendants and all persons acting on their
Concept, Inc. dated April 2, 1991, paragraph 2.1. thereof states:
behalf to return to the plaintiffs the Owner’s Copy of TCT No.
156254, including all the documents entrusted to them in
2.1. Like the rest of the intervenors herein, VTCI is claiming rights consideration of their Contract to Sell;
under a forged deed and a fake or absolutely void title. There was never
any Deed of Absolute Sale between plaintiffs and defendants. Much less
5. Ordering defendants and all persons, including the
was there any valid land title issued to defendants. Whatever deeds
intervenors and all persons claiming rights under them to
defendants may have shown VTCI are definitely fakes or foregeries,
return and surrender to the plaintiffs the peaceful possession
hence, null and void. Thus, no rights to plaintiff’s property ever passed
of the subject property covered by TCT No. 156254 located
to VTCI.66
atNo. 10 Panay Avenue, Quezon City in the event plaintiffs
Sanchezes decide to appropriate the townhouses and
An identical paragraph is also contained in the Sanchezes’ Answer with improvements for their own without need of payment of
Counter claims to Intervention filed by Far East Bank and Trust indemnity;
Company and Supplement to Complaint dated January 11, 1993. 67 Thus,
the complaint filed by the Sanchezes later became a direct attack
6. Ordering the defendants jointly and severally to pay the
against TCT 383697 and the CA correctly ordered the cancellation
plaintiffs the sum of One Hundred Thousand (₱100,000.00)
thereof.
Pesos, Philippine Currency as and by way of attorney’s fees;

WHEREFORE, the instant petitions are DENIED. The assailed November

7. Ordering the defendants jointly and severally to pay the
6, 2006 Decision of the Court of Appeals in CA-G.R. CV No. 83236 is
plaintiffs the sum of Two Hundred Thousand (₱200,000.00)
hereby AFFIRMED with MODIFICATION. The dispositive portion of the
Pesos, Philippine Currency as and by way of moral damages;
RTC Decision in Civil Case No. Q-90-4690, as affirmed by the CA, is
hereby modified to read:
8. Ordering the defendants jointly and severally to pay the
plaintiffs the sum of Two Hundred Thousand (₱200,000.00)
WHEREFORE, judgment is hereby rendered as follows:
Pesos, Philippine Currency as and by way ofexemplary
damages to serve as correction or example for the public
1. Directing the Register of Deeds of Quezon City to cancel good;
Transfer Certificate ofTitle No. 383697 in the name of Trans
American Sales and Exposition, Inc. and to reinstate Transfer
9. Ordering the defendants jointly and severally to pay the
Certificate of Title No. 156254 in the name of the [sic]
plaintiffs the sum of Two HundredNinety Thousand
Kenneth Nereo Sanchez, Vicente Victor Sanchez and Imelda
(₱290,000.00) Pesos, representing the depreciated cost of
C. Vda. de Sanchez in its original status prior to the claim of
the plaintiffs’ demolished building per their Agreement
the intervenors-appellants without need to pay any
(Exhibit "D");
registration fee, transfer tax, documentary stamp tax and
other expenses in relation to transfer of title.
10. Dismissing defendants’ counterclaim as well as
intervenors’ counterclaims/complaints and answers in
2. Granting to the Sanchezes the right to inform the Regional
intervention against the plaintiffs;
Trial Court of Quezon City, Branch 89 in Civil Case No. Q-90-
4690 within thirty (30) days from date of finality of decision
whether or not they will appropriate the townhouses and 11. Ordering the plaintiffs to return to the defendants, after
improvements on the lot covered by TCT No. 156254 as their deducting the damages herein awarded, the remaining
own without need to pay indemnity therefor pursuant to amount on the sum paid by the defendants on the subject
Article 449 of the Civil Code. property;

In such a case, the intervenors and all their successors-in- 12. Dismissing the counterclaim of plaintiffs against all
interest shall vacate the subject property and surrender intervenors except as awarded to the former in this Decision;
possession thereof to the Sanchezes within Thirty (30)
Daysfrom notice of their decision.
13. Ordering the defendants jointly and severally to return to
intervenors, Jose and Visitacion Caminas, Reynaldo
If the Sanchezes opt for the second option, the defendants or Maniwang, Generoso "Gener" Tulagan, and VTCI, and Arturo
intervenors shall demolish the townhouses and all other Marquez, the following sum to wit:
improvements on the property at their own expense within
ninety (90) days from notice of the Sanchezes’ decision. If
1. CAMINAS - ₱650,000.00 (Absolute Deed of Sale
they failto do so, the Sanchezes can have the same
dated 14 March 1989);
demolished and the expenses of demolition shall be charged
to the intervenors on a pro rata basis based on the respective
areas of their townhouses. 2. MANIWANG - ₱700,000.00 (Absolute Deed of
Sale dated 22 February 1989);
Finally, if the Sanchezes choose the third option, the case
shall be remanded to the RTC to determine the fair market 3. TULAGAN - ₱1.4 Million, representing the
value of the land at the time of the taking thereof in 1988 and following:
the intervenors-townhouse owners shall pay such value to
the Sanchezes within Thirty (30) days from the finality of the
3.1 ₱600,000.00 – (Contract To Sell
determination of the RTC of such fair market value;
dated 21 February 1989);
 3.2 ₱800,000.00 – (Conditional Deed of
Sale dated 31 January 1989);

4. VTCI - ₱2.1 Million, representing the following:

4.1 ₱700,000.00 – (Absolute Deed of

Sale dated 30 October 1989

– Lot 1-K);

4.2 ₱700,000.00 – (Absolute Deed of

Sale dated 30 October 1989

– Lot 1-I);

4.3 ₱700,000.00 – (Absolute Deed of

Sale dated 30 October 1989

– Lot 1-F);

5. MARQUEZ - ₱600,000.00 (Contract To Sell dated

8 March 1989);

6. BPI - Declaring the intervention of the Bank

without merit.

respectively, representing the fulland/or partial purchase

price of their respective units, all with six (6) percent interest
per annum counted from the time of their filing of their
intervention of judicial demand until fully paid.

With costs against defendants.

SO ORDERED.
G.R. No. 167519               January 14, 2015
THE WELLEX GROUP, INC., Petitioner, 
vs.
U-LAND AIRLINES, CO., LTD., Respondent.
DECISION
LEONEN, J.:
This is a Petition1 for Review on Certiorari under Rule 45 of the Rules of
Court. The Wellex Group, Inc. (Wellex) prays that the Decision 2 dated
July 30, 2004 of the Court of Appeals in CA-GR. CV No. 74850 be
reversed and set aside.3
The Court of Appeals affirmed the Decision 4 of the Regional Trial Court,
Branch 62 of Makati City in Civil Case No. 99-1407. The Regional Trial
Court rendered judgment in favor of U-Land Airlines, Co., Ltd. (ULand)
and ordered the rescission of the Memorandum of Agreement 5 between
Wellex and U-Land.6
Wellex is a corporation established under Philippine law and it
maintains airline operations in the Philippines. 7 It owns shares of stock
in several corporations including Air Philippines International
Corporation (APIC), Philippine Estates Corporation (PEC), and Express
Savings Bank (ESB).8 Wellex alleges that it owns all shares of stock of
Air Philippines Corporation (APC).9
U-Land Airlines Co. Ltd. (U-Land) "is a corporation duly organized and
existing under the laws of Taiwan, registered to do business . . . in the
Philippines."10 It is engaged in the business of air transportation in
Taiwan and in other Asian countries.11
On May 16, 1998, Wellex and U-Land entered into a Memorandum of
Agreement12 (First Memorandum of Agreement) to expand their
respective airline operations in Asia.13
Terms of the First Memorandum of Agreement
The preambular clauses of the First Memorandum of Agreement state:
WHEREAS, U-LAND is engaged in the business of airline transportation
in Taiwan, Philippines and/or in other countries in the Asian region,
and desires to expand its operation and increase its market share by,
among others, pursuing a long-term involvement in the growing
Philippine airline industry;
WHEREAS, WELLEX, on the other hand, has current airline operation in
the Philippines through its majority-owned subsidiary Air Philippines
International Corporation and the latter’s subsidiary, Air Philippines
Corporation, and in like manner also desires to expand its operation in
the Asian regional markets, a Memorandum of Agreement on ______, a
certified copy of which is attached hereto as Annex "A" and is hereby
made an integral part hereof, which sets forth, among others, the basis
for WELLEX’s present ownership of shares in Air Philippines
International Corporation. WHEREAS, the parties recognize the
opportunity to develop a long-term profitable relationship by
combining such of their respective resources in an expanded airline
operation as well as in property development and in other allied
business activities in the Philippines, and desire to set forth herein the
basic premises and their understanding with respect to their joint
cooperation and undertakings.14
In the First Memorandum of Agreement, Wellex and U-Land agreed to
develop a long-term business relationship through the creation of joint
interest in airline operations and property development projects in the
Philippines.15 This long-term business relationship would be
implemented through the following transactions, stated in Section 1 of
the First Memorandum of Agreement:
(a) U-LAND shall acquire from WELLEX, shares of stock of
AIR PHILIPPINES INTERNATIONAL CORPORATION ("APIC")
equivalent to at least 35% of the outstanding capital stock of
APIC, but in any case, not less than 1,050,000,000 shares . . .
[;]
(b) U-LAND shall acquire from WELLEX, shares of stock of
PHILIPPINE ESTATES CORPORATION ("PEC") equivalent to
at least 35% of the outstanding capital stock of PEC, but in
any case, not less than 490,000,000 shares . . . [;]
(c) U-LAND shall enter into a joint development agreement
with PEC . . . [; and]
(d) U-LAND shall be given the option to acquire from
WELLEX shares of stock of EXPRESS SAVINGS BANK ("ESB")
up to 40% of the outstanding capital stock of ESB . . . under
terms to be mutually agreed.16
I. Acquisition of APIC and PEC shares
The First Memorandum of Agreement stated that within 40 days from
its execution date, Wellex and U-Land would execute a share purchase
agreement covering U-Land’s acquisition of the shares of stock of both
APIC (APIC shares) and PEC (PEC shares). 17 In this share purchase
agreement, U-Land would purchase from Wellex its APIC shares and
PEC shares.18
Wellex and U-Land agreed to an initial purchase price of P0.30 per
share of APIC and 0.65 per share of PEC. However, they likewise agreed
that the final price of the shares of stock would be reflected in the actual
share purchase agreement.19
Both parties agreed that the purchase price of APIC shares and PEC
shares would be paid upon the execution of the share purchase
agreement and Wellex’s delivery of the stock certificates covering the
shares of stock. The transfer of APIC shares and PEC shares to U-Land
was conditioned on the full remittance of the final purchase price as
reflected in the share purchase agreement. Further, the transfer was
conditioned on the approval of the Securities and Exchange
Commission of the issuance of the shares of stock and the approval by
the Taiwanese government of U-Land’s acquisition of these shares of
stock.20
Thus, Section 2 of the First Memorandum of Agreement reads:
2. Acquisition of APIC and PEC Shares. - Within forty (40) days from
date hereof (unless extended by mutual agreement), U-LAND and
WELLEX shall execute a Share Purchase Agreement ("SHPA") covering
the acquisition by U-LAND of the APIC Shares and PEC Shares
(collectively, the "Subject Shares"). Without prejudice to any
subsequent agreement between the parties, the purchase price for the
APIC Shares to be reflected in the SHPA shall be THIRTY CENTAVOS
(P0.30) per share and that for the PEC Shares at SIXTY FIVE CENTAVOS
(P0.65) per share.
The purchase price for the Subject Shares as reflected in the SHPA shall
be paid in full upon execution of the SHPA against delivery of the
Subject Shares. The parties may agree on such other terms and
conditions governing the acquisition of the Subject Shares to be
provided in a separate instrument.
The transfer of the Subject Shares shall be effected to U-LAND provided
that: (i) the purchase price reflected in the SHPA has been fully paid; (ii)
the Philippine Securities & Exchange Commission (SEC) shall have
approved the issuance of the Subject Shares; and (iii) any required
approval by the Taiwanese government of the acquisition by U-LAND of
the Subject Shares shall likewise have been obtained. 21
II. Operation and management of APIC/PEC/APC
U-Land was "entitled to a proportionate representation in the Board of
Directors of APIC and PEC in accordance with Philippine
law."22 Operational control of APIC and APC would be exercised jointly
by Wellex and U-Land "on the basis of mutual agreement and
consultations."23 The parties intended that U-Land would gain primary
control and responsibility for the international operations of
APC.24 Wellex manifested that APC is a subsidiary of APIC in the second
preambular clause of the First Memorandum of Agreement. 25
Section 3 of the First Memorandum of Agreement reads:
3. Operation/Management of APIC/APC. - U-LAND shall be entitled to a
proportionate representation in the Board of Directors of APIC and PEC
in accordance with Philippine law. For this purpose, WELLEX shall
cause the resignation of its nominated Directors in APIC and PEC to
accommodate U-LAND’s pro rata number of Directors. Subject to
applicable Philippine law and regulations, operational control of APIC
and Air Philippines Corporation ("APC") shall be lodged jointly to
WELLEX and U-LAND on the basis of mutual agreement and
consultations. Further, U-LAND may second technical and other
consultants into APIC and/or APC with the view to increasing service,
productivity and efficiency, identifying and implementing profit-service
opportunities, developing technical capability and resources, and
installing adequate safety systems and procedures. In addition, U-LAND
shall arrange for the lease by APC of at least three (3) aircrafts owned
by ULAND under such terms as the parties shall mutually agree upon. It
is the intent of the parties that U-LAND shall have primary control and
responsibility for APC’s international operations.26
III. Entering into and funding a joint development agreement
implementing agreements, the terms of the First Memorandum of
Agreement would prevail, unless the parties specifically stated
otherwise or the context of any agreement between the parties would
reveal a different intent.31 Thus, in Section 6 of the First Memorandum
of Agreement:
6. Primacy of Agreement. – It is agreed that in case of conflict between
the provisions of this Agreement and those of the SHPA and the
implementing agreements of the SHPA, the provisions of this
Agreement shall prevail, unless the parties specifically state otherwise,
or the context clearly reveal a contrary intent.32
Finally, Wellex and U-Land agreed that if they were unable to agree on
the terms of the share purchase agreement and the joint development
agreement within 40 days from signing, then the First Memorandum of
Agreement would cease to be effective. 33
In case no agreements were executed, the parties would be released
from their respective undertakings, except that Wellex would be
required to refund within three (3) days the US$3 million given as
initial funding by U-Land for the development projects. If Wellex was
unable to refund the US$3 million to U-Land, U-Land would have the
right to recover on the 57,000,000 PEC shares that would be delivered
to it.34 Section 9 of the First Memorandum of Agreement reads:
9. Validity. - In the event the parties are unable to agree on the terms of
the SHPA and/or the JDA within forty (40) days from date hereof (or
such period as the parties shall mutually agree), this Memorandum of
Agreement shall cease to be effective and the parties released from
their respective undertakings herein, except that WELLEX shall refund
the US$3.0 million provided under Section 4 within three (3) days
therefrom, otherwise U-LAND shall have the right to recover on the
57,000,000 PEC shares delivered to U-LAND under Section 4. 35
The First Memorandum of Agreement was signed by Wellex Chairman
and President William T. Gatchalian (Mr. Gatchalian) and U-Land
Chairman Ker Gee Wang (Mr. Wang) on May 16, 1998. 36

Wellex and U-Land also agreed to enter into a joint development Annex "A" or the Second Memorandum of Agreement
agreement simultaneous with the execution of the share purchase
agreement. The joint development agreement shall cover housing and
Attached and made an integral part of the First Memorandum of
other real estate development projects. 27
Agreement was Annex "A," as stated in the second preambular clause. It
is a document denoted as a "Memorandum of Agreement" entered into
U-Land agreed to remit the sum ofUS$3 million not later than May 22, by Wellex, APIC, and APC.37
1998. This sum was to serve as initial funding for the development
projects that Wellex and U-Land were to undertake pursuant to the
The Second Memorandum of Agreement states:
joint development agreement. In exchange for the US$3 million, Wellex
would deliver stock certificates covering 57,000,000 PEC shares to U-
Land.28 This Memorandum of Agreement, made and executed this ___th day of
______ at Makati City, by and between:
The execution of a joint development agreement was also conditioned
on the execution of a share purchase agreement.29 THE WELLEX GROUP, INC., a corporation duly organized and existing
under the laws of the Philippines, with offices at 22F Citibank Tower,
8741 Paseo de Roxas, Makati City (hereinafter referred to as "TWGI"),
Section 4 of the First Memorandum of Agreement reads:

AIR PHILIPPINES INTERNATIONAL CORPORATION (formerly FORUM

4. Joint Development Agreement with PEC. – Simultaneous with the
PACIFIC, INC.), likewise a corporation duly organized and existing
execution of the SHPA, U-LAND and PEC shall execute a joint
under the laws of the Philippines, with offices at 8F Rufino Towers,
development agreement ("JDA") to pursue property development
Ayala Avenue, Makati City (hereinafter referred to as "APIC"),
projects in the Philippines. The JDA shall cover specific housing and
other real estate development projects as the parties shall agree. All
profits derived from the projects covered by the JDA shall be shared - and –
equally between ULAND and PEC. U-LAND shall, not later than May 22,
1998, remit the sum of US$3.0 million as initial funding for the
AIR PHILIPPINES CORPORATION, corporation duly organized and
aforesaid development projects against delivery by WELLEX of
existing under the laws of the Philippines, with offices at Multinational
57,000,000 shares of PEC as security for said amount in accordance
Building, Ayala Avenue, Makati City (hereinafter referred to as "APC").
with Section 9 below.30

W I T N E S S E T H: That -
In case of conflict between the provisions of the First Memorandum of
Agreement and the provisions of the share purchase agreement or its
WHEREAS, TWGI is the registered and beneficial owner, or has otherwise
acquired _____ (illegible in rollo) rights to the entire issued and
outstanding capital stock (the "APC SHARES") of AIR PHILIPPINES
CORPORATION ("APC") and has made stockholder advances to APC for
the _____ (illegible in rollo) of aircraft, equipment and for working capital
used in the latter’s operations (the "_____ (illegible in rollo) ADVANCES").
WHEREAS, APIC desires to obtain full ownership and control of APC,
including all of _____ (illegible in rollo) assets, franchise, goodwill and
operations, and for this purpose has offered to acquire the _____
(illegible in rollo) 302SHARES of TWGI in APC, including the APC
ADVANCES due to TWGI from APC, with _____ (illegible in rollo) of
acquiring all the assets, franchise, goodwill and operations of APC; and
TWGI has _____ (illegible in rollo) to the same in consideration of the
conveyance by APIC to TWGI of certain investments, _____ (illegible in
rollo) issuance of TWGI of shares of stock of APIC in exchange for said
APC SHARES and the _____ (illegible in rollo) ADVANCES, as more
particularly described hereunder.
NOW, THEREFORE, the parties agree as follows:
1. TWGI agrees to transfer the APC ADVANCES in
APIC in exchange for the _____ (illegible in rollo) by
APIC to TWGI of investment shares of APIC in
Express Bank, Petro Chemical _____ (illegible in
rollo) of Asia Pacific, Republic Resources &
Development Corporation and Philippine _____
(illegible in rollo) Corporation (the "APIC
INVESTMENTS").
2. TWGI likewise agrees to transfer the APC
SHARES to APIC in exchange solely _____ (illegible
in rollo) the issuance by APIC of One Billion Seven
Hundred Ninety-Seven Million Eight Hundred Fifty
Seven Thousand Three Hundred Sixty Four
(1,797,857,364) shares of its capital stock of a _____
(illegible in rollo) value of ₱1.00 per share (the
"APIC SHARES"), taken from the currently
authorized but _____ (illegible in rollo) shares of
the capital stock of APIC, as well as from the
increase in the authorized capital _____ (illegible in
rollo) of APIC from ₱2.0 billion to ₱3.5 billion.
3. It is the basic understanding of the parties
hereto that the transfer of the APC _____ (illegible
in rollo) as well as the APC ADVANCES to APIC
shall be intended to enable APIC to obtain _____
(illegible in rollo) and control of APC, including all
of APC’s assets, franchise, goodwill and _____
(illegible in rollo).
4. Unless the parties agree otherwise, the
effectivity of this Agreement and transfers _____
(illegible in rollo) APC ADVANCES in exchange for
the APIC INVESTMENTS, and the transfer of the
_____ (illegible in rollo) SHARES in exchange for the
issuance of new APIC SHARES, shall be subject to
_____ (illegible in rollo) due diligence as the parties
shall see fit, and the condition subsequent that the
_____ (illegible in rollo) for increase in the
authorized capital stock of the APIC from ₱2.0
billion to ₱3.5 _____ (illegible in rollo) shall have
been approved by the Securities and Exchange
Commission.
IN WITNESS WHEREOF, the parties have caused
these presents to be signed on the date _____
(illegible in rollo) first above written. 38 (Emphasis
supplied)
This Second Memorandum of Agreement was allegedly incorporated
into the First Memorandum of Agreement as a "disclosure to [U-Land]
[that] . . . [Wellex] was still in the process of acquiring and consolidating
its title to shares of stock of APIC."39 It "included the terms of a share
swap whereby [Wellex] agreed to transfer to APIC its shareholdings and
advances to APC in exchange for the issuance by APIC of shares of stock
to [Wellex]."40
The Second Memorandum of Agreement was signed by Mr. Gatchalian,
APIC President Salud,41 and APC President Augustus C. Paiso. 42 It was
not dated, and no place was indicated as the place of signing. 43 It was
not notarized either, and no other witnesses signed the document. 44
The 40-day period lapsed on June 25, 1998. 45 Wellex and U-Land were
not able to enter into any share purchase agreement although drafts
were exchanged between the two.
Despite the absence of a share purchase agreement, U-Land remitted to
Wellex a total of US$7,499,945.00. 46These were made in varying
amounts and through the issuance of post-dated checks.47 The dates of
remittances were the following:
Date Amount (in US$)
June 30, 1998 990,000.00
July 2, 1998 990,000.00
  20,000.00
July 30, 1998 990,000.00
  490,000.00
  490,000.00
August 1, 1998 990,000.00
  490,000.00
  490,000.00
August 3, 1998 990,000.00
  70,000.00
September 25, 1998 399,972.50
  99, 972.50
Total US$7,499,945.0048
Wellex acknowledged the receipt of these remittances in a confirmation
letter addressed to U-Land dated September 30, 1998. 49
According to Wellex, the parties agreed to enter into a security
arrangement. If the sale of the shares of stock failed to push through,
the partial payments or remittances U-Land made were to be secured
by these shares of stock and parcels of land. 50 This meant that U-Land
could recover the amount it paid to Wellex by selling these shares of
stock and land titles or using them to generate income.
Thus, after the receipt of US$7,499,945.00, Wellex delivered to U-Land
stock certificates representing 60,770,000 PEC shares and 72,601,000
APIC shares.51 These were delivered to U-Land on July 1, 1998,
September 1, 1998, and October 1, 1998. 52
In addition, Wellex delivered to U-Land Transfer Certificates of Title
(TCT) Nos. T-216769, T-216771, T-228231, T-228227, T-211250, and
T-216775 covering properties owned by Westland Pacific Properties
Corporation in Bulacan; and TCT Nos. T-107306, T-115667, T-105910,
T-120250, T-1114398, and T-120772 covering properties owned by
Rexlon Realty Group, Inc.53 On October 1, 1998,54 U-Land received a
letter from Wellex, indicating a list of stock certificates that the latter
was giving to the former by way of "security." 55
Despite these transactions, Wellex and U-Land still failed to enter into
the share purchase agreement and the joint development agreement.
In the letter56 dated July 22, 1999, 10 months 57 after the last formal
communication between the two parties, U-Land, through counsel,
demanded the return of the US$7,499,945.00. 58 This letter was sent 14
months after the signing of the First Memorandum of Agreement.
Counsel for U-Land claimed that "[Wellex] ha[d] unjustifiably refused to
enter into the. . . Share Purchase Agreement." 59 As far as U-Land was
concerned, the First Memorandum of Agreement was no longer in
effect, pursuant to Section 9.60 As such, U-Land offered to return all the
stock certificates covering APIC shares and PEC shares as well as the
titles to real property given by Wellex as security for the amount
remitted by U-Land.61
Wellex sent U-Land a letter62 dated August 2, 1999, which refuted U-
Land’s claims. Counsel for Wellex stated that the two parties carried out
several negotiations that included finalizing the terms of the share
purchase agreement and the terms of the joint development agreement.
Wellex asserted that under the joint development agreement, U-Land
agreed to remit the sum of US$3 million by May 22,1998 as initial
funding for the development projects.63
Wellex further asserted that it conducted extended discussions with U-
Land in the hope of arriving at the final terms of the agreement despite
the failure of the remittance of the US$3 million on May 22, 1998. 64 That
remittance pursuant to the joint development agreement "would have
demonstrated [U-Land’s] good faith in finalizing the agreements." 65
Wellex averred that, "[s]ave for a few items, [Wellex and U-Land]
virtually agreed on the terms of both [the share purchase agreement
and the joint development agreement.]"66 Wellex believed that the
parties had already "gone beyond the ‘intent’ stage of the [First
Memorandum of Agreement] and [had already] effected partial
implementation of an over-all agreement." 67 U-Land even delivered a
total of 12 post-dated checks to Wellex as payment for the APIC shares
and PEC shares.68 "[Wellex] on the other hand, had [already] delivered
to[U-Land] certificates of stock of APEC [sic] and PEC as well as various
land titles to cover actual remittances." 69 Wellex alleged that the
agreements were not finalized because U-Land was "forced to suspend
operations because of financial problems spawned by the regional
economic turmoil."70
Thus, Wellex maintained that "the inability of the parties to execute the
[share purchase agreement] and the [joint development agreement]
principally arose from problems at [U-Land’s] side, and not due to
[Wellex’s] ‘unjustified refusal to enter into [the] [share purchase
agreement][.]’"71
On July 30, 1999, U-Land filed a Complaint 72 praying for rescission of
the First Memorandum of Agreement and damages against Wellex and
for the issuance of a Writ of Preliminary Attachment. 73 From U-Land’s
point of view, its primary reason for purchasing APIC shares from
Wellex was APIC’s majority ownership of shares of stock in APC (APC
shares).74 After verification with the Securities and Exchange
Commission, U-Land discovered that "APIC did not own a single share
of stock in APC."75 U-Land alleged that it repeatedly requested that the
parties enter into the share purchase agreement. 76 U-Land attached the
demand letter dated July 22, 1999 to the Complaint. 77 However, the 40-
day period lapsed, and no share purchase agreement was finalized. 78
U-Land alleged that, as of the date of filing of the Complaint, Wellex still
refused to return the amount of US$7,499,945.00 while refusing to
enter into the share purchase agreement.79 U-Land stated that it was
induced by Wellex to enter into and execute the First Memorandum of
Agreement, as well as release the amount of US$7,499,945.00. 80
In its Answer with Compulsory Counterclaim, 81 Wellex countered that
U-Land had no cause of action. 82 Wellex maintained that under the First
Memorandum of Agreement, the parties agreed to enter into a share
purchase agreement and a joint development agreement. 83 Wellex
alleged that to bring the share purchase agreement to fruition, it would
have to acquire the corresponding shares in APIC. 84 It claimed that U-
Land was fully aware that the former "still ha[d] to consolidate its title
over these shares."85 This was the reason for Wellex’s attachment of the
Second Memorandum of Agreement to the First Memorandum of
Agreement. Wellex attached the Second Memorandum of Agreement as
evidence to refute U-Land’s claim of misrepresentation. 86
Wellex further alleged that U-Land breached the First Memorandum of
Agreement since the payment for the shares was to begin during the
40-day period, which began on May 16, 1998. 87 In addition, U-Land
failed to remit the US$3 million by May 22, 1998 that would serve as
initial funding for the development projects. 88 Wellex claimed that the
remittance of the US$3 million on May 22, 1998 was a mandatory
obligation on the part of U-Land. 89 Wellex averred that it presented
draft versions of the share purchase agreement, which were never
finalized.90 Thus, it believed that there was an implied extension of the
40-day period within which to enter into the share purchase agreement
and the joint development agreement since U-Land began remitting
sums of money in partial payment for the purchase of the shares of
stock.91
In its counterclaim against U-Land, Wellex alleged that it had already
set in motion building and development of real estate projects on four
(4) major sites in Cavite, Iloilo, and Davao. It started initial construction
on the basis of its agreement with U-Land to pursue real estate
development projects.92
Wellex claims that, had the development projects pushed through, the
parties would have shared equally in the profits of these
projects.93 These projects would have yielded an income of
₱2,404,948,000.00, as per the study Wellex conducted, which was duly
recognized by U-Land.94 Half of that amount, ₱1,202,474,000.00, would
have redounded to Wellex.95 Wellex, thus, prayed for the rescission of
the First Memorandum of Agreement and the payment of
₱1,202,474,000 in damages for loss of profit. 96 It prayed for the
payment of moral damages, exemplary damages, attorney’s fees, and
costs of suit.97
In its Reply,98 U-Land denied that there was an extension of the 40-day
period within which to enter into the share purchase agreement and the
joint development agreement. It also denied requesting for an extension
of the 40-day period. It further raised that there was no provision in the
First Memorandum of Agreement that required it to remit payments for
Wellex’s shares of stock in APIC and PEC within the 40-day period.
Rather, the remittances were supposed to begin upon the execution of
the share purchase agreement.99
As for the remittance of the US$3 million, U-Land stated that the
issuance of this amount on May 22, 1998 was supposed to be
simultaneously made with Wellex’s delivery of the stock certificates for
57,000,000 PEC shares. These stock certificates were not delivered on
that date.100
With regard to the drafting of the share purchase agreement, U-Land
denied that it was Wellex that presented versions of the agreement. U-
Land averred that it was its own counsel who drafted versions of the
share purchase agreement and the joint development agreement, which
Wellex refused to sign.101
U-Land specifically denied that it had any knowledge prior to or during
the execution of the First Memorandum of Agreement that Wellex still
had to "consolidate its title over" its shares in APIC. U-Land averred that
it relied on Wellex’s representation that it was a majority owner of APIC
shares and that APIC owned a majority of APC shares. 102
Moreover, U-Land denied any knowledge of the initial steps that Wellex
undertook to pursue the development projects and denied any
awareness of a study conducted by Wellex regarding the potential
profit of these projects.103
The case proceeded to trial.
U-Land presented Mr. David Tseng (Mr. Tseng), its President and Chief
Executive Officer, as its sole witness.104 Mr. Tseng testified that
"[s]ometime in 1997, Mr. William Gatchalian who was in Taiwan invited
[U-Land] to join in the operation of his airline company[.]" 105 U-Land did
not accept the offer at that time.106 During the first quarter of 1998, Mr.
Gatchalian "went to Taiwan and invited [U-Land] to invest in Air
Philippines[.]"107 This time, U-Land alleged that subsequent meetings
were held where Mr. Gatchalian, representing Wellex, "claimed
ownership of a majority of the shares of APIC and ownership by APIC of
a majority of the shares of [APC,] a domestic carrier in the
Philippines."108Wellex, through Mr. Gatchalian, offered to sell to U-Land
PEC shares as well.109
According to Mr. Tseng, the parties agreed to enter into the First
Memorandum of Agreement after their second meeting. 110 Mr. Tseng
testified that under this memorandum of agreement, the parties would
enter into a share purchase agreement "within forty (40) days from its
execution which [would] put into effect the sale of the shares [of stock]
of APIC and PEC[.]"111 However, the "[s]hare [p]urchase [a]greement
was not executed within the forty-day period despite the draft . . . given
[by U-Land to Wellex]."112
Mr. Tseng further testified that it was only after the lapse of the 40-day
period that U-Land discovered that Wellex needed money for the
transfer of APC shares to APIC. This allegedly shocked U-Land since
under the First Memorandum of Agreement, APIC was supposed to own
a majority of APC shares. Thus, U-Land remitted to Wellex a total of
US$7,499,945.00 because of its intent to become involved in the
aviation business in the Philippines. These remittances were confirmed
by Wellex through a confirmation letter. Despite the remittance of this
amount, no share purchase agreement was entered into by the
parties.113
Wellex presented its sole witness, Ms. Elvira Ting (Ms. Ting), Vice
President of Wellex. She admitted her knowledge of the First
Memorandum of Agreement as she was involved in its drafting. She
testified that the First Memorandum of Agreement made reference,
under its second preambular clause, to the Second Memorandum of
Agreement entered into by Wellex, APIC, and APC. She testified that
under the First Memorandum of Agreement, U-Land’s purchase of APIC
shares and PEC shares from Wellex would take place within 40 days,
with the execution of a share purchase agreement.114
According to Ms. Ting, after the 40-day period lapsed, U-Land Chairman
Mr. Wang requested sometime in June of 1998 for an extension for the
execution of the share purchase agreement and the remittance of the
US$3 million. As proof that Mr. Wang made this request, Ms. Ting
testified that Mr. Wang sent several post-dated checks to cover the
payment of the APIC shares and PEC shares and the initial funding of
US$3 million for the joint development agreement. She testified that Mr.
Wang presented a draft of the share purchase agreement, which Wellex
rejected. Wellex drafted a new version of the share purchase
agreement.115 However, the share purchase agreement was not
executed because during the period of negotiation, Wellex learned from
other sources that U-Land "encountered difficulties starting October of
1998."116 Ms. Ting admitted that U-Land made the remittances to Wellex
in the amount of US$7,499,945.00. 117
Ms. Ting testified that U-Land was supposed to make an initial payment
of US$19 million under the First Memorandum of Agreement. However,
U-Land only paid US$7,499,945.00. The total payments should have
amounted to US$41 million.118
Finally, Ms. Ting testified that Wellex tried to contact U-Land to have a
meeting to thresh out the problems of the First Memorandum of
Agreement, but U-Land did not reply. Instead, Wellex only received
communication from U-Land regarding their subsequent negotiations
through the latter’s demand letter dated July 22, 1999. In response,
Wellex wrote to U-Land requesting another meeting to discuss the
demands. However, U-Land already filed the Complaint for rescission
and caused the attachment against the properties of Wellex, causing
embarrassment to Wellex.119
In the Decision dated April 10, 2001, the Regional Trial Court of Makati
City held that rescission of the First Memorandum of Agreement was
proper:
The first issue must be resolved in the negative. Preponderance of
evidence leans in favor of plaintiff that it is entitled to the issuance of
the writ of preliminary attachment. Plaintiff’s evidence establishes the
facts that it is engaged in the airline business in Taiwan, was
approached by defendant, through its Chairman William Gatchalian,
and was invited by the latter to invest in an airline business in the
Philippines, Air Philippines Corporation (APC); that plaintiff became
interested in the invitation of defendant; that during the negotiations
between plaintiff and defendant, defendant induced plaintiff to buy
shares in Air Philippines International Corporation (APIC) since it owns
majority of the shares of APC; that defendant also induced plaintiff to
buy shares of APIC in Philippine Estates Corporation (PEC); that the
negotiations between plaintiff and defendant culminated into the
parties executing a MOA (Exhs. "C" to "C-3", also Exh. "1"); that in the
second "Whereas" clause of the MOA, defendant represented that it has
a current airline operation through its majority-owned subsidiary APIC,
that under the MOA, the parties were supposed to enter into a Share
Purchase Agreement (SPA) within forty (40) days from May 16, 1998,
the date the MOA in order to effect the transfer of APIC and PEC shares
of defendant to plaintiff; that plaintiff learned from defendant that APIC
does not actually own a single share in APC; that plaintiff verified with
the Securities and Exchange Commission (SEC), by obtaining a General
Information Sheet therefrom (Exh. "C-Attachment"); that APIC does not
in fact own APC; that defendant induced plaintiff to still remit its
investment to defendant, which plaintiff did as admitted by defendant
per its Confirmation Letter (Exh. "D") in order that APC shares could be
transferred to APIC; that plaintiff remitted a total of US$7,499,945.00 to
defendant; and that during the forty-day period stipulated in the MOA
and even after the lapse of the said period, defendant has not entered
into the SPA, nor has defendant caused the transfer of APC shares to
APIC.
In the second "Whereas" clause of the MOA (Exh. "C"), defendant’s
misrepresentation that APIC owns APC is made clear, as follows:
"WHEREAS, WELLEX, on the other hand, has current airline operation
in the Philippines through its majority-owned subsidiary Air
Philippines International Corporation (Exh. "C") and the latter’s
subsidiary, Air Philippines Corporation, and in like manner also desires
to expand its operation in the Asian regional markets; x x x" (Second
Whereas of Exh. "C")
On the other hand, defendant’s evidence failed to disprove plaintiff’s
evidence. The testimony of defendant’s sole witness Elvira Ting, that
plaintiff knew at the time of the signing of the MOA that APIC does not
own a majority of the shares of APC because another Memorandum of
Agreement was attached to the MOA (Exh "1") pertaining to the
purchase of APC shares by APIC is unavailing. The second "Whereas"
clause of the MOA leaves no room for interpretation. . . . The second
MOA purportedly attached as Annex "A" of this MOA merely enlightens
the parties on the manner by which APIC acquired the shares of APC.
Besides, . . . the second MOA was not a certified copy and did not contain
a marking that it is an Annex "A" when it was supposed to be an Annex
"A" and a certified copy per the MOA between plaintiff and defendant.
As can be also gathered from her testimony, Ms. Ting does not have
personal knowledge that plaintiff was not informed that APIC did not
own shares of APC during the negotiations as she was not present
during the negotiations between plaintiff and defendant’s William
Gatchalian. Her participation in the agreement between the parties
[was] merely limited to the preparation of the documents to be signed.
Ms. Ting testified, as follows:
"Q During the negotiation, you did not know anything about that?"
A I was not involved in the negotiation, sir.
Q And you are just making your statement that U-Land knew about the
intended transfer of shares from APC to APIC because of this WHEREAS
CLAUSE and the Annex to this Memorandum of Agreement?
A Yes, it was part of the contract."
(TSN, Elvira Ting, June 6, 2000, pp. 8-10)
Defendant’s fraud in the performance of its obligation under the MOA is
further revealed when Ms. Ting testified on cross-examination that
notwithstanding the remittances made by plaintiff in the total amountn
[sic] of US$7,499, 945.00 to partially defray the cost of transferring APC
shares to APIC even as of the year 2000, as follows:
"Q Ms. Ting, can you please tell the Court if you know who owns shares
of Air Philippines Corporation at this time?
A Air Philippines Corporation right now is own [sic] by Wellex Group
and certain individual.
Q How much shares of Air Philippines Corporation is owned by Wellex
Group?
A Around twenty...at this moment around twenty five percent (25%).
Q Can you tell us if you know who are the other owners of the shares of
Air Philippines?
A There are several individual owners, I cannot recall the names.
Q Could [sic] you know if Air Philippines Int’l. Corporation is one of the
owners?
A As of this moment, no sir."
(lbid, p. 16)
That defendant represented to plaintiff that it needed the remittances
of plaintiff, even if no SPA was executed yet between the parties, to
effect the transfer of APC shares to APIC is admitted by its same witness
also in this wise:
"Q You said that remittances were made to the Wellex Group,
Incorporated by plaintiff for the period from June 1998 to September
1998[,] is that correct?
A Yes, Sir.
Q During all these times, that remittances were made in the total
amount of more than seven million dollars, did you ever know if
plaintiff asked for evidence from your company that AIR PHILIPPINES
INTERNATIONAL CORPORATION has already acquired shares of AIR
PHILIPPINES CORPORATION?
A There were queries on the matter.
Q And what was your answer to those queries, Madam Witness?
A We informed them that the decision was still in the process.
Q Even up to the time that plaintiff U-Land stopped the remittances
sometime in September 1998 you have not effected the transfer of
shares of AIR PHILIPPINES CORPORATION to AIR PHILIPPINES
INTERNATIONCAL [sic] CORPORATION[,] am I correct?
A APC to APIC, well at that time it’s still in the process.
Q In fact, Madam Witness, is it not correct for me to say that one of the
reasons why U-Land Incorporated was convinced to remit the amounts
of money totalling seven million dollars plus,
was that your company said that it needed funds to effect these
transfers, is that correct?
A Yes, sir."
(lbid, pp. 25-29)
As the evidence adduced by the parties stand, plaintiff has established
the fact that it had made remittances in the total amount of
US$7,499,945.00 to defendant in order that defendant will make good
its representation that APC is a subsidiary of APIC. The said remittances
are admitted by defendant.
Notwithstanding the said remittances, APIC does not own a single share
of APC. On the other hand, defendant could not even satisfactorily
substantiate its claim that at least it had the intention to cause the
transfer of APC shares to APIC. [D]efendant obviously did not enter into
the stipulated SPA because it did not have the shares of APC transferred
to APIC despite its representations. Under the circumstances, it is clear
that defendant fraudulently violated the provisions of the
MOA.120 (Emphasis supplied)
On appeal, the Court of Appeals affirmed the ruling of the Regional Trial
Court.121 In its July 30, 2004 Decision, the Court of Appeals held that the
Regional Trial Court did not err in granting the rescission:
Records show that in the answer filed by defendant-appellant, the latter
itself asked for the rescission of the MOA. Thus, in effect, it prays for the
return of what has been given or paid under the MOA, as the law creates
said obligation to return the things which were the object of the
contract, and the same could be carried out only when he who demands
rescission can return whatever he may be obliged to restore. The law
says:
"Rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its
interest; consequently, it can be carried out only when he who demands
rescission can return whatever he may be obliged to restore."
Appellant, therefore, cannot ask for rescission of the MOA and yet
refuse to return what has been paid to it. Further, appellant’s claim that
the lower court erred in ruling for the rescission of the MOA is absurd
and ridiculous because rescission thereof is prayed for by the
former. . . . This Court agrees with the lower court that appellee is the
injured party in this case, and therefore is entitled to rescission,
because the rescission referred to here is predicated on the breach of
faith by the appellant which breach is violative of the reciprocity
between the parties. It is noted that appellee has partly complied with
its own obligation, while the appellant has not. It is, therefore, the right
of the injured party to ask for rescission because the guilty party cannot
ask for rescission.
The lower court . . . correctly ruled that:
". . . This Court agrees with plaintiff that defendant’s misrepresentations
regarding APIC’s not owning shares in APC vitiates its consent to the
MOA. Defendant’s continued misrepresentation that it will cause the
transfer of APC shares in APIC inducing plaintiff to remit money despite
the lapse of the stipulated forty day period, further establishes
plaintiff’s right to have the MOA rescinded.
Section 9 of the MOA itself provides that in the event of the non-
execution of an SPA within the 40 day period, or within the extensions
thereof, the payments made by plaintiff shall be returned to it, to wit:
"9 Validity.- In the event that the parties are unable to agree on the
terms of the SHPA and/or JDA within forty (40) days from the date
hereof (or such period as the parties shall mutually agree), this
Memorandum of Agreement shall cease to be effective and the parties
released from their respective undertakings herein, except that
WELLEX shall refund the US$3.0 million under Section 4 within three
(3) days therefrom, otherwise U-LAND shall have the right to recover
the 57,000,000 PEC shares delivered to ULAND under Section 4."
Clearly, the parties were not able to agree on the terms of the SPA
within and even after the lapse of the stipulated 40 day period. There
being no SPA entered into by and between the plaintiff and defendant,
defendant’s return of the remittances [of] plaintiff in the total amount of
US$7,499,945 is only proper, in the same vein, plaintiff should return to
defendant the titles and certificates of stock given to it by
defendant.122 (Citations omitted)
Hence, this Petition was filed.
Petitioner’s Arguments
Petitioner Wellex argues that contrary to the finding of the Court of
Appeals, respondent U-Land was not entitled to rescission because the
latter itself violated the First Memorandum of Agreement. Petitioner
Wellex states that respondent U-Land was actually bound to pay
US$17.5 million for all of APIC shares and PEC shares under the First
Memorandum of Agreement and the US$3 million to pursue the
development projects under the joint development agreement. In sum,
respondent U-Land was liable to petitioner Wellex for the total amount
of US$20.5 million. Neither the Court of Appeals nor the Regional Trial
Court made any mention of the legal effect of respondent U-Land’s
failure to pay the full purchase price. 123
As to the finding of misrepresentations, petitioner Wellex raises that a
seller may sell a thing not yet belonging to him at the time of the
transaction, provided that he will become the owner at the time of
delivery so that he can transfer ownership to the buyer. Contrary to the
finding of the lower courts, petitioner Wellex was obliged to be the
owner of the shares only when the time came to deliver these to
respondent U-Land and not during the perfection of the contract
itself.133
Finally, petitioner Wellex argues that respondent U-Land could have
recovered through the securities given to the latter. 134 Petitioner Wellex
invokes Suria v. Intermediate Appellate Court, 135 which held that an
"action for rescission is not a principal action that is retaliatory in
character [under Article 1191 of the Civil Code, but] a subsidiary one
which. . . is available only in the absence of any other legal remedy
[under Article 1384 of the Civil Code]."136Respondent’s Arguments
Respondent U-Land argues that it was the execution of the share
purchase agreement that would result in its purchase of the APIC shares
and PEC shares.137 It was not the full remittance of the purchase price of
the shares of stock as indicated in the First Memorandum of Agreement,
as alleged by petitioner Wellex.138 Respondent U-Land asserts that the
First Memorandum of Agreement provides that the exact number of
APIC shares and PEC shares to be purchased under the share purchase
agreement and the final price of these shares were not yet determined
by the parties.139
Respondent U-Land reiterates that it was petitioner Wellex that
requested for the remittances amounting to US$7,499,945.00 to
facilitate APIC’s purchase of APC shares. 140 Thus, it was petitioner
Wellex’s refusal to enter into the share purchase agreement that led to
respondent U-Land demanding rescission of the First Memorandum of
Agreement and the return of the US$7,499,945.00. 141 Respondent U-
Land further argues before this court that petitioner Wellex failed to
present evidence as to how the money was spent, stating that Ms. Ting
admitted that the Second Memorandum of Agreement "was not
consummated at any time."142 Respondent U-Land raises that petitioner
Wellex was guilty of fraud by making it appear that APC was a
subsidiary of APIC.143 It reiterates that, as an airline company, its
primary reason for entering into the First Memorandum of Agreement
was to acquire management of APC, another airline company. 144 Under
Article 1191 of the Civil Code, respondent U-Land, as the injured party,
was entitled to rescission due to the fatal misrepresentations
committed by petitioner Wellex.145

Respondent U-Land further asserts that the "shareholdings in APIC and

On the share purchase agreement, petitioner Wellex asserts that its
APC were never in question." 146 Rather, it was petitioner Wellex’s
obligation to deliver the totality of the shares of stock would become
misrepresentation that APIC was a majority shareholder of APC that
demandable only upon remittance of the full purchase price of US$17.5
compelled it to enter into the agreement.147
million.124 The full remittance of the purchase price of the shares of
stock was a suspensive condition for the execution of the share
purchase agreement and delivery of the shares of stock. Petitioner As for Suria, respondent U-land avers that this case was inapplicable
Wellex argues that the use of the term "upon" in Section 2 of the First because the pertinent provision in Suria was not Article 1191 but
Memorandum of Agreement clearly provides that the full payment of rescission under Article 1383 of the Civil Code. 148 The "rescission"
the purchase price must be given "simultaneously" or "concurrent" with referred to in Article 1191 referred to "resolution" of a contract due to a
the execution of the share purchase agreement.125 breach of a mutual obligation, while Article 1384 spoke of "rescission"
because of lesion and damage. 149 Thus, the rescission that is relevant to
the present case is that of Article 1191, which involves breach in a
Petitioner Wellex raises that the Court of Appeals erred in saying that
reciprocal obligation. It is, in fact, resolution, and not rescission as a
the rescission of the First Memorandum of Agreement was proper
result of fraud or lesion, as found in Articles 1381, 1383, and 1384 of
because petitioner Wellex itself asked for this in its Answer before the
the Civil Code.150
trial court.126 It asserts that "there can be no rescission of a non-existent
obligation, such as [one] whose suspensive condition has not yet
happened[,]"127 as held in Padilla v. Spouses Paredes.128 Citing Villaflor v. The Issue
Court of Appeals129 and Spouses Agustin v. Court of Appeals, 130 it argues
that "the vendor. . . has no obligation to deliver the thing sold. . . if the
The question presented in this case is whether the Court of Appeals
buyer. . . fails to fully pay the price as required by the contract." 131 In
erred in affirming the Decision of the Regional Trial Court that granted
this case, petitioner Wellex maintains that respondent U-Land’s
the rescission of the First Memorandum of Agreement prayed for by U-
remittance of US$7,499,945.00 constituted mere partial performance of
Land.
a reciprocal obligation.132 Thus, respondent U-Land was not entitled to
rescission. The nature of this reciprocal obligation requires both
parties’ simultaneous fulfillment of the totality of their reciprocal The Petition must be denied.
obligations and not only partial performance on the part of the allegedly
injured party.
I (a) U-LAND shall acquire from WELLEX, shares of stock of
The requirement of a share
purchase agreement
The Civil Code provisions on the interpretation of contracts are
controlling to this case, particularly Article 1370, which reads:
ART. 1370. If the terms of a contract are clear and leave no doubt upon
the intention of the contracting parties, the literal meaning of its
stipulations shall control.
If the words appear to be contrary to the evident intention of the
parties, the latter shall prevail over the former.
In Norton Resources and Development Corporation v. All Asia Bank
Corporation:151
The cardinal rule in the interpretation of contracts is embodied in the
first paragraph of Article 1370 of the Civil Code: "[i]f the terms of a
contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control."
This provision is akin to the "plain meaning rule" applied by
Pennsylvania courts, which assumes that the intent of the parties to an
instrument is "embodied in the writing itself, and when the words are
clear and unambiguous the intent is to be discovered only from the
express language of the agreement." It also resembles the "four
corners" rule, a principle which allows courts in some cases to search
beneath the semantic surface for clues to meaning. A court's purpose in
examining a contract is to interpret the intent of the contracting parties,
as objectively manifested by them. The process of interpreting a
contract requires the court to make a preliminary inquiry as to whether
the contract before it is ambiguous. A contract provision is ambiguous if
it is susceptible of two reasonable alternative interpretations. Where
the written terms of the contract are not ambiguous and can only be
read one way, the court will interpret the contract as a matter of law. If
the contract is determined to be ambiguous, then the interpretation of
the contract is left to the court, to resolve the ambiguity in the light of
the intrinsic evidence.152 (Emphasis supplied)
As held in Norton, this court must first determine whether a provision
or stipulation contained in a contract is ambiguous. Absent any
ambiguity, the provision on its face will be read as it is written and
treated as the binding law of the parties to the contract.
The parties have differing interpretations of the terms of the First
Memorandum of Agreement. Petitioner Wellex even admits that "the
facts of the case are fairly undisputed [and that] [i]t is only the parties’
respective [understanding] of these facts that are not in harmony." 153
The second preambular clause of the First Memorandum of Agreement
reads:
WHEREAS, WELLEX, on the other hand, has current airline operation in
the Philippines through its majority-owned subsidiary Air Philippines
International Corporation and the latter’s subsidiary, Air Philippines
Corporation, and in like manner also desires to expand its operation in
the Asian regional markets; a Memorandum of Agreement on ______, a
certified copy of which is attached hereto as Annex "A" and is hereby
made an integral part hereof, which sets forth, among others, the basis
for WELLEX’s present ownership of shares in Air Philippines
International Corporation.154 (Emphasis supplied)
Section 1 of the First Memorandum of Agreement reads:
I. Basic Agreement. - The parties agree to develop a long-term business
relationship initially through the creation of joint interest in airline
operations as well as in property development projects in the
Philippines to be implemented as follows:
AIR PHILIPPINES INTERNATIONAL CORPORATION ("APIC")
equivalent to at least 35% of the outstanding capital stock of
APIC, but in any case, not less than 1,050,000,000 shares (the
"APIC Shares").
(b) U-LAND shall acquire from WELLEX, shares of stock of
PHILIPPINE ESTATES CORPORATION ("PEC") equivalent to
at least 35% of the outstanding capital stock of PEC, but in
any case, not less than 490,000,000 shares (the "PEC
Shares").
(c) U-LAND shall enter into a joint development agreement
with PEC to jointly pursue property development projects in
the Philippines.
(d) U-LAND shall be given the option to acquire from
WELLEX shares of stock of EXPRESS SAVINGS BANK ("ESB")
up to 40% of the outstanding capital stock of ESB (the "ESB
Shares") under terms to be mutually agreed.155
The First Memorandum of Agreement contained the following
stipulations regarding the share purchase agreement:
2. Acquisition of APIC and PEC Shares. - Within forty (40) days from
date hereof (unless extended by mutual agreement), U-LAND and
WELLEX shall execute a Share Purchase Agreement ("SHPA") covering
the acquisition by U-LAND of the APIC Shares and PEC Shares
(collectively, the "Subject Shares"). Without prejudice to any
subsequent agreement between the parties, the purchase price for the
APIC Shares to be reflected in the SHPA shall be THIRTY CENTAVOS
(P0.30) per share and that for the PEC Shares at SIXTY FIVE CENTAVOS
(P0.65) per share.
The purchase price for the Subject Shares as reflected in the SHPA shall
be paid in full upon execution of the SHPA against delivery of the
Subject Shares. The parties may agree on such other terms and
conditions governing the acquisition of the Subject Shares to be
provided in a separate instrument.
The transfer of the Subject Shares shall be effected to U-LAND provided
that: (i) the purchase price reflected in the SHPA has been fully paid; (ii)
the Philippine Securities & Exchange Commission (SEC) shall have
approved the issuance of the Subject Shares; and (iii) any required
approval by the Taiwanese government of the acquisition by U-LAND of
the Subject Shares shall likewise have been obtained. 156 (Emphasis
supplied)
As for the joint development agreement, the First Memorandum of
Agreement contained the following stipulation:
4. Joint Development Agreement with PEC. – Simultaneous with the
execution of the SHPA, U-LAND and PEC shall execute a joint
development agreement ("JDA") to pursue property development
projects in the Philippines. The JDA shall cover specific housing and
other real estate development projects as the parties shall agree. All
profits derived from the projects covered by the JDA shall be shared
equally between ULAND and PEC. U-LAND shall, not later than May 22,
1998, remit the sum of US$3.0 million as initial funding for the
aforesaid development projects against delivery by WELLEX of
57,000,000 shares of PEC as security for said amount in accordance
with Section 9 below.157 (Emphasis provided)
Finally, the parties included the following stipulation in case of a failure
to agree on the terms of the share purchase agreement or the joint
development agreement:
9. Validity. - In the event the parties are unable to agree on the terms of
the SHPA and/or the JDA within forty (40) days from date hereof (or
such period as the parties shall mutually agree), this Memorandum of
Agreement shall cease to be effective and the parties released from
their respective undertakings herein, except that WELLEX shall refund
the US$3.0 million provided under Section 4 within three (3) days
therefrom, otherwise U-LAND shall have the right to recover on the
57,000,000 PEC shares delivered to U-LAND under Section 4.158
Section 2 of the First Memorandum of Agreement clearly provides that
the execution of a share purchase agreement containing mutually
agreeable terms and conditions must first be accomplished by the
parties before respondent U-Land purchases any of the shares owned
by petitioner Wellex. A perusal of the stipulation on its face allows for
no other interpretation.
The need for a share purchase agreement to be entered into before
payment of the full purchase price can further be discerned from the
other stipulations of the First Memorandum of Agreement.
In Section 1, the parties agreed to enter into a joint business venture,
through entering into two (2) agreements: a share purchase agreement
and a joint development agreement. However, Section 1 provides that
in the share purchase agreement, "U-LAND shall acquire from WELLEX,
shares of stock of AIR PHILIPPINES INTERNATIONAL CORPORATION
(‘APIC’) equivalent to at least 35% of the outstanding capital stock of
APIC, but in any case, not less than 1,050,000,000 shares (the ‘APIC
Shares’)."159
As for the PEC shares, Section 1 provides that respondent U-Land shall
purchase from petitioner Wellex "shares of stock of PHILIPPINE
ESTATES CORPORATION (‘PEC’) equivalent to at least 35% of the
outstanding capital stock of PEC, but in any case, not less than
490,000,000 shares(the ‘PEC Shares’)."160
The use of the terms "at least 35% of the outstanding capital stock of
APIC, but in any case, not less than 1,050,000,000 shares" and "at least
35% of the outstanding capital stock of PEC, but in any case, not less
than 490,000,000 shares" means that the parties had yet to agree on the
number of shares of stock to be purchased.
The need to execute a share purchase agreement before payment of the
purchase price of the shares is further shown by the clause, "[w]ithout
prejudice to any subsequent agreement between the parties, the
purchase price for the APIC Shares to be reflected in the [share
purchase agreement] shall be... P0.30 per share and that for the PEC
Shares at... P0.65 per share." 161 This phrase clearly shows that the final
price of the shares of stock was to be reflected in the share purchase
agreement. There being no share purchase agreement executed,
respondent U-Land was under no obligation to begin payment or
remittance of the purchase price of the shares of stock.
Petitioner Wellex argues that the use of "upon" in Section 2 162 of the
First Memorandum of Agreement means that respondent U-Land must
pay the purchase price of the shares of stock in its entirety when they
are transferred. This argument has no merit.
Article 1373 of the Civil Code provides:
ART. 1373. If some stipulation of any contract should admit of several
meanings, it shall be understood as bearing that import which is most
adequate to render it effectual.
It is necessary for the parties to first agree on the final purchase price
and the number of shares of stock to be purchased before respondent
U-Land is obligated to pay or remit the entirety of the purchase price.
Thus, petitioner Wellex’s argument cannot be sustained since the
parties to the First Memorandum of Agreement were clearly unable to
agree on all the terms concerning the share purchase agreement. It
would be absurd for petitioner Wellex to expect payment when
respondent U-Land did not yet agree to the final amount to be paid for
the totality of an indeterminate number of shares of stock.
The third paragraph of Section 2163 provides that the "transfer of the
Subject Shares" shall take place upon the fulfillment of certain
conditions, such as full payment of the purchase price "as reflected in
the [share purchase agreement]." The transfer of the shares of stock is
different from the execution of the share purchase agreement. The
transfer of the shares of stock requires full payment of the final
purchase price. However, that final purchase price must be reflected in
the share purchase agreement. The execution of the share purchase
agreement will require the existence of a final agreement.
In its Answer with counterclaim before the trial court, petitioner Wellex
argued that the payment of the shares of stock was to begin within the
40-day period. Petitioner Wellex’s claim is not in any of the stipulations
of the contract. Its subsequent claim that respondent U-Land was
actually required to remit a total of US$20.5 million is likewise bereft of
basis since there was no final purchase price of the shares of stock that
was agreed upon, due to the failure of the parties to execute a share
purchase agreement. In addition, the parties had yet to agree on the
final number of APIC shares and PEC shares that respondent U-Land
would acquire from petitioner Wellex.
Therefore, the understanding of the parties captured in the First
Memorandum of Agreement was to continue their negotiation to
determine the price and number of the shares to be purchased. Had it
been otherwise, the specific number or percentage of shares and its
price should already have been provided clearly and unambiguously.
Thus, they agreed to a 40-day period of negotiation.
Section 9 of the First Memorandum of Agreement explicitly provides
that:
In the event the parties are unable to agree on the terms of the SHPA
and/or the JDA within forty (40)days from date hereof (or such period
as the parties shall mutually agree), this Memorandum of Agreement
shall cease to be effective and the parties released from their respective
undertakings herein . . .164
The First Memorandum of Agreement was, thus, an agreement to enter
into a share purchase agreement. The share purchase agreement should
have been executed by the parties within 40 days from May 16, 1998,
the date of the signing of the First Memorandum of Agreement.
When the 40-day period provided for in Section 9 lapsed, the efficacy of
the First Memorandum of Agreement ceased. The parties were
"released from their respective undertakings." Thus, from June 25,
1998, the date when the 40-day period lapsed, the parties were no
longer obliged to negotiate with each other in order to enter into a
share purchase agreement.
However, Section 9 provides for another period within which the
parties could still be required to negotiate. The clause "or such period
as the parties shall mutually agree" means that the parties should agree
on a period within which to continue negotiations for the execution of
an agreement. This means that after the 40-day period, the parties were
still allowed to negotiate, provided that they could mutually agree on a
new period of negotiation.
Based on the records and the findings of the lower courts, the parties
were never able to arrive at a specific period within which they would
bind themselves to enter into an agreement. There being no other
period specified, the parties were no longer under any obligation to
negotiate and enter into a share purchase agreement. Section 9 clearly
freed them from this undertaking.
II
There was no express or implied
novation of the First Memorandum
of Agreement
The subsequent acts of the parties after the 40-day period were,
therefore, independent of the First Memorandum of Agreement.
In its Appellant’s Brief before the Court of Appeals, petitioner Wellex
mentioned that there was an "implied partial objective or real
novation"165 of the First Memorandum of Agreement. Petititoner did not
raise this argument of novation before this court. In Gayos v.
Gayos,166 this court held that "it is a cherished rule of procedure that a
court should always strive to settle the entire controversy in a single
proceeding leaving no root or branch to bear the seeds of future
litigation[.]"167
Articles 1291 and 1292 of the Civil Code provides how obligations may
be modified:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.
Article 1292. In order that an obligation may be extinguished by
another which substitute the same, it is imperative that it be so
declared in unequivocal terms, or that the old and the new obligations
be on every point incompatible with each other.
In Arco Pulp and Paper Co. v. Lim, 168 this court discussed the concept of
novation:
Novation extinguishes an obligation between two parties when there is
a substitution of objects or debtors or when there is subrogation of the
creditor. It occurs only when the new contract declares so "in
unequivocal terms" or that "the old and the new obligations be on every
point incompatible with each other."
....
For novation to take place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
Novation may also be express or implied. It is express when the new
obligation declares in unequivocal terms that the old obligation is
extinguished. It is implied when the new obligation is incompatible with
the old one on every point. The test of incompatibility is whether the
two obligations can stand together, each one with its own independent
existence. (Emphasis from the original omitted)
Because novation requires that it be clear and unequivocal, it is never
presumed, thus:
In the civil law setting, novatiois literally construed as to make new. So
it is deeply rooted in the Roman Law jurisprudence, the principle —
novatio non praesumitur— that novation is never presumed. At bottom,
for novation to be a jural reality, its animus must be ever present,
debitum pro debito— basically extinguishing the old obligation for the
new one.169 (Emphasis from the original omitted, citations omitted)
Applying Arco, it is clear that there was no novation of the original
obligation.
After the 40-day period, the parties did not enter into any subsequent
written agreement that was couched in unequivocal terms. The
transaction of the First Memorandum of Agreement involved large
amounts of money from both parties. The parties sought to participate
in the air travel industry, which has always been highly regulated and
subject to the strictest commercial scrutiny. Both parties admitted that
their counsels participated in the crafting and execution of the First
Memorandum of Agreement as well as in the efforts to enter into the
share purchase agreement. Any subsequent agreement would be
expected to be clearly agreed upon with their counsels’ assistance and
in writing, as well.
Given these circumstances, there was no express novation.
There was also no implied novation of the original obligation. In Quinto
v. People:170
[N]o 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.
....
. . . The test of incompatibility is whether or not the two obligations can
stand together, each one having its independent existence. If they
cannot, they are incompatible and the latter obligation novates the first.
Corollarily, changes that breed incompatibility must be essential in
nature and not merely accidental. The incompatibility must take place
in any of the essential elements of the obligation, such as its object,
cause or principal conditions thereof; otherwise, the change would be
merely modificatory in nature and insufficient to extinguish the original
obligation.171(Citations omitted)
There was no incompatibility between the original terms of the First
Memorandum of Agreement and the remittances made by respondent
U-Land for the shares of stock. These remittances were actually made
with the view that both parties would subsequently enter into a share
purchase agreement. It is clear that there was no subsequent agreement
inconsistent with the provisions of the First Memorandum of
Agreement.
Thus, no implied novation took place. In previous cases, 172 this court has
consistently ruled that presumed novation or implied novation is not
deemed favorable. In United Pulp and Paper Co., Inc. v. Acropolis
Central Guaranty Corporation:173
Neither can novation be presumed in this case. As explained in Duñ go v.
Lopena:
"Novation by presumption has never been favored. To be sustained, it
need be established that the old and new contracts are incompatible in
all points, or that the will to novate appears by express agreement of
the parties or in acts of similar import."174 (Emphasis supplied)
There being no novation of the First Memorandum of Agreement,
respondent U-Land is entitled to the return of the amount it remitted to
petitioner Wellex. Petitioner Wellex is likewise entitled to the return of
the certificates of shares of stock and titles of land it delivered to
respondent U-Land. This is simply an enforcement of Section 9 of the
First Memorandum of Agreement. Pursuant to Section 9, only the
execution of a final share purchase agreement within either of the
periods contemplated by this stipulation will justify the parties’
retention of what they received or would receive from each other.
III
Applying Article 1185 of the Civil
Code, the parties are obligated to
return to each other all they have
received
Article 1185 of the Civil Code provides that:
ART. 1185. The condition that some event will not happen at a
determinate time shall render the obligation effective from the moment
the time indicated has elapsed, or if it has become evident that the
event cannot occur.
If no time has been fixed, the condition shall be deemed fulfilled at such
time as may have probably been contemplated, bearing in mind the
nature of the obligation.
Article 1185 provides that if an obligation is conditioned on the
nonoccurrence of a particular event at a determinate time, that
obligation arises (a) at the lapse of the indicated time, or(b) if it has
become evident that the event cannot occur.
Petitioner Wellex and respondent U-Land bound themselves to
negotiate with each other within a 40-day period to enter into a share
purchase agreement. If no share purchase agreement was entered into,
both parties would be freed from their respective undertakings.
It is the non-occurrence or non-execution of the share purchase
agreement that would give rise to the obligation to both parties to free
each other from their respective undertakings. This includes returning
to each other all that they received in pursuit of entering into the share
purchase agreement.
At the lapse of the 40-day period, the parties failed to enter into a share
purchase agreement. This lapse is the first circumstance provided for in
Article 1185 that gives rise to the obligation. Applying Article 1185, the
parties were then obligated to return to each other all that they had
received in order to be freed from their respective undertakings.
However, the parties continued their negotiations after the lapse of the
40-day period. They made subsequent transactions with the intention
to enter into the share purchase agreement. Despite that, they still
failed to enter into a share purchase agreement. Communication
between the parties ceased, and no further transactions took place.
It became evident that, once again, the parties would not enter into the
share purchase agreement. This is the second circumstance provided
for in Article 1185. Thus, the obligation to free each other from their
respective undertakings remained.
As such, petitioner Wellex is obligated to return the remittances made
by respondent U-Land, in the same way that respondent U-Land is
obligated to return the certificates of shares of stock and the land titles
to petitioner Wellex.
IV
Respondent U-Land is praying
rescission or resolution under
Article 1191, and not rescission
under Article 1381
The arguments of the parties generally rest on the propriety of the
rescission of the First Memorandum of Agreement. This requires a
clarification of rescission under Article 1191, and rescission under
Article 1381 of the Civil Code.
Article 1191 of the Civil Code provides:
ART. 1191. The power to rescind obligations is implied in reciprocal
ones, in case one of the obligors should not comply with what is
incumbent upon him.
The injured party may choose between the fulfillment and the
rescission of the obligation, with the payment of damages in either case.
He may also seek rescission, even after he has chosen fulfillment, if the
latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons
who have acquired the thing, in accordance with articles 1385 and 1388
and the Mortgage Law.
Articles 1380 and 1381, on the other hand, provide an enumeration of
rescissible contracts: ART. 1380. Contracts validly agreed upon may be
rescinded in the cases established by law. ART. 1381. The following
contracts are rescissible:
(1) Those which are entered into by guardians whenever the
wards whom they represent suffer lesion by more than one-
fourth of the value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the
latter suffer the lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter
cannot in any other manner collect the claims due them;
(4) Those which refer to things under litigation if they have
been entered into by the defendant without the knowledge
and approval of the litigants or of competent judicial
authority;
(5) All other contracts specially declared by law to be subject
to rescission.
Article 1383 expressly provides for the subsidiary nature of rescission:
ART. 1383. The action for rescission is subsidiary; it cannot be
instituted except when the party suffering damage has no other legal
means to obtain reparation for the same.
Rescission itself, however, is defined by Article 1385:
ART. 1385. Rescission creates the obligation to return the things which
were the object of the contract, together with their fruits, and the price
with its interest; consequently, it can be carried out only when he who
demands rescission can return whatever he may be obliged to restore.
Neither shall rescission take place when the things which are the object
of the contract are legally in the possession of third persons who did
not act in bad faith.
for In this case, indemnity for damages may be demanded from the person
causing the loss. Gotesco Properties v. Fajardo175 categorically stated
that Article 1385 is applicable to Article 1191:
At this juncture, it is noteworthy to point out that rescission does not
merely terminate the contract and release the parties from further
obligations to each other, but abrogates the contract from its inception
and restores the parties to their original positions as if no contract has
been made. Consequently, mutual restitution, which entails the return
of the benefits that each party may have received as a result of the
contract, is thus required. To be sure, it has been settled that the effects
of rescission as provided for in Article 1385 of the Code are equally
applicable to cases under Article 1191, to wit:
xxxx
Mutual restitution is required in cases involving rescission under
Article 1191. This means bringing the parties back to their original
status prior to the inception of the contract. Article 1385 of the Civil
Code provides, thus:
The cause is the vinculum juris or juridical tie that essentially binds the
parties to the obligation. This linkage between the parties is a binding
relation that is the result of their bilateral actions, which gave rise to the
existence of the contract.
The failure of one of the parties to comply with its reciprocal prestation
allows the wronged party to seek the remedy of Article 1191. The
wronged party is entitled to rescission or resolution under Article 1191,
and even the payment of damages. It is a principal action precisely
because it is a violation of the original reciprocal prestation.

Article 1381 and Article 1383, on the other hand, pertain to rescission
ART. 1385. Rescission creates the obligation to return the things which
where creditors or even third persons not privy to the contract can file
were the object of the contract, together with their fruits, and the price
an action due to lesion or damage as a result of the contract. In Ong v.
with its interest; consequently, it can be carried out only when he who
Court of Appeals,181 this court defined rescission:
demands rescission can return whatever he may be obligated to
restore. Neither shall rescission take place when the things which are
the object of the contract are legally in the possession of third persons Rescission, as contemplated in Articles 1380, et seq., of the New Civil
who did not act in bad faith. Code, is a remedy granted by law to the contracting parties and even to
third persons, to secure the reparation of damages caused to them by a
contract, even if this should be valid, by restoration of things to their
In this case, indemnity for damages may be demanded from the person
condition at the moment prior to the celebration of the contract. It
causing the loss.
implies a contract, which even if initially valid, produces a lesion or a
pecuniary damage to someone.182(Citations omitted)
This Court has consistently ruled that this provision applies to
rescission under Article 1191: [S]ince Article 1385 of the Civil Code
Ong elaborated on the confusion between "rescission" or resolution
expressly and clearly states that "rescission creates the obligation to
under Article 1191 and rescission under Article 1381:
return the things which were the object of the contract, together with
their fruits, and the price with its interest," the Court finds no
justification to sustain petitioners’ position that said Article 1385 does On the other hand, Article 1191 of the New Civil Code refers to
not apply to rescission under Article 1191. x x x176 (Emphasis from the rescission applicable to reciprocal obligations. Reciprocal obligations
original, citations omitted) are those which arise from the same cause, and in which each party is a
debtor and a creditor of the other, such that the obligation of one is
dependent upon the obligation of the other. They are to be performed
Rescission, as defined by Article 1385, mandates that the parties must
simultaneously such that the performance of one is conditioned upon
return to each other everything that they may have received as a result
the simultaneous fulfillment of the other. Rescission of reciprocal
of the contract. This pertains to rescission or resolution under Article
obligations under Article 1191 of the New Civil Code should be
1191, as well as the provisions governing all forms of rescissible
distinguished from rescission of contracts under Article 1383. Although
contracts.
both presuppose contracts validly entered into and subsisting and both
require mutual restitution when proper, they are not entirely identical.
For Article 1191 to be applicable, however, there must be reciprocal
prestations as distinguished from mutual obligations between or among
While Article 1191 uses the term "rescission," the original term which
the parties. A prestation is the object of an obligation, and it is the
was used in the old Civil Code, from which the article was based, was
conduct required by the parties to do or not to do, or to give. 177 Parties
"resolution." Resolution is a principal action which is based on breach
may be mutually obligated to each other, but the prestations of these
of a party, while rescission under Article 1383 is a subsidiary action
obligations are not necessarily reciprocal. The reciprocal prestations
limited to cases of rescissionfor lesion under Article 1381 of the New
must necessarily emanate from the same cause that gave rise to the
Civil Code, which expressly enumerates the following rescissible
existence of the contract. This distinction is best illustrated by an
contracts:
established authority in civil law, the late Arturo Tolentino:

1. Those which are entered into by guardians whenever the

This article applies only to reciprocal obligations. It has no application
wards whom they represent suffer lesion by more than one
to every case where two persons are mutually debtor and creditor of
fourth of the value of the things which are the object thereof;
each other. There must be reciprocity between them. Both relations
must arise from the same cause, such that one obligation is correlative
to the other. Thus, a person may be the debtor of another by reason of 2. Those agreed upon in representation of absentees, if the
an agency, and his creditor by reason of a loan. They are mutually latter suffer the lesion stated in the preceding number;
obligated, but the obligations are not reciprocal. Reciprocity arises from
identity of cause, and necessarily the two obligations are created at the
3. Those undertaken in fraud of creditors when the latter
same time.178(Citation omitted)
cannot in any manner collect the claims due them;

Ang Yu Asuncion v. Court of Appeals 179 provides a clear necessity of the

cause in perfecting the existence of an obligation:
An obligation is a juridical necessity to give, to do or not to do (Art.
1156, Civil Code). The obligation is constituted upon the concurrence of
the essential elements thereof, viz: (a) The vinculum juris or juridical tie
which is the efficient cause established by the various sources of
obligations (law, contracts, quasi-contracts, delicts and quasi-delicts);
(b) the object which is the prestation or conduct, required to be
observed (to give, to do or not to do); and (c) the subject-persons who,
viewed from the demandability of the obligation, are the active
(obligee) and the passive (obligor) subjects.180
4. Those which refer to things under litigation if they have
been entered into by the defendant without the knowledge
and approval of the litigants or of competent judicial
authority; [and]
5. All other contracts specially declared by law to be subject
to rescission.183 (Citations omitted)
When a party seeks the relief of rescission as provided in Article 1381,
there is no need for reciprocal prestations to exist between or among
the parties. All that is required is that the contract should be among
those enumerated in Article 1381 for the contract to be considered
rescissible. Unlike Article 1191, rescission under Article 1381 must be a
subsidiary action because of Article 1383.
Contrary to petitioner Wellex’s argument, this is not rescission under
Article 1381 of the Civil Code. This case does not involve prejudicial
transactions affecting guardians, absentees, or fraud of creditors. Article
1381(3) pertains in particular to a series of fraudulent actions on the
part of the debtor who is in the process of transferring or alienating
property that can be used to satisfy the obligation of the debtor to the
creditor. There is no allegation of fraud for purposes of evading
obligations to other creditors. The actions of the parties involving the
terms of the First Memorandum of Agreement do not fall under any of
the enumerated contracts that may be subject of rescission.
Further, respondent U-Land is pursuing rescission or resolution under
Article 1191, which is a principal action. Justice J.B.L. Reyes’ concurring
opinion in the landmark case of Universal Food Corporation v. Court of
Appeals184gave a definitive explanation on the principal character of
resolution under Article 1191 and the subsidiary nature of actions
under Article 1381:
The rescission on account of breach of stipulations is not predicated on
injury to economic interests of the party plaintiff but on the breach of
faith by the defendant, that violates the reciprocity between the parties.
It is not a subsidiary action, and Article 1191 may be scanned without
disclosing anywhere that the action for rescission thereunder is
subordinated to anything other than the culpable breach of his
obligations by the defendant. This rescission is a principal action
retaliatory in character, it being unjust that a party be held bound to
fulfill his promises when the other violates his. As expressed in the old
Latin aphorism: "Non servanti fidem, non est fides servanda." Hence,
the reparation of damages for the breach is purely secondary.
On the contrary, in the rescission by reason of lesion or economic
prejudice, the cause of action is subordinated to the existence of that
prejudice, because it is the raison detre as well as the measure of the
right to rescind. Hence, where the defendant makes good the damages
caused, the action cannot be maintained or continued, as expressly
provided in Articles 1383 and 1384. But the operation of these two
articles is limited to the cases of rescission for lesió n enumerated in
Article 1381 of the Civil Code of the Philippines, and does not apply to
cases under Article 1191.185
Rescission or resolution under Article 1191, therefore, is a principal
action that is immediately available to the party at the time that the
reciprocal prestation was breached. Article 1383 mandating that
rescission be deemed a subsidiary action cannot be applicable to
rescission or resolution under Article 1191. Thus, respondent U-Land
correctly sought the principal relief of rescission or resolution under
Article 1191.
The obligations of the parties gave rise to reciprocal prestations, which
arose from the same cause: the desire of both parties to enter into a
share purchase agreement that would allow both parties to expand
their respective airline operations in the Philippines and other
neighboring countries.
V
The jurisprudence relied upon by
petitioner Wellex is not applicable
The cases that petitioner Wellex cited to advance its arguments against
respondent U-Land’s right to rescission are not in point.
Suria v. Intermediate Appellate Court is not applicable. In that case, this
court specifically stated that the parties entered into a contract of sale,
and their reciprocal obligations had already been fulfilled: 186
There is no dispute that the parties entered into a contract of sale as
distinguished from a contract to sell.
By the contract of sale, the vendor obligates himself to transfer the
ownership of and to deliver a determinate thing to the buyer, who in
turn, is obligated to pay a price certain in money or its equivalent (Art.
1458, Civil Code). From the respondents’ own arguments, we note that
they have fully complied with their part of the reciprocal obligation. As
a matter of fact, they have already parted with the title as evidenced by
the transfer certificate of title in the petitioners’ name as of June 27,
1975.
The buyer, in turn, fulfilled his end of the bargain when he executed the
deed of mortgage. The payments on an installment basis secured by the
execution of a mortgage took the place of a cash payment. In other
words, the relationship between the parties is no longer one of buyer
and seller because the contract of sale has been perfected and
consummated. It is already one of a mortgagor and a mortgagee. In
consideration of the petitioners’ promise to pay on installment basis the
sum they owe the respondents, the latter have accepted the mortgage
as security for the obligation.
The situation in this case is, therefore, different from that envisioned in
the cited opinion of Justice J.B.L. Reyes. The petitioners’ breach of
obligations is not with respect to the perfected contract of sale but in
the obligations created by the mortgage contract. The remedy of
rescission is not a principal action retaliatory in character but becomes
a subsidiary one which by law is available only in the absence of any
other legal remedy. (Art. 1384, Civil Code). Foreclosure here is not only
a remedy accorded by law but, as earlier stated, is a specific provision
found in the contract between the parties.187 (Emphasis supplied)
In Suria, this court clearly applied rescission under Article 1384 and not
rescission or resolution under Article 1191. In addition, the First
Memorandum of Agreement is not a contract to sell shares of stock. It is
an agreement to negotiate with the view of entering into a share
purchase agreement.
Villaflor v. Court of Appealsis not applicable either. In Villaflor, this
court held that non-payment of consideration of contracts only gave
rise to the right to sue for collection, but this non-payment cannot serve
as proof of a simulated contract. 188 The case did not rule that the vendor
has no obligation to deliver the thing sold if the buyer fails to fully pay
the price required by the contract. In Villaflor:
Petitioner insists that nonpayment of the consideration in the contracts
proves their simulation. We disagree. Nonpayment, at most, gives him
only the right to sue for collection. Generally, in a contract of sale,
payment of the price is a resolutory condition and the remedy of the
seller is to exact fulfillment or, in case of a substantial breach, to rescind
the contract under Article 1191 of the Civil Code. However, failure to
pay is not even a breach, but merely an event which prevents the
vendor’s obligation to convey title from acquiring binding
force.189 (Citations omitted) This court’s statement in Villaflor regarding
rescission under Article 1191 was a mere obiter dictum. In Land Bank
of the Philippines v. Suntay, 190 this court discussed the nature of an
obiter dictum:
An obiter dictum has been defined as an opinion expressed by a court
upon some question of law that is not necessary in the determination of
the case before the court. It is a remark made, or opinion expressed, by
a judge, in his decision upon a cause by the way, that is, incidentally or
collaterally, and not directly upon the question before him, or upon a
point not necessarily involved in the determination of the cause, or
introduced by way of illustration, or analogy or argument. It does not
embody the resolution or determination of the court, and is made
without argument, or full consideration of the point. It lacks the force of
an adjudication, being a mere expression of an opinion with no binding
force for purposes of res judicata. 191 (Citations omitted)
Petitioner Wellex’s reliance on Padilla v. Spouses Paredes and Spouses
Agustin v. Court of Appeals is also misplaced. In these cases, this court
held that there can be no rescission for an obligation that is nonexistent,
considering that the suspensive condition that will give rise to the
obligation has not yet happened. This is based on an allegation that the
contract involved is a contract to sell. In a contract to sell, the failure of
the buyer to pay renders the contract without effect. A suspensive
condition is one whose non-fulfillment prevents the existence of the
obligation.192 Payment of the purchase price, therefore, constitutes a
suspensive condition in a contract to sell. Thus, this court held that non-
remittance of the full price allowed the seller to withhold the transfer of
the thing to be sold.
In this case, the First Memorandum of Agreement is not a contract to
sell. Entering into the share purchase agreement or the joint
development agreement remained a stipulation that the parties
themselves agreed to pursue in the First Memorandum of Agreement.
Based on the First Memorandum of Agreement, the execution of the
share purchase agreement was necessary to put into effect respondent
U-Land’s purchase of the shares of stock. This is the stipulation
indicated in this memorandum of agreement. There was no suspensive
condition of full payment of the purchase price needed to execute either
the share purchase agreement or the joint development agreement.
Upon the execution of the share purchase, the obligation of petitioner
Wellex to transfer the shares of stock and of respondent U-Land to pay
the price of these shares would have arisen.
Enforcement of Section 9 of the First Memorandum of Agreement has
the same effect as rescission or resolution under Article 1191 of the
Civil Code. The parties are obligated to return to each other all that they
may have received as a result of the breach by petitioner Wellex of the
reciprocal obligation. Therefore, the Court of Appeals did not err in
affirming the rescission granted by the trial court.
VI
Petitioner Wellex was not guilty of
fraud but of violating Article 1159
of the Civil Code
In the issuance of the Writ of Preliminary Attachment, the lower court
found that petitioner Wellex committed fraud by inducing respondent
U-Land to purchase APIC shares and PEC shares and by leading the
latter to believe that APC was a subsidiary of APIC.
Determining the existence of fraud is not necessary in an action for
rescission or resolution under Article 1191. The existence of fraud must
be established if the rescission prayed for is the rescission under Article
1381.
However, the existence of fraud is a question that the parties have
raised before this court. To settle this question with finality, this court
will examine the established facts and determine whether petitioner
Wellex indeed defrauded respondent U-Land.
In Tankeh v. Development Bank of the Philippines, 193 this court
enumerated the relevant provisions of the Civil Code on fraud:
Fraud is defined in Article 1338 of the Civil Code as:
x x x fraud when, through insidious words or machinations of one of the
contracting parties, the other is induced to enter into a contract which,
without them, he would not have agreed to.
This is followed by the articles which provide legal examples and
illustrations of fraud.
....
Art. 1340. The usual exaggerations in trade, when the other party had
an opportunity to know the facts, are not in themselves fraudulent. (n)
Art. 1341. A mere expression of an opinion does not signify fraud,
unless made by an expert and the other party has relied on the former’s
special knowledge. (n)
Art. 1342. Misrepresentation by a third person does not vitiate consent,
unless such misrepresentation has created substantial mistake and the
same is mutual. (n)
Art. 1343. Misrepresentation made in good faith is not fraudulent but
may constitute error. (n) The distinction between fraud as a ground for
rendering a contract voidable or as basis for an award of damages is
provided in Article 1344:
In order that fraud may make a contract voidable, it should be serious
and should not have been employed by both contracting parties.
Incidental fraud only obliges the person employing it to pay damages.
(1270)194
Tankeh further discussed the degree of evidence needed to prove the
existence of fraud:
[T]he standard of proof required is clear and convincing evidence. This
standard of proof is derived from American common law. It is less than
proof beyond reasonable doubt (for criminal cases) but greater than
preponderance of evidence (for civil cases). The degree of believability
is higher than that of an ordinary civil case. Civil cases only require a
preponderance of evidence to meet the required burden of proof.
However, when fraud is alleged in an ordinary civil case involving
contractual relations, an entirely different standard of proof needs to be
satisfied. The imputation of fraud in a civil case requires the
presentation of clear and convincing evidence. Mere allegations will not
suffice to sustain the existence of fraud. The burden of evidence rests on
the part of the plaintiff or the party alleging fraud. The quantum of
evidence is such that fraud must be clearly and convincingly shown. 195
To support its allegation of fraud, Mr. Tseng, respondent U-Land’s
witness before the trial court, testified that Mr. Gatchalian approached
respondent U-Land on two (2) separate meetings to propose entering
into an agreement for joint airline operations in the Philippines. Thus,
the parties entered into the First Memorandum of Agreement.
Respondent U-Land primarily anchors its allegation of fraud against
petitioner Wellex on the existence of the second preambular clause of
the First Memorandum of Agreement.
In its Appellant’s Brief before the Court of Appeals, petitioner Wellex
admitted that "[t]he amount of US$7,499,945.00 was remitted for the
purchase of APIC and PEC shares." 196 In that brief, it argued that the
parties were already in the process of partially executing the First
Memorandum of Agreement.
As held in Tankeh, there must be clear and convincing evidence of
fraud. Based on the established facts, respondent U-Land was unable to
clearly convince this court of the existence of fraud.
Respondent U-Land had every reasonable opportunity to ascertain
whether APC was indeed a subsidiary of APIC. This is a multimillion
dollar transaction, and both parties admitted that the share purchase
agreement underwent several draft creations. Both parties admitted the
participation of their respective counsels in the drafting of the First
Memorandum of Agreement. Respondent U-Land had every
opportunity to ascertain the ownership of the shares of stock.
Respondent U-Land itself admitted that it was not contesting petitioner
Wellex’s ownership of the APIC shares or APC shares; hence, it was not
contesting the existence of the Second Memorandum of Agreement. Article 1374 of the Civil Code provides that:
Upon becoming aware of petitioner Wellex’s representations
concerning APIC’s ownership or control of APC as a subsidiary,
ART. 1374. The various stipulations of a contract shall be interpreted
respondent U-Land continued to make remittances totalling the amount
together, attributing to the doubtful ones that sense which may result
sought to be rescinded. It had the option to opt out of negotiations after
from all of them taken jointly.
the lapse of the 40-day period. However, it proceeded to make the
remittances to petitioner Wellex and proceed with negotiations.
The execution of the joint development agreement was contingent on
the execution of the share purchase agreement.1âwphi1 This is
Respondent U-Land was not defrauded by petitioner Wellex to agree to
provided for in Section 4 of the First Memorandum of Agreement, which
the First Memorandum of Agreement.1awp++i1 To constitute fraud
stated that the execution of the two agreements is
under Article 1338, the words and machinations must have been so
"[s]imultaneous."201 Thus, the failure of the share purchase agreement’s
insidious or deceptive that the party induced to enter into the contract
execution would necessarily mean the failure of the joint development
would not have agreed to be bound by its terms if that party had an
agreement’s execution.
opportunity to be aware of the truth. 197 Respondent U-Land was already
aware that APC was not a subsidiary of APIC after the 40-day period.
Still, it agreed to be bound by the First Memorandum of Agreement by Section 9 of the First Memorandum of Agreement provides that should
making the remittances from June 30 to September 25, 1998. 198 Thus, the parties fail to execute the agreement, they would be released from
petitioner Wellex’s failure to inform respondent U-Land that APC was their mutual obligations. Had respondent U-Land paid the US$3 million
not a subsidiary of APIC when the First Memorandum of Agreement and petitioner Wellex delivered the 57,000,000 PEC shares for the
was being executed did not constitute fraud. purpose of the joint development agreement, they would have been
obligated to return these to each other.
However, the absence of fraud does not mean that petitioner Wellex is
free of culpability. By failing to inform respondent U-Land that APC was Section 4 and Section 9 of the First Memorandum of Agreement must be
not yet a subsidiary of APIC at the time of the execution of the First interpreted together. Since the parties were unable to agree on a final
Memorandum of Agreement, petitioner Wellex violated Article 1159 of share purchase agreement and there was no exchange of money or
the Civil Code. Article 1159 reads: shares of stock due to the continuing negotiations, respondent U-Land
was no longer obliged to provide the money for the real estate
development projects. The payment of the US$3 million was for
ART. 1159. Obligations arising from contracts have the force of law
pursuing the real estate development projects under the joint
between the contracting parties and should be complied with in good
development agreement. There being no joint development agreement,
faith.
the obligation to deliver the US$3 million and the delivery of the PEC
shares for that purpose were no longer incumbent upon the parties.
In Ochoa v. Apeta,199 this court defined good faith:
VIII
Good faith is an intangible and abstract quality with no technical
meaning or statutory definition, and it encompasses, among other
Respondent U-Land was not
things, an honest belief, the absence of malice and the absence of design
obligated to exhaust the "securities"
to defraud or to seek an unconscionable advantage. It implies honesty
given by petitioner Wellex
of intention, and freedom from knowledge of circumstances which
ought to put the holder upon inquiry. The essence of good faith lies in
an honest belief in the validity of one’s right, ignorance of a superior Contrary to petitioner Wellex’s assertion, there is no obligation on the
claim and absence of intention to overreach another. 200 (Citations part of respondent U-Land to exhaust the "securities" given by
omitted) petitioner Wellex. No such meeting of the minds to create a guarantee
or surety or any other form of security exists. The principal obligation is
not a loan or an obligation subject to the conditions of sureties or
It was incumbent upon petitioner Wellex to negotiate the terms of the
guarantors under the Civil Code. Thus, there is no need to exhaust the
pending share purchase agreement in good faith. This duty included
securities given to respondent U-Land, and there is no need for a legal
providing a full disclosure of the nature of the ownership of APIC in
condition where respondent U-Land should pursue other remedies.
APC. Unilaterally compelling respondent U-Land to remit money to
finalize the transactions indicated in the Second Memorandum of
Agreement cannot constitute good faith. Neither petitioner Wellex nor respondent U-Land stated that there was
already a transfer of ownership of the shares of stock or the land titles.
Respondent U-Land itself maintained that the delivery of the shares of
The absence of fraud in a transaction does not mean that rescission
stock and the land titles were not in the nature of a pledge or
under Article 1191 is not proper. This case is not an action to declare
mortgage.202 It received the certificates of shares of stock and the land
the First Memorandum of Agreement null and void due to fraud at the
titles with an understanding that the parties would subsequently enter
inception of the contract or dolo causante. This case is not an action for
a share purchase agreement. There being no share purchase agreement,
fraud based on Article 1381 of the Civil Code. Rescission or resolution
respondent U-Land is obligated to return the certificates of shares of
under Article 1191 is predicated on the failure of one of the parties in a
stock and the land titles to petitioner Wellex.
reciprocal obligation to fulfill the prestation as required by that
obligation. It is not based on vitiation of consent through fraudulent
misrepresentations. The parties are bound by the 40-day period provided for in the First
Memorandum of Agreement. Adherence by the parties to Section 9 of
the First Memorandum of Agreement has the same effect as the
VII
rescission or resolution prayed for and granted by the trial court.

Respondent U-Land was not bound

Informal acts are prone to ambiguous legal interpretation. This will be
to pay the US$3 million under the
based on the say-so of each party and is a fragile setting for good
joint development agreement
business transactions. It will contribute to the unpredictability of the
market as it would provide courts with extraordinary expectations to
The alleged failure of respondent U-Land to pay the amount of US$3 determine the business actor's intentions. The parties appear to be
million to petitioner Wellex does not justify the actions of the latter in responsible businessmen who know that their expectations and
refusing to return the US$7,499,945.00. obligations should be clearly articulated between them. They have the
resources to engage legal representation. Indeed, they have reduced
their agreement in writing.

Petitioner Wellex now wants this court to define obligations that do not
appear in these instruments. We cannot do so. This court cannot
interfere in the bargains, good or bad, entered into by the parties. Our
duty is to affirm legal expectations, not to guarantee good business
judgments.

WHEREFORE, the petition is DENIED. The Decision of the Regional Trial

Court in Civil Case No. 99-1407 and the Decision of the Court of Appeals
in CA-G.R. CV No. 74850 are AFFIRMED. Costs against petitioner The
Wellex Group, Inc.

SO ORDERED.
THIRD DIVISION
Respondent then elevated the matter to the HLURB Board of
Commissioners.
G.R. No. 207133, March 09, 2015
In a Decision 5 dated March 30, 2006, the HLURB Board of
SWIRE REALTY DEVELOPMENT CORPORATION, Petitioner, v. JAYNE Commissioners reversed and set aside the ruling of the HLURB ENCRFO
YU, Respondent. and ordered the rescission of the Contract to Sell,
ratiocinating:chanRoblesvirtualLawlibrary
DECISION
We find merit in the appeal. The report on the ocular inspection
conducted on the subject condominium project and subject unit shows
PERALTA, J.: that the amenities under the approved plan have not yet been provided
as of May 3, 2002, and that the subject unit has not been delivered to
This is a Petition for Review on Certiorari under Rule 45 of the 1997 [respondent] as of August 28, 2002, which is beyond the period of
Rules of Civil Procedure which seeks to reverse and set aside the development of December 1999 under the license to sell. The delay in
Decision 1 dated January 24, 2013 and Resolution 2 dated April 30, 2013 the completion of the project as well as of the delay in the delivery of
of the Court of Appeals (CA) in CA-G.R. SP No. 121175. the unit are breaches of statutory and contractual obligations which
entitles [respondent] to rescind the contract, demand a refund and
The facts follow. payment of damages.

Respondent Jayne Yu and petitioner Swire Realty Development
Corporation entered into a Contract to Sell on July 25, 1995 covering
one residential condominium unit, specifically Unit 3007 of the Palace
of Makati, located at P. Burgos corner Caceres Sts., Makati City, with an
area of 137.30 square meters for the total contract price of
P7,519,371.80, payable in equal monthly installments until September
24, 1997. Respondent likewise purchased a parking slot in the same
condominium building for P600,000.00.
On September 24, 1997, respondent paid the full purchase price of
P7,519,371.80 for the unit while making a down payment of P20,000.00
for the parking lot. However, notwithstanding full payment of the
contract price, petitioner failed to complete and deliver the subject unit
on time. This prompted respondent to file a Complaint for Rescission of
Contract with Damages before the Housing and Land Use Regulatory
Board (HLURB) Expanded National Capital Region Field Office
(ENCRFO).
The delay in the completion of the project in accordance with the
license to sell also renders [petitioner] liable for the payment of
administrative fine.
Wherefore, the decision of the Office below is set aside and a new
decision is rendered as follows:
1. Declaring the contract to sell as rescinded and directing
[petitioner] to refund to [respondent] the amount of
P7,519,371.80 at 6% per annum from the time of
extrajudicial demand on January 05, 2001: subject to
computation and payment of the correct filing
fee;ChanRoblesVirtualawlibrary
2. Directing [petitioner] to pay respondent attorney’s fees in
the amount of P20,000.00;ChanRoblesVirtualawlibrary

On October 19, 2004, the HLURB ENCRFO rendered a 3. Directing [petitioner] to pay an administrative fine of
Decision 3 dismissing respondent’s complaint. It ruled that rescission is P10,000.00 for violation of Section 20, in relation to Section
not permitted for slight or casual breach of the contract but only for 38 of P.D. 957:
such breaches as are substantial and fundamental as to defeat the
object of the parties in making the agreement. It disposed of the case as SO ORDERED. 6cralawred
follows:chanRoblesvirtualLawlibrary cralawlawlibrary

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered Petitioner moved for reconsideration, but the same was denied by the
ordering [petitioner] the following: HLURB Board of Commissioners in a Resolution 7 dated June 14, 2007.

1. To finish the subject unit as pointed out in the Unfazed, petitioner appealed to the Office of the President (OP) on
inspection Report August 7, 2007.

In a Decision 8 dated November 21, 2007, the OP, through then Deputy

2. To pay [respondent] the following: Executive Secretary Manuel Gaite, dismissed petitioner’s appeal on the
ground that it failed to promptly file its appeal before the OP. It
a. the amount of P100,000 as held:chanRoblesvirtualLawlibrary
compensatory damages for the minor
irreversible defects in her unit Records show that [petitioner] received its copy of the 30 March 2006
[respondent], or, in the alternative, HLURB Decision on 17 April 2006 and instead of filing an appeal, it
conduct the necessary repairs on the opted first to file a Motion for Reconsideration on 28 April 2006 or
subject unit to conform to the intended eleven (11) days thereafter. The said motion interrupted the 15-day
specifications; period to appeal.
b. moral damages of P20,000.00
c. Attorney’s fees of P20,000.00 On 23 July 2007, [petitioner] received the HLURB Resolution dated 14
June 2007 denying the Motion for Reconsideration.
On the other hand, [respondent] is hereby directed to immediately
update her account insofar as the parking slot is concerned, without Based on the ruling in United Overseas Bank Philippines, Inc. v.
interest, surcharges or penalties charged therein. Ching (486 SCRA 655), the period to appeal decisions of the HLURB
Board of Commissioners to the Office of the President is 15 days from
All other claims and counterclaims are hereby dismissed for lack of receipt thereof pursuant to Section 15 of P.D. No. 957 and Section 2 of
merit. P.D. No. 1344 which are special laws that provide an exception to
Section 1 of Administrative Order No. 18.
IT IS SO ORDERED. 4cralawlawlibrary
Corollary thereto, par. 2, Section 1 of Administrative Order No. 18, 1. TECHNICAL RULES ARE NOT BINDING UPON
Series of 1987 provides that: ADMINISTRATIVE AGENCIES; and
The time during which a motion for reconsideration has been pending
with the Ministry/Agency concerned shall be deducted from the period 2. RESCISSION WILL BE ORDERED ONLY WHERE THE BREACH
of appeal. But where such a motion for reconsideration has been filed COMPLAINED OF IS SUBSTANTIAL AS TO DEFEAT THE
during office hours of the last day of the period herein provided, the OBJECT OF THE PARTIES IN ENTERING INTO THE
appeal must be made within the day following receipt of the denial of AGREEMENT. 14
said motion by the appealing party.  (Underscoring supplied)

xxxx cralawlawlibrary
Accordingly, the [petitioner] had only four (4) days from receipt on 23
July 2007 of HLURB Resolution dated 14 June 2007, or until 27 July In essence, the issues are: (1) whether petitioner’s appeal was timely
2007 to file the Notice of Appeal before this Office. However, filed before the OP; and (2) whether rescission of the contract is proper
[petitioner] filed its appeal only on 7 August 2007 or eleven (11) days in the instant case.
late.
We shall resolve the issues in seriatim.
Thus, this Office need not delve on the merits of the appeal filed as the
records clearly show that the said appeal was filed out of time. First, the period to appeal the decision of the HLURB Board of
Commissioners to the Office of the President has long been settled in
WHEREFORE, premises considered, [petitioner]’s appeal is the case of SGMC Realty Corporation v. Office of the President,  15 as
hereby DISMISSED, and the HLURB Decision dated 30 March 2006 and reiterated in the cases of Maxima Realty Management and Development
HLURB Resolution dated 14 June 2007 are hereby AFFIRMED. Corporation v. Parkway Real Estate Development
Corporation 16 and United Overseas Bank Philippines, Inc. v.
SO ORDERED. 9cralawlawlibrary Ching. 17cralawred

Immediately thereafter, petitioner filed a motion for reconsideration In the aforementioned cases, we ruled that the period to appeal
against said decision. decisions of the HLURB Board of Commissioners is fifteen (15) days
from receipt thereof pursuant to Section 15 18 of PD No. 957 19 and
In a Resolution 10 dated February 17, 2009, the OP, through then Section 2 20 of PD No. 1344 21 which are special laws that provide an
Executive Secretary Eduardo Ermita, granted petitioner’s motion and exception to Section 1 of Administrative Order No. 18. Thus, in
set aside Deputy Executive Secretary Gaite’s decision. It held that after a the SGMC Realty Corporation v. Office of the President case, the Court
careful and thorough evaluation and study of the records of the case, explained:chanRoblesvirtualLawlibrary
the OP was more inclined to agree with the earlier decision of the
HLURB ENCRFO as it was more in accord with facts, law and As pointed out by public respondent, the aforecited administrative
jurisprudence relevant to the case. Thus:chanRoblesvirtualLawlibrary order allows aggrieved party to file its appeal with the Office of the
President within thirty (30) days from receipt of the decision
WHEREFORE, premises considered, the instant Motion for complained of. Nonetheless, such thirty-day period is subject to the
Reconsideration is hereby GRANTED. The Decision and Resolution of qualification that there are no other statutory periods of appeal
the HLURB Third Division Board of Commissioners, dated March 30, applicable. If there are special laws governing particular cases which
2006 and June 14, 2007, respectively, are hereby SET ASIDE, and provide for a shorter or longer reglementary period, the same shall
the HLURB ENCRFO Decision dated October 19, 2004 is hereby prevail over the thirty-day period provided for in the administrative
REINSTATED. order. This is in line with the rule in statutory construction that an
administrative rule or regulation, in order to be valid, must not
SO ORDERED. 11cralawred contradict but conform to the provisions of the enabling law.
cralawlawlibrary
We note that indeed there are special laws that mandate a shorter
Respondent sought reconsideration of said resolution, however, the period of fifteen (15) days within which to appeal a case to public
same was denied by the OP in a Resolution 12 dated August 18, 2011. respondent. First, Section 15 of Presidential Decree No. 957 provides
that the decisions of the National Housing Authority (NHA) shall
Consequently, respondent filed an appeal to the CA. become final and executory after the lapse of fifteen (15) days from the
date of receipt of the decision. Second, Section 2 of Presidential Decree
In a Decision dated January 24, 2013, the CA granted respondent’s No. 1344 states that decisions of the National Housing Authority shall
appeal and reversed and set aside the Order of the OP. The fallo of its become final and executory after the lapse of fifteen (15) days from the
decision reads:chanRoblesvirtualLawlibrary date of its receipt. The latter decree provides that the decisions of the
NHA is appealable only to the Office of the President. Further, we note
that the regulatory functions of NHA relating to housing and land
WHEREFORE, the Petition is hereby GRANTED. The
development has been transferred to Human Settlements Regulatory
assailed Resolution dated 17 February 2009 and Order dated 18 August
Commission, now known as HLURB.  x x x 22cralawlawlibrary
2011 of the Office of the President, in O.P. Case No. 07-H-283, are
hereby REVERSED and SET ASIDE. Accordingly, the Decision dated 30
Records show that petitioner received a copy of the HLURB Board of
March 2006 and Resolution dated 14 June 2007 of the HLURB Board of
Commissioners’ decision on April 17, 2006. Correspondingly, it had
Commissioners in HLURB Case No. REM-A-050127-0014,
fifteen days from April 17, 2006 within which to file its appeal or until
are REINSTATED.
May 2, 2006. However, on April 28, 2006, or eleven days after receipt of
the HLURB Board of Commissioner’s decision, it filed a Motion for
SO ORDERED.cralawlawlibrary 13cralawred
Reconsideration, instead of an appeal.
cralawlawlibrary
Concomitantly, Section 1 of Administrative Order No. 18 23 provides that
Petitioner moved for reconsideration, however, the CA denied the same
the time during which a motion for reconsideration has been pending
in a Resolution dated April 30, 2013.
with the ministry or agency concerned shall be deducted from the
period for appeal. Petitioner received the HLURB Board Resolution
Hence, the present petition wherein petitioner raises the following
denying its Motion for Reconsideration on July 23, 2007 and filed its
grounds to support its petition:chanRoblesvirtualLawlibrary
appeal only on August 7, 2007. Consequently therefore, petitioner had
only four days from July 23, 2007, or until July 27, 2007, within which
THE COURT OF APPEALS GRAVELY ERRED IN IGNORING THE LEGAL to file its appeal to the OP as the filing of the motion for reconsideration
PRECEPTS THAT: merely suspended the running of the 15-day period. However, records
reveal that petitioner only appealed to the OP on August 7, 2007, or
eleven days late. Ergo, the HLURB Board of Commissioners’ decision
had become final and executory on account of the fact that petitioner
did not promptly appeal with the OP.
3.
In like manner, we find no cogent reason to exempt petitioner from the
effects of its failure to comply with the rules.
In an avuncular case, we have held that while the dismissal of an appeal
on purely technical grounds is concededly frowned upon, it bears
emphasizing that the procedural requirements of the rules on appeal
are not harmless and trivial technicalities that litigants can just discard
and disregard at will. Neither being a natural right nor a part of due
process, the rule is settled that the right to appeal is merely a statutory
privilege which may be exercised only in the manner and in accordance
with the provisions of the law. 24cralawred
Time and again, we have held that rules of procedure exist for a noble
purpose, and to disregard such rules, in the guise of liberal
construction, would be to defeat such purpose. Procedural rules are not
to be disdained as mere technicalities. They may not be ignored to suit
the convenience of a party. 25 The reason for the liberal application of
the rules before quasi-judicial agencies cannot be used to perpetuate
injustice and hamper the just resolution of the case. Neither is the rule
on liberal construction a license to disregard the rules of
procedure. 26cralawred
Thus, while there may be exceptions for the relaxation of technical rules
principally geared to attain the ends of justice, petitioner’s fatuous
belief that it had a fresh 15-day period to elevate an appeal with the OP
is not the kind of exceptional circumstance that merits relaxation.
Second, Article 1191 of the Civil Code sanctions the right to rescind the
obligation in the event that specific performance becomes impossible,
to wit:chanRoblesvirtualLawlibrary
Article 1191. The power to rescind obligations is implied in reciprocal
ones, in case one of the obligors should not comply with what is
incumbent upon him.
The injured party may choose between the fulfillment and the
rescission of the obligation, with the payment of damages in either case.
He may also seek rescission, even after he has chosen fulfillment, if the
latter should become impossible.
2. During the time of inspection, the said unit appears to be
completed except for the installation of kitchen cabinets and
fixtures.
Complainant pinpointed to the undersigned the deficiencies
as follows:
a. The delivered unit has high density fiber (HDF)
floorings instead of narra wood parquet.
b. The [petitioners] have also installed baseboards as
borders instead of pink porrino granite boarders.
c. Walls are newly painted by the respondent and the
alleged obvious signs of cladding could not be
determined.
d. Window opening at the master bedroom conforms
to the approved plans. As a result it leaves a 3
inches (sic) gap between the glass window and
partitioning of the master’s bedroom.
e. It was verified and confirmed that a square
column replaced the round column, based on the
approved plans.
f. At the time of inspection, amenities such as
swimming pool and change room are seen at the
31st floor only. These amenities are reflected on
the 27th floor plan of the approved condominium
plans. Health spa for men and women, Shiatsu
Massage Room, Two-Level Sky Palace Restaurant
and Hall for games and entertainments, replete
with billiard tables, a bar, indoor golf with
spectacular deck and karaoke rooms were not yet
provided by the [petitioner].
g. The [master’s] bedroom door bore sign of poor
quality of workmanship as seen below.
h. The stairs have been installed in such manner
acceptable to the undersigned.

The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons
who have acquired the thing, in accordance with Articles 1385 and
1388 and the Mortgage Law.cralawlawlibrary
Basic is the rule that the right of rescission of a party to an obligation
under Article 1191 of the Civil Code is predicated on a breach of faith by
the other party who violates the reciprocity between them. The breach
contemplated in the said provision is the obligor’s failure to comply
with an existing obligation. When the obligor cannot comply with what
is incumbent upon it, the obligee may seek rescission and, in the
absence of any just cause for the court to determine the period of
compliance, the court shall decree the rescission. 27cralawred
In the instant case, the CA aptly found that the completion date of the
condominium unit was November 1998 pursuant to License No. 97-12-
3202 dated November 2, 1997 but was extended to December 1999 as
per License to Sell No. 99-05-3401 dated May 8, 1999. However, at the
time of the ocular inspection conducted by the HLURB ENCRFO, the unit
was not yet completely finished as the kitchen cabinets and fixtures
were not yet installed and the agreed amenities were not yet available.
Said inspection report states:chanRoblesvirtualLawlibrary
1. The unit of the [respondent] is Unit 3007, which was labeled
as P2-07, at the Palace of Makati, located at the corner of P.
Burgos Street and Caceres Street, Poblacion, Makati City.
Based on the approved plans, the said unit is at the 26 th Floor.
i. Bathrooms and powder room have been installed
in such manner acceptable to the undersigned. 28
cralawlawlibrary
From the foregoing, it is evident that the report on the ocular inspection
conducted on the subject condominium project and subject unit shows
that the amenities under the approved plan have not yet been provided
as of May 3, 2002, and that the subject unit has not been delivered to
respondent as of August 28, 2002, which is beyond the period of
development of December 1999 under the license to sell.
Incontrovertibly, petitioner had incurred delay in the performance of its
obligation amounting to breach of contract as it failed to finish and
deliver the unit to respondent within the stipulated period. The delay in
the completion of the project as well as of the delay in the delivery of
the unit are breaches of statutory and contractual obligations which
entitle respondent to rescind the contract, demand a refund and
payment of damages.
WHEREFORE, premises considered, the instant petition is DENIED. The
Decision dated January 24, 2013 and Resolution dated April 30, 2013 of
the Court of Appeals in CA-G.R. SP No. 121175 are hereby AFFIRMED,
with MODIFICATION that moral damages be awarded in the
amount of P20,000.00
SO ORDERED.
 G.R. No. 185592               June 15, 2015 June 13, 1997

GEORGE C. FONG, Petitioner,  Mr. Jose Dueñ as

vs. c/o Camira Industries
JOSE V. DUEÑAS, Respondent.
Re: Proposed JV in Bakcom, D.C. Danton and Boboli
DECISION
Dear Jojit,
BRION, J.:
Enclosed is our check for ₱919,534.80 representing our additional
We resolve in this petition for review on certiorari 1 the challenge to the advances to subject company in process of incorporation. This will
September 16, 2008 decision2 and the December 8, 2008 resolution 3 of make our total advances to date amounting to ₱5 million.
the Court of Appeals (CA) in CA-G.R. CV No. 88396.
Since we agreed in principal late last year to pursue subject matter, the
These assailed CA rulings annulled the June 27, 2006 decision 4 and delays in implementing the joint venture have caused us to rethink our
October 30, 2006 order 5 of the Regional Trial Court of Makati, Branch position. First, we were faced with the ‘personal’ factor which was
64 (trial court), which directed respondent Jose V. Dueñ as (Dueñ as) to explained to you one time. This has caused us to turn down a number of
pay Five Million Pesos (₱5 Million) to petitioner George C. Fong (Fong), business opportunities. Secondly, since last year, the operation of
and imposed a six percent (6%) annual interest on this amount. Century 21 has been taking more time from us than anticipated. That is
why we decided to relinquish our original plan to manage and operate
‘Boboli’ knowing this limitation. For us, it does not make sense anymore
Factual Antecedents
to go for a significant shareholding when we cannot be hands on and
participate actively as originally planned. For your information, we will
Dueñ as is engaged in the bakery, food manufacturing, and retailing probably be giving up our subway franchise too.
business, which are all operated under his two companies, D.C.
DANTON, Inc. (Danton) and Bakcom Food Industries, Inc. (Bakcom). He
Together with our business advisers and legal counsel, we came to a
was an old acquaintance of Fong as they were former schoolmates at
decision to hold our commitment (from advances to investment) at ₱5
the De La Salle University.6
million only for now from the original plan of ₱32.5 million, if this is
acceptable to you.
Sometime in November 1996, Dueñ as and Fong entered into a verbal
joint venture contract where they agreed to engage in the food business
We know that our decision will somewhat upset the overall plans. But it
and to incorporate a holding company under the name Alliance
will probably be more problematic for us in the long run if we continue
Holdings, Inc. (Alliance or the proposed corporation). Its capitalization
full speed. We have put our money down in trust and good faith despite
would be Sixty Five Million Pesos (₱65 Million), to which they would
the much delayed financials. We continue to believe in your game plan
contribute in equal parts. 7
and capabilities to achieve the desired goals for subject undertaking.
Please permit us instead to be just a modest silent investor now with a
The parties agreed that Fong would contribute Thirty Two Million and take out plan when time and price is right.
Five Hundred Thousand Pesos (₱32.5 Million) in cash while Dueñ as
would contribute all his Danton and Bakcom shares which he valued at
Thank you for your kind understanding and consideration.
₱32.5 Million.8 Fong required Dueñ as to submit the financial documents
supporting the valuation of these shares.
With best regards.
On November 25, 1996, Fong started remitting in tranches his share in
the proposed corporation’s capital. He made the remittances under the (Signed) George Fong11
impression that his contribution would be applied as his subscription to
fifty percent (50%) of Alliance’s total shareholdings. On the other hand,
Fong observed that despite his ₱5 Million contribution, Dueñ as still
Dueñ as started processing the Boboli 9 international license that they
failed to give him the financial documents on the valuation of the
would use in their food business. Fong’s cash contributions are
Danton and Bakcom shares. Thus, except for Dueñ as’ representations,
summarized below.10
Fong had nothing to rely on to ensure that these shares were really
valued at ₱32.5 Million. Moreover, Dueñ as failed to incorporate and
Amount register Alliance with the Securities and Exchange Commission (SEC). 12

996 ₱1,980,475.20 These circumstances convinced Fong that Dueñ as would no longer
honor his obligations in their joint venture agreement. 13 Thus, on
7 ₱1,000,000.00
October 30, 1997, Fong wrote Dueñ as informing him of his decision to
7 ₱500,000.00 cancel the joint venture agreement. He also asked for the refund of the
₱5 Million that he advanced. 14 In response, Dueñ as admitted that he
₱100,000.00 could not immediately return the money since he used it to defray the
business expenses of Danton and Bakcom.15
₱500,000.00

₱919,524.80 To meet Fong’s demand, Dueñ as proposed several schemes for payment
of the ₱5 Million.16 However, Fong did not accept any of these proposed
₱5,000,000.00 schemes. On March 25, 1998, Fong wrote a final letter of
demand17 informing Dueñ as that he would file a judicial action against
him should he still fail to pay after receipt of this written demand.
On June 13, 1997, Fong sent a letter to Dueñ as informing him of his
decision to limit his total contribution from ₱32.5 Million to ₱5 Million.
This letter reads:
Since Dueñ as did not pay, Fong filed a complaint against him for
collection of a sum of money and damages18 on April 24, 1998.
The Trial Court’s Ruling
In its June 27, 2006 decision, the trial court ruled in favor of Fong and
held that a careful examination of the complaint shows that although it
was labeled as an action for collection of a sum of money, it was actually
an action for rescission.19
The trial court noted that Dueñ as’ failure to furnish Fong with the
financial documents on the valuation of the Danton and Bakcom shares,
as well as the almost one year delay in the incorporation of Alliance,
caused Fong to rescind the joint venture agreement. 20 According to the
trial court, these are adequate and acceptable reasons for rescission.
The trial court also held that Dueñ as erroneously invested Fong’s cash
contributions in his two companies, Danton and Bakcom. The signed
receipts,21 presented as evidence, expressly provided that each
remittance should be applied as advance subscription to Fong’s
shareholding in Alliance. Thus, Dueñ as’ investment of the money in
Danton and Bakcom was clearly unauthorized and contrary to the
parties’ agreement.
Since Dueñ as was unjustly enriched by Fong’s advance capital
contributions, the trial court ordered him to return the money
amounting to ₱5 Million and to pay ten percent (10%) of this amount in
attorney’s fees, as well as the cost of the suit. 22
Fong filed a partial motion for reconsideration from the trial court’s
June 27, 2006 decision and asked for the imposition of a six percent
(6%) annual interest, computed from the date of extrajudicial demand
until full payment of the award. The trial court granted this prayer in its
October 30, 2006 order.23
The CA’s Ruling
Dueñ as responded to the trial court’s ruling through an appeal with the
CA, which granted the appeal and annulled the trial court’s ruling.
The CA ruled that Fong’s June 13, 1997 letter evidenced his intention to
convert his cash contributions from "advances" to the proposed
corporation’s shares, to mere "investments." Thus, contrary to the trial
court’s ruling, Dueñ as correctly invested Fong’s ₱5 Million contribution
to Bakcom and Danton. This did not deviate from the parties’ original
agreement as eventually, the shares of these two companies would form
part of Alliance’s capital.24
Lastly, the CA held that the June 13, 1997 letter showed that Fong knew
all along that he could not immediately ask for the return of his ₱5
Million investment. Thus, whether the action filed was a complaint for
collection of a sum of money, or rescission, it must still fail.25
The Petition
Fong submits that the CA erred when it ruled that his June 13, 1997
letter showed his intent to convert his contributions from advance
subscriptions to Alliance’s shares, to investments in Dueñ as’ two
companies. Contrary to the CA’s findings, the receipts and the letter
expressly mentioned that his contributions should all be treated as his
share subscription to Alliance.26 Also, Fong argues that Dueñ as’
unjustified retention of the ₱5 Million and its appropriation to his
(Dueñ as’) own business, amounted to unjust enrichment; and that he
contributed to fund Alliance’s capital and incorporation, not to pay for
Danton and Bakcom’s business expenses. 27
The Case for Dueñ as
Dueñ as contends that he could no longer refund the ₱5 Million since he
had already applied it to his two companies; that this is proper since
Danton and Bakcom’s shares would also form part of his capital
contribution to Alliance.28
Moreover, the incorporation did not push through because Fong
unilaterally rescinded the joint venture agreement by limiting his
investment from ₱32.5 Million to ₱5 Million. 29 Thus, it was Fong who
first breached the contract, not he. Consequently, Fong’s failure to
comply with his undertaking disqualified him from seeking the
agreement’s rescission.30
The Court's Ruling
We resolve to GRANT the petition.
At the outset, the Court notes that the parties’ joint venture agreement
to incorporate a company that would hold the shares of Danton and
Bakcom and that would serve as the business vehicle for their food
enterprise, is a valid agreement. The failure to reduce the agreement to
writing does not affect its validity or enforceability as there is no law or
regulation which provides that an agreement to incorporate must be in
writing.
With this as premise, we now address the related issues raised by the
parties.
The body rather than the title of
the complaint determines the
nature of the action.
A well-settled rule in procedural law is that the allegations in the body
of the pleading or the complaint, and not its title, determine the nature
of an action.31
An examination of Fong’s complaint shows that although it was labeled
as an action for a sum of money and damages, it was actually a
complaint for rescission. The following allegations in the complaint
support this finding:
9. Notwithstanding the aforesaid remittances, defendant failed for an
unreasonable length of time to submit a valuation of the equipment of
D.C. Danton and Bakcom x x x.
10. Worse, despite repeated reminders from plaintiff, defendant failed
to accomplish the organization and incorporation of the proposed
holding company, contrary to his representation to promptly do so.
xxxx
17. Considering that the incorporation of the proposed holding
company failed to materialize, despite the lapse of one year and four
months from the time of subscription, plaintiff has the right to revoke
his pre-incorporation subscription. Such revocation entitles plaintiff to
a refund of the amount of ₱5,000,000.00 he remitted to defendant,
representing advances made in favor of defendant to be considered as
payment on plaintiff’s subscription to the proposed holding company
upon its incorporation, plus interest from receipt by defendant of said
amount until fully paid. [Emphasis supplied.]
Fong’s allegations primarily pertained to his cancellation of their verbal
agreement because Dueñ as failed to perform his obligations to provide
verifiable documents on the valuation of the Danton’s and Bakcom’s
shares, and to incorporate the proposed corporation. These allegations
clearly show that what Fong sought was the joint venture agreement’s
rescission.
As a contractual remedy, rescission is available when one of the parties
substantially fails to do what he has obligated himself to perform. 32 It
aims to address the breach of faith and the violation of reciprocity
between two parties in a contract.33 Under Article 1191 of the Civil
Code, the right of rescission is inherent in reciprocal obligations, viz:
The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon
him. [Emphasis supplied.]
Dueñ as submits that Fong’s prayer for the return of his cash
contribution supports his claim that Fong’s complaint is an action for
collection of a sum of money. However, Dueñ as failed to appreciate that
the ultimate effect of rescission is to restore the parties to their original
status before they entered in a contract. As the Court ruled in Unlad
Resources v. Dragon:34 Rescission has the effect of "unmaking a
contract, or its undoing from the beginning, and not merely its
termination." Hence, rescission creates the obligation to return the
object of the contract. It can be carried out only when the one who
demands rescission can return whatever he may be obliged to restore.
To rescind is to declare a contract void at its inception and to put an end
to it as though it never was. It is not merely to terminate it and release
the parties from further obligations to each other, but to abrogate it
from the beginning and restore the parties to their relative positions as
if no contract has been made.
Accordingly, when a decree for rescission is handed down, it is the duty
of the court to require both parties to surrender that which they have
respectively received and to place each other as far as practicable in his
original situation.35 [Emphasis supplied.]
In this light, we rule that Fong’s prayer for the return of his contribution
did not automatically convert the action to a complaint for a sum of
money. The mutual restitution of the parties’ original contributions is
only a necessary consequence of their agreement’s rescission.
Rescission under Art. 1191 is
applicable in the present case
Reciprocal obligations are those which arise from the same cause, in
which each party is a debtor and a creditor of the other, such that the
obligation of one is dependent on the obligation of the other. 36
Fong and Dueñ as’ execution of a joint venture agreement created
between them reciprocal obligations that must be performed in order
to fully consummate the contract and achieve the purpose for which it
was entered into.
Both parties verbally agreed to incorporate a company that would hold
the shares of Danton and Bakcom and which, in turn, would be the
platform for their food business. Fong obligated himself to contribute
half of the capital or ₱32.5 Million in cash. On the other hand, Dueñ as
bound himself to shoulder the other half by contributing his Danton and
Bakcom shares, which were allegedly also valued at ₱32.5 Million. Aside
from this, Dueñ as undertook toprocess Alliance’s incorporation and
registration with the SEC.
When the proposed company remained unincorporated by October 30,
1997, Fong cancelled the joint venture agreement and demanded the
return of his ₱5 Million contribution.
For his part, Dueñ as explained that he could not immediately return the
₱5 Million since he had invested it in his two companies. He found
nothing irregular in this as eventually, the Danton and Bakcom shares
would form part of Alliance’s capital.
Dueñ as’ assertion is erroneous.
The parties never agreed that Fong would invest his money in Danton
and Bakcom. Contrary toDueñ as’ submission, Fong’s understanding was
that his money would be applied to his shareholdings in Alliance. As
shown in Fong’s June13, 1997 letter, this fact remained to be true even
after he limited his contribution to ₱5 Million, viz:
Dear Jojit,
Enclosed is our check for ₱919,534.80 representing our additional
advances to subject company in process of incorporation. This will
make our total advances to date amounting to ₱5 million. 37[Emphasis
supplied.]
Moreover, under the Corporation Code, before a stock corporation may
be incorporated and registered, itis required that at least twenty five
percent (25%) of its authorized capital stock as stated in the articles of
incorporation, be first subscribed at the time of incorporation, and at
least twenty five percent (25%) of the total subscription, be paid upon
subscription.38
To prove compliance with this requirement, the SEC requires the
incorporators to submit a treasurer’s affidavit and a certificate of bank
deposit, showing the existence of an amount compliant with the
prescribed capital subscription. 39
In this light, we conclude that Fong’s cash contributions play an
indispensable part in Alliance’s incorporation. The process necessarily
requires the money not only to fund Alliance’s registration with the SEC
but also its initial capital subscription. This is evident in the receipts
which Dueñ as himself executed, one of which provides:
I, JOSE V. DUEÑ AS, hereby acknowledge the receipt on January 14, 1997
of the amount of One Million Pesos (Php1,000,000.00) Check No. 118
118 7014 Metro Bank, Pasong Tamo branch dated January 13, 1997
from Mr. George Fong, which amount shall constitute an advance of the
contribution or investment of Mr. Fong in the joint venture which he
and I are in the process of organizing. Specifically, this amount will be
considered as part of Mr. Fong’s subscription to the shares of stock of
the joint venture company which we will incorporate to embody and
carry out our joint venture.40 [Emphasis supplied.]
Thus, Dueñ as erred when he invested Fong’s contributions in his two
companies. This money should have been used in processing Alliance’s
registration. Its incorporation would not materialize if there would be
no funds for its initial capital. Moreover, Dueñ as represented that
Danton and Bakcom’s shares were valued at ₱32.5 Million. If this was
true, then there was no need for Fong’s additional ₱5 Million
investment, which may possibly increase the value of the Danton and
Bakcom shares.
Under these circumstances, the Court agrees with the trial court that
Dueñ as violated his agreement with Fong. Aside from unilaterally
applying Fong’s contributions to his two companies, Dueñ as also failed
to deliver the valuation documents of the Danton and Bakcom shares to
prove that the combined values of their capital contributions actually
amounted to ₱32.5 Million. These acts led to Dueñ as’ delay in
incorporating the planned holding company, thus resulting in his
breach of the contract.
On this basis, Dueñ as’ breach justified Fong’s rescission of the joint
venture agreement under Article 1191. As the Court ruled in Velarde v.
Court of Appeals:41
The right of rescission of a party to an obligation under Article 1191 of
the Civil Code is predicated on a breach of faith by the other party who
violates the reciprocity between them. The breach contemplated in the
said provision is the obligor’s failure to comply with an existing
obligation. When the obligor cannot comply with what is incumbent
upon it, the obligee may seek rescission and in the absence of any just
cause for the court to determine the period of compliance, the court
shall decree the rescission.
In the present case, private respondents validly exercised their right to
rescind the contract, because of the failure of petitioners to comply with
their obligation to pay the balance of the purchase price. Indubitably,
the latter violated the very essence of reciprocity in the contract of sale,
a violation that consequently gave rise to private respondents’ right to
rescind the same in accordance with law.42 [Emphasis supplied.]
However, the Court notes that Fong also breached his obligation in the
joint venture agreement. In his June 13, 1997 letter, Fong expressly
informed Dueñ as that he would be limiting his cash contribution from
₱32.5 Million to ₱5 Million because of the following reasons which we
quote verbatim:
1. First, we were faced with the ‘personal’ factor which was
explained to you one time. This has caused us to turn down a
number of business opportunities;
2. Secondly, since last year, the operation of Century 21 has
been taking more time from us than anticipated. That is why
we decided to relinquish our original plan to manage and
operate ‘Boboli’ knowing this limitation. For us, it does not
make sense anymore to go for a significant shareholding
when we cannot be hands on and participate actively as
originally planned.43 x x x.
Although these reasons appear to be valid, they do not erase the fact
that Fong still reneged on his original promise to contribute ₱32.5
Million. The joint venture agreement was not reduced to writing and
the evidence does not show if the parties agreed on valid causes that
would justify the limitation of the parties’ capital contributions. Their
only admission was that they obligated themselves to contribute ₱32.5
Million each.
Hence, Fong’s diminution of his capital share to ₱5 Million also
amounted to a substantial breach of the joint venture agreement, which
breach occurred before Fong decided to rescind his agreement with
Dueñ as. Thus, Fong also contributed to the non-incorporation of
Alliance that needed ₱65 Million as capital to operate.
documents on the Danton and Bakcom shares would just follow. It
could also be the other way around. Further, the parties could have
even agreed to simultaneously perform their respective obligations.
Despite these gray areas, the fact that both Fong and Dueñ as
substantially contributed to the non-incorporation of Alliance and to
the failure of their food business plans remains certain.
As the Court cannot precisely determine who between the parties first
violated the agreement, we apply the second part of Article 1192 which
states: "if it cannot be determined which of the parties first violated the
contract, the same shall be deemed extinguished, and each shall bear
his own damages. "
In these lights, the Court holds that the joint venture agreement
between Fong and Dueñ as is deemed extinguished through rescission
under Article 1192 in relation with Article 1191 of the Civil Code.
Dueñ as must therefore return the ₱5 Million that Fong initially
contributed since rescission requires mutual restitution. 44 After
rescission, the parties must go back to their original status before they
entered into the agreement. Dueñ as cannot keep Fong's contribution as
this would constitute unjust enrichment.
No damages shall be awarded to any party in accordance with the rule
under Article 1192 of the Civil Code that in case of mutual breach and
the first infractor of the contract cannot exactly be determined, each
party shall bear his own damages.
WHEREFORE, premises considered, we hereby GRANT the petition and
reverse the September 16, 2008 decision and December 8, 2008
resolution of the Court of Appeals in CA-G.R. CV No. 88396. Respondent
Jose V. Dueñ as is ordered to RETURN Five Million Pesos to petitioner
George C. Fong. This amount shall incur an interest of six percent (6%)
per annum from the date of finality of this judgment until fully
paid.45 The parties' respective claims for damages are deemed
EXTINGUISHED and each of them shall bear his own damages.
SO ORDERED.

Fong cannot entirely blame Dueñ as since the substantial reduction of

his capital contribution also greatly impeded the implementation of
their agreement to engage in the food business and to incorporate a
holding company for it.

As both parties failed to comply with their respective reciprocal

obligations, we apply Article 1192 of the Civil Code, which provides:

Art. 1192. In case both parties have committed a breach of the

obligation, the liability of the first in fractor shall be equitably tempered
by the courts. If it cannot be determined which of the parties first
violated the contract, the same shall be deemed extinguished, and each
shall bear his own damages. [Emphasis supplied.]

Notably, the Court is not aware of the schedule of performance of the

parties’ obligations since the joint venture agreement was never
reduced to writing. The facts, however, show that both parties began
performing their obligations after executing the joint venture
agreement. Fong started remitting his share while Dueñ as started
processing the Boboli international license for the proposed
corporation’s food business.

The absence of a written contract renders the Court unsure as to whose

obligation must be performed first. It is possible that the parties agreed
that Fong would infuse capital first and Dueñ as’ submission of the
SECOND DIVISION
Pacific made several demands on petitioners to fulfill their obligations
under the Deed of Conditional Sale. Instead of heeding the demands,
G.R. No. 205113, August 26, 2015
petitioners, through a certain Atty. Fojas, began negotiating with Pacific
for the rescission of the Deed of Conditional Sale.14redarclaw
HONORLITA ASCANO-CUPINO AND FLAVIANA ASCANO-
COLOCADO, Petitioners, v. PACIFIC REHOUSE On 11 February 1999, Pacific made another demand on petitioners to
CORPORATION, Respondent. fulfill all their obligations under the Deed of Conditional Sale or to
return all payments it had already made plus legal interest. Petitioners
continued to ignore the demand. 15redarclaw
DECISION
On 2 September 1999, Pacific filed a Complaint for Cancellation of
CARPIO, J.: Contract, Sum of Money and Damages before the RTC of Trece Martires
City. However, before pre-trial, Pacific discovered that petitioners had
withdrawn the PI,005,180 it had deposited with Capitol Bank of General
The Case
Trias.16redarclaw
Before the Court is a petition for review on certiorari under Rule 45 of
In view of petitioners' action, Pacific filed an Amended
the Rules of Court seeking to reverse the Decision 1 dated 17 July 2012
Complaint17 changing its cause of action from cancellation to specific
and Resolution 2 dated 8 January 2013 of the Court of Appeals (CA) in
performance.
CA-G.R. CV No. 90568. The CA reversed and set aside the
Decision3 dated 15 April 2005 of the Regional Trial Court (RTC) of Trece
On the other hand, petitioners alleged that it was Pacific that defaulted
Martires City, Cavite, Branch 23, in Civil Case No. TM-936.
in its payment. They maintained that the real purchase price they
agreed upon was P200 per square meter, or a total of P11,950,600, and
The Facts that allegedly the much lower amount stated in the Deed of Conditional
Sale was put there at Pacific's request in order to lower the taxes they
On 1 October 1994. Honorlita Ascano-Cupino4 and Flaviana Ascano- would need to pay.18redarclaw
Colocado (petitioners), and their sister, Noeminia Ascano, (collectively,
the Ascanos)5 entered into a Deed of Conditional Sale with Pacific Petitioners further alleged that in October 2004, the parties had
Rehouse Corporation (Pacific). The latter obliged itself to purchase executed an Addendum to Deed of Conditional Sale, 19 with item "2" of
from the Ascanos a parcel of land with an area of 59,753 square meters the original deed amended to read as follows:LawlibraryofCRAlaw
located in General Trias, Cavite for P5,975,300.
That full payment of the balance of P4,182,710.00 shall be paid in full to
Following the terms of the Deed of Conditional Sale, Pacific paid a down the Vendors by the Vendees within six (6) months from the date of the
payment of P1,792,590 leaving a balance of P4,182,710, to be paid upon Deed of Conditional Sale, otherwise, in case of default, the sale shall
the fulfillment of certain conditions, namely: (1) the completion of all automatically be cancelled and all monies received by the Vendors shall
documents necessary for the transfer of the certificate of title of the be refunded to the Vendee, minus the amount of P792,590.00 taken by
land; (2) the vendors (the Ascanos) shall guarantee removal of the the representative of the Vendee for payment of disturbance
tenants, squatters and other occupants on the land, with the compensation to ten[a]nts.
disturbance compensation to said tenants to be paid by vendors; and Petitioners insisted that the Addendum clearly stated that Pacific
(3) submission by vendors to Pacific of the Affidavit of Non-Tenancy undertook the obligation to pay the tenants' disturbance compensation
and the land operation transfer documents. 6redarclaw with the P792,590 taken by Fortuno as Pacific's authorized
representative. However, petitioners averred that the amount was
In November 1994, petitioners asked for an additional P600,000 to be never paid to the tenants, who remained in the subject property, in
deducted from the purchase price, which Pacific paid. 7redarclaw violation of the conditions set in the deed. 20redarclaw

In 1995, petitioners asked for another P1,000,000, again deductible Pacific, however, refused to acknowledge the Addendum because the
from the purchase price, purportedly to be used to fulfill the conditions same was allegedly not signed by its authorized representative, Dee
in the Deed of Conditional Sale. Pacific paid the amount. 8redarclaw Hua T. Gatchalian, who was the signatory in the original Deed of
Conditional Sale. Pacific also denied that the price they agreed upon
On 13 February 1995, petitioners submitted to Pacific a Barangay was P11,950,600.21redarclaw
Agrarian Reform Council Certification stating that the property was
untenanted. They also informed Pacific that the other necessary
The Decision of the RTC
documents were being processed and more expected to be completed
the following month.9redarclaw
On 15 April 2005, the RTC promulgated its decision, the dispositive
portion of which reads:LawlibraryofCRAlaw
The following month, however, petitioners failed to submit the
necessary documents despite several demands from Pacific to do so.
WHEREFORE, judgment is hereby rendered cancelling the contract and
Instead, they informed Pacific that they wanted to rescind the contract
the addendum to it entered into by the plaintiff and defendants dated
and refused to accept Pacific's tender of additional payments
October 1, 1994 and ordering defendants Honorlita Ascañ o, Noeminia
amounting to P1,005,180.10redarclaw
Ascañ o and Flaviana Ascañ o to return the amount of Two Million Six
Hundred Two Thousand (P2,602,000.00) Pesos to the plaintiff; while
In the latter part of March 1995, Pacific, through Melecio P. Fortuno, Jr.
Plaintiff is hereby ordered to pay defendants who incurred the
(Fortuno), opened a savings account with the Capitol Bank of General
following in defending their rights:LawlibraryofCRAlaw
Trias, Cavite, in the names of petitioners, depositing in said account the
amount of P1,005,180.11 Pacific then informed petitioners of the deposit
1. The amount of One Hundred Fifty Thousand (P150,000.00) Pesos as
and that "they were authorized to withdraw the same at [their]
damages;
convenience."12redarclaw
2. The amount of One Hundred Thousand (P100,000.00) Pesos as
Thereafter, Pacific learned that petitioners were negotiating the sale of
attorney's fees; and
the property with other buyers allegedly for a higher consideration. In
September 1995, Pacific effected an annotation of an adverse claim on
3. The litigation expenses.
the property's title.13redarclaw
SO ORDERED.22
The RTC held:LawlibraryofCRAlaw
In this case, parties admitted that there was a Deed of Conditional Sale
and an addendum to it executed by the parties. That based on this
contract, plaintiff paid defendant the amount of One Million Seven
Hundred Ninety Two Thousand Five Hundred Ninety (PI ,792,590.00)
[Pesos] (Exh. "K"), Six Hundred Thousand (P600,000.00) Pesos (Exh.
"M"), One Million (PI,000,000.00) Pesos (Exh[.] "Q") and Five Hundred
Five Thousand One Hundred Eighty (P505,[180].00) Pesos (Exh. "Q")
and those payments were all received by defendants, that when Plaintiff
deposited the balance of One Million (P1,000,000.00) pesos as full
payment for the property, defendants refused to withdraw it from the
bank until plaintiff for failure of the defendants] to withdraw their
tender of payment, withdraw the amount deposited.
Defendants in their defense alleged that they refused to withdraw the
amount as full payment since plaintiff failed to pay their tenants and the
latter were still occupying their property. With respect to this, plaintiff
alleged that it is the duty of the party defendants to pay their tenants as
per their agreement but defendants countered that as per their
addendum, which was incorporated in their Contract to Sell, a part of
what they received from the plaintiff was given to Mr. Melecio Fortuno
to pay the tenants amounting to Seven Hundred Ninety Two Thousand
(P792,000.00) Pesos; that with respect to the claims of the defendants],
plaintiff denied that Mr. Melecio Fortuno (now deceased) is not their
(sic) authorized agent to transact in behalf of the plaintiff.
With respect to this, the Court can very well see that this claim of the
plaintiff cannot be given merit. Plaintiff cannot deny that in their letter
addressed to Honorlita and Flaviano (sic) Ascaiio (Exhibit "G"), the
signature of Melecio Fortuno appeared as authorized representative of
the plaintiff and this cannot be denied by plaintiff. The fact that it was
this person who received the amount of P792,000.00 as payment for
the tenant shov/s that defendants cannot be faulted when they refused
to accept the full payment for their property considering that the
tenants are still occupying defendants' land despite the latter giving the
amount to be paid to the tenant.
However, plaintiff in his (sic) complaint prays for the rescission or
cancellation of contract and to this allegation, the Court has no recourse
but to grant this prayer since parties are no longer willing to proceed
with their contract and in rescission, the parties are duty bound to
return what they received. With respect to damages, expenses and
attorney's fees alleged by the parties, the Court from the pieces of
evidence submitted so maintains that plaintiff is not entitled since
defendants] [are] not at fault. 23
Pacific filed a motion for reconsideration of the RTC's decision.
However, the motion was denied in an Order24 dated 9 May 2006,
prompting it to file an appeal before the CA.25
The Decision of the CA
In the assailed decision dated 17 July 2012, the CA granted the appeal,
thus:LawlibraryofCRAlaw
WHEREFORE, premises considered, the instant Appeal is GRANTED.
The appealed Decision dated 15 April 2005 is hereby REVERSED and
SET ASIDE. Accordingly, this Court ORDERS:LawlibraryofCRAlaw
(1) the plaintiff-appellant to pay the defendants-appellees the amount
of One Million Five Hundred Seventy Seven Thousand Five Hundred
Thirty Pesos (P1,577,530.00), upon the execution by the defendants-
appellees of the Deed of Absolute Sale in favor of the plaintiff-appellant
and delivery to the latter all documents necessary for the transfer of the
title to the subject property; and
(2) the defendants-appellees shall, at their expense, commence the
necessary proceedings for the eviction of the tenants and/or informal
settlers in the property until the same is cleared of the same.
No pronouncement as to costs.
SO ORDERED.26
The CA held that "the trial court erred in deciding the case on the basis
of the original complaint." The CA noted that Pacific amended its
complaint from cancellation of contract to specific performance, which
was done with leave of and allowed by the RTC. 27redarclaw
The CA also held that rescission was not warranted in this case. It ruled
that petitioners "were clearly the ones who failed in their obligation
under the contract."28 Pacific then is the injured party entitled to choose
between rescission of the contract and fulfillment of the obligation.
Pacific chose the latter, as stated in their Amended Complaint for
specific performance.29redarclaw
Lastly, the CA found that it was proven and undisputed that a total of
P4,497,770 had already been paid by Pacific leaving only a balance of
P4,577,530.
Petitioners filed a motion for reconsideration, which was denied in a
Resolution dated 8 January 2013. 30redarclaw
Petition for Review with Prayer for TRO
Petitioners filed the present petition for review asking the Court to
verse the decision of the CA and reinstate the decision of the RTC with
the deletion of the order to return the payments received. 31redarclaw
Petitioners also prayed for the issuance of a temporary restraining
order (TRO) arguing that Pacific was likely to move for a writ of
execution once the CA issues an entry of judgment, causing them grave
and irreparable damage.
In its Resolution dated 4 March 2013, the Court granted the request for
TRO upon payment of a cash or surety bond in the amount of P4.4
million.32 However, petitioners later withdrew their application for TRO
'ecause they could no longer afford to pay or secure a surety
bond.33redarclaw
Petitioners' Arguments
Petitioners aver that the CA erred in ordering specific performance
instead of rescission, arguing that the cancellation of the Deed of
Conditional Sale was justified because Pacific was indeed remiss in its
obligation as vendee.34 Petitioners further argue that they, and not
Pacific, are the injured parties in this case.
Petitioners assert that Pacific is bound by the Deed of Conditional Sale
and its Addendum because Fortuno was its authorized representative.
They emphasized that Fortuno, along with Pacific's liaison officer Purita
Mendez, signed the Deed of Conditional Sale and Addendum, while Dee
Hua T. Gatchalian did not. 35 As further proof, they pointed to a letter
dated 5 April 1995 where Fortuno himself clearly stated that he was the
company's authorized representative. 36redarclaw
Petitioners also insist that Pacific has not paid the entire purchase price
agreed upon. They underscore that the real purchase price agreed upon
was P200 per square meter or P11,950,600. However, Pacific only
acknowledges the purchase price to be P5,975,300, the amount stated
in the Deed of Conditional Sale. In any case, petitioners insist that since
the total amount paid by Pacific only totals P3,605,180, 37there remains
a balance to be paid whether the purchase price is that stated in the
Deed of Conditional Sale or P11,950,600.
Petitioners also allege that Pacific has not complied with its contractual
obligation to pay the tenants' disturbance compensation. Despite
receiving P792,590 through its authorized representative, Pacific never
paid the tenants who continue to occupy the property. 38redarclaw
Thus, petitioners contend that they are the injured parties in this case,
and therefore, entitled to ask for the rescission of the Deed of
Conditional Sale.39redarclaw
Respondent's Arguments
In its Comment/Opposition,40 Pacific presents a different version of the
facts. It alleges that the purchase price agreed upon is that stated in the
Deed of Conditional Sale, which is P5,975,300. Pacific paid the down The Issue
payment amounting to P1,792,590, leaving a balance of P4,182,710. The
balance, as stipulated in the deed, was to be paid "upon completion by Petitioners raise this sole issue:LawlibraryofCRAlaw
the VENDORS of the pertinent documents that are necessary for the
transfer of trie Certificate of Title of the above mentioned parcel of land WITH ALL DUE RESPECT, TO DECLARE THAT SPECIFIC
unto the VENDEE[.]" Likewise, the deed stated that the vendors PERFORMANCE IS WARRANTED IN THE CASE AT BAR, INSTEAD OF
guaranteed to pay the tenants disturbance compensation to rid the RESCISSION, THE COURT OF APPEALS HAS DECIDED IN A WAY
property of squatters and other occupants.41redarclaw PROBABLY NOT IN ACCORD WITH LAW AND/OR WITH THE
APPLICABLE DECISIONS OF THIS HONORABLE COURT. ON THE
In November 1994, petitioners requested from Pacific an additional CONTRARY, CANCELLATION OF THE DEED OF CONDITIONAL SALE IS
partial payment of P600,000 purportedly to be used to fulfill the JUSTIFIED BECAUSE [RESPONDENT] WAS INDEED REMISS [IN] ITS
conditions in the Deed of Conditional Sale. Thereafter, petitioners asked OBLIGATION AS VENDEE.53
for another P1,000,000, again to be considered as partial payment, The Court's Ruling
which Pacific agreed tj) pay on the conditions that, first, petitioners
submit a Barangay Agrarian Reform Council Certification that the The petition is denied. The Court affirms the assailed decision and
property was untenanted, and second, deliver all the necessary resolution of the CA.
documents, certifications and clearances necessary to consummate the
sale. On 13 February 1995, petitioners submitted to Pacific a Barangay The RTC erred in deciding 
Agrarian Reform Council Certification that the land was untenanted. based on the original complaint.
They also assured Pacific that the other documents needed to complete
the sale were being processed. 42redarclaw It is clear that the RTC erred in deciding the case based on the original
complaint and not on the Amended Complaint,
However, by March 1995, petitioners were still unable to deliver the thus:LawlibraryofCRAlaw
necessary documents, certifications and clearances. Pacific also heard
from Fortuno that petitioners were contemplating on rescinding the [Pacific] in [its] complaint prays for the rescission or cancellation of
Deed of Conditional Sale. contract and to this allegation, the Court has no recourse but to grant
this prayer x x x.
This prompted Pacific to tender to petitioners the payment for the
balance of the purchase price by opening a savings account in WHEREFORE, judgment is hereby rendered cancelling (sic) the contract
petitioners' names and depositing the amount in said account. Pacific and the addendum to it entered into by [Pacific] and [petitioners] on
informed petitioners of the deposit and told them that the amount was October 1, 1994 x x x." 54
at their disposal. Petitioners still failed to comply with their obligations The RTC failed to consider the Amended Complaint filed by Pacific
under the Deed of Conditional Sale.43redarclaw which changed Pacific's cause of action from cancellation/rescission of
the Conditional Deed of Sale 55 into one for specific performance. In
Pacific was then constrained to effect an annotation of adverse claim on particular, he Amended Complaint modified Pacific's prayer to
the property's transfer certificate of title.44 Thereafter, Pacific sent read:LawlibraryofCRAlaw
several demand letters to petitioners, 45 which remained unheeded.
WHEREFORE, in view of the foregoing premises, plaintiff respectfully
When Pacific was about to initiate legal action, petitioners' lawyer prays that judgment be rendered in favor of plaintiff and against
commenced negotiations for the rescission of the Deed of Conditional defendants:LawlibraryofCRAlaw
Sale. However, in December 1998, the lawyer informed Pacific that his
services lad been terminated and he would no longer negotiate for a) Directing defendants to sign and deliver to plaintiff a Deed of
petitioners.46redarclaw Absolute Sale covering the subject property and compel said defendants
[to] comply with their undertaking with plaintiff as embodied in the
On 11 February 1999, Pacific again demanded that petitioners fulfill Conditional Deed of Sale marked as Annex C.
their obligations under the Deed of Conditional Sale.47 The demand was
again unheeded. Hence, Pacific filed the x x x x56 (Underscoring in the original)
Complaint48 for rescission/cancellation of contract and damages before Section 8, Rule 10 of the Rules of Court provides:LawlibraryofCRAlaw
the RTC.
SEC. 8. Effect of amended pleadings. - An amended pleading
Pacific argues that the petition raises questions of fact and should be supersedes the pleading that it amends. However, admissions in
denied. Moreover, Pacific avers that the issues raised by petitioners superseded pleadings may be received in evidence against the pleader;
have already been decided by the CA. In particular, Pacific emphasizes and claims or defenses alleged therein not incorporated in the amended
that the argument regarding Fortuno's authority has been conclusively pleading shall be deemed waived. (Emphasis supplied)
passed upon by the CA.49redarclaw With Pacific's filing of the Amended Complaint, the original one must be
deemed to have been abandoned and to have become functus
Pacific also maintains that it is not the party guilty of failing to comply officio.57 Thus, this Court has ruled:LawlibraryofCRAlaw
with the obligations under the Deed of Conditional Sale. It maintains
that it is simply not true that the purchase price agreed upon is P200 When a pleading is amended, the original pleading is deemed
per square meter. For one, it says, being a corporation, it is in its best abandoned. The original ceases to perform any further function as a
interest that the true and correct purchase price be recorded in its pleading. The case stands for trial on the amended pleading only. 58
books as an expense. In fact, it further says, the party that will most Therefore, the Amended Compliant, to which petitioners filed an
benefit from reducing the price will be petitioners Amended Answer with Counterclaim, 59should have been the basis for
themselves.50redarclaw the RTC's decision.

Likewise, Pacific points out that the Addendum, which states, "[t]hat The parties' obligations under
we, the above-named Vendors, hereby amend item 2 of the said Deed of the Deed of Conditional Sale
Conditional Sale to read as follows x x x," proves that the amendment
was a "unilateral act" and without Pacific's consent. 51redarclaw Considering that Pacific seeks specific performance, particularly for
petitioners to execute a Deed of Absolute Sale and fulfill their
Based on the foregoing arguments, Pacific insists that it is the injured obligations under the Deed of Conditional Sale, it is prudent to re-
party in this case. As it has clearly asked for specific performance in its examine the terms of said deed to understand each party's obligations.
Amended Complaint, the CA correctly overturned the RTC's
decision.52redarclaw In particular, the terms and conditions under the Deed of Conditional
Sale are:LawlibraryofCRAlaw

1. That the VENDEE shall pay unto the VENDORS the sum of PESOS:
ONE MILLION SEVEN HUNDRED NINETY TWO THOUSAND FIVE
HUNDRED NINETY (P1,792,590.00), as downpayment for the purchase
of the aforesaid parcel of land, which the VENDORS acknowledged
receipt hereof upon the execution of this Conditional Sale;
2.  That full payment of the balance of PESOS: FOUR MILLION ONE
HUNDRED EIGHTY TWO THOUSAND SEVEN HUNDRED TEN ONLY
(P4,182,710.00), shall be made by the VENDEE unto the VENDORS  property's present occupants. Petitioners failed to fulfill this obligation,
upon  completion  by  the  VENDORS  of the  pertinent documents that
are necessary for the transfer of the [Transfer of] Certificate of Title of
the above mentioned parcel of land unto the VENDEE;
3.  That the VENDORS shall guarantee the removal of any tenant/s,
squatters and other occupants on the said parcel of land. Payments for
the tenants' disturbance compensation shall be shouldered by the
VENDORS;
4.  That the VENDORS shall furnish the VENDEE the Affidavit of Non-
Tenancy and the Land operation transfer document;
x x x x60
In summary, Pacific's obligations are: (1) to pay the down payment of
P1,892,590, which it did; and (2) to pay the balance of the purchase
price "upon completion by the VENDORS of the pertinent documents
that are necessary for the transfer of the Transfer Certificate of Title of
the above mentioned parcel of land unto the VENDEE[.]"
On the other hand, the Ascanos undertook the following: (1) to furnish
Pacific with all "pertinent documents that are necessary for the transfer
of the Transfer Certificate of Title" to the subject property; (2) to
guarantee removal of tenants and shoulder the full amount of the
tenants' disturbance compensation; and (3) to furnish Pacific the
certificate of non-tenancy and land operation transfer document.
Likewise, as ruled by the CA, the Addendum relied upon by petitioners
cannot prevail over the original Deed of Conditional Sale entered into
by the parties.61 As the CA found, the Addendum was not signed by any
of Pacific's officers or authorized representatives. Pacific's authorized
representative, Dee Hua T. Gatchalian, did not sign the Addendum.
Moreover, Fortuno, the person purported to be Pacific's representative,
signed as a mere witness.62redarclaw
A witness is not a party to the contract and is not automatically
converted to a party simply because, under some other extraneous
document or circumstance, he has presented himself as the
corporation's authorized representative. 63 Likewise, such act of signing
as a witness cannot be taken as evidence of that person's authority.
Thus, the Addendum did not alter the parties' obligations under the
original Deed of Conditional Sale.
Pacific is entitled to ask
for specific performance.
Article 1191 of the Civil Code states:LawlibraryofCRAlaw
Art. 1191. The power to rescind obligations is implied in reciprocal
ones, in case one of the obligors should not comply with what is
incumbent upon him.
The injured party may choose between fulfillment and the rescission of
the obligation, with payment of damages in either case. He may also
seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons
who have acquired the thing, in accordance with Articles 1385 and
1388 and the Mortgage Law.
As previously discussed, the Deed of Conditional Sale clearly spells out
the obligations of each party. Based on the allegations of the parties and
the findings of the lower courts, Pacific has already partially fulfilled its
obligation while petitioners have not.
The obligation of petitioners under the Deed of Conditional Sale is to
"guarantee removal of tenants" and not merely to pay disturbance
compensation. It is an undertaking specifically given to petitioners
under the Deed of Conditional Sale, considering that Pacific is not yet
the owner of the property and will have no personality to evict the
as well as the obligation to deliver the necessary documents to
complete the sale.
As previously held by the Court, "the injured party is the party who has
faithfully fulfilled his obligation or is ready and willing to perform his
obligation."64 From the foregoing, it is clear that Pacific is the injured
party, entitled to elect between rescinding of the contract and exacting
fulfillment of the obligation. It has opted for the remedy of specific
performance, as embodied in its Amended Complaint.
Moreover, rescission must not be allowed in favor of petitioners, since
they themselves failed to perform their obligations under the Deed of
Conditional Sale.65redarclaw
As to the purchase price, both the RTC and the CA held that, given no
other evidence to conclude otherwise, the true purchase price agreed
upon by the parties is P5,975,300, the amount stipulated in the Deed of
Conditional Sale.
The Court agrees.
The RTC's Pre-trial Order66 is instructive. Specifically, item "2" of the
stipulations reads:LawlibraryofCRAlaw
STIPULATIONS
The parties have agreed on the following:LawlibraryofCRAlaw
x x x x
2. That on October 1, 1994, plaintiff and defendants] entered into a
Deed of Conditional Sale whereby plaintiff obliged itself to purchase the
property belonging to defendants for a sum of P5,975,300.00;
x x x x67
Likewise, in the check vouchers issued by Pacific for each of its
payments, the consideration under the contract was stated as P100 per
square meter. These check vouchers were acknowledged and signed by
petitioners.68redarclaw
Finally, records show, and petitioners do not dispute, that the following
amounts have already been paid by Pacific:LawlibraryofCRAlaw
(1) down payment of PI,792,590, receipt evidenced by Check Voucher
No. 0863;69redarclaw
(2) additional payment of P600,000, receipt evidenced by Check
Voucher No. 0968;70redarclaw
(3) additional payment of P1,000,000, receipt evidenced by Check
Voucher No. 1113;71redarclaw
(4) additional payments of P505,180 72 and P500,000 deposited at
Capitol Bank of General Trias in Cavite.73
Pacific, therefore, has a balance of P1,577,530 to be paid upon the
fulfillment by petitioners of their obligations under the Deed of
Conditional Sale. Thereafter, petitioners are to execute the Deed of
Absolute Sale in favor of Pacific and deliver all the necessary documents
to consummate the sale.
WHEREFORE, the petition is DENIED for lack of merit. The Decision
dated 17 July 2012 and Resolution dated 8 January 2013 of the Court of
Appeals in CA-G.R. CV No. 90568 are AFFIRMED.

SO ORDERED.
Effects of Negligence, NCC 1170, 2201, 2202, 1191
Gutierrez vs Gutierrez, 56 Phil 177 (1932)
G.R. No. L-48930             February 23, 1944
ANTONIO VAZQUEZ, petitioner,  The original decision of the Court of Appeals and its subsequent
vs.
FRANCISCO DE BORJA, respondent.
x---------------------------------------------------------x
G.R. No. L-48931             February 23, 1944
FRANCISCO DE BORJA, petitioner,  entregaron, 2,583 quedando en poder del demandado el
vs.
ANTONIO VAZQUEZ, respondent.
OZAETA, J.:
This action was commenced in the Court of First Instance of Manila by
Francisco de Borja against Antonio Vazquez and Fernando Busuego to
recover from them jointly and severally the total sum of P4,702.70 upon
three alleged causes of action, to wit: First, that in or about the month of
January, 1932, the defendants jointly and severally obligated
themselves to sell to the plaintiff 4,000 cavans of palay at P2.10 per
cavan, to be delivered during the month of February, 1932, the said
defendants having subsequently received from the plaintiff in virtue of
said agreement the sum of P8,400; that the defendants delivered to the
plaintiff during the months of February, March, and April, 1932, only
2,488 cavans of palay of the value of P5,224.80 and refused to deliver
the balance of 1,512 cavans of the value of P3,175.20 notwithstanding
repeated demands. Second, that because of defendants' refusal to
deliver to the plaintiff the said 1,512 cavans of palay within the period
above mentioned, the plaintiff suffered damages in the sum of P1,000.
And, third, that on account of the agreement above mentioned the
plaintiff delivered to the defendants 4,000 empty sacks, of which they
returned to the plaintiff only 2,490 and refused to deliver to the plaintiff
the balance of 1,510 sacks or to pay their value amounting to P377.50;
and that on account of such refusal the plaintiff suffered damages in the
sum of P150.
The defendant Antonio Vazquez answered the complaint, denying
having entered into the contract mentioned in the first cause of action
in his own individual and personal capacity, either solely or together
with his codefendant Fernando Busuego, and alleging that the
agreement for the purchase of 4,000 cavans of palay and the payment of
the price of P8,400 were made by the plaintiff with and to the
Natividad-Vasquez Sabani Development Co., Inc., a corporation
organized and existing under the laws of the Philippines, of which the
defendant Antonio Vazquez was the acting manager at the time the
transaction took place. By way of counterclaim, the said defendant
alleged that he suffered damages in the sum of P1,000 on account of the
filing of this action against him by the plaintiff with full knowledge that
the said defendant had nothing to do whatever with any and all of the
transactions mentioned in the complaint in his own individual and
personal capacity.
The trial court rendered judgment ordering the defendant Antonio
Vazquez to pay to the plaintiff the sum of P3,175.20 plus the sum of
P377.50, with legal interest on both sums, and absolving the defendant
Fernando Busuego (treasurer of the corporation) from the complaint
and the plaintiff from the defendant Antonio Vazquez' counterclaim.
Upon appeal to the Court of Appeals, the latter modified that judgment
by reducing it to the total sum of P3,314.78, with legal interest thereon
and the costs. But by a subsequent resolution upon the defendant's
motion for reconsideration, the Court of Appeals set aside its judgment
and ordered that the case be remanded to the court of origin for further
proceedings. The defendant Vazquez, not being agreeable to that result,
filed the present petition for certiorari (G.R. No. 48930) to review and
reverse the judgment of the Court of Appeals; and the plaintiff Francisco
de Borja, excepting to the resolution of the Court of Appeals whereby its
original judgment was set aside and the case was ordered remanded to
the court of origin for further proceedings, filed a cross-petition for
certiorari (G.R. No. 48931) to maintain the original judgment of the
Court of Appeals.
resolutions on reconsideration read as follows:
Es hecho no controvertido que el 25 de Febrero de 1932, el
demandado-apelante vendio al demandante 4,000 cavanes
de palay al precio de P2.10 el cavan, de los cuales, dicho
demandante solamente recibio 2,583 cavanes; y que
asimismo recibio para su envase 4,000 sacos vacios. Esta
provbado que de dichos 4,000 sacos vacios solamente se
resto, y cuyo valor es el de P0.24 cada uno. Presentada la
demanda contra los demandados Antonio Vazquez y
Fernando Busuego para el pago de la cantidad de P4,702.70,
con sus intereses legales desde el 1.o de marzo de 1932 hasta
su completo pago y las costas, el Juzgado de Primera
Instancia de Manila el asunto condenando a Antonio Vazquez
a pagar al demandante la cantidad de P3,175.20, mas la
cantidad de P377.50, con sus intereses legales, absolviendo al
demandado Fernando Busuego de la demanda y al
demandante de la reconvencion de los demandados, sin
especial pronunciamiento en cuanto a las costas. De dicha
decision apelo el demandado Antonio Vazquez, apuntado
como principal error el de que el habia sido condenado
personalmente, y no la corporacion por el representada.
Segun la preponderancia de las pruebas, la venta hecha por
Antonio Vazquez a favor de Francisco de Borja de los 4,000
cavanes de palay fue en su capacidad de Presidente interino y
Manager de la corporacion Natividad-Vazquez Sabani
Development Co., Inc. Asi resulta del Exh. 1, que es la copia al
carbon del recibo otorgado por el demandado Vazquez, y
cuyo original lo habia perdido el demandante, segun el. Asi
tambien consta en los libros de la corporacion arriba
mencionada, puesto que en los mismos se ha asentado tanto
la entrada de los P8,400, precio del palay, como su envio al
gobierno en pago de los alquileres de la Hacienda Sabani. Asi
mismo lo admitio Francisco de Borja al abogado Sr. Jacinto
Tomacruz, posterior presidente de la corporacion sucesora
en el arrendamiento de la Sabani Estate, cuando el solicito
sus buenos oficios para el cobro del precio del palay no
entregado. Asi igualmente lo declaro el que hizo entrega de
parte del palay a Borja, Felipe Veneracion, cuyo testimonio
no ha sido refutado. Y asi se deduce de la misma demanda,
cuando se incluyo en ella a Fernando Busuego, tesorero de la
Natividad-Vazquez Sabani Development Co., Inc.
Siendo esto asi, la principal responsable debe ser la
Natividad-Vazquez Sabani Development Co., Inc., que quedo
insolvente y dejo de existir. El Juez sentenciador declaro, sin
embargo, al demandado Vazquez responsable del pago de la
cantidad reclamada por su negligencia al vender los referidos
4,000 cavanes de palay sin averiguar antes si o no dicha
cantidad existia en las bodegas de la corporacion.
Resulta del Exh. 8 que despues de la venta de los 4,000
cavanes de palay a Francisco de Borja, el mismo demandado
vendio a Kwong Ah Phoy 1,500 cavanes al precio de P2.00 el
cavan, y decimos 'despues' porque esta ultima venta aparece
asentada despues de la primera. Segun esto, el apelante no
solamente obro con negligencia, sino interviniendo culpa de
su parte, por lo que de acuerdo con los arts. 1102, 1103 y
1902 del Codigo Civil, el debe ser responsable
subsidiariamente del pago de la cantidad objecto de la
demanda.
 En meritos de todo lo expuesto, se confirma la decision
apelada con la modificacion de que el apelante debe pagar al
apelado la suma de P2,295.70 como valor de los 1,417
cavanes de palay que dejo de entregar al demandante, mas la
suma de P339.08 como importe de los 1,417 sacos vacios,
que dejo de devolver, a razon de P0.24 el saco, total
P3,314.78, con sus intereses legales desde la interposicion de
la demanda y las costas de ambas instancias.
Vista la mocion de reconsideracion de nuestra decision de
fecha 13 de Octubre de 1942, y alegandose en la misma que
cuando el apelante vendio los 1,500 cavanes de palay a Ah
Phoy, la corporacion todavia tenia bastante existencia de
dicho grano, y no estando dicho extremo suficientemente
discutido y probado, y pudiendo variar el resultado del
asunto, dejamos sin efecto nuestra citada decision, y
ordenamos la devolucion de la causa al Juzgado de origen
para que reciba pruebas al efecto y dicte despues la decision
correspondiente.
Upon consideration of the motion of the attorney for the
plaintiff-appellee in case CA-G.R. No. 8676, Francisco de Borja
vs. Antonio Vasquez et al., praying, for the reasons therein
given, that the resolution of December 22, 1942, be
reconsidered: Considering that said resolution remanding
the case to the lower court is for the benefit of the plaintiff-
appellee to afford him opportunity to refute the contention of
the defendant-appellant Antonio Vazquez, motion denied.
The action is on a contract, and the only issue pleaded and tried is
whether the plaintiff entered into the contract with the defendant
Antonio Vazquez in his personal capacity or as manager of the
Natividad-Vazquez Sabani Development Co., Inc. The Court of Appeals
found that according to the preponderance of the evidence "the sale
made by Antonio Vazquez in favor of Francisco de Borja of 4,000 cavans
of palay was in his capacity as acting president and manager of the
corporation Natividad-Vazquez Sabani Development Co., Inc." That
finding of fact is final and, it resolving the only issue involved, should be
determinative of the result.
The Court of Appeals doubly erred in ordering that the cause be
remanded to the court of origin for further trial to determine whether
the corporation had sufficient stock of palay at the time appellant sold,
1500 cavans of palay to Kwong Ah Phoy. First, if that point was material
to the issue, it should have been proven during the trial; and the
statement of the court that it had not been sufficiently discussed and
proven was no justification for ordering a new trial, which, by the way,
neither party had solicited but against which, on the contrary, both
parties now vehemently protest. Second, the point is, in any event,
beside the issue, and this we shall now discuss in connection with the
original judgment of the Court of Appeals which the plaintiff cross-
petitioner seeks to maintain.
The action being on a contract, and it appearing from the
preponderance of the evidence that the party liable on the contract is
the Natividad-Vazquez Sabani Development Co., Inc. which is not a
party herein, the complaint should have been dismissed. Counsel for the
plaintiff, in his brief as respondent, argues that altho by the
preponderance of the evidence the trial court and the Court of Appeals
found that Vazquez celebrated the contract in his capacity as acting
president of the corporation and altho it was the latter, thru Vazquez,
with which the plaintiff had contracted and which, thru Vazquez, had
received the sum of P8,400 from Borja, and altho that was true from the
point of view of a legal fiction, "ello no impede que tambien sea verdad
lo alegado en la demanda de que la misma persona de Vasquez fue la
que contrato con Borja y que la misma persona de Vasquez fue quien
recibio la suma de P8,400." But such argument is invalid and
insufficient to show that the president of the corporation is personally
liable on the contract duly and lawfully entered into by him in its behalf.
It is well known that a corporation is an artificial being invested by law
with a personality of its own, separate and distinct from that of its
stockholders and from that of its officers who manage and run its
affairs. The mere fact that its personality is owing to a legal fiction and
that it necessarily has to act thru its agents, does not make the latter
personally liable on a contract duly entered into, or for an act lawfully
performed, by them for an in its behalf. The legal fiction by which the
personality of a corporation is created is a practical reality and
necessity. Without it no corporate entities may exists and no corporate
business may be transacted. Such legal fiction may be disregarded only
when an attempt is made to use it as a cloak to hide an unlawful or
fraudulent purpose. No such thing has been alleged or proven in this
case. It has not been alleged nor even intimated that Vazquez personally
benefited by the contract of sale in question and that he is merely
invoking the legal fiction to avoid personal liability. Neither is it
contended that he entered into said contract for the corporation in bad
faith and with intent to defraud the plaintiff. We find no legal and
factual basis upon which to hold him liable on the contract either
principally or subsidiarily.
The trial court found him guilty of negligence in the performance of the
contract and held him personally liable on that account. On the other
hand, the Court of Appeals found that he "no solamente obro con
negligencia, sino interveniendo culpa de su parte, por lo que de acuerdo
con los arts. 1102, 1103 y 1902 del Codigo Civil, el debe ser responsable
subsidiariamente del pago de la cantidad objeto de la demanda." We
think both the trial court and the Court of Appeals erred in law in so
holding. They have manifestly failed to distinguish a contractual from
an extracontractual obligation, or an obligation arising from contract
from an obligation arising from culpa aquiliana. The fault and
negligence referred to in articles 1101-1104 of the Civil Code are those
incidental to the fulfillment or nonfullfillment of a contractual
obligation; while the fault or negligence referred to in article 1902 is
the culpa aquiliana of the civil law, homologous but not identical to tort
of the common law, which gives rise to an obligation independently of
any contract. (Cf. Manila R.R. Co. vs. Cia. Trasatlantica, 38 Phil., 875, 887-
890; Cangco vs. Manila R.R. Co., 38 Phil. 768.) The fact that the
corporation, acting thru Vazquez as its manager, was guilty of
negligence in the fulfillment of the contract, did not make Vazquez
principally or even subsidiarily liable for such negligence. Since it was
the corporation's contract, its nonfulfillment, whether due to negligence
or fault or to any other cause, made the corporation and not its agent
liable.
On the other hand if independently of the contract Vazquez by his fault
or negligence cause damaged to the plaintiff, he would be liable to the
latter under article 1902 of the Civil Code. But then the plaintiff's cause
of action should be based on culpa aquiliana and not on the contract
alleged in his complaint herein; and Vazquez' liability would be
principal and not merely subsidiary, as the Court of Appeals has
erroneously held. No such cause of action was alleged in the complaint
or tried by express or implied consent of the parties by virtue of section
4 of Rule 17. Hence the trial court had no jurisdiction over the issue and
could not adjudicate upon it (Reyes vs. Diaz, G.R. No. 48754.)
Consequently it was error for the Court of Appeals to remand the case
to the trial court to try and decide such issue.
It only remains for us to consider petitioner's second assignment of
error referring to the lower courts' refusal to entertain his counterclaim
for damages against the respondent Borja arising from the bringing of
this action. The lower courts having sustained plaintiff's action. The
finding of the Court of Appeals that according to the preponderance of
the evidence the defendant Vazquez celebrated the contract not in his
personal capacity but as acting president and manager of the
corporation, does not warrant his contention that the suit against him is
malicious and tortious; and since we have to decide defendant's
counterclaim upon the facts found by the Court of Appeals, we find no
sufficient basis upon which to sustain said counterclaim. Indeed, we feel
that a a matter of moral justice we ought to state here that the indignant
attitude adopted by the defendant towards the plaintiff for having
brought this action against him is in our estimation not wholly right.
Altho from the legal point of view he was not personally liable for the
fulfillment of the contract entered into by him on behalf of the
corporation of which he was the acting president and manager, we
think it was his moral duty towards the party with whom he contracted
in said capacity to see to it that the corporation represented by him
fulfilled the contract by delivering the palay it had sold, the price of
which it had already received. Recreant to such duty as a moral person,
he has no legitimate cause for indignation. We feel that under the
circumstances he not only has no cause of action against the plaintiff for
damages but is not even entitled to costs.
The judgment of the Court of Appeals is reversed, and the complaint is
hereby dismissed, without any finding as to costs.
Yulo, C.J., Moran, Horrilleno and Bocobo, JJ., concur.
In its Answer with Counterclaim, FBI claimed that FSI completed only
eighty-five percent (85%) of the contracted works, failing to finish the
diaphragm wall and component works in accordance with the plans and
specifications and abandoning the jobsite. FBI maintains that because of
FSI’s inadequacy, its schedule in finishing the Project has been delayed
resulting in the Project owner’s deferment of its own progress
billings.10 It further interposed counterclaims for amounts it spent for
the remedial works on the alleged defects in FSI’s work.
On May 3, 2001, after evaluating the evidence of both parties, the RTC
ruled in favor of FSI, the dispositive portion of its Decision reads:

WHEREFORE, on the basis of the foregoing, judgment is rendered

ordering defendant to pay plaintiff the following:
G.R. No. 194507               September 8, 2014

1. The sum of ₱1,024,600.00 representing billings 3 and 4,

FEDERAL BUILDERS, INC., Petitioner, 
less the amount of ₱33,354.40 plus 12% legal interest from
vs.
August 30, 1991;
FOUNDATION SPECIALISTS, INC., Respondent,

2. The sum of ₱279,585.00 representing the cost of

x-----------------------x
undelivered cement;

G.R. No. 194621

3. The sum of ₱200,000.00 as attorney’s fees; and

FOUNDATION SPECIALISTS, INC., Petitioner, 

4. The cost of suit.
vs.
FEDERAL BUILDERS, INC., Respondent.
Defendant’s counterclaim is deniedfor lack of factual and legal basis.
DECISION
SO ORDERED.11
PERALTA, J.:
On appeal, the CA affirmed the Decision of the lower court, but deleted
the sum of ₱279,585.00 representing the cost of undelivered cement
Before the Court are two consolidated cases, namely: (1) Petition for
and reduced the award of attorney’s fees to ₱50,000.00. In its
review on certiorari under Rule 45 of the Rules of Court, docketed as
Decision 12 dated July 15, 2010, the CA explained that FSI failed to
G.R. No. 194507, filed by Federal Builders, Inc., assailing the
substantiate how and in what manner it incurred the cost of cement by
Decision1 and Resolution,2dated July 15, 2010 and November 23, 2010,
stressing that its claim was not supported by actual receipts. Also, it
respectively, of the Court of Appeals (CA) in CA-G.R. CV No. 70849,
found that while the trial court did not err in awarding attorney’s fees,
which affirmed with modification the Decision 3 dated May 3, 2001 of
the same should be reduced for being unconscionable and excessive. On
the Regional Trial Court (RTC) in Civil Case No. 92-075; and (2) Petition
FBI’s rejection of the 12% annual interest rate on the amount of Billings
for review on certiorari under Rule 45 of the Rules of Court,docketed as
3 and 4, the CA ruled that the lower court did not err in imposing the
G.R. No. 194621, filed by Foundation Specialists, Inc., assailing the same
same in the following wise:
Decision4 and Resolution,5 dated July 15, 2010 and November 23,
2010,respectively, of the CA in CA- G.R. CV No. 70849, which affirmed
with modification the Decision 6 dated May 3, 2001 of the RTC in Civil x x x The rule is well-settled that when an obligation is breached, and it
Case No. 92-075. consists in the payment of a sum of money, the interest due shall itself
earn legal interest from the time it is judicially demanded (BPI Family
Savings Bank, Inc. vs. First Metro Investment Corporation, 429 SCRA
The antecedent facts are as follows:
30). When there is no rate of interest stipulated, such as in the present
case, the legal rate of interest shall be imposed, pursuant to Article
On August 20, 1990, Federal Builders, Inc. (FBI) entered into an 2209 of the New Civil Code. In the absence of a stipulated interest rate
agreement with Foundation Specialists, Inc. (FSI) whereby the latter, as on a loan due, the legal rate of interest shall be 12% per annum.13
subcontractor, undertook the construction of the diaphragm wall,
capping beam, and guide walls of the Trafalgar Plaza located at Salcedo
Both parties filed separate Motions for Reconsideration assailing
Village, Makati City (the Project), for a total contract price of Seven
different portions of the CADecision, but to no avail.14 Undaunted, they
Million Four Hundred Thousand Pesos (₱7,400,000.00). 7 Under the
subsequently elevated their claims withthis Court via petitions for
agreement,8 FBI was to pay a downpayment equivalent to twenty
review on certiorari.
percent (20%) of the contract price and the balance, through a progress
billing every fifteen (15) days, payable not later than one (1) week from
presentation of the billing. On the one hand, FSI asserted that the CA should not have deleted the
sum of ₱279,585.00 representing the cost of undelivered cement and
reduced the award of attorney’s fees to ₱50,000.00, since it was an
On January 9, 1992, FSI filed a complaint for Sum of Money against FBI
undisputed fact that FBI failed to deliver the agreed quantity of cement.
before the RTC of Makati City seeking to collect the amount of One
On the other hand, FBI faulted the CA for affirming the decision of the
Million Six Hundred Thirty-Five Thousand Two Hundred Seventy-Eight
lower court insofar as the award of the sum representing Billings 3 and
Pesos and Ninety-One Centavos (₱1,635,278.91), representing Billings
4, the interest imposed thereon, and the rejection of his counterclaim
No. 3 and 4, with accrued interest from August 1, 1991 plus moral and
were concerned. In a Resolution 15 dated February 21, 2011, however,
exemplary damages with attorney’s fees. 9 In its complaint,FSI alleged
this Court denied, with finality, the petition filed by FSI in G.R. No.
that FBI refused to pay said amount despite demand and itscompletion
194621 for having been filed late.
of ninety-seven percent (97%) of the contracted works.
Hence, the present petition filed byFBI in G.R. No. 194507 invoking the
following arguments:
I.
THE COURT OF APPEALS COMMITTED A CLEAR,
REVERSABLE ERROR WHEN IT AFFIRMED THE TRIAL
COURT’S JUDGMENT THAT FEDERAL BUILDERS, INC. WAS
LIABLE TO PAY THE BALANCE OF ₱1,024,600.00 LESS THE
AMOUNT OF ₱33,354.40 NOTWITHSTANDING THAT THE
DIAPHRAGM WALL CONSTRUCTED BY FOUNDATION
SPECIALIST, INC. WAS CONCEDEDLY DEFECTIVE AND OUT-
OF-SPECIFICATIONS AND THAT PETITIONER HAD TO REDO
IT AT ITS OWN EXPENSE.
II.
THE COURT OF APPEALS COMMITTED SERIOUS,
REVERSABLE ERROR WHEN IT IMPOSED THE 12% LEGAL
INTEREST FROM AUGUST 30, 1991 ON THE DISPUTED
CLAIM OF ₱1,024,600.00 LESS THE AMOUNT OF ₱33,354.40
DESPITE THE FACT THAT THERE WAS NO STIPULATION IN
THE AGREEMENT OF THE PARTIES WITH REGARD TO
INTEREST AND DESPITE THE FACT THAT THEIR
AGREEMENT WAS NOT A "LOAN OR FORBEARANCE OF
MONEY."
III.
THE COURT OF APPEALS COMMITTED GRAVE AND SERIOUS
REVERSABLE ERROR WHEN IT DISMISSED THE
COUNTERCLAIM OF PETITIONER NOTWITHSTANDING
OVERWHELMING EVIDENCE SUPPORTING ITS CLAIM OF
₱8,582,756.29 AS ACTUAL DAMAGES.
The petition is partly meritorious.
We agree with the courts below and reject FBI’s first and third
arguments. Well-entrenched in jurisprudence is the rule that factual
findings of the trial court, especially when affirmed by the appellate
court, are accorded the highest degree of respectand considered
conclusive between the parties, save for the following exceptional and
meritorious circumstances: (1) when the factual findings of the
appellate court and the trial court are contradictory; (2) whenthe
findings of the trial court are grounded entirely on speculation,
surmises or conjectures; (3) when the lower court’s inference from its
factual findings is manifestly mistaken, absurd or impossible; (4) when
there is grave abuse of discretion in the appreciation of facts; (5) when
the findings of the appellate court go beyond the issues of the case, or
fail to notice certain relevant facts which, if properly considered, will
justify a different conclusion; (6) when there is a misappreciation of
facts; (7) when the findings of fact are themselves conflicting; and (8)
when the findings of fact are conclusions without mention of the
specific evidence on which they are based, are premised on the absence
of evidence, or are contradicted by evidence on record. 16
None of the aforementioned exceptions are present herein. In the
assailed Decision, the RTC meticulouslydiscussed the obligations of
each party, the degree of their compliance therewith, as well as their
respective shortcomings, all of which were properly substantiated with
the corresponding documentary and testimonial evidence.
Under the construction agreement, FSI’s scope of workconsisted in (1)
the construction of the guide walls, diaphragm walls, and capping beam;
and (2) the installation of steel props. 17 As the lower courts aptly
observed from the records at hand, FSI had, indeed, completed ninety-
seven percent (97%) of its contracted works and the non-completion of
the remaining three percent (3%), as well as the alleged defects in the
said works, are actually attributable to FBI’s own fault such as, but not
limited to, the failure to deliver the needed cement as agreed upon in
the contract, to wit:
On March 8, 1991, plaintiff had finished the construction of the guide
wall and diaphragm wall (Exh. "R") but had not yet constructed the
capping beam as of April 22, 1991 for defendant’s failure to deliver the
needed cement in accordance with their agreement(Exhibit "I"). The
diaphragm wall had likewise been concrete tested and was found to
have conformed with the required design strength (Exh. "R").
Subsequently, plaintiff was paid the aggregate amount of
₱5,814,000.00. But as of May 30, 1991, plaintiff’s billings numbers 3 and
4 had remained unpaid (Exhs. "L", "M", and "M-1").
xxxx
On the misaligned diaphragm wall from top to bottom and inbetween
panels, plaintiff explained thatin the excavation of the soil where the
rebar cages are lowered and later poured with concrete cement, the
characteristics of the soil is not the same or homogenous all throughout.
Because of this property of the soil,in the process of excavation, it may
erode in some places that may cause spaces that the cement may fill or
occupy which would naturally cause bulges, protrusions and
misalignment in the concrete cast into the excavated ground(tsn., June
1, 2000, pp 14-18). This, in fact was anticipated when the agreement
was executed and included as provision 6.4 thereof.
The construction of the diaphragm wall panel by panel caused
misalignment and the chipping off of the portions misaligned is
considered a matter of course. Defendant, as the main contractor of the
project, has the responsibility of chopping or chipping off of bulges(tsn.,
ibid, pp 20-21). Wrong location of rebar dowels was anticipated by both
contractor and subcontractor as the latter submitted a plan called
"Detail of Sheer Connectors" (Exh "T") which was approved.The plan
provided two alternatives by which the wrong location of rebar dowels
may be remedied. Hence, defendant, aware of the possibility of
inaccurate location of these bars, cannot therefore ascribe the same to
the plaintiff as defective work.
Construction of the capping beam required the use of cement. Records,
however, show that from September 14, 1990 up to May 30, 1991
(Exhs. "B" to "L"), plaintiff had repeatedly requested defendant to
deliver cement. Finally, on April 22, 1991, plaintiff notified defendant of
its inability to construct the capping beam for the latter’s failure to
deliver the cement as provided in their agreement(Exh. "I"). Although
records show that there was mention of revision of design, there was no
evidence presented to show such revision required less amount of
cement than what was agreed on by plaintiff and defendant.
The seventh phase of the construction of the diaphragm wall is the
construction of the steel props which could be installed only after the
soil has been excavated by the main contractor. When defendant
directed plaintiff to install the props, the latter requested for a site
inspection to determine if the excavation of the soil was finished up to
the 4th level basement. Plaintiff, however, did not receive any
response.It later learned that defendant had contracted out that portion
of work to another sub-contractor (Exhs. "O" and "P"). Nevertheless,
plaintiff informed defendant of its willingness to execute that portion of
its work.18
It is clear from the foregoing that contrary to the allegations of FBI, FSI
had indeed completed its assigned obligations, with the exception of
certain assigned tasks, which was due to the failure of FBI to fulfil its
end of the bargain.
It can similarly be deduced that the defects FBI complained of, such as
the misaligned diaphragm wall and the erroneous location of the rebar
dowels, were not only anticipated by the parties, having stipulated
alternative plans to remedy the same, but more importantly, are also
attributable to the very actions of FBI. Accordingly, considering that the
alleged defects in FSI’s contracted works were not so much due to the
fault or negligence of the FSI, but were satisfactorily proven to be
caused by FBI’s own acts, FBI’s claim of ₱8,582,756.29 representing the
cost of the measures it undertook to rectify the alleged defects must
necessarily fail. In fact, as the lower court noted, at the time when FBI
had evaluated FSI’s works, it did not categorically pose any objection
thereto, viz:
Defendant admitted that it had paid ₱6 million based on its evaluation
of plaintiff’s accomplishments (tsn., Sept. 28, 2000, p. 17) and its
payment was made without objection on plaintiff’s works, the majority
of which were for the accomplishments in the construction of the
diaphragm wall (tsn., ibid, p. 70).
xxxx
While there is no evidence to show the scope of work for these billings,
it is safe to assume that these were also works in the construction of the
diaphragm wall considering that as of May 16, 1991, plaintiff had only
the installation of the steel props and welding works to complete (Exh.
"H"). If defendant was able to evaluate the work finished by plaintiff the
majority of which was the construction of the diaphragm wall and paid
it about ₱6 million as accomplishment, there was no reason why it
could not evaluate plaintiff’s works covered by billings 3 and 4.In other
words, defendants did nothave to excavate in order to determine and
evaluate plaintiff’s works. Hence, defendant’s refusal to pay was not
justified and the alleged defects of the diaphragm wall (tsn, Sept. 28,
2000, p. 17) which it claims to have discovered only after January 1992
were mere afterthoughts.19
Thus, in the absence of any record to otherwise prove FSI’s neglect in
the fulfilment of its obligations under the contract, this Court shall
refrain from reversing the findings of the courts below, which are fully
supported by and deducible from, the evidence on record. Indeed, FBI
failed to present any evidence to justify its refusal to pay FSI for the
works it was contracted to perform. As such, We do not see any reason
to deviate from the assailed rulings.
Anent FBI’s second assignment of error, however, We find merit in the
argument that the 12% interest rateis inapplicable, since this case does
not involve a loan or forbearance ofmoney. In the landmark case of
Eastern Shipping Lines, Inc. v. Court of Appeals, 20 We laid down the
following guidelines in computing legal interest:
II. With regard particularly to an award of interest in the concept of
actual and compensatory damages, the rate of interest, as well as the
accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest
shall be 12% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand under and subject to
the provisions of Article1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance
of money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the
rate of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be
deemed to have been reasonably ascertained). The actual
base for the computation of legal interest shall, in any case,
be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2,
above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.21
In line, however, with the recent circular of the Monetary Board of the
Bangko Sentral ng Pilipinas (BSP-MB) No. 799, we have modified the
guidelines in Nacar v. Gallery Frames,22 as follows:
I. When an obligation, regardless of itssource, i.e., law,
contracts, quasicontracts, delicts or quasi-delicts is breached,
the contravenor can be held liable for damages. The
provisions under Title XVIII on "Damages" of the Civil Code
govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists
in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be
that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall
be 6% per annumto be computed from default, i.e.,
from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the
Civil Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed
at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on
unliquidated claims or damages, except when or
until the demand can be established with
reasonable certainty. Accordingly, where the
demand is established with reasonable certainty,
the interest shall begin to run from the time the
claim is made judicially or extrajudicially(Art.
1169, Civil Code), but when such certainty cannot
be so reasonably established at the time the
demand is made, the interest shall begin to run
only from the date the judgment of the court is
made (at which time the quantification of damages
may be deemed to have been reasonably
ascertained). The actual base for the computation
of legal interest shall, in any case, be on the
amount finally adjudged. 3. When the judgment of
the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether
the case falls under paragraph 1 or paragraph 2,
above, shall be 6% per annumfrom such finality
until its satisfaction, this interim period being
deemed to be by then an equivalent to a
forbearance of credit.
And, in addition to the above, judgments that have become final and
executory prior to July 1, 2013, shall not be disturbed and shall
continue to be implemented applying the rate of interest fixed therein. 23
It should be noted, however, that the new rate could only be applied
prospectively and not retroactively. Consequently, the twelve percent
(12%) per annum legal interest shall apply only until June 30, 2013.
Come July 1, 2013, the new rate of six percent (6%) per annum shall be
the prevailing rate of interest when applicable. Thus, the need to
determine whether the obligation involved herein is a loanand
forbearance of money nonetheless exists.
In S.C. Megaworld Construction and Development Corporation v. Engr.
Parada,24 We clarified the meaning of obligations constituting loans or
forbearance of money in the following wise:
As further clarified in the case of Sunga-Chan v. CA, a loan or
forbearance of money, goods or credit describes a contractual
obligation whereby a lender or creditor has refrained during a given
period from requiring the borrower or debtor to repay the loan or debt
then due and payable. Thus:
In Reformina v. Tomol, Jr., the Court held that the legal interest at 12%
per annum under Central Bank (CB) Circular No. 416 shall be adjudged
only in cases involving the loan or forbearance of money. And for
transactions involving payment of indemnities in the concept of
damages arising from default in the performance of obligations in
general and/or for money judgment not involving a loan or forbearance
of money, goods, or credit, the governing provision is Art. 2209 of the
Civil Code prescribing a yearly 6% interest. Art. 2209 pertinently
provides:
The 6% interest rate shall further be imposed from the finality of the
judgment herein until satisfaction thereof, in light of our recent ruling
in Nacar v. Gallery Frames.34
Note, however, that contrary to FBI’sassertion, We find no error in the
RTC’s ruling that the interest shall begin to run from August 30, 1991 as
this is the date when FSI extrajudicially made its claim against FBI
through a letter demanding payment for its services. 35
In view of the foregoing, therefore, We find no compelling reason to
disturb the factual findings of the RTC and the CA, which are fully
supported by and deducible from, the evidence on record, insofar as the
sum representing Billings 3 and 4 is concerned. As to the rate of interest
due thereon, however, We note that the same should be reduced to 6%
per annum considering the fact that the obligation involved herein does
not partake of a loan or forbearance of money.
WHEREFORE, premises considered, the instant petition is DENIED. The
Decision and Resolution, dated July 15, 2010 and November 23, 2010,
respectively, of the Court of Appeals in CA-G.R. CV No. 70849 are hereby
AFFIRMED with MODIFICATION. Federal Builders, Inc. is ORDERED to
pay Foundation Specialists, Inc. the sum of Pl ,024,600.00 representing
billings 3 and 4, less the amount of ₱33,354.40, plus interest at six
percent (6%) per annum reckoned from August 30, 1991 until full
payment thereof.

Art. 2209. If the obligation consists in the payment of a sum of money, SO ORDERED.
and the debtor incurs in delay, the indemnity for damages, there being
no stipulation to the contrary, shall be the payment of the interest
agreed upon, and in the absence of stipulation, the legal interest, which
is six per cent per annum.

The term "forbearance," within the context of usury law, has been
described as a contractual obligation ofa lender or creditor to refrain,
during a given period of time, from requiring the borrower or debtor to
repay the loan or debt then due and payable.25

Forbearance of money, goods or credits, therefore, refers to

arrangements other than loan agreements, where a person acquiesces
to the temporary use of his money, goods orcredits pending the
happening of certain events or fulfilment of certain
conditions.26 Consequently, if those conditions are breached, said
person is entitled not only to the return of the principal amount paid,
but also to compensation for the use of his money which would be the
same rateof legal interest applicable to a loan since the use or
deprivation of funds therein is similar to a loan.27

This case, however, does not involve an acquiescence to the temporary

use of a party’s money but a performance of a particular service,
specifically the construction of the diaphragm wall, capping beam, and
guide walls of the Trafalgar Plaza.

A review of similar jurisprudence would tell us that this Court had

repeatedly recognized this distinction and awarded interest at a rate of
6% on actual or compensatory damages arising from a breach not only
of construction contracts,28 such as the one subject ofthis case, but also
of contracts wherein one of the parties reneged on its obligation to
perform messengerial services, 29 deliver certain quantities of
molasses,30 undertake the reforestation of a denuded forest land,31 as
well as breaches of contracts of carriage, 32 and trucking
agreements.33 We have explained therein that the reason behind such is
that said contracts do not partake of loans or forbearance of money but
are more in the nature of contracts of service.

Thus, in the absence of any stipulation as to interest in the agreement

between the parties herein, the matter of interest award arising from
the dispute in this case would actually fall under the second paragraph
of the above-quoted guidelines inthe landmark case of Eastern Shipping
Lines, which necessitates the imposition of interestat the rate of 6%,
instead of the 12% imposed by the courts below.
c. Delay
G.R. No. 73345. April 7, 1993.
SOCIAL SECURITY SYSTEM, petitioner, 
vs.
MOONWALK DEVELOPMENT & HOUSING CORPORATION, ROSITA U.
ALBERTO, ROSITA U. ALBERTO, JMA HOUSE, INC., MILAGROS SANCHEZ
SANTIAGO, in her capacity as Register of Deeds for the Province of
Cavite, ARTURO SOLITO, in his capacity as Register of Deeds for Metro
Manila District IV, Makati, Metro Manila and the INTERMEDIATE
APPELLATE COURT, respondents.
The Solicitor General for petitioner.
K.V. Faylona & Associates for private respondents.
DECISION
CAMPOS, JR., J p:
Before Us is a petition for review on certiorari of decision 1 of the then
Intermediate Appellate Court affirming in toto the decision of the
former Court of First Instance of Rizal, Seventh Judicial District, Branch
XXIX, Pasay City.
The facts as found by the Appellate Court are as follows:
"On February 20, 1980, the Social Security System, SSS for brevity, filed
a complaint in the Court of First Instance of Rizal against Moonwalk
Development & Housing Corporation, Moonwalk for short, alleging that
the former had committed an error in failing to compute the 12%
interest due on delayed payments on the loan of Moonwalk — resulting
in a chain of errors in the application of payments made by Moonwalk
and, in an unpaid balance on the principal loan agreement in the
amount of P7,053.77 and, also in not reflecting in its statement or
account an unpaid balance on the said penalties for delayed payments
in the amount of P7,517,178.21 as of October 10, 1979.
Moonwalk answered denying SSS' claims and asserting that SSS had the
opportunity to ascertain the truth but failed to do so.
The trial court set the case for pre-trial at which pre-trial conference,
the court issued an order giving both parties thirty (30) days within
which to submit a stipulation of facts.
The Order of October 6, 1980 dismissing the complaint followed the
submission by the parties on September 19, 1980 of the following
stipulation of Facts:
"1. On October 6, 1971, plaintiff approved the application of defendant
Moonwalk for an interim loan in the amount of THIRTY MILLION PESOS
(P30,000,000.00) for the purpose of developing and constructing a
housing project in the provinces of Rizal and Cavite;
"2. Out of the approved loan of THIRTY MILLION PESOS
(P30,000,000.00), the sum of P9,595,000.00 was released to defendant
Moonwalk as of November 28, 1973;
"3. A third Amended Deed of First Mortgage was executed on December
18, 1973 Annex `D' providing for restructuring of the payment of the
released amount of P9,595,000.00.
"4. Defendants Rosita U. Alberto and Rosita U. Alberto, mother and
daughter respectively, under paragraph 5 of the aforesaid Third
Amended Deed of First Mortgage substituted Associated Construction
and Surveys Corporation, Philippine Model Homes Development
Corporation, Mariano Z. Velarde and Eusebio T. Ramos, as solidary
obligors;
"5. On July 23, 1974, after considering additional releases in the amount
of P2,659,700.00, made to defendant Moonwalk, defendant Moonwalk
delivered to the plaintiff a promissory note for TWELVE MILLION TWO
HUNDRED FIFTY FOUR THOUSAND SEVEN HUNDRED PESOS
(P12,254,700.00) Annex `E', signed by Eusebio T. Ramos, and the said
Rosita U. Alberto and Rosita U. Alberto;
"6. Moonwalk made a total payment of P23,657,901.84 to SSS for the
loan principal of P12,254,700.00 released to it. The last payment made
by Moonwalk in the amount of P15,004,905.74 were based on the
Statement of Account, Annex "F" prepared by plaintiff SSS for
defendant;
"7. After settlement of the account stated in Annex 'F' plaintiff issued to
defendant Moonwalk the Release of Mortgage for Moonwalk's
mortgaged properties in Cavite and Rizal, Annexes 'G' and 'H' on
October 9, 1979 and October 11, 1979 respectively.
"8. In letters to defendant Moonwalk, dated November 28, 1979 and
followed up by another letter dated December 17, 1979, plaintiff
alleged that it committed an honest mistake in releasing defendant.
"9. In a letter dated December 21, 1979, defendant's counsel told
plaintiff that it had completely paid its obligations to SSS;
"10. The genuineness and due execution of the documents marked as
Annex (sic) 'A' to 'O' inclusive, of the Complaint and the letter dated
December 21, 1979 of the defendant's counsel to the plaintiff are
admitted.
"Manila for Pasay City, September 2, 1980." 2
On October 6, 1990, the trial court issued an order dismissing the
complaint on the ground that the obligation was already extinguished
by the payment by Moonwalk of its indebtedness to SSS and by the
latter's act of cancelling the real estate mortgages executed in its favor
by defendant Moonwalk. The Motion for Reconsideration filed by SSS
with the trial court was likewise dismissed by the latter.
These orders were appealed to the Intermediate Appellate Court.
Respondent Court reduced the errors assigned by the SSS into this
issue: ". . . are defendants-appellees, namely, Moonwalk Development
and Housing Corporation, Rosita U. Alberto, Rosita U. Alberto, JMA
House, Inc. still liable for the unpaid penalties as claimed by plaintiff-
appellant or is their obligation extinguished?" 3 As We have stated
earlier, the respondent Court held that Moonwalk's obligation was
extinguished and affirmed the trial court.
Hence, this Petition wherein SSS raises the following grounds for
review:
"First, in concluding that the penalties due from Moonwalk are "deemed
waived and/or barred," the appellate court disregarded the basic tenet
that waiver of a right must be express, made in a clear and unequivocal
manner. There is no evidence in the case at bar to show that SSS made a
clear, positive waiver of the penalties, made with full knowledge of the
circumstances.
Second, it misconstrued the ruling that SSS funds are trust funds, and
SSS, being a mere trustee, cannot perform acts affecting the same,
including condonation of penalties, that would diminish property rights
of the owners and beneficiaries thereof. (United Christian Missionary
Society v. Social Security Commission, 30 SCRA 982, 988 [1969]).
Third, it ignored the fact that penalty at the rate of 12% p.a. is not
inequitable.
Fourth, it ignored the principle that equity will cancel a release on the
ground of mistake of fact." 4
The same problem which confronted the respondent court is presented
before Us: Is the penalty demandable even after the extinguishment of
the principal obligation?
The former Intermediate Appellate Court, through Justice Eduard P.
Caguioa, held in the negative. It reasoned, thus:
"2. As we have explained under No. 1, contrary to what the plaintiff-
appellant states in its Brief, what is sought to be recovered in this case
is not the 12% interest on the loan but the 12% penalty for failure to
pay on time the amortization. What is sought to be enforced therefore is
the penal clause of the contract entered into between the parties.
Now, what is a penal clause. A penal clause has been defined as
"an accessory obligation which the parties attach to a principal
obligation for the purpose of insuring the performance thereof by
imposing on the debtor a special presentation (generally consisting in
the payment of a sum of money) in case the obligation is not fulfilled or
is irregularly or inadequately fulfilled" (3 Castan 8th Ed. p. 118).
Now an accessory obligation has been defined as that attached to a
principal obligation in order to complete the same or take its place in
the case of breach (4 Puig Peñ a Part 1 p. 76). Note therefore that an
accessory obligation is dependent for its existence on the existence of a
principal obligation. A principal obligation may exist without an
accessory obligation but an accessory obligation cannot exist without a
principal obligation. For example, the contract of mortgage is an
accessory obligation to enforce the performance of the main obligation
of indebtedness. An indebtedness can exist without the mortgage but a
mortgage cannot exist without the indebtedness, which is the principal
obligation. In the present case, the principal obligation is the loan
between the parties. The accessory obligation of a penal clause is to
enforce the main obligation of payment of the loan. If therefore the
principal obligation does not exist the penalty being accessory cannot
exist.
Now then when is the penalty demandable? A penalty is demandable in
case of non performance or late performance of the main obligation. In
other words in order that the penalty may arise there must be a breach
of the obligation either by total or partial non fulfillment or there is non
fulfillment in point of time which is called mora or delay. The debtor
therefore violates the obligation in point of time if there is mora or
delay. Now, there is no mora or delay unless there is a demand. It is
noteworthy that in the present case during all the period when the
principal obligation was still subsisting, although there were late
amortizations there was no demand made by the creditor, plaintiff-
appellant for the payment of the penalty. Therefore up to the time of the
letter of plaintiff-appellant there was no demand for the payment of the
penalty, hence the debtor was no in mora in the payment of the penalty.
However, on October 1, 1979, plaintiff-appellant issued its statement of
account (Exhibit F) showing the total obligation of Moonwalk as
P15,004,905.74, and forthwith demanded payment from defendant-
appellee. Because of the demand for payment, Moonwalk made several
payments on September 29, October 9 and 19, 1979 respectively, all in
all totalling P15,004,905.74 which was a complete payment of its
obligation as stated in Exhibit F. Because of this payment the obligation
of Moonwalk was considered extinguished, and pursuant to said
extinguishment, the real estate mortgages given by Moonwalk were
released on October 9, 1979 and October 10, 1979 (Exhibits G and H).
For all purposes therefore the principal obligation of defendant-
appellee was deemed extinguished as well as the accessory obligation
of real estate mortgage; and that is the reason for the release of all the
Real Estate Mortgages on October 9 and 10, 1979 respectively.
Now, besides the Real Estate Mortgages, the penal clause which is also
an accessory obligation must also be deemed extinguished considering
that the principal obligation was considered extinguished, and the penal
clause being an accessory obligation. That being the case, the demand
for payment of the penal clause made by plaintiff-appellant in its
demand letter dated November 28, 1979 and its follow up letter dated
December 17, 1979 (which parenthetically are the only demands for
payment of the penalties) are therefore ineffective as there was nothing
to demand. It would be otherwise, if the demand for the payment of the
penalty was made prior to the extinguishment of the obligation because
then the obligation of Moonwalk would consist of: 1) the principal
obligation 2) the interest of 12% on the principal obligation and 3) the
penalty of 12% for late payment for after demand, Moonwalk would be
in mora and therefore liable for the penalty.
Let it be emphasized that at the time of the demand made in the letters
of November 28, 1979 and December 17, 1979 as far as the penalty is
concerned, the defendant-appellee was not in default since there was
no mora prior to the demand. That being the case, therefore, the
demand made after the extinguishment of the principal obligation
which carried with it the extinguishment of the penal clause being
merely an accessory obligation, was an exercise in futility.
3. At the time of the payment made of the full obligation on October 10,
1979 together with the 12% interest by defendant-appellee Moonwalk,
its obligation was extinguished. It being extinguished, there was no
more need for the penal clause. Now, it is to be noted that penalty at
anytime can be modified by the Court. Even substantial performance
under Art. 1234 authorizes the Court to consider it as complete
performance minus damages. Now, Art, 1229 Civil Code of the
Philippines provides:
"ART. 1229. The judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the
debtor. Even if there has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or unconscionable."
If the penalty can be reduced after the principal obligation has been
partly or irregularly complied with by the debtor, which is nonetheless
a breach of the obligation, with more reason the penal clause is not
demandable when full obligation has been complied with since in that
case there is no breach of the obligation. In the present case, there has
been as yet no demand for payment of the penalty at the time of the
extinguishment of the obligation, hence there was likewise an
extinguishment of the penalty.
Let Us emphasize that the obligation of defendant-appellee was fully
complied with by the debtor, that is, the amount loaned together with
the 12% interest has been fully paid by the appellee. That being so,
there is no basis for demanding the penal clause since the obligation has
been extinguished. Here there has been a waiver of the penal clause as
it was not demanded before the full obligation was fully paid and
extinguished. Again, emphasis must be made on the fact that plaintiff-
appellant has not lost anything under the contract since in got back in
full the amount loan (sic) as well as the interest thereof. The same thing
would have happened if the obligation was paid on time, for then the
penal clause, under the terms of the contract would not apply. Payment
of the penalty does not mean gain or loss of plaintiff-appellant since it is
merely for the purpose of enforcing the performance of the main
obligation has been fully complied with and extinguished, the penal
clause has lost its raison d' entre." 5
We find no reason to depart from the appellate court's decision. We,
however, advance the following reasons for the denial of this petition.
Article 1226 of the Civil Code provides:
"Art. 1226. In obligations with a penal clause, he penalty shall substitute
the indemnity for damages and the payment of interests in case of
noncompliance, if there is no stipulation to the contrary. Nevertheless,
damages shall be paid if the obligor refuses to pay the penalty or is
guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance
with the provisions of this Code." (Emphasis Ours.)
A penal clause is an accessory undertaking to assume greater liability in
case of breach. 6 It has a double function: (1) to provide for liquidated
damages, and (2) to strengthen the coercive force of the obligation by
the threat of greater responsibility in the event of breach. 7 From the
foregoing, it is clear that a penal clause is intended to prevent the
obligor from defaulting in the performance of his obligation. Thus, if
there should be default, the penalty may be enforced. One commentator
of the Civil Code wrote:
"Now when is the penalty deemed demandable in accordance with the
provisions of the Civil Code? We must make a distinction between a
positive and a negative obligation. With regard to obligations which are
positive (to give and to do), the penalty is demandable when the debtor
is in mora; hence, the necessity of demand by the debtor unless the
same is excused . . ." 8
When does delay arise? Under the Civil Code, delay begins from the
time the obligee judicially or extrajudicially demands from the obligor
the performance of the obligation.
"Art. 1169. Those obliged to deliver or to do something incur in delay
from the time the obligee judicially or extrajudicially demands from
them the fulfillment of their obligation."
There are only three instances when demand is not necessary to render
the obligor in default. These are the following:
"(1) When the obligation or the law expressly so declares;
(2) When from the nature and the circumstances of the obligation it
appears that the designation of the time when the thing is to be
delivered or the service is to be rendered was a controlling motive for
the establishment of the contract; or
(3) When the demand would be useless, as when the obligor has
rendered it beyond his power to perform." 9
This case does not fall within any of the established exceptions. Hence,
despite the provision in the promissory note that "(a)ll amortization
payments shall be made every first five (5) days of the calendar month
until the principal and interest on the loan or any portion thereof
actually released has been fully paid," 10 petitioner is not excused from
making a demand. It has been established that at the time of payment of
the full obligation, private respondent Moonwalk has long been
delinquent in meeting its monthly arrears and in paying the full amount
of the loan itself as the obligation matured sometime in January, 1977.
But mere delinquency in payment does not necessarily mean delay in
the legal concept. To be in default ". . . is different from mere delay in
the grammatical sense, because it involves the beginning of a special
condition or status which has its own peculiar effects or results." 11 In
order that the debtor may be in default it is necessary that the following
requisites be present: (1) that the obligation be demandable and
already liquidated; (2) that the debtor delays performance; and (3) that
the creditor requires the performance judicially and extrajudicially. 12
Default generally begins from the moment the creditor demands the
performance of the obligation. 13
Nowhere in this case did it appear that SSS demanded from Moonwalk
the payment of its monthly amortizations. Neither did it show that
petitioner demanded the payment of the stipulated penalty upon the
failure of Moonwalk to meet its monthly amortization. What the
complaint itself showed was that SSS tried to enforce the obligation
sometime in September, 1977 by foreclosing the real estate mortgages
executed by Moonwalk in favor of SSS. But this foreclosure did not push
through upon Moonwalk's requests and promises to pay in full. The
next demand for payment happened on October 1, 1979 when SSS
issued a Statement of Account to Moonwalk. And in accordance with
said statement, Moonwalk paid its loan in full. What is clear, therefore,
is that Moonwalk was never in default because SSS never compelled
performance. Though it tried to foreclose the mortgages, SSS itself
desisted from doing so upon the entreaties of Moonwalk. If the
Statement of Account could properly be considered as demand for
payment, the demand was complied with on time. Hence, no delay
occurred and there was, therefore, no occasion when the penalty
became demandable and enforceable. Since there was no default in the
performance of the main obligation — payment of the loan — SSS was
never entitled to recover any penalty, not at the time it made the
Statement of Account and certainly, not after the extinguishment of the
principal obligation because then, all the more that SSS had no reason to
ask for the penalties. Thus, there could never be any occasion for waiver
or even mistake in the application for payment because there was
nothing for SSS to waive as its right to enforce the penalty did not arise.
SSS, however, in buttressing its claim that it never waived the penalties,
argued that the funds it held were trust funds and as trustee, the
petitioner could not perform acts affecting the funds that would
diminish property rights of the owners and beneficiaries thereof. To
support its claim, SSS cited the case of United Christian Missionary
Society v. Social Security Commission. 14
We looked into the case and found out that it is not applicable to the
present case as it dealt not with the right of the SSS to collect penalties
which were provided for in contracts which it entered into but with its
right to collect premiums and its duty to collect the penalty for delayed
payment or non-payment of premiums. The Supreme Court, in that
case, stated:
"No discretion or alternative is granted respondent Commission in the
enforcement of the law's mandate that the employer who fails to
comply with his legal obligation to remit the premiums to the System
within the prescribed period shall pay a penalty of three (3%) per
month. The prescribed penalty is evidently of a punitive character,
provided by the legislature to assure that employers do not take lightly
the State's exercise of the police power in the implementation of the
Republic's declared policy "to develop, establish gradually and perfect a
social security system which shall be suitable to the needs of the people
throughout the Philippines and (to) provide protection to employers
against the hazards of disability, sickness, old age and death . . ."
Thus, We agree with the decision of the respondent court on the matter
which We quote, to wit:
"Note that the above case refers to the condonation of the penalty for
the non remittance of the premium which is provided for by Section
22(a) of the Social Security Act . . . In other words, what was sought to
be condoned was the penalty provided for by law for non remittance of
premium for coverage under the Social Security Act.
The case at bar does not refer to any penalty provided for by law nor
does it refer to the non remittance of premium. The case at bar refers to
a contract of loan entered into between plaintiff and defendant
Moonwalk Development and Housing Corporation. Note, therefore, that
no provision of law is involved in this case, nor is there any penalty
imposed by law nor a case about non-remittance of premium required
by law. The present case refers to a contract of loan payable in
installments not provided for by law but by agreement of the parties.
Therefore, the ratio decidendi of the case of United Christian Missionary
Society vs. Social Security Commission which plaintiff-appellant relies is
not applicable in this case; clearly, the Social Security Commission,
which is a creature of the Social Security Act cannot condone a
mandatory provision of law providing for the payment of premiums
and for penalties for non remittance. The life of the Social Security Act is
in the premiums because these are the funds from which the Social
Security Act gets the money for its purposes and the non-remittance of
the premiums is penalized not by the Social Security Commission but by
law.

xxx xxx xxx

It is admitted that when a government created corporation enters into a

contract with private party concerning a loan, it descends to the level of
a private person. Hence, the rules on contract applicable to private
parties are applicable to it. The argument therefore that the Social
Security Commission cannot waive or condone the penalties which was
applied in the United Christian Missionary Society cannot apply in this
case. First, because what was not paid were installments on a loan but
premiums required by law to be paid by the parties covered by the
Social Security Act. Secondly, what is sought to be condoned or waived
are penalties not imposed by law for failure to remit premiums
required by law, but a penalty for non payment provided for by the
agreement of the parties in the contract between them . . ." 15

WHEREFORE, in view of the foregoing, the petition is DISMISSED and

the decision of the respondent court is AFFIRMED. LLpr

SO ORDERED.

Narvasa, C .J ., Padilla, Regalado and Nocon, JJ ., concur.

G.R. No. 184458               January 14, 2015
RODRIGO RIVERA, Petitioner, 
vs.
SPOUSES SALVADOR CHUA AND VIOLETA S. CHUA, Respondents.
x-----------------------x
G.R. No. 184472
SPS. SALVADOR CHUA and VIOLETA S. CHUA, Petitioners, 
vs.
RODRIGO RIVERA, Respondent.
DECISION
PEREZ, J.:
Before us are consolidated Petitions for Review on Certiorari under
Rule 45 of the Rules of Court assailing the Decision1 of the Court of
Appeals in CA-G.R. SP No. 90609 which affirmed with modification the
separate rulings of the Manila City trial courts, the Regional Trial Court,
Branch 17 in Civil Case No. 02-1052562 and the Metropolitan Trial
Court (MeTC), Branch 30, in Civil Case No. 163661,3 a case for collection
of a sum of money due a promissory note. While all three (3) lower
courts upheld the validity and authenticity of the promissory note as
duly signed by the obligor, Rodrigo Rivera (Rivera), petitioner in G.R.
No. 184458, the appellate court modified the trial courts’ consistent
awards: (1) the stipulated interest rate of sixty percent (60%) reduced
to twelve percent (12%) per annumcomputed from the date of judicial
or extrajudicial demand, and (2) reinstatement of the award of
attorney’s fees also in a reduced amount of ₱50,000.00.
In G.R. No. 184458, Rivera persists in his contention that there was no
valid promissory note and questions the entire ruling of the lower
courts. On the other hand, petitioners in G.R. No. 184472, Spouses
Salvador and Violeta Chua (Spouses Chua), take exception to the
appellate court’s reduction of the stipulated interest rate of sixty
percent (60%) to twelve percent (12%) per annum.
We proceed to the facts.
The parties were friends of long standing having known each other
since 1973: Rivera and Salvador are kumpadres, the former is the
godfather of the Spouses Chua’s son.
On 24 February 1995, Rivera obtained a loan from the Spouses Chua:
PROMISSORY NOTE
120,000.00
FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses
SALVADOR C. CHUA and VIOLETA SY CHUA, the sum of One Hundred
Twenty Thousand Philippine Currency (₱120,000.00) on December 31,
1995.
It is agreed and understood that failure on my part to pay the amount of
(120,000.00) One Hundred Twenty Thousand Pesos on December 31,
1995. (sic) I agree to pay the sum equivalent to FIVE PERCENT (5%)
interest monthly from the date of default until the entire obligation is
fully paid for.
Should this note be referred to a lawyer for collection, I agree to pay the
further sum equivalent to twenty percent (20%) of the total amount
due and payable as and for attorney’s fees which in no case shall be less
than ₱5,000.00 and to pay in addition the cost of suit and other
incidental litigation expense.
Any action which may arise in connection with this note shall be
brought in the proper Court of the City of Manila.
Manila, February 24, 1995[.]
(SGD.) RODRIGO RIVERA4
In October 1998, almost three years from the date of payment
stipulated in the promissory note, Rivera, as partial payment for the
loan, issued and delivered to the SpousesChua, as payee, a check
numbered 012467, dated 30 December 1998, drawn against Rivera’s
current account with the Philippine Commercial International Bank
(PCIB) in the amount of ₱25,000.00.
On 21 December 1998, the Spouses Chua received another check
presumably issued by Rivera, likewise drawn against Rivera’s PCIB
current account, numbered 013224, duly signed and dated, but blank as
to payee and amount. Ostensibly, as per understanding by the parties,
PCIB Check No. 013224 was issued in the amount of ₱133,454.00 with
"cash" as payee. Purportedly, both checks were simply partial payment
for Rivera’s loan in the principal amount of ₱120,000.00.
Upon presentment for payment, the two checks were dishonored for
the reason "account closed."
As of 31 May 1999, the amount due the Spouses Chua was pegged at
₱366,000.00 covering the principal of ₱120,000.00 plus five percent
(5%) interest per month from 1 January 1996 to 31 May 1999.
The Spouses Chua alleged that they have repeatedly demanded
payment from Rivera to no avail. Because of Rivera’s unjustified refusal
to pay, the Spouses Chua were constrained to file a suit on 11 June
1999. The case was raffled before the MeTC, Branch 30, Manila and
docketed as Civil Case No. 163661.
In his Answer with Compulsory Counterclaim, Rivera countered that:
(1) he never executed the subject Promissory Note; (2) in all instances
when he obtained a loan from the Spouses Chua, the loans were always
covered by a security; (3) at the time of the filing of the complaint, he
still had an existing indebtedness to the Spouses Chua, secured by a real
estate mortgage, but not yet in default; (4) PCIB Check No. 132224
signed by him which he delivered to the Spouses Chua on 21 December
1998, should have been issued in the amount of only 1,300.00,
representing the amount he received from the Spouses Chua’s
saleslady; (5) contrary to the supposed agreement, the Spouses Chua
presented the check for payment in the amount of ₱133,454.00; and (6)
there was no demand for payment of the amount of ₱120,000.00 prior
to the encashment of PCIB Check No. 0132224.5
In the main, Rivera claimed forgery of the subject Promissory Note and
denied his indebtedness thereunder.
The MeTC summarized the testimonies of both parties’ respective
witnesses:
[The spouses Chua’s] evidence include[s] documentary evidence and
oral evidence (consisting of the testimonies of [the spouses] Chua and
NBI Senior Documents Examiner Antonio Magbojos). x x x
xxxx
Witness Magbojos enumerated his credentials as follows: joined the NBI WHEREFORE, the judgment appealed from is hereby AFFIRMED,
(1987); NBI document examiner (1989); NBI Senior Document subject to the MODIFICATION that the interest rate of 60% per annum
Examiner (1994 to the date he testified); registered criminologist; is hereby reduced to12% per annum and the award of attorney’s fees is
graduate of 18th Basic Training Course [i]n Questioned Document reinstated atthe reduced amount of ₱50,000.00 Costs against [Rivera].9
Examination conducted by the NBI; twice attended a seminar on US
Dollar Counterfeit Detection conducted by the US Embassy in Manila;
Hence, these consolidated petitions for review on certiorariof Rivera in
attended a seminar on Effective Methodology in Teaching and
G.R. No. 184458 and the Spouses Chua in G.R. No. 184472, respectively
Instructional design conducted by the NBI Academy; seminar lecturer
raising the following issues:
on Questioned Documents, Signature Verification and/or Detection; had
examined more than a hundred thousand questioned documents at the
time he testified. A. In G.R. No. 184458

Upon [order of the MeTC], Mr. Magbojos examined the purported 1. WHETHER OR NOT THE HONORABLE COURT
signature of [Rivera] appearing in the Promissory Note and compared OF APPEALS ERRED IN UPHOLDING THE RULING
the signature thereon with the specimen signatures of [Rivera] OF THE RTC AND M[e]TC THAT THERE WAS A
appearing on several documents. After a thorough study, examination, VALID PROMISSORY NOTE EXECUTED BY
and comparison of the signature on the questioned document [RIVERA].
(Promissory Note) and the specimen signatures on the documents
submitted to him, he concluded that the questioned signature
2. WHETHER OR NOT THE HONORABLE COURT
appearing in the Promissory Note and the specimen signatures of
OF APPEALS ERRED IN HOLDING THAT DEMAND
[Rivera] appearing on the other documents submitted were written by
IS NO LONGER NECESSARY AND IN APPLYING
one and the same person. In connection with his findings, Magbojos
THE PROVISIONS OF THE NEGOTIABLE
prepared Questioned Documents Report No. 712-1000 dated 8 January
INSTRUMENTS LAW.
2001, with the following conclusion: "The questioned and the standard
specimen signatures RODGRIGO RIVERA were written by one and the
same person." 3. WHETHER OR NOT THE HONORABLE COURT
OF APPEALS ERRED IN AWARDING ATTORNEY’S
FEES DESPITE THE FACT THAT THE SAME HAS
[Rivera] testified as follows: he and [respondent] Salvador are
NO BASIS IN FACT AND IN LAW AND DESPITE
"kumpadres;" in May 1998, he obtained a loan from [respondent]
THE FACT THAT [THE SPOUSES CHUA] DID NOT
Salvador and executed a real estate mortgage over a parcel of land in
APPEAL FROM THE DECISION OF THE RTC
favor of [respondent Salvador] as collateral; aside from this loan, in
DELETING THE AWARD OF ATTORNEY’S FEES.10
October, 1998 he borrowed ₱25,000.00 from Salvador and issued PCIB
Check No. 126407 dated 30 December 1998; he expressly denied
execution of the Promissory Note dated 24 February 1995 and alleged B. In G.R. No. 184472
that the signature appearing thereon was not his signature;
[respondent Salvador’s] claim that PCIB Check No. 0132224 was partial
[WHETHER OR NOT] THE HONORABLE COURT OF APPEALS
payment for the Promissory Note was not true, the truth being that he
COMMITTED GROSS LEGAL ERROR WHEN IT MODIFIED THE
delivered the check to [respondent Salvador] with the space for amount
APPEALED JUDGMENT BY REDUCING THE INTEREST RATE FROM 60%
left blank as he and [respondent] Salvador had agreed that the latter
PER ANNUM TO 12% PER ANNUM IN SPITE OF THE FACT THAT
was to fill it in with the amount of ₱1,300.00 which amount he owed
RIVERA NEVER RAISED IN HIS ANSWER THE DEFENSE THAT THE
[the spouses Chua]; however, on 29 December 1998 [respondent]
SAID STIPULATED RATE OF INTEREST IS EXORBITANT,
Salvador called him and told him that he had written ₱133,454.00
UNCONSCIONABLE, UNREASONABLE, INEQUITABLE, ILLEGAL,
instead of ₱1,300.00; x x x. To rebut the testimony of NBI Senior
IMMORAL OR VOID.11
Document Examiner Magbojos, [Rivera] reiterated his averment that
the signature appearing on the Promissory Note was not his signature
and that he did not execute the Promissory Note.6 As early as 15 December 2008, wealready disposed of G.R. No. 184472
and denied the petition, via a Minute Resolution, for failure to
sufficiently show any reversible error in the ruling of the appellate
After trial, the MeTC ruled in favor of the Spouses Chua:
court specifically concerning the correct rate of interest on Rivera’s
indebtedness under the Promissory Note.12
WHEREFORE, [Rivera] is required to pay [the spouses Chua]:
₱120,000.00 plus stipulated interest at the rate of 5% per month from 1
On 26 February 2009, Entry of Judgment was made in G.R. No. 184472.
January 1996, and legal interest at the rate of 12% percent per annum
from 11 June 1999, as actual and compensatory damages; 20% of the
whole amount due as attorney’s fees.7 Thus, what remains for our disposition is G.R. No. 184458, the appeal of
Rivera questioning the entire ruling of the Court of Appeals in CA-G.R.
SP No. 90609.
On appeal, the Regional Trial Court, Branch 17, Manila affirmed the
Decision of the MeTC, but deleted the award of attorney’s fees to the
Spouses Chua: Rivera continues to deny that heexecuted the Promissory Note; he
claims that given his friendship withthe Spouses Chua who were money
lenders, he has been able to maintain a loan account with them.
WHEREFORE, except as to the amount of attorney’s fees which is
However, each of these loan transactions was respectively "secured by
hereby deleted, the rest of the Decision dated October 21, 2002 is
checks or sufficient collateral."
hereby AFFIRMED.8

Rivera points out that the Spouses Chua "never demanded payment for
Both trial courts found the Promissory Note as authentic and validly
the loan nor interest thereof (sic) from [Rivera] for almost four (4)
bore the signature of Rivera. Undaunted, Rivera appealed to the Court
years from the time of the alleged default in payment [i.e., after
of Appeals which affirmed Rivera’s liability under the Promissory Note,
December 31, 1995]."13
reduced the imposition of interest on the loan from 60% to 12% per
annum, and reinstated the award of attorney’s fees in favor of the
Spouses Chua: On the issue of the supposed forgery of the promissory note, we are not
inclined to depart from the lower courts’ uniform rulings that Rivera
indeed signed it.
Rivera offers no evidence for his asseveration that his signature on the Hence, the MeTC ruled that:
promissory note was forged, only that the signature is not his and
varies from his usual signature. He likewise makes a confusing defense
[Rivera] executed the Promissory Note after consideration of the
of having previously obtained loans from the Spouses Chua who were
following: categorical statement of [respondent] Salvador that [Rivera]
money lenders and who had allowed him a period of "almost four (4)
signed the Promissory Note before him, in his ([Rivera’s]) house; the
years" before demanding payment of the loan under the Promissory
conclusion of NBI Senior Documents Examiner that the questioned
Note.
signature (appearing on the Promissory Note) and standard specimen
signatures "Rodrigo Rivera" "were written by one and the same
First, we cannot give credence to such a naked claim of forgery over the person"; actual view at the hearing of the enlarged photographs of the
testimony of the National Bureau of Investigation (NBI) handwriting questioned signature and the standard specimen signatures.19
expert on the integrity of the promissory note. On that score, the
appellate court aptly disabled Rivera’s contention:
Specifically, Rivera insists that: "[i]f that promissory note indeed exists,
it is beyond logic for a money lender to extend another loan on May 4,
[Rivera] failed to adduce clear and convincing evidence that the 1998 secured by a real estate mortgage, when he was already in default
signature on the promissory note is a forgery. The fact of forgery cannot and has not been paying any interest for a loan incurred in February
be presumed but must be proved by clear, positive and convincing 1995."20
evidence. Mere variance of signatures cannot be considered as
conclusive proof that the same was forged. Save for the denial of Rivera
We disagree.
that the signature on the note was not his, there is nothing in the
records to support his claim of forgery. And while it is true that resort
to experts is not mandatory or indispensable to the examination of It is likewise likely that precisely because of the long standing
alleged forged documents, the opinions of handwriting experts are friendship of the parties as "kumpadres," Rivera was allowed another
nevertheless helpful in the court’s determination of a document’s loan, albeit this time secured by a real estate mortgage, which will cover
authenticity. Rivera’s loan should Rivera fail to pay. There is nothing inconsistent
with the Spouses Chua’s two (2) and successive loan accommodations
to Rivera: one, secured by a real estate mortgage and the other, secured
To be sure, a bare denial will not suffice to overcome the positive value
by only a Promissory Note.
of the promissory note and the testimony of the NBI witness. In fact,
even a perfunctory comparison of the signatures offered in evidence
would lead to the conclusion that the signatures were made by one and Also completely plausible is thatgiven the relationship between the
the same person. parties, Rivera was allowed a substantial amount of time before the
Spouses Chua demanded payment of the obligation due under the
Promissory Note.
It is a basic rule in civil cases that the party having the burden of proof
must establish his case by preponderance of evidence, which simply
means "evidence which is of greater weight, or more convincing than In all, Rivera’s evidence or lack thereof consisted only of a barefaced
that which is offered in opposition to it." claim of forgery and a discordant defense to assail the authenticity and
validity of the Promissory Note. Although the burden of proof rested on
the Spouses Chua having instituted the civil case and after they
Evaluating the evidence on record, we are convinced that [the Spouses
established a prima facie case against Rivera, the burden of evidence
Chua] have established a prima faciecase in their favor, hence, the
shifted to the latter to establish his defense.21 Consequently, Rivera
burden of evidence has shifted to [Rivera] to prove his allegation of
failed to discharge the burden of evidence, refute the existence of the
forgery. Unfortunately for [Rivera], he failed to substantiate his
Promissory Note duly signed by him and subsequently, that he did not
defense.14 Well-entrenched in jurisprudence is the rule that factual
fail to pay his obligation thereunder. On the whole, there was no
findings of the trial court, especially when affirmed by the appellate
question left on where the respective evidence of the parties
court, are accorded the highest degree of respect and are considered
preponderated—in favor of plaintiffs, the Spouses Chua. Rivera next
conclusive between the parties.15 A review of such findings by this Court
argues that even assuming the validity of the Promissory Note, demand
is not warranted except upon a showing of highly meritorious
was still necessary in order to charge him liable thereunder. Rivera
circumstances, such as: (1) when the findings of a trial court are
argues that it was grave error on the part of the appellate court to apply
grounded entirely on speculation, surmises or conjectures; (2) when a
Section 70 of the Negotiable Instruments Law (NIL).22
lower court's inference from its factual findings is manifestly mistaken,
absurd or impossible; (3) when there is grave abuse of discretion in the
appreciation of facts; (4) when the findings of the appellate court go We agree that the subject promissory note is not a negotiable
beyond the issues of the case, or fail to notice certain relevant facts instrument and the provisions of the NIL do not apply to this case.
which, if properly considered, will justify a different conclusion; (5) Section 1 of the NIL requires the concurrence of the following elements
when there is a misappreciation of facts; (6) when the findings of fact to be a negotiable instrument:
are conclusions without mention of the specific evidence on which they
are based, are premised on the absence of evidence, or are contradicted
(a) It must be in writing and signed by the maker or drawer;
by evidence on record.16 None of these exceptions obtains in this
instance. There is no reason to depart from the separate factual findings
of the three (3) lower courts on the validity of Rivera’s signature (b) Must contain an unconditional promise or order to pay a
reflected in the Promissory Note. sum certain in money;

Indeed, Rivera had the burden ofproving the material allegations which
he sets up in his Answer to the plaintiff’s claim or cause of action, upon
which issue is joined, whether they relate to the whole case or only to
certain issues in the case.17
(c) Must be payable on demand, or at a fixed or determinable
future time;
(d) Must be payable to order or to bearer; and

In this case, Rivera’s bare assertion is unsubstantiated and directly

(e) Where the instrument is addressed to a drawee, he must
disputed by the testimony of a handwriting expert from the NBI. While
be named or otherwise indicated therein with reasonable
it is true that resort to experts is not mandatory or indispensable to the
certainty.
examination or the comparison of handwriting, the trial courts in this
case, on its own, using the handwriting expert testimony only as an aid,
found the disputed document valid.18
On the other hand, Section 184 of the NIL defines what negotiable
promissory note is: SECTION 184. Promissory Note, Defined. – A
negotiable promissory note within the meaning of this Act is an
unconditional promise in writing made by one person to another,
signed by the maker, engaging to pay on demand, or at a fixed or
determinable future time, a sum certain in money to order or to bearer.
Where a note is drawn to the maker’s own order, it is not complete until
indorsed by him.
The Promissory Note in this case is made out to specific persons, herein
respondents, the Spouses Chua, and not to order or to bearer, or to the
order of the Spouses Chua as payees. However, even if Rivera’s
Promissory Note is not a negotiable instrument and therefore outside
the coverage of Section 70 of the NIL which provides that presentment
for payment is not necessary to charge the person liable on the
instrument, Rivera is still liable under the terms of the Promissory Note
that he issued.
The Promissory Note is unequivocal about the date when the obligation
falls due and becomes demandable—31 December 1995. As of 1
January 1996, Rivera had already incurred in delay when he failed to
pay the amount of ₱120,000.00 due to the Spouses Chua on 31
December 1995 under the Promissory Note.
Article 1169 of the Civil Code explicitly provides:
Art. 1169. Those obliged to deliver or to do something incur in delay
from the time the obligee judicially or extrajudicially demands from
them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order
that delay may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the
obligation it appears that the designation of the time when
the thing is to be delivered or the service is to be rendered
was a controlling motive for the establishment of the
contract; or
(3) When demand would be useless, as when the obligor has
rendered it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does
not comply or is not ready to comply in a proper manner with what is
incumbent upon him. From the moment one of the parties fulfills his
obligation, delay by the other begins. (Emphasis supplied)
There are four instances when demand is not necessary to constitute
the debtor in default: (1) when there is an express stipulation to that
effect; (2) where the law so provides; (3) when the period is the
controlling motive or the principal inducement for the creation of the
obligation; and (4) where demand would be useless. In the first two
paragraphs, it is not sufficient that the law or obligation fixes a date for
performance; it must further state expressly that after the period
lapses, default will commence.
We refer to the clause in the Promissory Note containing the stipulation
of interest:
It is agreed and understood that failure on my part to pay the amount of
(₱120,000.00) One Hundred Twenty Thousand Pesos on December 31,
1995. (sic) I agree to pay the sum equivalent to FIVE PERCENT (5%)
interest monthly from the date of default until the entire obligation is
fully paid for.23
which expressly requires the debtor (Rivera) to pay a 5% monthly
interest from the "date of default" until the entire obligation is fully paid
for. The parties evidently agreed that the maturity of the obligation at a
date certain, 31 December 1995, will give rise to the obligation to pay
interest. The Promissory Note expressly provided that after 31
December 1995, default commences and the stipulation on payment of
interest starts.
The date of default under the Promissory Note is 1 January 1996, the
day following 31 December 1995, the due date of the obligation. On that
date, Rivera became liable for the stipulated interest which the
Promissory Note says is equivalent to 5% a month. In sum, until 31
December 1995, demand was not necessary before Rivera could be held
liable for the principal amount of ₱120,000.00. Thereafter, on 1 January
1996, upon default, Rivera became liable to pay the Spouses Chua
damages, in the form of stipulated interest.
The liability for damages of those who default, including those who are
guilty of delay, in the performance of their obligations is laid down on
Article 117024 of the Civil Code.
Corollary thereto, Article 2209 solidifies the consequence of payment of
interest as an indemnity for damages when the obligor incurs in delay:
Art. 2209. If the obligation consists inthe payment of a sum of money,
and the debtor incurs in delay, the indemnity for damages, there being
no stipulation to the contrary, shall be the payment of the interest
agreed upon, and in the absence of stipulation, the legal interest, which
is six percent per annum. (Emphasis supplied)
Article 2209 is specifically applicable in this instance where: (1) the
obligation is for a sum of money; (2) the debtor, Rivera, incurred in
delay when he failed to pay on or before 31 December 1995; and (3) the
Promissory Note provides for an indemnity for damages upon default of
Rivera which is the payment of a 5%monthly interest from the date of
default.
We do not consider the stipulation on payment of interest in this case as
a penal clause although Rivera, as obligor, assumed to pay additional
5% monthly interest on the principal amount of ₱120,000.00 upon
default.
Article 1226 of the Civil Code provides:
Art. 1226. In obligations with a penal clause, the penalty shall substitute
the indemnity for damages and the payment of interests in case of
noncompliance, if there isno stipulation to the contrary. Nevertheless,
damages shall be paid if the obligor refuses to pay the penalty or is
guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance
with the provisions of this Code.
The penal clause is generally undertaken to insure performance and
works as either, or both, punishment and reparation. It is an exception
to the general rules on recovery of losses and damages. As an exception
to the general rule, a penal clause must be specifically set forth in the
obligation.25
In high relief, the stipulation in the Promissory Note is designated as
payment of interest, not as a penal clause, and is simply an indemnity
for damages incurred by the Spouses Chua because Rivera defaulted in
the payment of the amount of ₱120,000.00. The measure of damages for
the Rivera’s delay is limited to the interest stipulated in the Promissory
Note. In apt instances, in default of stipulation, the interest is that
provided by law.26
In this instance, the parties stipulated that in case of default, Rivera will
pay interest at the rate of 5% a month or 60% per annum. On this score,
the appellate court ruled:
It bears emphasizing that the undertaking based on the note clearly
states the date of payment tobe 31 December 1995. Given this
circumstance, demand by the creditor isno longer necessary in order
that delay may exist since the contract itself already expressly so
declares. The mere failure of [Spouses Chua] to immediately demand or
collect payment of the value of the note does not exonerate [Rivera]
from his liability therefrom. Verily, the trial court committed no
reversible error when it imposed interest from 1 January 1996 on the
ratiocination that [Spouses Chua] were relieved from making demand
under Article 1169 of the Civil Code.
As for the legal interest accruing from 11 June 1999, when judicial
demand was made, to the date when this Decision becomes final and
executory, such is likewise divided into two periods: (1) 12% per
annum from 11 June 1999, the date of judicial demand to 30 June 2013;
and (2) 6% per annum from 1 July 2013 to date when this Decision
becomes final and executor.31 We base this imposition of interest on
interest due earning legal interest on Article 2212 of the Civil Code
which provides that "interest due shall earn legal interest from the time
it is judicially demanded, although the obligation may be silent on this
point."
From the time of judicial demand, 11 June 1999, the actual amount
owed by Rivera to the Spouses Chua could already be determined with
reasonable certainty given the wording of the Promissory Note.32

xxxx We cite our recent ruling in Nacar v. Gallery Frames:33

As observed by [Rivera], the stipulated interest of 5% per month or I. When an obligation, regardless of its source, i.e., law,
60% per annum in addition to legal interests and attorney’s fees is, contracts, quasicontracts, delicts or quasi-delicts is breached,
indeed, highly iniquitous and unreasonable. Stipulated interest rates the contravenor can be held liable for damages. The
are illegal if they are unconscionable and the Court is allowed to temper provisions under Title XVIII on "Damages" of the Civil Code
interest rates when necessary. Since the interest rate agreed upon is govern in determining the measure of recoverable damages.
void, the parties are considered to have no stipulation regarding the
interest rate, thus, the rate of interest should be 12% per annum
II. With regard particularly to an award of interest in the
computed from the date of judicial or extrajudicial demand.27
concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows:
The appellate court found the 5% a month or 60% per annum interest
rate, on top of the legal interest and attorney’s fees, steep, tantamount
1. When the obligation is breached, and it consists
to it being illegal, iniquitous and unconscionable. Significantly, the issue
in the payment of a sum of money, i.e., a loan or for
on payment of interest has been squarely disposed of in G.R. No.
bearance of money, the interest due should be that
184472 denying the petition of the Spouses Chua for failure to
which may have been stipulated in writing.
sufficiently showany reversible error in the ruling of the appellate
Furthermore, the interest due shall itself earn legal
court, specifically the reduction of the interest rate imposed on Rivera’s
interest from the time it is judicially demanded. In
indebtedness under the Promissory Note. Ultimately, the denial of the
the absence of stipulation, the rate of interest shall
petition in G.R. No. 184472 is res judicata in its concept of "bar by prior
be 6% per annum to be computed from default,
judgment" on whether the Court of Appeals correctly reduced the
i.e., from judicial or extra judicial demand under
interest rate stipulated in the Promissory Note.
and subject to the provisions ofArticle 1169 of the
Civil Code.
Res judicata applies in the concept of "bar by prior judgment" if the
following requisites concur: (1) the former judgment or order must be
2. When an obligation, not constituting a loan or
final; (2) the judgment or order must be on the merits; (3) the decision
forbearance of money, is breached, an interest on
must have been rendered by a court having jurisdiction over the subject
the amount of damages awarded may be imposed
matter and the parties; and (4) there must be, between the first and the
at the discretion of the court at the rate of 6% per
second action, identity of parties, of subject matter and of causes of
annum.1âwphi1 No interest, however, shall be
action.28
adjudged on unliquidated claims or damages,
except when or until the demand can be
In this case, the petitions in G.R. Nos. 184458 and 184472 involve an established with reasonable certainty.
identity of parties and subject matter raising specifically errors in the Accordingly, where the demand is established with
Decision of the Court of Appeals. Where the Court of Appeals’ reasonable certainty, the interest shall begin to
disposition on the propriety of the reduction of the interest rate was run from the time the claim is made judicially or
raised by the Spouses Chua in G.R. No. 184472, our ruling thereon extrajudicially (Art. 1169, Civil Code), but when
affirming the Court of Appeals is a "bar by prior judgment." such certainty cannot be so reasonably established
at the time the demand is made, the interest shall
begin to run only from the date the judgment of
At the time interest accrued from 1 January 1996, the date of default
the court is made (at which time the quantification
under the Promissory Note, the then prevailing rate of legal interest
of damages may be deemed to have been
was 12% per annum under Central Bank (CB) Circular No. 416 in cases
reasonably ascertained). The actual base for the
involving the loan or for bearance of money.29 Thus, the legal interest
computation of legal interest shall, in any case, be
accruing from the Promissory Note is 12% per annum from the date of
on the amount finally adjudged. 3. When the
default on 1 January 1996. However, the 12% per annumrate of legal
judgment of the court awarding a sum of money
interest is only applicable until 30 June 2013, before the advent and
becomes final and executory, the rate of legal
effectivity of Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series
interest, whether the case falls under paragraph 1
of 2013 reducing the rate of legal interest to 6% per annum. Pursuant to
or paragraph 2, above, shall be 6% per annum
our ruling in Nacar v. Gallery Frames,30 BSP Circular No. 799 is
from such finality until its satisfaction, this interim
prospectively applied from 1 July 2013. In short, the applicable rate of
period being deemed to be by then an equivalent
legal interest from 1 January 1996, the date when Rivera defaulted, to
to a for bearance of credit. And, in addition to the
date when this Decision becomes final and executor is divided into two
above, judgments that have become final and
periods reflecting two rates of legal interest: (1) 12% per annum from 1
executory prior to July 1, 2013, shall not be
January 1996 to 30 June 2013; and (2) 6% per annum FROM 1 July
disturbed and shall continue to be implemented
2013 to date when this Decision becomes final and executory.
applying the rate of interest fixed therein.
(Emphasis supplied)
 On the reinstatement of the award of attorney’s fees based on the
stipulation in the Promissory Note, weagree with the reduction thereof
but not the ratiocination of the appellate court that the attorney’s fees
are in the nature of liquidated damages or penalty. The interest
imposed in the Promissory Note already answers as liquidated damages
for Rivera’s default in paying his obligation. We award attorney’s fees,
albeit in a reduced amount, in recognition that the Spouses Chua were
compelled to litigate and incurred expenses to protect their
interests.34 Thus, the award of ₱50,000.00 as attorney’s fees is proper.

For clarity and to obviate confusion, we chart the breakdown of the

total amount owed by Rivera to the Spouses Chua:

ted Interest A & B Interest due earning legal interest A & B Attorney

January 1, 1996 to A. June 11, 1999 (date of judicial demand) to Wholesale

30, 2013 June 30, 2013
B. July 1, 2013 to date when this Decision
1 2013 to date when this Decision becomes final and executory
es final and executory

% per annumon the principal amount A. 12% per annumon the total amount of ₱50,000.00
₱120,000.00 column 2
per annumon the principal amount of B. 6% per annumon the total amount of
00.00 column 235

The total amount owing to the Spouses Chua set forth in this Decision
shall further earn legal interest at the rate of 6% per annum computed
from its finality until full payment thereof, the interim period being
deemed to be a forbearance of credit.

WHEREFORE, the petition in G.R. No. 184458 is DENIED. The Decision

of the Court of Appeals in CA-G.R. SP No. 90609 is MODIFIED. Petitioner
Rodrigo Rivera is ordered to pay respondents Spouse Salvador and
Violeta Chua the following:

(1) the principal amount of ₱120,000.00;

(2) legal interest of 12% per annumof the principal amount

of ₱120,000.00 reckoned from 1 January 1996 until 30 June
2013;

(3) legal interest of 6% per annumof the principal amount of

₱120,000.00 form 1 July 2013 to date when this Decision
becomes final and executory;

(4) 12% per annumapplied to the total of paragraphs 2 and 3

from 11 June 1999, date of judicial demand, to 30 June 2013,
as interest due earning legal interest;

(5) 6% per annumapplied to the total amount of paragraphs

2 and 3 from 1 July 2013 to date when this Decision becomes
final and executor, asinterest due earning legal interest;

(6) Attorney’s fees in the amount of ₱50,000.00; and

(7) 6% per annum interest on the total of the monetary

awards from the finality of this Decision until full payment
thereof.

Costs against petitioner Rodrigo Rivera.

SO ORDERED.

JOSE PORTUGAL PEREZ

Associate Justice

G.R. No. 213014, October 14, 2015
MAYBANK PHILIPPINES, INC. (FORMERLY PNB-REPUBLIC
BANK1), Petitioner, v. SPOUSES OSCAR AND NENITA
TARROSA, Respondents.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari2 are the Decision 3 dated
November 29, 2013 and the Resolution4 dated May 13, 2014 of the
Court of Appeals (CA) in CA-G.R. CV No. 02211, which affirmed the
Decision5 dated June 16, 2005 of the Regional Trial Court of Bacolod
City, Branch 41 (RTC) in Civil Case No. 98-10451 declaring the
extrajudicial foreclosure sale of the property covered by Transfer
Certificate of Title (TCT) No. T-5649 as null and void for being barred
by prescription.
The Facts
On December 15, 1980, respondents-spouses Oscar and Nenita Tarrosa
(Sps. Tarrosa) obtained from then PNB-Republic Bank, now petitioner
Maybank Philippines, Inc. (Maybank), a loan in the amount of
P91,000.00. The loan was secured by a Real Estate Mortgage6 dated
January 5, 1981 (real estate mortgage) over a 500-square meter parcel
of land situated in San Carlos City, Negros Occidental (subject property),
covered by TCT No. T-5649,7 and the improvements thereon.8
After paying the said loan, or sometime in March 1983, Sps. Tarrosa
obtained another loan from Maybank in the amount of P60,000.00
(second loan),9 payable on March 11, 1984.10 However, Sps. Tarrosa
failed to settle the second loan upon maturity.11
Sometime in April 1998, Sps. Tarrosa received a Final Demand
Letter12 dated March 4, 1998 (final demand letter) from Maybank
requiring them to settle their outstanding loan in the aggregate amount
of P564,579.91, inclusive of principal, interests, and penalty
charges.13 They offered to pay a lesser amount, which Maybank
refused.14 Thereafter, or on June 25, 1998, Maybank commenced
extrajudicial foreclosure proceedings15 before the office of Ex-Officio
Provincial Sheriff Ildefonso Villanueva, Jr. (Sheriff Villanueva). The
subject property was eventually sold in a public auction sale held on
July 29, 199816 for a total bid price of P600,000.00, to the highest
bidder, Philmay Property, Inc. (PPI), which was thereafter issued a
Certificate of Sale17 dated July 30, 1998.18
On September 7, 1998, Sps. Tarrosa filed a complaint19 for declaration
of nullity and invalidity of the foreclosure of real estate and of public
auction sale proceedings and damages with prayer for preliminary
injunction against Maybank, PPI, Sheriff Villanueva, and the Registry of
Deeds of San Carlos City, Negros Occidental (RD-San Carlos), before the
RTC, docketed as Civil Case No. 98-10451. They averred, inter alia, that:
(a) the second loan was a clean or unsecured loan; (b) after receiving
the final demand letter, they tried to pay the second loan, including the
agreed interests and charges, but Maybank unjustly refused their offers
of payment; and (c) Maybank's right to foreclose had prescribed or is
barred by laches.20
On the other hand, Maybank and PPI countered21 that: (a) the second
loan was secured by the same real estate mortgage under a continuing
security provision therein; (b) when the loan became past due, Sps.
Tarrosa promised to pay and negotiated for a restructuring of their
loan, but failed to pay despite demands; and (c) Sps. Tarrosa's positive
acknowledgment and admission of their indebtedness controverts the
defense of prescription.
The RTC Ruling
In a Decision23 dated June 16, 2005, the RTC held that the second loan
was subject to the continuing security provision in the real estate
mortgage.24 However, it ruled that Maybank's right to foreclose,
reckoned from the time the mortgage indebtedness became due and
payable on March 11, 1984, had already prescribed, considering the
lack of any timely judicial action, written extrajudicial demand or
written acknowledgment by the debtor of his debt that could interrupt
the prescriptive period.25Accordingly, it declared the extrajudicial
foreclosure proceedings affecting the subject property as null and void,
and ordered Maybank to pay Sps. Tarrosa moral and exemplary
damages, as well as attorney's fees and litigation expenses.26
Maybank filed a motion for reconsideration27 which was, however,
denied in an Order28 dated December 9, 2005, prompting it to
appeal29 to the CA.
The CA Ruling
In a Decision30 dated November 29, 2013, the CA affirmed the RTC
ruling that Maybank's right to foreclose the real estate mortgage over
the subject property is already barred by prescription. It held that the
prescriptive period should be reckoned from March 11, 1984 when the
second loan had become past due and remained unpaid since demand
was not a condition sine qua non for the accrual of the latter's right to
foreclose under paragraph 5 of the real estate mortgage. It observed
that Maybank failed to present evidence of any timely written
extrajudicial demand or written acknowledgment by the debtors of
their debt that could have effectively interrupted the running of the
prescriptive period.31
Undaunted, Maybank moved for reconsideration,32 which was denied in
a Resolution33 dated May 13, 2014; hence this petition.
The Issues Before the Court
The essential issue for the Court's resolution is whether or not the CA
committed reversible error in finding that Maybank's right to foreclose
the real estate mortgage over the subject property was barred by
prescription.chanrobleslaw
The Court's Ruling
The petition is meritorious.
An action to enforce a right arising from a mortgage should be
enforced within ten (10) years from the time the right of action
accrues, i.e., when the mortgagor defaults in the payment of his
obligation to the mortgagee; otherwise, it will be barred by
prescription and the mortgagee will lose his rights under the
mortgage.34 However, mere delinquency in payment does not
necessarily mean delay in the legal concept. To be in default is different
from mere delay in the grammatical sense, because it involves the
beginning of a special condition or status which has its own peculiar
effects or results.35
In order that the debtor may be in default, it is necessary that: (a) the
obligation be demandable and already liquidated; (b) the debtor delays
performance; and (c) the creditor requires the performance judicially
or extrajudicially,36unless demand is not necessary - i.e., when there is
an express stipulation to that effect; where the law so provides; when
the period is the controlling motive or the principal inducement for the
creation of the obligation; and where demand would be useless.
Moreover, it is not sufficient that the law or obligation fixes a date for
performance; it must further state expressly that after the period
lapses, default will commence. Thus, it is only when demand to pay is
unnecessary in case of the aforementioned circumstances, or when
required, such demand is made and subsequently refused that the
mortgagor can be considered in default and the mortgagee obtains
the right to file an action to collect the debt or foreclose the
mortgage.38
In the present case, both the CA and the RTC reckoned the accrual of
Maybank's cause of action to foreclose the real estate mortgage over the
subject property from the maturity of the second loan on May 11, 1984.
The CA further held that demand was unnecessary for the accrual of the
cause of action in light of paragraph 5 of the real estate mortgage, which
pertinently provides:

5. In the event that the Mortgagor herein should fail or refuse to pay any
of the sums of money secured by this mortgage, or any part thereof, in
accordance with the terms and conditions herein set forth, or should
he/it fail to perform any of the conditions stipulated herein, then and in
any such case, the Mortgagee shall have the right, at its election to
foreclose this mortgage, [x x x].39

However, this provision merely articulated Maybank's right to elect

foreclosure upon Sps. Tarrosa's failure or refusal to comply with the
obligation secured, which is one of the rights duly accorded to
mortgagees in a similar situation.40 In no way did it affect the general
parameters of default, particularly the need of prior demand under
Article 116941 of the Civil Code, considering that it did not expressly
declare: (a) that demand shall not be necessary in order that the
mortgagor may be in default; or (b) that default shall commence upon
mere failure to pay on the maturity date of the loan. Hence, the CA erred
in construing the above provision as one through which the parties had
dispensed with demand as a condition sine qua non for the accrual of
Maybank's right to foreclose the real estate mortgage over the subject
property, and thereby, mistakenly reckoned such right from the
maturity date of the loan on March 11, 1984. In the absence of showing
that demand is unnecessary for the loan obligation to become due and
demandable, Maybank's right to foreclose the real estate mortgage
accrued only after the lapse of the period indicated in its final demand
letter for Sps. Tarrosa to pay, i.e., after the lapse of five (5) days from
receipt of the final demand letter dated March 4, 1998.42 Consequently,
both the CA and the RTC committed reversible error in declaring that
Maybank's right to foreclose the real estate mortgage had already
prescribed.

Thus, considering that the existence of the loan had been admitted, the
default on the part of the debtors-mortgagors had been duly
established, and the foreclosure proceedings had been initiated within
the prescriptive period as afore-discussed, the Court finds no reason to
nullify the extrajudicial foreclosure sale of the subject property.

WHEREFORE, the petition is GRANTED. The Decision dated

November 29, 2013 and the Resolution dated May 13, 2014 of the Court
of Appeals in CA-G.R. CV No. 02211 are hereby REVERSED AND SET
ASIDE. The complaint in Civil Case No. 98-10451 is DISMISSED.

SO ORDERED.
Kinds of Delay The court below absolved the defendant from the complaint, and the
plaintiff appealed.lawphi1>net
1. mora solvendi
In rendering that judgment, the court relied on the fact that the plaintiff
had failed to pay the price of the lots within the stipulated time; and
G.R. No. L-32336             December 20, 1930
that since the contract between plaintiff and defendant was an option
for the purchase of the lots, time was an essential element in it.
JULIO C. ABELLA, plaintiff-appellant, 
vs.
It is to be noted that in the document signed by the defendant, the 15th
GUILLERMO B. FRANCISCO, defendant-appellee.
of December was fixed as the date, extendible for fifteen days, for the
payment by the plaintiff of the balance of the selling price. It has been
Antonio T. Carrascoso, Jr. for appellant. admitted that the plaintiff did not offer to complete the payment until
Camus and Delgado for appellee. January 9, 1929. He contends that Mabanta, as attorney-in-fact for the
defendant in this transaction, granted him an extension of time until the
9th of January. But Mabanta has stated that he only extended the time
until the 5th of that month. Mabanta's testimony on this point is
corroborated by that of Paz Vicente and by the plaintiff's own
admission to Narciso Javier that his option to purchase those lots
expired on January 5, 1929.
AVANCEÑA, C.J.:

In holding that the period was an essential element of the transaction

Defendant Guillermo B. Francisco purchased from the Government on
between plaintiff and defendant, the trial court considered that the
installments, lots 937 to 945 of the Tala Estate in Novaliches, Caloocan,
contract in question was an option for the purchase of the lots, and that
Rizal. He was in arrears for some of these installments. On the 31st of
in an agreement of this nature the period is deemed essential. The
October, 1928, he signed the following document:
opinion of the court is divided upon the question of whether the
agreement was an option or a sale, but even supposing it was a sale, the
MANILA, October 31, 1928 court holds that time was an essential element in the transaction. The
defendant wanted to sell those lots to the plaintiff in order to pay off
certain obligations which fell due in the month of December, 1928. The
Received from Mr. Julio C. Abella the amount of five hundred
time fixed for the payment of the price was therefore essential for the
pesos (P500), payment on account of lots Nos. 937, 938, 939,
defendant, and this view is borne out by his letter to his representative
940, 941, 942, 943, 924, and 945 of the Tala Estate, barrio of
Mabanta instructing him to consider the contract rescinded if the price
Novaliches, Caloocan, Rizal, containing an area of about 221
was not completed in time. In accordance with article 1124 of the Civil
hectares, at the rate of one hundred pesos (P100) per
Code, the defendant is entitled to resolve the contract for failure to pay
hectare, the balance being due on or before the fifteenth day
the price within the time specified.
of December, 1928, extendible fifteen days thereafter. (Sgd.)
G. B. FRANCISCO — P500 — Phone 67125.
The judgment appealed from is affirmed, with costs against the
appellant. So ordered.
After having made this agreement, the plaintiff proposed the sale of
these lots at a higher price to George C. Sellner, collecting P10,000 on
account thereof on December 29, 1928.

Besides the P500 which, according to the instrument quoted above, the
plaintiff paid, he made another payment of P415.31 on November 13,
1928, upon demand made by the defendant. On December 27th of the
same year, the defendant, being in the Province of Cebu, wrote to
Roman Mabanta of this City of Manila, attaching a power of attorney
authorizing him to sign in behalf of the defendant all the documents
required by the Bureau of Lands for the transfer of the lots to the
plaintiff. In that letter the defendant instructed Roman Mabanta, in the
event that the plaintiff failed to pay the remainder of the selling price, to
inform him that the option would be considered cancelled, and to
return to him the amount of P915.31 already delivered. On January 3,
1929, Mabanta notified the plaintiff that he had received the power of
attorney to sign the deed of conveyance of the lots to him, and that he
was willing to execute the proper deed of sale upon payment of the
balance due. The plaintiff asked for a few days' time, but Mabanta,
following the instructions he had received from the defendant, only
gave him until the 5th of that month. The plaintiff did not pay the rest of
the price on the 5th of January, but on the 9th of the month attempted
to do so; Mabanta, however, refused to accept it, and gave him to
understand that he regarded the contract as rescinded. On the same
day, Mabanta returned by check the sum of P915.31 which the plaintiff
had paid.

The plaintiff brought this action to compel the defendant to execute the
deed of sale of the lots in question, upon receipt of the balance of the
price, and asks that he be judicially declared the owner of said lots and
that the defendant be ordered to deliver them to him.
SANTOS VENTURA HOCORMA FOUNDATION, INC., petitioner,  5. Failure of compliance of any of the foregoing terms and
vs.
ERNESTO V. SANTOS and RIVERLAND, INC., respondents.
DECISION
QUISUMBING, J.:
Subject of the present petition for review on certiorari is the
Decision,1 dated January 30, 2002, as well as the April 12, 2002,
Resolution2 of the Court of Appeals in CA-G.R. CV No. 55122. The
appellate court reversed the Decision,3dated October 4, 1996, of the
Regional Trial Court of Makati City, Branch 148, in Civil Case No. 95-
811, and likewise denied petitioner's Motion for Reconsideration.
The facts of this case are undisputed.
Ernesto V. Santos and Santos Ventura Hocorma Foundation, Inc.
(SVHFI) were the plaintiff and defendant, respectively, in several civil
cases filed in different courts in the Philippines. On October 26, 1990,
the parties executed a Compromise Agreement4 which amicably ended
all their pending litigations. The pertinent portions of the Agreement
read as follows:
1. Defendant Foundation shall pay Plaintiff Santos P14.5
Million in the following manner:
a. P1.5 Million immediately upon the execution of
this agreement;
b. The balance of P13 Million shall be paid,
whether in one lump sum or in installments, at the
discretion of the Foundation, within a period of
not more than two (2) years from the execution of
this agreement; provided, however, that in the
event that the Foundation does not pay the whole
or any part of such balance, the same shall be paid
with the corresponding portion of the land or real
properties subject of the aforesaid cases and
previously covered by the notices of lis pendens,
under such terms and conditions as to area,
valuation, and location mutually acceptable to
both parties; but in no case shall the payment of
such balance be later than two (2) years from the
date of this agreement; otherwise, payment of any
unpaid portion shall only be in the form of land
aforesaid;
2. Immediately upon the execution of this agreement (and
[the] receipt of the P1.5 Million), plaintiff Santos shall cause
the dismissal with prejudice of Civil Cases Nos. 88-743,
1413OR, TC-1024, 45366 and 18166 and voluntarily
withdraw the appeals in Civil Cases Nos. 4968 (C.A.-G.R. No.
26598) and 88-45366 (C.A.-G.R. No. 24304) respectively and
for the immediate lifting of the aforesaid various notices of lis
pendens on the real properties aforementioned (by signing
herein attached corresponding documents, for such lifting);
provided, however, that in the event that defendant
Foundation shall sell or dispose of any of the lands
previously subject of lis pendens, the proceeds of any such
sale, or any part thereof as may be required, shall be partially
devoted to the payment of the Foundation's obligations
under this agreement as may still be subsisting and payable
at the time of any such sale or sales;
...
conditions by either or both parties to this agreement shall
ipso facto and ipso jure automatically entitle the aggrieved
party to a writ of execution for the enforcement of this
agreement. [Emphasis supplied]5
In compliance with the Compromise Agreement, respondent Santos
moved for the dismissal of the aforesaid civil cases. He also caused the
lifting of the notices of lis pendens on the real properties involved. For
its part, petitioner SVHFI, paid P1.5 million to respondent Santos,
leaving a balance of P13 million.
Subsequently, petitioner SVHFI sold to Development Exchange
Livelihood Corporation two real properties, which were previously
subjects of lis pendens. Discovering the disposition made by the
petitioner, respondent Santos sent a letter to the petitioner demanding
the payment of the remaining P13 million, which was ignored by the
latter. Meanwhile, on September 30, 1991, the Regional Trial Court of
Makati City, Branch 62, issued a Decision 6approving the compromise
agreement.
On October 28, 1992, respondent Santos sent another letter to
petitioner inquiring when it would pay the balance of P13 million.
There was no response from petitioner. Consequently, respondent
Santos applied with the Regional Trial Court of Makati City, Branch 62,
for the issuance of a writ of execution of its compromise judgment
dated September 30, 1991. The RTC granted the writ. Thus, on March
10, 1993, the Sheriff levied on the real properties of petitioner, which
were formerly subjects of the lis pendens. Petitioner, however, filed
numerous motions to block the enforcement of the said writ. The
challenge of the execution of the aforesaid compromise judgment even
reached the Supreme Court. All these efforts, however, were futile.
On November 22, 1994, petitioner's real properties located in
Mabalacat, Pampanga were auctioned. In the said auction, Riverland,
Inc. was the highest bidder for P12 million and it was issued a
Certificate of Sale covering the real properties subject of the auction
sale. Subsequently, another auction sale was held on February 8, 1995,
for the sale of real properties of petitioner in Bacolod City. Again,
Riverland, Inc. was the highest bidder. The Certificates of Sale issued for
both properties provided for the right of redemption within one year
from the date of registration of the said properties.
On June 2, 1995, Santos and Riverland Inc. filed a Complaint for
Declaratory Relief and Damages7 alleging that there was delay on the
part of petitioner in paying the balance of P13 million. They further
alleged that under the Compromise Agreement, the obligation became
due on October 26, 1992, but payment of the remaining P12 million was
effected only on November 22, 1994. Thus, respondents prayed that
petitioner be ordered to pay legal interest on the obligation, penalty,
attorney's fees and costs of litigation. Furthermore, they prayed that the
aforesaid sales be declared final and not subject to legal redemption.
In its Answer,8 petitioner countered that respondents have no cause of
action against it since it had fully paid its obligation to the latter. It
further claimed that the alleged delay in the payment of the balance was
due to its valid exercise of its rights to protect its interests as provided
under the Rules. Petitioner counterclaimed for attorney's fees and
exemplary damages.
On October 4, 1996, the trial court rendered a Decision 9 dismissing
herein respondents' complaint and ordering them to pay attorney's fees
and exemplary damages to petitioner. Respondents then appealed to
the Court of Appeals. The appellate court reversed the ruling of the trial
court:
WHEREFORE, finding merit in the appeal, the appealed
Decision is hereby REVERSED and judgment is hereby
rendered ordering appellee SVHFI to pay appellants Santos
 and Riverland, Inc.: (1) legal interest on the principal amount
of P13 million at the rate of 12% per annum from the date of
demand on October 28, 1992 up to the date of actual
payment of the whole obligation; and (2) P20,000 as
attorney's fees and costs of suit.
SO ORDERED.
Hence this petition for review on certiorari where petitioner assigns the
following issues:
I
WHETHER OR NOT THE COURT OF APPEALS COMMITTED
REVERSIBLE ERROR WHEN IT AWARDED LEGAL INTEREST
IN FAVOR OF THE RESPONDENTS, MR. SANTOS AND
RIVERLAND, INC., NOTWITHSTANDING THE FACT THAT
NEITHER IN THE COMPROMISE AGREEMENT NOR IN THE
COMPROMISE JUDGEMENT OF HON. JUDGE DIOKNO
PROVIDES FOR PAYMENT OF INTEREST TO THE
RESPONDENT
II
WHETHER OF NOT THE COURT OF APPEALS ERRED IN
AWARDING LEGAL IN[T]EREST IN FAVOR OF THE
RESPONDENTS, MR. SANTOS AND RIVERLAND, INC.,
NOTWITHSTANDING THE FACT THAT THE OBLIGATION OF
THE PETITIONER TO RESPONDENT SANTOS TO PAY A SUM
OF MONEY HAD BEEN CONVERTED TO AN OBLIGATION TO
PAY IN KIND – DELIVERY OF REAL PROPERTIES OWNED BY
THE PETITIONER – WHICH HAD BEEN FULLY PERFORMED
III
WHETHER OR NOT RESPONDENTS ARE BARRED FROM
DEMANDING PAYMENT OF INTEREST BY REASON OF THE
WAIVER PROVISION IN THE COMPROMISE AGREEMENT,
WHICH BECAME THE LAW AMONG THE PARTIES10
The only issue to be resolved is whether the respondents are entitled to
legal interest.
Petitioner SVHFI alleges that where a compromise agreement or
compromise judgment does not provide for the payment of interest, the
legal interest by way of penalty on account of fault or delay shall not be
due and payable, considering that the obligation or loan, on which the
payment of legal interest could be based, has been superseded by the
compromise agreement.11 Furthermore, the petitioner argues that the
respondents are barred by res judicata from seeking legal interest on
account of the waiver clause in the duly approved compromise
agreement.12 Article 4 of the compromise agreement provides:
Plaintiff Santos waives and renounces any and all other
claims that he and his family may have on the defendant
Foundation arising from and in connection with the aforesaid
civil cases, and defendant Foundation, on the other hand, also
waives and renounces any and all claims that it may have
against plaintiff Santos in connection with such
cases.13 [Emphasis supplied.]
Lastly, petitioner alleges that since the compromise agreement did not
provide for a period within which the obligation will become due and
demandable, it is incumbent upon respondent Santos to ask for judicial
intervention for purposes of fixing the period. It is only when a fixed
period exists that the legal interests can be computed.
Respondents profer that their right to damages is based on delay in the
payment of the obligation provided in the Compromise Agreement. The
Compromise Agreement provides that payment must be made within
the two-year period from its execution. This was approved by the trial
court and became the law governing their contract. Respondents posit
that petitioner's failure to comply entitles them to damages, by way of
interest.14
The petition lacks merit.
A compromise is a contract whereby the parties, by making reciprocal
concessions, avoid a litigation or put an end to one already
commenced.15 It is an agreement between two or more persons, who,
for preventing or putting an end to a lawsuit, adjust their difficulties by
mutual consent in the manner which they agree on, and which everyone
of them prefers in the hope of gaining, balanced by the danger of
losing.16
The general rule is that a compromise has upon the parties the effect
and authority of res judicata, with respect to the matter definitely
stated therein, or which by implication from its terms should be
deemed to have been included therein.17 This holds true even if the
agreement has not been judicially approved.18
In the case at bar, the Compromise Agreement was entered into by the
parties on October 26, 1990.19 It was judicially approved on September
30, 1991.20 Applying existing jurisprudence, the compromise agreement
as a consensual contract became binding between the parties upon its
execution and not upon its court approval. From the time a compromise
is validly entered into, it becomes the source of the rights and
obligations of the parties thereto. The purpose of the compromise is
precisely to replace and terminate controverted claims.21
In accordance with the compromise agreement, the respondents asked
for the dismissal of the pending civil cases. The petitioner, on the other
hand, paid the initial P1.5 million upon the execution of the agreement.
This act of the petitioner showed that it acknowledges that the
agreement was immediately executory and enforceable upon its
execution.
As to the remaining P13 million, the terms and conditions of the
compromise agreement are clear and unambiguous. It provides:
...
b. The balance of P13 Million shall be paid, whether in one
lump sum or in installments, at the discretion of the
Foundation, within a period of not more than two (2) years
from the execution of this agreement…22[Emphasis supplied.]
...
The two-year period must be counted from October 26, 1990, the date
of execution of the compromise agreement, and not on the judicial
approval of the compromise agreement on September 30, 1991. When
respondents wrote a demand letter to petitioner on October 28, 1992,
the obligation was already due and demandable. When the petitioner
failed to pay its due obligation after the demand was made, it incurred
delay.
Article 1169 of the New Civil Code provides:
Those obliged to deliver or to do something incur in delay
from the time the obligee judicially or extrajudicially
demands from them the fulfillment of their obligation.
[Emphasis supplied]
Delay as used in this article is synonymous to default or mora which
means delay in the fulfillment of obligations. It is the non-fulfillment of
the obligation with respect to time.23

In order for the debtor to be in default, it is necessary that the following

requisites be present: (1) that the obligation be demandable and
already liquidated; (2) that the debtor delays performance; and (3) that
the creditor requires the performance judicially or extrajudicially.24

In the case at bar, the obligation was already due and demandable after
the lapse of the two-year period from the execution of the contract. The
two-year period ended on October 26, 1992. When the respondents
gave a demand letter on October 28, 1992, to the petitioner, the
obligation was already due and demandable. Furthermore, the
obligation is liquidated because the debtor knows precisely how much
he is to pay and when he is to pay it.

The second requisite is also present. Petitioner delayed in the

performance. It was able to fully settle its outstanding balance only on
February 8, 1995, which is more than two years after the extra-judicial
demand. Moreover, it filed several motions and elevated adverse
resolutions to the appellate court to hinder the execution of a final and
executory judgment, and further delay the fulfillment of its obligation.

Third, the demand letter sent to the petitioner on October 28, 1992, was
in accordance with an extra-judicial demand contemplated by law.

Verily, the petitioner is liable for damages for the delay in the
performance of its obligation. This is provided for in Article 117025 of
the New Civil Code.

When the debtor knows the amount and period when he is to pay,
interest as damages is generally allowed as a matter of right.26 The
complaining party has been deprived of funds to which he is entitled by
virtue of their compromise agreement. The goal of compensation
requires that the complainant be compensated for the loss of use of
those funds. This compensation is in the form of interest.27 In the
absence of agreement, the legal rate of interest shall prevail.28 The legal
interest for loan as forbearance of money is 12% per annum29 to be
computed from default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil Code.30

WHEREFORE, the petition is DENIED for lack of merit. The Decision

dated January 30, 2002 of the Court of Appeals and its April 12, 2002
Resolution in CA-G.R. CV No. 55122 are AFFIRMED. Costs against
petitioner.

SO ORDERED.
G.R. No. 149734             November 19, 2004
DR. DANIEL VAZQUEZ and MA. LUIZA M. VAZQUEZ, petitioners, 
vs.
AYALA CORPORATION, respondent
DECISION
TINGA, J.:
The rise in value of four lots in one of the country's prime residential
developments, Ayala Alabang Village in Muntinlupa City, over a period
of six (6) years only, represents big money. The huge price difference
lies at the heart of the present controversy. Petitioners insist that the
lots should be sold to them at 1984 prices while respondent maintains
that the prevailing market price in 1990 should be the selling price.
Dr. Daniel Vazquez and Ma. Luisa Vazquez1 filed this Petition for Review
on Certiorari2 dated October 11, 2001 assailing the Decision3 of the
Court of Appeals dated September 6, 2001 which reversed the
Decision4 of the Regional Trial Court (RTC) and dismissed their
complaint for specific performance and damages against Ayala
Corporation.
Despite their disparate rulings, the RTC and the appellate court agree
on the following antecedents:5
On April 23, 1981, spouses Daniel Vasquez and Ma. Luisa M.
Vasquez (hereafter, Vasquez spouses) entered into a
Memorandum of Agreement (MOA) with Ayala Corporation
(hereafter, AYALA) with AYALA buying from the Vazquez
spouses, all of the latter's shares of stock in Conduit
Development, Inc. (hereafter, Conduit). The main asset of
Conduit was a 49.9 hectare property in Ayala Alabang,
Muntinlupa, which was then being developed by Conduit
under a development plan where the land was divided into
Villages 1, 2 and 3 of the "Don Vicente Village." The
development was then being undertaken for Conduit by G.P.
Construction and Development Corp. (hereafter, GP
Construction).
Under the MOA, Ayala was to develop the entire property,
less what was defined as the "Retained Area" consisting of
18,736 square meters. This "Retained Area" was to be
retained by the Vazquez spouses. The area to be developed
by Ayala was called the "Remaining Area". In this "Remaining
Area" were 4 lots adjacent to the "Retained Area" and Ayala
agreed to offer these lots for sale to the Vazquez spouses at
the prevailing price at the time of purchase. The relevant
provisions of the MOA on this point are:
"5.7. The BUYER hereby commits that it will develop the
'Remaining Property' into a first class residential subdivision
of the same class as its New Alabang Subdivision, and that it
intends to complete the first phase under its amended
development plan within three (3) years from the date of this
Agreement. x x x"
5.15. The BUYER agrees to give the SELLERS a first option to
purchase four developed lots next to the "Retained Area" at
the prevailing market price at the time of the purchase."
The parties are agreed that the development plan referred to
in paragraph 5.7 is not Conduit's development plan, but
Ayala's amended development plan which was still to be
formulated as of the time of the MOA. While in the Conduit
plan, the 4 lots to be offered for sale to the Vasquez Spouses
were in the first phase thereof or Village 1, in the Ayala plan
which was formulated a year later, it was in the third phase,
or Phase II-c.
Under the MOA, the Vasquez spouses made several express
warranties, as follows:
"3.1. The SELLERS shall deliver to the BUYER:
xxx
3.1.2. The true and complete list, certified by the Secretary
and Treasurer of the Company showing:
xxx
D. A list of all persons and/or entities with whom the
Company has pending contracts, if any.
xxx
3.1.5. Audited financial statements of the Company as at
Closing date.
4. Conditions Precedent
All obligations of the BUYER under this Agreement are
subject to fulfillment prior to or at the Closing, of the
following conditions:
4.1. The representations and warranties by the SELLERS
contained in this Agreement shall be true and correct at the
time of Closing as though such representations and
warranties were made at such time; and
xxx
6. Representation and Warranties by the SELLERS
The SELLERS jointly and severally represent and warrant to
the BUYER that at the time of the execution of this Agreement
and at the Closing:
xxx
6.2.3. There are no actions, suits or proceedings pending, or
to the knowledge of the SELLERS, threatened against or
affecting the SELLERS with respect to the Shares or the
Property; and
7. Additional Warranties by the SELLERS
7.1. With respect to the Audited Financial Statements
required to be submitted at Closing in accordance with Par.
3.1.5 above, the SELLER jointly and severally warrant to the
BUYER that:
7.1.1 The said Audited Financial Statements shall show that
on the day of Closing, the Company shall own the "Remaining
Property", free from all liens and encumbrances and that the
Company shall have no obligation to any party except for
billings payable to GP Construction & Development
Corporation and advances made by Daniel Vazquez for which
BUYER shall be responsible in accordance with Par. 2 of this
Agreement.
7.1.2 Except to the extent reflected or reserved in the Audited
Financial Statements of the Company as of Closing, and those
disclosed to BUYER, the Company as of the date thereof, has
no liabilities of any nature whether accrued, absolute,
contingent or otherwise, including, without limitation, tax
liabilities due or to become due and whether incurred in
respect of or measured in respect of the Company's income
prior to Closing or arising out of transactions or state of facts
existing prior thereto.
7.2 SELLERS do not know or have no reasonable ground to
know of any basis for any assertion against the Company as
at closing or any liability of any nature and in any amount not
fully reflected or reserved against such Audited Financial
Statements referred to above, and those disclosed to BUYER.
xxx xxx xxx
7.6.3 Except as otherwise disclosed to the BUYER in writing
on or before the Closing, the Company is not engaged in or a
party to, or to the best of the knowledge of the SELLERS,
threatened with, any legal action or other proceedings before
any court or administrative body, nor do the SELLERS know
or have reasonable grounds to know of any basis for any such
action or proceeding or of any governmental investigation
relative to the Company.
7.6.4 To the knowledge of the SELLERS, no default or breach
exists in the due performance and observance by the
Company of any term, covenant or condition of any
instrument or agreement to which the company is a party or
by which it is bound, and no condition exists which, with
notice or lapse of time or both, will constitute such default or
breach."
After the execution of the MOA, Ayala caused the suspension
of work on Village 1 of the Don Vicente Project. Ayala then
received a letter from one Maximo Del Rosario of Lancer
General Builder Corporation informing Ayala that he was
claiming the amount of P1,509,558.80 as the subcontractor
of G.P. Construction...
G.P. Construction not being able to reach an amicable
settlement with Lancer, on March 22, 1982, Lancer sued G.P.
Construction, Conduit and Ayala in the then Court of First
Instance of Manila in Civil Case No. 82-8598. G.P.
Construction in turn filed a cross-claim against Ayala. G.P.
Construction and Lancer both tried to enjoin Ayala from
undertaking the development of the property. The suit was
terminated only on February 19, 1987, when it was
dismissed with prejudice after Ayala paid both Lancer and GP
Construction the total of P4,686,113.39.
Taking the position that Ayala was obligated to sell the 4 lots
adjacent to the "Retained Area" within 3 years from the date
of the MOA, the Vasquez spouses sent several "reminder"
letters of the approaching so-called deadline. However, no
demand after April 23, 1984, was ever made by the Vasquez
spouses for Ayala to sell the 4 lots. On the contrary, one of the
letters signed by their authorized agent, Engr. Eduardo Turla,
categorically stated that they expected "development of
Phase 1 to be completed by February 19, 1990, three years
from the settlement of the legal problems with the previous
contractor."
By early 1990 Ayala finished the development of the vicinity
of the 4 lots to be offered for sale. The four lots were then
offered to be sold to the Vasquez spouses at the prevailing
price in 1990. This was rejected by the Vasquez spouses who
wanted to pay at 1984 prices, thereby leading to the suit
below.
After trial, the court a quo rendered its decision, the
dispositive portion of which states:
"THEREFORE, judgment is hereby rendered in favor of
plaintiffs and against defendant, ordering defendant to sell to
plaintiffs the relevant lots described in the Complaint in the
Ayala Alabang Village at the price of P460.00 per square
meter amounting to P1,349,540.00; ordering defendant to
reimburse to plaintiffs attorney's fees in the sum of
P200,000.00 and to pay the cost of the suit."
In its decision, the court a quo concluded that the Vasquez
spouses were not obligated to disclose the potential claims of
GP Construction, Lancer and Del Rosario; Ayala's accountants
should have opened the records of Conduit to find out all
claims; the warranty against suit is with respect to "the
shares of the Property" and the Lancer suit does not affect
the shares of stock sold to Ayala; Ayala was obligated to
develop within 3 years; to say that Ayala was under no
obligation to follow a time frame was to put the Vasquezes at
Ayala's mercy; Ayala did not develop because of a slump in
the real estate market; the MOA was drafted and prepared by
the AYALA who should suffer its ambiguities; the option to
purchase the 4 lots is valid because it was supported by
consideration as the option is incorporated in the MOA
where the parties had prestations to each other. [Emphasis
supplied]
Ayala Corporation filed an appeal, alleging that the trial court erred in
holding that petitioners did not breach their warranties under the
MOA6 dated April 23, 1981; that it was obliged to develop the land
where the four (4) lots subject of the option to purchase are located
within three (3) years from the date of the MOA; that it was in delay;
and that the option to purchase was valid because it was incorporated
in the MOA and the consideration therefor was the commitment by
Ayala Corporation to petitioners embodied in the MOA.
As previously mentioned, the Court of Appeals reversed the RTC
Decision. According to the appellate court, Ayala Corporation was never
informed beforehand of the existence of the Lancer claim. In fact, Ayala
Corporation got a copy of the Lancer subcontract only on May 29, 1981
from G.P. Construction's lawyers. The Court of Appeals thus held that
petitioners violated their warranties under the MOA when they failed to
disclose Lancer's claims. Hence, even conceding that Ayala Corporation
was obliged to develop and sell the four (4) lots in question within
three (3) years from the date of the MOA, the obligation was suspended
during the pendency of the case filed by Lancer.
Interpreting the MOA's paragraph 5.7 above-quoted, the appellate court
held that Ayala Corporation committed to develop the first phase of its
own amended development plan and not Conduit's development plan.
Nowhere does the MOA provide that Ayala Corporation shall follow
Conduit's development plan nor is Ayala Corporation prohibited from
changing the sequence of the phases of the property it will develop.
Anent the question of delay, the Court of Appeals ruled that there was
no delay as petitioners never made a demand for Ayala Corporation to
sell the subject lots to them. According to the appellate court, what
petitioners sent were mere reminder letters the last of which was dated
prior to April 23, 1984 when the obligation was not yet demandable. At
any rate, the Court of Appeals found that petitioners in fact waived the
three (3)-year period when they sent a letter through their agent, Engr.
Eduardo Turla, stating that they "expect that the development of Phase I
will be completed by 19 February 1990, three years from the settlement
of the legal problems with the previous contractor."7
The appellate court likewise ruled that paragraph 5.15 above-quoted is
not an option contract but a right of first refusal there being no separate
consideration therefor. Since petitioners refused Ayala Corporation's
offer to sell the subject lots at the reduced 1990 price of P5,000.00 per
square meter, they have effectively waived their right to buy the same.
In the instant Petition, petitioners allege that the appellate court erred
in ruling that they violated their warranties under the MOA; that Ayala
Corporation was not obliged to develop the "Remaining Property"
within three (3) years from the execution of the MOA; that Ayala was
not in delay; and that paragraph 5.15 of the MOA is a mere right of first
refusal. Additionally, petitioners insist that the Court should review the
factual findings of the Court of Appeals as they are in conflict with those
of the trial court.
8 
Ayala Corporation filed a Comment on the Petition dated March 26,
2002, contending that the petition raises questions of fact and seeks a
review of evidence which is within the domain of the Court of Appeals.
Ayala Corporation maintains that the subcontract between GP
Construction, with whom Conduit contracted for the development of
the property under a Construction Contract dated October 10, 1980,
and Lancer was not disclosed by petitioners during the negotiations.
Neither was the liability for Lancer's claim included in the Audited
Financial Statements submitted by petitioners after the signing of the
MOA. These justify the conclusion that petitioners breached their
warranties under the afore-quoted paragraphs of the MOA. Since the
Lancer suit ended only in February 1989, the three (3)-year period
within which Ayala Corporation committed to develop the property
should only be counted thence. Thus, when it offered the subject lots to
petitioners in 1990, Ayala Corporation was not yet in delay.
In response to petitioners' contention that there was no action or
proceeding against them at the time of the execution of the MOA on
April 23, 1981, Ayala Corporation avers that the facts and
circumstances which gave rise to the Lancer claim were already extant
then. Petitioners warranted that their representations under the MOA
shall be true and correct at the time of "Closing" which shall take place
within four (4) weeks from the signing of the MOA.9 Since the MOA was
signed on April 23, 1981, "Closing" was approximately the third week of
May 1981. Hence, Lancer's claims, articulated in a letter which Ayala
Corporation received on May 4, 1981, are among the liabilities
warranted against under paragraph 7.1.2 of the MOA.
Moreover, Ayala Corporation asserts that the warranties under the
MOA are not just against suits but against all kinds of liabilities not
reflected in the Audited Financial Statements. It cannot be faulted for
relying on the express warranty that except for billings payable to GP
Construction and advances made by petitioner Daniel Vazquez in the
amount of P38,766.04, Conduit has no other liabilities. Hence,
petitioners cannot claim that Ayala Corporation should have examined
and investigated the Audited Financial Statements of Conduit and
should now assume all its obligations and liabilities including the
Lancer suit and the cross-claim of GP Construction.
Furthermore, Ayala Corporation did not make a commitment to
complete the development of the first phase of the property within
three (3) years from the execution of the MOA. The provision refers to a
mere declaration of intent to develop the first phase of its (Ayala
Corporation's) own development plan and not Conduit's. True to its
intention, Ayala Corporation did complete the development of the first
phase (Phase II-A) of its amended development plan within three (3)
years from the execution of the MOA. However, it is not obliged to
develop the third phase (Phase II-C) where the subject lots are located
within the same time frame because there is no contractual stipulation
in the MOA therefor. It is free to decide on its own the period for the
development of Phase II-C. If petitioners wanted to impose the same
three (3)-year timetable upon the third phase of the amended
development plan, they should have filed a suit to fix the time table in
accordance with Article 119710 of the Civil Code. Having failed to do so,
Ayala Corporation cannot be declared to have been in delay.
Ayala Corporation further contends that no demand was made on it for
the performance of its alleged obligation. The letter dated October 4,
1983 sent when petitioners were already aware of the Lancer suit did
not demand the delivery of the subject lots by April 23, 1984. Instead, it
requested Ayala Corporation to keep petitioners posted on the status of
the case. Likewise, the letter dated March 4, 1984 was merely an
inquiry as to the date when the development of Phase 1 will be
completed. More importantly, their letter dated June 27, 1988 through
Engr. Eduardo Turla expressed petitioners' expectation that Phase 1
will be completed by February 19, 1990.
Lastly, Ayala Corporation maintains that paragraph 5.15 of the MOA is a
right of first refusal and not an option contract.
Petitioners filed their Reply11 dated August 15, 2002 reiterating the
arguments in their Petition and contending further that they did not
violate their warranties under the MOA because the case was filed by
Lancer only on April 1, 1982, eleven (11) months and eight (8) days
after the signing of the MOA on April 23, 1981. Ayala Corporation
admitted that it received Lancer's claim before the "Closing" date. It
therefore had all the time to rescind the MOA. Not having done so, it can
be concluded that Ayala Corporation itself did not consider the matter a
violation of petitioners' warranty.
Moreover, petitioners submitted the Audited Financial Statements of
Conduit and allowed an acquisition audit to be conducted by Ayala
Corporation. Thus, the latter bought Conduit with "open eyes."
Petitioners also maintain that they had no knowledge of the impending
case against Conduit at the time of the execution of the MOA. Further,
the MOA makes Ayala Corporation liable for the payment of all billings
of GP Construction. Since Lancer's claim was actually a claim against GP
Construction being its sub-contractor, it is Ayala Corporation and not
petitioners which is liable.
Likewise, petitioners aver that although Ayala Corporation may change
the sequence of its development plan, it is obliged under the MOA to
develop the entire area where the subject lots are located in three (3)
years.
They also assert that demand was made on Ayala Corporation to
comply with their obligation under the MOA. Apart from their reminder
letters dated January 24, February 18 and March 5, 1984, they also sent
a letter dated March 4, 1984 which they claim is a categorical demand
for Ayala Corporation to comply with the provisions of the MOA.
The parties were required to submit their respective memoranda in the
Resolution12 dated November 18, 2002. In compliance with this
directive, petitioners submitted their Memorandum13 dated February
14, 2003 on even date, while Ayala Corporation filed its
Memorandum14 dated February 14, 2003 on February 17, 2003.
We shall first dispose of the procedural question raised by the instant
petition.
It is well-settled that the jurisdiction of this Court in cases brought to it
from the Court of Appeals by way of petition for review under Rule 45 is
limited to reviewing or revising errors of law imputed to it, its findings
of fact being conclusive on this Court as a matter of general principle.
However, since in the instant case there is a conflict between the factual
findings of the trial court and the appellate court, particularly as
regards the issues of breach of warranty, obligation to develop and
incurrence of delay, we have to consider the evidence on record and
resolve such factual issues as an exception to the general rule.15 In any
event, the submitted issue relating to the categorization of the right to
purchase granted to petitioners under the MOA is legal in character.
The next issue that presents itself is whether petitioners breached their
warranties under the MOA when they failed to disclose the Lancer
claim. The trial court declared they did not; the appellate court found
otherwise.
Ayala Corporation summarizes the clauses of the MOA which
petitioners allegedly breached when they failed to disclose the Lancer
claim:
a) Clause 7.1.1. – that Conduit shall not be obligated to
anyone except to GP Construction for P38,766.04, and for
advances made by Daniel Vazquez;
b) Clause 7.1.2. – that except as reflected in the audited
financial statements Conduit had no other liabilities whether
accrued, absolute, contingent or otherwise;
c) Clause 7.2. – that there is no basis for any assertion against
Conduit of any liability of any value not reflected or reserved
in the financial statements, and those disclosed to Ayala;
d) Clause 7.6.3. – that Conduit is not threatened with any
legal action or other proceedings; and
e) Clause 7.6.4. – that Conduit had not breached any term,
condition, or covenant of any instrument or agreement to
which it is a party or by which it is bound.16
The Court is convinced that petitioners did not violate the foregoing
warranties.
The exchanges of communication between the parties indicate that
petitioners substantially apprised Ayala Corporation of the Lancer
claim or the possibility thereof during the period of negotiations for the
sale of Conduit.
In a letter17 dated March 5, 1984, petitioner Daniel Vazquez reminded
Ayala Corporation's Mr. Adolfo Duarte (Mr. Duarte) that prior to the
completion of the sale of Conduit, Ayala Corporation asked for and was
given information that GP Construction sub-contracted, presumably to
Lancer, a greater percentage of the project than it was allowed.
Petitioners gave this information to Ayala Corporation because the
latter intimated a desire to "break the contract of Conduit with GP."
Ayala Corporation did not deny this. In fact, Mr. Duarte's letter18 dated
March 6, 1984 indicates that Ayala Corporation had knowledge of the
Lancer subcontract prior to its acquisition of Conduit. Ayala
Corporation even admitted that it "tried to explore…legal basis to
discontinue the contract of Conduit with GP" but found this "not
feasible when information surfaced about the tacit consent of Conduit
to the sub-contracts of GP with Lancer."
At the latest, Ayala Corporation came to know of the Lancer claim
before the date of Closing of the MOA. Lancer's letter19 dated April 30,
1981 informing Ayala Corporation of its unsettled claim with GP
Construction was received by Ayala Corporation on May 4, 1981, well
before the "Closing"20 which occurred four (4) weeks after the date of
signing of the MOA on April 23, 1981, or on May 23, 1981.
The full text of the pertinent clauses of the MOA quoted hereunder
likewise indicate that certain matters pertaining to the liabilities of
Conduit were disclosed by petitioners to Ayala Corporation although
the specifics thereof were no longer included in the MOA:
7.1.1 The said Audited Financial Statements shall show that
on the day of Closing, the Company shall own the "Remaining
Property", free from all liens and encumbrances and that the
Company shall have no obligation to any party except for
billings payable to GP Construction & Development
Corporation and advances made by Daniel Vazquez for which
BUYER shall be responsible in accordance with Paragraph 2
of this Agreement.
7.1.2 Except to the extent reflected or reserved in the Audited
Financial Statements of the Company as of Closing, and those
disclosed to BUYER, the Company as of the date hereof, has
no liabilities of any nature whether accrued, absolute,
contingent or otherwise, including, without limitation, tax
liabilities due or to become due and whether incurred in
respect of or measured in respect of the Company's income
prior to Closing or arising out of transactions or state of facts
existing prior thereto.
7.2 SELLERS do not know or have no reasonable ground to
know of any basis for any assertion against the Company as
at Closing of any liability of any nature and in any amount not
fully reflected or reserved against such Audited Financial
Statements referred to above, and those disclosed to BUYER.
xxx xxx xxx
7.6.3 Except as otherwise disclosed to the BUYER in writing
on or before the Closing, the Company is not engaged in or a
party to, or to the best of the knowledge of the SELLERS,
threatened with, any legal action or other proceedings before
any court or administrative body, nor do the SELLERS know
or have reasonable grounds to know of any basis for any such
action or proceeding or of any governmental investigation
relative to the Company.
7.6.4 To the knowledge of the SELLERS, no default or breach
exists in the due performance and observance by the
Company of any term, covenant or condition of any
instrument or agreement to which the Company is a party or
by which it is bound, and no condition exists which, with
notice or lapse of time or both, will constitute such default or
breach."21 [Emphasis supplied]
Hence, petitioners' warranty that Conduit is not engaged in, a party to,
or threatened with any legal action or proceeding is qualified by Ayala
Corporation's actual knowledge of the Lancer claim which was
disclosed to Ayala Corporation before the "Closing."
At any rate, Ayala Corporation bound itself to pay all billings payable to
GP Construction and the advances made by petitioner Daniel Vazquez.
Specifically, under paragraph 2 of the MOA referred to in paragraph
7.1.1, Ayala Corporation undertook responsibility "for the payment of
all billings of the contractor GP Construction & Development
Corporation after the first billing and any payments made by the
company and/or SELLERS shall be reimbursed by BUYER on closing
which advances to date is P1,159,012.87."22
The billings knowingly assumed by Ayala Corporation necessarily
include the Lancer claim for which GP Construction is liable. Proof of
this is Ayala Corporation's letter23 to GP Construction dated before
"Closing" on May 4, 1981, informing the latter of Ayala Corporation's
receipt of the Lancer claim embodied in the letter dated April 30, 1981,
acknowledging that it is taking over the contractual responsibilities of
Conduit, and requesting copies of all sub-contracts affecting the Conduit
property. The pertinent excerpts of the letter read:
…
In this connection, we wish to inform you that this morning
we received a letter from Mr. Maximo D. Del Rosario,
President of Lancer General Builders Corporation apprising
us of the existence of subcontracts that they have with your
corporation. They have also furnished us with a copy of their
letter to you dated 30 April 1981.
Since we are taking over the contractual responsibilities of
Conduit Development, Inc., we believe that it is necessary, at
this point in time, that you furnish us with copies of all your
 subcontracts affecting the property of Conduit, not only with
Lancer General Builders Corporation, but all subcontracts
with other parties as well…24
Quite tellingly, Ayala Corporation even attached to its Pre-Trial
Brief25 dated July 9, 1992 a copy of the letter26 dated May 28, 1981 of GP
Construction's counsel addressed to Conduit furnishing the latter with
copies of all sub-contract agreements entered into by GP Construction.
Since it was addressed to Conduit, it can be presumed that it was the
latter which gave Ayala Corporation a copy of the letter thereby
disclosing to the latter the existence of the Lancer sub-contract.
The ineluctable conclusion is that petitioners did not violate their
warranties under the MOA. The Lancer sub-contract and claim were
substantially disclosed to Ayala Corporation before the "Closing" date of
the MOA. Ayala Corporation cannot disavow knowledge of the claim.
Moreover, while in its correspondence with petitioners, Ayala
Corporation did mention the filing of the Lancer suit as an obstacle to
its development of the property, it never actually brought up nor sought
redress for petitioners' alleged breach of warranty for failure to
disclose the Lancer claim until it filed its Answer27 dated February 17,
1992.
We now come to the correct interpretation of paragraph 5.7 of the MOA.
Does this paragraph express a commitment or a mere intent on the part
of Ayala Corporation to develop the property within three (3) years
from date thereof? Paragraph 5.7 provides:
5.7. The BUYER hereby commits that it will develop the
'Remaining Property' into a first class residential subdivision
of the same class as its New Alabang Subdivision, and that it
intends to complete the first phase under its amended
development plan within three (3) years from the date of this
Agreement….28
Notably, while the first phrase of the paragraph uses the word
"commits" in reference to the development of the "Remaining Property"
into a first class residential subdivision, the second phrase uses the
word "intends" in relation to the development of the first phase of the
property within three (3) years from the date of the MOA. The variance
in wording is significant. While "commit"29 connotes a pledge to do
something, "intend"30 merely signifies a design or proposition.
Atty. Leopoldo Francisco, former Vice President of Ayala Corporation's
legal division who assisted in drafting the MOA, testified:
COURT
You only ask what do you mean by that intent. Just answer on
that point.
ATTY. BLANCO
Don't talk about standard.
WITNESS
A Well, the word intent here, your Honor, was used to
emphasize the tentative character of the period of
development because it will be noted that the sentence refers
to and I quote "to complete the first phase under its amended
development plan within three (3) years from the date of this
agreement, at the time of the execution of this agreement,
your Honor." That amended development plan was not yet in
existence because the buyer had manifested to the seller that
the buyer could amend the subdivision plan originally
belonging to the seller to conform with its own standard of
development and second, your Honor, (interrupted)31
It is thus unmistakable that this paragraph merely expresses an
intention on Ayala Corporation's part to complete the first phase under
its amended development plan within three (3) years from the
execution of the MOA. Indeed, this paragraph is so plainly worded that
to misunderstand its import is deplorable.
More focal to the resolution of the instant case is paragraph 5.7's clear
reference to the first phase of Ayala Corporation's amended
development plan as the subject of the three (3)-year intended
timeframe for development. Even petitioner Daniel Vazquez admitted
on cross-examination that the paragraph refers not to Conduit's but to
Ayala Corporation's development plan which was yet to be formulated
when the MOA was executed:
Q: Now, turning to Section 5.7 of this Memorandum of Agreement, it is
stated as follows: "The Buyer hereby commits that to develop the
remaining property into a first class residential subdivision of the same
class as New Alabang Subdivision, and that they intend to complete the
first phase under its amended development plan within three years
from the date of this agreement."
Now, my question to you, Dr. Vasquez is that there is no dispute that the
amended development plan here is the amended development plan of
Ayala?
A: Yes, sir.
Q: In other words, it is not Exhibit "D-5" which is the original
plan of Conduit?
A: No, it is not.
Q: This Exhibit "D-5" was the plan that was being followed by
GP Construction in 1981?
A: Yes, sir.
Q: And point of fact during your direct examination as of the
date of the agreement, this amended development plan was
still to be formulated by Ayala?
A: Yes, sir.32
As correctly held by the appellate court, this admission is crucial
because while the subject lots to be sold to petitioners were in the first
phase of the Conduit development plan, they were in the third or last
phase of the Ayala Corporation development plan. Hence, even
assuming that paragraph 5.7 expresses a commitment on the part of
Ayala Corporation to develop the first phase of its amended
development plan within three (3) years from the execution of the
MOA, there was no parallel commitment made as to the timeframe for
the development of the third phase where the subject lots are located.
Lest it be forgotten, the point of this petition is the alleged failure of
Ayala Corporation to offer the subject lots for sale to petitioners within
three (3) years from the execution of the MOA. It is not that Ayala
Corporation committed or intended to develop the first phase of its
amended development plan within three (3) years. Whether it did or
did not is actually beside the point since the subject lots are not located
in the first phase anyway.
We now come to the issue of default or delay in the fulfillment of the
obligation.
Article 1169 of the Civil Code provides:
Art. 1169. Those obliged to deliver or to do something incur
in delay from the time the obligee judicially or extrajudicially
demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary
in order that delay may exist:
(1) When the obligation or the law expressly so declares; or
(2) When from the nature and the circumstances of the
obligation it appears that the designation of the time when
the thing is to be delivered or the service is to be rendered
was a controlling motive for the establishment of the
contract; or
(3) When demand would be useless, as when the obligor has
rendered it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does
not comply or is not ready to comply in a proper manner with what is
incumbent upon him. From the moment one of the parties fulfills his
obligation, delay by the other begins.
In order that the debtor may be in default it is necessary that the
following requisites be present: (1) that the obligation be demandable
and already liquidated; (2) that the debtor delays performance; and (3)
that the creditor requires the performance judicially or extrajudicially.33
Under Article 1193 of the Civil Code, obligations for whose fulfillment a
day certain has been fixed shall be demandable only when that day
comes. However, no such day certain was fixed in the MOA. Petitioners,
therefore, cannot demand performance after the three (3) year period
fixed by the MOA for the development of the first phase of the property
since this is not the same period contemplated for the development of
the subject lots. Since the MOA does not specify a period for the
development of the subject lots, petitioners should have petitioned the
court to fix the period in accordance with Article 119734 of the Civil
Code. As no such action was filed by petitioners, their complaint for
specific performance was premature, the obligation not being
demandable at that point. Accordingly, Ayala Corporation cannot
likewise be said to have delayed performance of the obligation.
Even assuming that the MOA imposes an obligation on Ayala
Corporation to develop the subject lots within three (3) years from date
thereof, Ayala Corporation could still not be held to have been in delay
since no demand was made by petitioners for the performance of its
obligation.
As found by the appellate court, petitioners' letters which dealt with the
three (3)-year timetable were all dated prior to April 23, 1984, the date
when the period was supposed to expire. In other words, the letters
were sent before the obligation could become legally demandable.
Moreover, the letters were mere reminders and not categorical
demands to perform. More importantly, petitioners waived the three
(3)-year period as evidenced by their agent, Engr. Eduardo Turla's
letter to the effect that petitioners agreed that the three (3)-year period
should be counted from the termination of the case filed by Lancer. The
letter reads in part:
I. Completion of Phase I
As per the memorandum of Agreement also dated April 23,
1981, it was undertaken by your goodselves to complete the
development of Phase I within three (3) years. Dr. & Mrs.
Vazquez were made to understand that you were unable to
accomplish this because of legal problems with the previous
contractor. These legal problems were resolved as of
February 19, 1987, and Dr. & Mrs. Vazquez therefore expect
that the development of Phase I will be completed by
February 19, 1990, three years from the settlement of the
legal problems with the previous contractor. The reason for
this is, as you know, that security-wise, Dr. & Mrs. Vazquez
have been advised not to construct their residence till the
surrounding area (which is Phase I) is developed and
occupied. They have been anxious to build their residence for
quite some time now, and would like to receive assurance
from your goodselves regarding this, in compliance with the
agreement.
II. Option on the adjoining lots
We have already written your goodselves regarding the
intention of Dr. & Mrs. Vazquez to exercise their option to
purchase the two lots on each side (a total of 4 lots) adjacent
to their "Retained Area". They are concerned that although
over a year has elapsed since the settlement of the legal
problems, you have not presented them with the size,
configuration, etc. of these lots. They would appreciate being
provided with these at your earliest convenience.35
Manifestly, this letter expresses not only petitioners' acknowledgement
that the delay in the development of Phase I was due to the legal
problems with GP Construction, but also their acquiescence to the
completion of the development of Phase I at the much later date of
February 19, 1990. More importantly, by no stretch of semantic
interpretation can it be construed as a categorical demand on Ayala
Corporation to offer the subject lots for sale to petitioners as the letter
merely articulates petitioners' desire to exercise their option to
purchase the subject lots and concern over the fact that they have not
been provided with the specifications of these lots.
The letters of petitioners' children, Juan Miguel and Victoria Vazquez,
dated January 23, 198436 and February 18, 198437 can also not be
considered categorical demands on Ayala Corporation to develop the
first phase of the property within the three (3)-year period much less to
offer the subject lots for sale to petitioners. The letter dated January 23,
1984 reads in part:
You will understand our interest in the completion of the
roads to our property, since we cannot develop it till you
have constructed the same. Allow us to remind you of our
Memorandum of Agreement, as per which you committed to
develop the roads to our property "as per the original plans
of the company", and that
1. The back portion should have been developed before the
front portion – which has not been the case.
2. The whole project – front and back portions be completed
by 1984.38
The letter dated February 18, 1984 is similarly worded. It
states:
In this regard, we would like to remind you of Articles 5.7 and 5.9 of our
Memorandum of Agreement which states respectively:…39
Even petitioner Daniel Vazquez' letter40 dated March 5, 1984 does not
make out a categorical demand for Ayala Corporation to offer the
subject lots for sale on or before April 23, 1984. The letter reads in part:
…and that we expect from your goodselves compliance with
our Memorandum of Agreement, and a definite date as to
when the road to our property and the development of Phase
I will be completed.41
At best, petitioners' letters can only be construed as mere reminders
which cannot be considered demands for performance because it must
appear that the tolerance or benevolence of the creditor must have
ended.42
The petition finally asks us to determine whether paragraph 5.15 of the
MOA can properly be construed as an option contract or a right of first
refusal. Paragraph 5.15 states:
market price for the property when the offer was made on June 18,
1990.48 Insisting on paying for the lots at the prevailing market price in
1984 of P460.00/square meter, petitioners rejected the offer. Ayala
Corporation reduced the price to P5,000.00/square meter but again,
petitioners rejected the offer and instead made a counter-offer in the
amount of P2,000.00/square meter.49 Ayala Corporation rejected
petitioners' counter-offer. With this rejection, petitioners lost their right
to purchase the subject lots.

It cannot, therefore, be said that Ayala Corporation breached

5.15 The BUYER agrees to give the SELLERS first option to
petitioners' right of first refusal and should be compelled by an action
purchase four developed lots next to the "Retained Area" at
for specific performance to sell the subject lots to petitioners at the
the prevailing market price at the time of the purchase.43
prevailing market price in 1984.

The Court has clearly distinguished between an option contract and a

WHEREFORE, the instant petition is DENIED. No pronouncement as to
right of first refusal. An option is a preparatory contract in which one
costs.
party grants to another, for a fixed period and at a determined price, the
privilege to buy or sell, or to decide whether or not to enter into a
principal contract. It binds the party who has given the option not to SO ORDERED.
enter into the principal contract with any other person during the
period designated, and within that period, to enter into such contract
with the one to whom the option was granted, if the latter should decide
to use the option. It is a separate and distinct contract from that which
the parties may enter into upon the consummation of the option. It
must be supported by consideration.44

In a right of first refusal, on the other hand, while the object might be
made determinate, the exercise of the right would be dependent not
only on the grantor's eventual intention to enter into a binding juridical
relation with another but also on terms, including the price, that are yet
to be firmed up.45

Applied to the instant case, paragraph 5.15 is obviously a mere right of

first refusal and not an option contract. Although the paragraph has a
definite object, i.e., the sale of subject lots, the period within which they
will be offered for sale to petitioners and, necessarily, the price for
which the subject lots will be sold are not specified. The phrase "at the
prevailing market price at the time of the purchase" connotes that there
is no definite period within which Ayala Corporation is bound to
reserve the subject lots for petitioners to exercise their privilege to
purchase. Neither is there a fixed or determinable price at which the
subject lots will be offered for sale. The price is considered certain if it
may be determined with reference to another thing certain or if the
determination thereof is left to the judgment of a specified person or
persons.46

Further, paragraph 5.15 was inserted into the MOA to give petitioners
the first crack to buy the subject lots at the price which Ayala
Corporation would be willing to accept when it offers the subject lots
for sale. It is not supported by an independent consideration. As such it
is not governed by Articles 1324 and 1479 of the Civil Code, viz:

Art. 1324. When the offeror has allowed the offeree a certain
period to accept, the offer may be withdrawn at any time
before acceptance by communicating such withdrawal,
except when the option is founded upon a consideration, as
something paid or promised.

Art. 1479. A promise to buy and sell a determinate thing for a

price certain is reciprocally demandable.

An accepted unilateral promise to buy or to sell a determinate thing for

a price certain is binding upon the promissor if the promise is
supported by a consideration distinct from the price.

Consequently, the "offer" may be withdrawn anytime by

communicating the withdrawal to the other party.47

In this case, Ayala Corporation offered the subject lots for sale to
petitioners at the price of P6,500.00/square meter, the prevailing
G.R. No. 182963               June 3, 2013
SPOUSES DEO AGNER and MARICON AGNER, Petitioners, 
vs.
BPI FAMILY SAVINGS BANK, INC., Respondent.
DECISION
PERALTA, J.:
This is a petition for review on certiorari assailing the April 30, 2007
Decision1 and May 19, 2008 Resolution2of the Court of Appeals in
CAG.R. CV No. 86021, which affirmed the August 11, 2005 Decision3 of
the Regional Trial Court, Branch 33, Manila City.
On February 15, 2001, petitioners spouses Deo Agner and Maricon
Agner executed a Promissory Note with Chattel Mortgage in favor of
Citimotors, Inc. The contract provides, among others, that: for receiving
the amount of Php834, 768.00, petitioners shall pay Php 17,391.00
every 15th day of each succeeding month until fully paid; the loan is
secured by a 2001 Mitsubishi Adventure Super Sport; and an interest of
6% per month shall be imposed for failure to pay each installment on or
before the stated due date.4
On the same day, Citimotors, Inc. assigned all its rights, title and
interests in the Promissory Note with Chattel Mortgage to ABN AMRO
Savings Bank, Inc. (ABN AMRO), which, on May 31, 2002, likewise
assigned the same to respondent BPI Family Savings Bank, Inc.5
For failure to pay four successive installments from May 15, 2002 to
August 15, 2002, respondent, through counsel, sent to petitioners a
demand letter dated August 29, 2002, declaring the entire obligation as
due and demandable and requiring to pay Php576,664.04, or surrender
the mortgaged vehicle immediately upon receiving the letter.6 As the
demand was left unheeded, respondent filed on October 4, 2002 an
action for Replevin and Damages before the Manila Regional Trial Court
(RTC).
A writ of replevin was issued.7 Despite this, the subject vehicle was not
seized.8 Trial on the merits ensued. On August 11, 2005, the Manila RTC
Br. 33 ruled for the respondent and ordered petitioners to jointly and
severally pay the amount of Php576,664.04 plus interest at the rate of
72% per annum from August 20, 2002 until fully paid, and the costs of
suit.
Petitioners appealed the decision to the Court of Appeals (CA), but the
CA affirmed the lower court’s decision and, subsequently, denied the
motion for reconsideration; hence, this petition.
Before this Court, petitioners argue that: (1) respondent has no cause of
action, because the Deed of Assignment executed in its favor did not
specifically mention ABN AMRO’s account receivable from petitioners;
(2) petitioners cannot be considered to have defaulted in payment for
lack of competent proof that they received the demand letter; and (3)
respondent’s remedy of resorting to both actions of replevin and
collection of sum of money is contrary to the provision of Article
14849 of the Civil Code and the Elisco Tool Manufacturing Corporation
v. Court of Appeals10ruling.
The contentions are untenable.
With respect to the first issue, it would be sufficient to state that the
matter surrounding the Deed of Assignment had already been
considered by the trial court and the CA. Likewise, it is an issue of fact
that is not a proper subject of a petition for review under Rule 45. An
issue is factual when the doubt or difference arises as to the truth or
falsehood of alleged facts, or when the query invites calibration of the
whole evidence, considering mainly the credibility of witnesses,
existence and relevancy of specific surrounding circumstances, their
relation to each other and to the whole, and the probabilities of the
situation.11 Time and again, We stress that this Court is not a trier of
facts and generally does not weigh anew evidence which lower courts
have passed upon.
As to the second issue, records bear that both verbal and written
demands were in fact made by respondent prior to the institution of the
case against petitioners.12 Even assuming, for argument’s sake, that no
demand letter was sent by respondent, there is really no need for it
because petitioners legally waived the necessity of notice or demand in
the Promissory Note with Chattel Mortgage, which they voluntarily and
knowingly signed in favor of respondent’s predecessor-in-interest. Said
contract expressly stipulates:
In case of my/our failure to pay when due and payable, any sum which
I/We are obliged to pay under this note and/or any other obligation
which I/We or any of us may now or in the future owe to the holder of
this note or to any other party whether as principal or guarantor x x x
then the entire sum outstanding under this note shall, without prior
notice or demand, immediately become due and payable. (Emphasis
and underscoring supplied)
A provision on waiver of notice or demand has been recognized as legal
and valid in Bank of the Philippine Islands v. Court of
Appeals,13 wherein We held:
The Civil Code in Article 1169 provides that one incurs in delay or is in
default from the time the obligor demands the fulfillment of the
obligation from the obligee. However, the law expressly provides that
demand is not necessary under certain circumstances, and one of these
circumstances is when the parties expressly waive demand. Hence,
since the co-signors expressly waived demand in the promissory notes,
demand was unnecessary for them to be in default.14
Further, the Court even ruled in Navarro v. Escobido15 that prior
demand is not a condition precedent to an action for a writ of replevin,
since there is nothing in Section 2, Rule 60 of the Rules of Court that
requires the applicant to make a demand on the possessor of the
property before an action for a writ of replevin could be filed.
Also, petitioners’ representation that they have not received a demand
letter is completely inconsequential as the mere act of sending it would
suffice. Again, We look into the Promissory Note with Chattel Mortgage,
which provides:
All correspondence relative to this mortgage, including demand letters,
summonses, subpoenas, or notifications of any judicial or extrajudicial
action shall be sent to the MORTGAGOR at the address indicated on this
promissory note with chattel mortgage or at the address that may
hereafter be given in writing by the MORTGAGOR to the MORTGAGEE
or his/its assignee. The mere act of sending any correspondence by mail
or by personal delivery to the said address shall be valid and effective
notice to the mortgagor for all legal purposes and the fact that any
communication is not actually received by the MORTGAGOR or that it
has been returned unclaimed to the MORTGAGEE or that no person was
found at the address given, or that the address is fictitious or cannot be
located shall not excuse or relieve the MORTGAGOR from the effects of
such notice.16 (Emphasis and underscoring supplied)
The Court cannot yield to petitioners’ denial in receiving respondent’s
demand letter. To note, their postal address evidently remained
unchanged from the time they executed the Promissory Note with
Chattel Mortgage up to time the case was filed against them. Thus, the
presumption that "a letter duly directed and mailed was received in the
regular course of the mail"17 stands in the absence of satisfactory proof
to the contrary.
Petitioners cannot find succour from Ting v. Court of Appeals18 simply
because it pertained to violation of Batas Pambansa Blg. 22 or the
Bouncing Checks Law. As a higher quantum of proof – that is, proof
beyond reasonable doubt – is required in view of the criminal nature of
the case, We found insufficient the mere presentation of a copy of the
demand letter allegedly sent through registered mail and its
corresponding registry receipt as proof of receiving the notice of
dishonor.
Perusing over the records, what is clear is that petitioners did not take
advantage of all the opportunities to present their evidence in the
proceedings before the courts below. They miserably failed to produce
the original cash deposit slips proving payment of the monthly
amortizations in question. Not even a photocopy of the alleged proof of
payment was appended to their Answer or shown during the trial.
Neither have they demonstrated any written requests to respondent to
furnish them with official receipts or a statement of account. Worse,
petitioners were not able to make a formal offer of evidence
considering that they have not marked any documentary evidence
during the presentation of Deo Agner’s testimony.19
Jurisprudence abounds that, in civil cases, one who pleads payment has
the burden of proving it; the burden rests on the defendant to prove
payment, rather than on the plaintiff to prove non-payment.20 When the
creditor is in possession of the document of credit, proof of non-
payment is not needed for it is presumed.21 Respondent's possession of
the Promissory Note with Chattel Mortgage strongly buttresses its
claim that the obligation has not been extinguished. As held in Bank of
the Philippine Islands v. Spouses Royeca:22
x x x The creditor's possession of the evidence of debt is proof that the
debt has not been discharged by payment. A promissory note in the
hands of the creditor is a proof of indebtedness rather than proof of
payment. In an action for replevin by a mortgagee, it is prima facie
evidence that the promissory note has not been paid. Likewise, an
uncanceled mortgage in the possession of the mortgagee gives rise to
the presumption that the mortgage debt is unpaid.23
Indeed, when the existence of a debt is fully established by the evidence
contained in the record, the burden of proving that it has been
extinguished by payment devolves upon the debtor who offers such
defense to the claim of the creditor.24 The debtor has the burden of
showing with legal certainty that the obligation has been discharged by
payment.25
Lastly, there is no violation of Article 1484 of the Civil Code and the
Court’s decision in Elisco Tool Manufacturing Corporation v. Court of
Appeals.26
In Elisco, petitioner's complaint contained the following prayer:
WHEREFORE, plaintiffs pray that judgment be rendered as follows:
ON THE FIRST CAUSE OF ACTION
Ordering defendant Rolando Lantan to pay the plaintiff the sum of
₱39,054.86 plus legal interest from the date of demand until the whole
obligation is fully paid;
ON THE SECOND CAUSE OF ACTION
To forthwith issue a Writ of Replevin ordering the seizure of the motor
vehicle more particularly described in paragraph 3 of the Complaint,
from defendant Rolando Lantan and/or defendants Rina Lantan, John
Doe, Susan Doe and other person or persons in whose possession the
said motor vehicle may be found, complete with accessories and
equipment, and direct deliver thereof to plaintiff in accordance with
law, and after due hearing to confirm said seizure and plaintiff's
possession over the same;
PRAYER COMMON TO ALL CAUSES OF ACTION
1. Ordering the defendant Rolando Lantan to pay the plaintiff
an amount equivalent to twenty-five percent (25%) of his
outstanding obligation, for and as attorney's fees;
2. Ordering defendants to pay the cost or expenses of
collection, repossession, bonding fees and other incidental
expenses to be proved during the trial; and
3. Ordering defendants to pay the costs of suit.
Plaintiff also prays for such further reliefs as this Honorable Court may
deem just and equitable under the premises.27
The Court therein ruled:
The remedies provided for in Art. 1484 are alternative, not cumulative.
The exercise of one bars the exercise of the others. This limitation
applies to contracts purporting to be leases of personal property with
option to buy by virtue of Art. 1485. The condition that the lessor has
deprived the lessee of possession or enjoyment of the thing for the
purpose of applying Art. 1485 was fulfilled in this case by the filing by
petitioner of the complaint for replevin to recover possession of
movable property. By virtue of the writ of seizure issued by the trial
court, the deputy sheriff seized the vehicle on August 6, 1986 and
thereby deprived private respondents of its use. The car was not
returned to private respondent until April 16, 1989, after two (2) years
and eight (8) months, upon issuance by the Court of Appeals of a writ of
execution.
Petitioner prayed that private respondents be made to pay the sum of
₱39,054.86, the amount that they were supposed to pay as of May 1986,
plus interest at the legal rate. At the same time, it prayed for the
issuance of a writ of replevin or the delivery to it of the motor vehicle
"complete
with accessories and equipment." In the event the car could not be
delivered to petitioner, it was prayed that private respondent Rolando
Lantan be made to pay petitioner the amount of ₱60,000.00, the
"estimated actual value" of the car, "plus accrued monthly rentals
thereof with interests at the rate of fourteen percent (14%) per annum
until fully paid." This prayer of course cannot be granted, even
assuming that private respondents have defaulted in the payment of
their obligation. This led the trial court to say that petitioner wanted to
eat its cake and have it too.28
In contrast, respondent in this case prayed:
(a) Before trial, and upon filing and approval of the bond, to
forthwith issue a Writ of Replevin ordering the seizure of the
motor vehicle above-described, complete with all its
accessories and equipments, together with the Registration
Certificate thereof, and direct the delivery thereof to plaintiff
in accordance with law and after due hearing, to confirm the
said seizure;
(b) Or, in the event that manual delivery of the said motor
vehicle cannot be effected to render judgment in favor of
plaintiff and against defendant(s) ordering them to pay to
plaintiff, jointly and severally, the sum of ₱576,664.04 plus
interest and/or late payment charges thereon at the rate of
72% per annum from August 20, 2002 until fully paid;
(c) In either case, to order defendant(s) to pay jointly and
severally:
(1) the sum of ₱297,857.54 as attorney’s fees,
liquidated damages, bonding fees and other
expenses incurred in the seizure of the said motor
vehicle; and
 (2) the costs of suit.

Plaintiff further prays for such other relief as this Honorable Court may
deem just and equitable in the premises.29

Compared with Elisco, the vehicle subject matter of this case was never
recovered and delivered to respondent despite the issuance of a writ of
replevin. As there was no seizure that transpired, it cannot be said that
petitioners were deprived of the use and enjoyment of the mortgaged
vehicle or that respondent pursued, commenced or concluded its actual
foreclosure. The trial court, therefore, rightfully granted the alternative
prayer for sum of money, which is equivalent to the remedy of "exacting
fulfillment of the obligation." Certainly, there is no double recovery or
unjust enrichment30 to speak of.1âwphi1

All the foregoing notwithstanding, We are of the opinion that the

interest of 6% per month should be equitably reduced to one percent
(1%) per month or twelve percent (12%) per annum, to be reckoned
from May 16, 2002 until full payment and with the remaining
outstanding balance of their car loan as of May 15, 2002 as the base
amount.

Settled is the principle which this Court has affirmed in a number of

cases that stipulated interest rates of three percent (3%) per month and
higher are excessive, iniquitous, unconscionable, and
exorbitant.31 While Central Bank Circular No. 905-82, which took effect
on January 1, 1983, effectively removed the ceiling on interest rates for
both secured and unsecured loans, regardless of maturity, nothing in
the said circular could possibly be read as granting carte blanche
authority to lenders to raise interest rates to levels which would either
enslave their borrowers or lead to a hemorrhaging of their
assets.32 Since the stipulation on the interest rate is void for being
contrary to morals, if not against the law, it is as if there was no express
contract on said interest rate; thus, the interest rate may be reduced as
reason and equity demand.33

WHEREFORE, the petition is DENIED and the Court AFFIRMS WITH

MODIFICATION the April 30, 2007 Decision and May 19, 2008
Resolution of the Court of Appeals in CA-G.R. CV No. 86021. Petitioners
spouses Deo Agner and Maricon Agner are ORDERED to pay, jointly and
severally, respondent BPI Family Savings Bank, Inc. ( 1) the remaining
outstanding balance of their auto loan obligation as of May 15, 2002
with interest at one percent ( 1 o/o) per month from May 16, 2002 until
fully paid; and (2) costs of suit.

SO ORDERED.

DIOSDADO M. PERALTA
Associate Justice
2. mora accipiendi

[G.R. No. L-10394. December 13, 1958.]

DECISION
CLAUDINA VDA. DE VILLARUEL, ET AL., Plaintiffs-Appellees, v.
MANILA MOTOR CO., INC. and ARTURO COLMENARES, Defendants-
Appellants.  REYES, J.B.L., J.:

Hilado & Hilado for Appellees. 

Ozaeta, Gibbs & Ozaeta for appellant company.  Manila Motor Co., Inc., and Arturo Colmenares interpose this appeal
against the decision of the Court of First Instance of Negros Occidental,
Jose L. Gamboa and Napoleon Garcia for appellant Arturo in its Civil Case No. 648, ordering the defendant Manila Motor Co., Inc.
Colmenares. to pay to the plaintiffs Villaruel the sum of (a) P11,900 with legal
interest from May 18, 1953, on which date, the court below declared
invalid the continued operation of the Debt Moratorium, under the first
cause of action; (b) P38,395 with legal interest from the date of filing of
SYLLABUS the original complaint on April 26, 1947, on the second cause of action;
and against both the Manila Motor Co., Inc. and its co-defendant, Arturo
Colmenares, the sum of P30,000 to be paid, jointly and severally, with
respect to the third cause of action. 
1. INTERNATIONAL LAW; SEQUESTRATION OF PRIVATE PROPERTY BY
BELLIGERENT OCCUPANT RECOGNIZED; LESSOR OF SEIZED
On May 31, 1940, the plaintiffs Villaruel and the defendant Manila
PROPERTY LIABLE FOR DISTURBANCE. — Under the generally
Motor Co., Inc. entered into a contract (Exhibit "A") whereby, the former
accepted principles of international law, which are made part of the law
agreed to convey by way of lease to the latter the following described
of the Philippines, a belligerent occupant (like the Japanese) may
premises;
legitimately billet or quarter its troops in privately owned land and
buildings for the duration of its military operations, or as military
(a) Five hundred (500) square meters of floor space of a building of
necessity should demand. Thus, when the Japanese forces evicted
strong materials for automobile showroom, offices, and store room for
appellant lessee company from the leased buildings and occupied the
automobile spare parts;
same as quarters for its troops, the Japanese authorities acted pursuant
to a right recognized by international and domestic law. Its act of
(b) Another building of strong materials for automobile repair shop;
dispossession, therefore, did not constitute a mere act of trespass
and
(perturbacion de mero hecho) but a trespass under color of title
(perturbacion de derecho) chargeable to the lessors of the seized
(c) A 5-bedroom house of strong materials for residence of the Bacolod
premises, since the belligerent occupant acted pursuant to a right that
Branch Manager of the defendant company. 
the law recognizes. 
The term of the lease was five (5) years, to commence from the time
2. ID.; ID.; ID.; LIABILITY OF LESSEE FOR RENTS DURING OCCUPATION
that the building were delivered and placed at the disposal of the lessee
OF PROPERTY. — Such dispossession, though not due to the fault of the
company, ready for immediate occupancy. The contract was renewable
lessors or lessee nevertheless deprived the lessee of the enjoyment of
for an additional period of five (5) years. The Manila Motor Company, in
the thing leased. Wherefore, the lessee’s corresponding obligation to
consideration of the above covenants, agreed to pay to the lessors, or
pay rentals ceased during such deprivation. 
their duly authorized representative, a monthly rental of Three
Hundred (P300) pesos payable in advance before the fifth day of each
3. ID.; ID.; ID.; IMPORTER REFUSAL TO ACCEPT RENTS PLACES
month, and for the residential house of its branch manager, a monthly
LESSORS IN DEFAULT; LIABILITY FOR SUPERVENING RISK. — Since
rental not to exceed Fifty (P50) pesos "payable separately by the
the lessee was exempt from paying the rents for the period of its ouster,
Manager." 
the insistence of the lessors to collect the rentals corresponding to said
period was unwarranted and their refusal to accept the currant rents
The leased premises were placed in the possession of the lessee on the
tendered by the lessee was unjustified. Such refusal places the lessors in
31st day of October, 1940, from which date, the period of the lease
default (mora) and they must shoulder the subsequent accidental loss
started to run under their agreement. 
of the premises leased. 
This situation, the Manila Motor Co., Inc. and its branch manager
4. ID.; ID.; ID.; ID.; ID.; MORA OF LESSORS NOT CURED BY FAILURE OF
enjoying the premises, and the lessors receiving the corresponding
LESSEE TO CONSIGN RENTS IN COURT. — The mora of the lessors was
rentals as stipulated, continued until the invasion of 1941; and shortly
not cured by the failure of the lessee to make the consignation of the
after the Japanese military occupation of the Provincial Capital of
rejected payments, but the lessee remained obligated to pay the
Bacolod the enemy forces held and used the properties leased as part of
amounts tendered and not consigned by it in court. 
their quarters from June 1, 1942 to March 29, 1945, ousting the lessee
therefrom. No payment of rentals were made at any time during the
5. PLEADING AND PRACTICE; CHANGE IN THE RELIEF PRAYED
said period. 
DURING THE PENDENCY OF THE ACTION. — A change in the relief
prayed, brought about by circumstances occurring during the pendency
Immediately upon the liberation of the said city in 1945, the American
of the action, is not improper. This is justified under Section 2, Rule 17
Forces occupied the same buildings that were vacated by the Japanese,
of the Rules of Court (on amendments) "to the end that the real matter
including those leased by the plaintiffs, until October 31, 1945. Monthly
in dispute and all matters in the action in dispute between the parties
rentals were paid by the said occupants to the owners during the time
may, as far as possible be completely determined in a single
that they were in possession, as the same rate that the defendant
proceeding."cralaw virtua1aw library
company used to pay. 
6. ID.; DISMISSAL WITHOUT PREJUDICE. — The dismissal of plaintiffs’
Thereafter, when the United States Army finally gave up the occupancy
two causes of action in the case at bar was premised on the existence of
the premises, the Manila Motor Co., Inc., through their branch manager,
the "Debt Moratorium" which suspended the enforcement of the
Rafael B. Grey, decided to exercise their option to renew the contract for
obligation up to a certain time. The reference thereto by the court
the additional period of five (5) years, and the parties agreed that the
amounted to a dismissal "without prejudice", since in effect it ruled that
seven months occupancy by the U. S. Army would not be counted as
the plaintiffs could not, at the time they sought it, enforce their right of
part of the new 5-year term. Simultaneously with such renewal, the
action against the defendants, but they must wait until the moratorium
company sublet the same buildings, except that used for the residence
was lifted. In this way, the court qualified its dismissal.
of the branch manager, to the other defendant, Arturo Colmenares.  cannot be sustained under the circumstances. This action was
However, before resuming the collection of rentals, Dr. Alfredo
Villaruel, who was entrusted with the same, consulted Atty. Luis Hilado
on whether they (the lessors) had the right to collect, from the
defendant company, rentals corresponding to the time during which the
Japanese military forces had control over the leased premises. Upon
being advised that they had such a right, Dr. Villaruel demanded
payment thereof, but the defendant company refused to pay. As a result,
Dr. Villaruel gave notice seeking the rescission of the contract of lease
and the payment of rentals from June 1, 1942 to March 31, 1945
totalling P11,900. This was also rejected by the defendant company in
its letter to Villaruel, dated July 27, 1946.  555, 59 F. 2d 711). The filing of the supplemental complaint can well be
Sometime on that same month of July, Rafael B. Grey offered to pay to
Dr. Villaruel the sum of P350, for which, tenderer requested a receipt
that would state that it was in full payment for the said month. The
latter expressed willingness to accept the tendered amount provided,
however, that his acceptance should be understood to be without
prejudice to their demand for the rescission of the contract, and for
increased rentals until their buildings were returned to them. Later, Dr.
Villaruel indicated his willingness to limit the condition of his
acceptance to be that "neither the lessee nor the lessors admit the
contention of the other by the mere fact of payment." As no accord
could still be reached between the parties as to the context of the
receipt, no payment was thereafter tendered until the end of November,
1946. On December 4, 1946 (the day after the defendant company
notified Dr. Villaruel by telegram, that it cancelled the power of attorney
given to Grey, and that it now authorized Arturo Colmenares, instead, to
pay the rent of P350 each month), the Manila Motor Co., Inc. remitted to
Dr. Villaruel by letter, the sum of P350.90. For this payment, the latter
issued a receipt stating that it was "without prejudice" to their demand
for rents in arrears and for the rescission of the contract of lease.  until the moratorium was lifted. In this way, the court qualified its
After it had become evident that the parties could not settle their case
amicably, the lessors commenced this action on April 26, 1947 with the
Court of First Instance of Negros Occidental against the appellants
herein. During the pendency of the case, a fire originating from the
projection room of the City Theatre, into which Arturo Colmenares, (the
sublessee) had converted the former repair shop of the Manila Motor
Co. Inc., completely razed the building, engulfing also the main building
where Colmenares had opened a soda fountain and refreshment parlor,
and made partitions for store spaces which he rented to other persons.  then it never was in default nor was it chargeable for the accidental lose
Because of the aforesaid occurrence, plaintiffs demanded
reimbursement from the defendants, but having been refused, they filed
a supplemental complaint to include as their third cause of action, the
recovery of the value of the burned buildings.  The appellees contended, and the court below has held, that the ouster
Defendants filed their amended answer and also moved for the
dismissal of the plaintiffs’ first and second causes of action invoking the
Debt Moratorium that was then in force. The dismissal was granted by
the trial court on February 5, 1951, but hearing was set as regards the
third cause of action.  to pay rent. We find that contention and ruling erroneous and
On August 11, 1952, the defendant company filed a motion for
summary judgment dismissing the plaintiffs, third cause of action, to
which plaintiffs registered objection coupled with a petition for
reconsideration of the order of the court dismissing the first and second
causes of action. Pending the resolution of this incident, plaintiffs, on
October 2, 1953, called the court’s attention to the decision in the case
of Rutter v. Esteban (93 Phil., 68; 49 Off. Gaz. [5] 1807) invalidating the
continued effectivity of the Moratorium Law (R. A. 342). On November
25, 1953, the trial court denied the defendant company’s motion for
summary judgment and set aside its previous order dismissing the first
and second causes of action. The case was accordingly heard and
thereafter, judgment was rendered in plaintiffs’ favor in the terms set in
the opening paragraph of this decision. Thereafter, the defendants
regularly appealed to this Court.  3. To maintain the lessee in the peaceful enjoyment of the lease during
The defendants-appellants raise a number of procedural points. The
first of these relates to their contention that the supplemental
complaint which included a third cause of action, should not have been
admitted, as it brought about a change in the original theory of the case
and that it raised new issues not theretofore considered. This argument
inceptionally instituted for the rescission of the contract of lease and for
the recovery of unpaid rentals before and after liberation. When the
leased buildings were destroyed, the plaintiffs-lessors demanded from
the defendants-lessees, instead, the value of the burned premises,
basing their right to do so on defendants’ alleged default in the payment
of post-liberation rentals (which was also their basis in formerly
seeking for rescission). This cannot be considered as already altering
the theory of the case which is merely a change in the relief prayed for,
brought about by circumstances occurring during the pendency of the
action, and is not improper. (Southern Pacific Co. v. Conway, 115 F. 2d
746; Suburban Improvement Company v. Scott Lumber Co., 87 A.L.R.
justified also under section 2, Rule 17 of the Rules of Court (on
amendments) "to the end that the real matter in dispute and all matters
in the action in dispute between the parties may, as far as possible be
completely determined in a single proceedings." It is to be noted
furthermore, that the admission or rejection of this kind of pleadings is
within the sound discretion of the court that will not be disturbed on
appeal in the absence of abuse thereof (see Sec. 5, Rule 17, Rules of
Court), especially so, as in this case, where no substantial procedural
prejudice is caused to the adverse party. 
It is urged that the dismissal of the first and second causes of action on
February 5, 1951 had the effect of a dismissal "with prejudice" as the
court did not make any qualification in its dismissal order. Appellants,
apparently, lost sight of the fact that the dismissal was premised on the
existence of the "Debt Moratorium" which suspended the enforcement
of the obligation up to a certain time. The reference thereto by the
lower court amounted to a dismissal "without prejudice", since in effect
it ruled that the plaintiffs could not, at the time they sought it, enforce
their right of action against the defendants, but plaintiffs must wait
dismissal. 
Taking up the case on its merits, it is readily seen that the key to the
entire dispute is the question whether the defendant-appellant Manila
Motor Co., Inc. should be held liable for the rentals of the premises
leased corresponding to the lapse of time that they were occupied as
quarters or barracks by the invading Japanese army, and whether said
appellant was placed in default by its refusal to comply with the
demand to pay such rents. For if the Motor Company was not so liable,
of the buildings, nor for any damages except the rental at the contract
rate from its reoccupation of the premises leased until the same were
accidentally destroyed by fire on March 2, 1948. 
of the lessee company by the Japanese occupation forces from 1942
until liberation, while operating to deprive the lessee of the enjoyment
of the thing leased, was, nevertheless, a mere act of trespass
("perturbacion de mero hecho") that, under the Spanish Civil Code of
1889 (in force here until 1950), did not exempt the lessee from the duty
untenable. 
The pertinent articles of the Civil Code of Spain of 1889
provide:jgc:chanrobles.com.ph
"ART. 1554. It shall be the duty of the lessor;
1. To deliver to the lessee the thing which is the subject matter of the
contract;
2. To make thereon, during the lease, all repairs necessary in order to
keep it in serviceable condition for the purpose for which it was
intended;
the entire term of the contract."cralaw virtua1aw library
"ART. 1560. The lessor shall not be liable for any act of mere
disturbance of a third person of the use of the leased property; but the
lessee shall have a direct action against the trespasser. 
If the third person, be it the Government or a private individual, has
acted in reliance upon a right, such action shall not be deemed a mere
act of disturbance." (Italics supplied)
Under the first paragraph of article 1560 the lessor does not answer for
a mere act of trespass (perturbacion de mero hecho) as distinguished
from trespass under color of title (perturbacion de derecho). As to what
would constitute a mere act of trespass, this Court in the case of
Goldstein v. Roces (34 Phil. 562), made this
pronouncement:jgc:chanrobles.com.ph
"Si el hecho perturbador no va acompañ ado ni precedido de nada que
revele una intencion propiamente juridica en el que lo realiza, de tal
suerte que el arrendatario solo pueda apreciar el hecho material
desnudo de toda forma o motivacion de derecho, entendemos que se
trata de una perturbacion de mero hecho."cralaw virtua1aw library
Upon the basis of the distinction thus established between the
perturbacion de hecho and the perturbacion de derecho, it is
demonstrable that the ouster of the appellant by the Japanese
occupying forces belongs to the second class of disturbances, de
derecho. For under the generally accepted principles of international
law (and it must be remembered that those principles are made by our
Constitution a part of the law of our nation 1) a belligerent occupant
(like the Japanese in 1942-1945) may legitimately billet or quarter its
troops in privately owned land and buildings for the duration of its
military operations, or as military necessity should demand. The well
known writer Oppenheim, discoursing on the laws of war on land, says
upon this topic;
"Immovable private enemy property may under no circumstances or
conditions be appropriated by an invading belligerent. Should he
confiscate and sell private land or buildings, the buyer would acquire no
right whatever to the property. Article 46 of the Hague Regulations
expressly enacts that ‘private property may not be confiscated.’ But
confiscation differs from the temporary use of private land and building
for all kinds of purposes demanded by the necessities of war. What has
been said above with regard to utilization of public buildings applies
equally to private buildings. If necessary, they may be converted into
hospitals, barracks, and stables without compensation for the
proprietors, and they may also be converted into fortifications. A
humane belligerent will not drive the wretched inhabitants into the
street if he can help it. But under the pressure of necessity he may be
obliged to do this, and he is certainly not prohibited from doing it.
(Italics supplied) (Oppenheim & Lauterpach, International Law, Vol. II,
p. 312, 1944 Ed.)  propiedad de la finca, no se observaron las formalidades legales, a causa
The view thus expressed is concurred in by other writers. Hyde
(International Law, Vol. 3, p. 1893, 2nd Rev. Ed.) quotes the U. S. War
Department 1940 Rules of Land Warfare (Rule No. 324) to the effect
that — igualmente por la Sala que el hecho de que la industria no funcionara en
"The measure of permissible devastation is found in the strict
necessities of war. As an end in itself, as a separate measure of war,
devastation is not sanctioned by the law of war. There must be some
reasonably close connection between the destruction of property and
the overcoming of the enemy’s army. Thus the rule requiring respect for
private property is not violated through damage resulting from
operations, movements, or combats of the army; that is, real estate may
be utilized for marches, camp sites, construction of trenches, etc.
Building may be used for shelter for troops, the sick and wounded, for
animals, for reconnaisance, cover defense, etc. Fences, woods, crops,
buildings, etc., may be demolished, cut down, and removed to clear a
field of fire, to construct bridges, to furnish fuel if imperatively needed
for the army." (Emphasis supplied)
Reference may also be made to Rule 336:jgc:chanrobles.com.ph
"What may be requisitioned. — Practically everything may be
requisitioned under this article (art. LII of the regulations above
quoted) that is necessary for the maintenance of the army and not of
direct military use, such as fuel, food, forage, clothing, tobacco, printing
presses, type, leather, cloth, etc. Billeting of troops for quarters and
subsistence is also authorized." (Emphasis supplied)
And Forest and Tucker state:jgc:chanrobles.com.ph
"The belligerent occupant may destroy or appropriate public property
which may have a hostile purpose, as forts, arms, armories, etc. The
occupying force may enjoy the income from the public sources. Strictly
private property should be inviolable, exce pt so for as the necessity of
war requires contrary action." (Forest and Tucker, International Law,
9th Ed., p. 277) (Emphasis supplied)
The distinction between confiscation and temporary sequestration of
private property by a belligerent occupant was also passed upon by this
Court in Haw Pia v. China Banking Corporation, 80 Phil. 604, wherein
the right of Japan to sequester or take temporary control over enemy
private property in the interest of its military effort was expressly
recognized. 
We are thus forced to conclude that in evicting the lessee, Manila Motor
Co., Inc. from the leased buildings and occupying the same as quarters
for troops, the Japanese authorities acted pursuant to a right recognized
by international and domestic law. Its act of dispossession, therefore,
did not constitute perturbacion de hecho but a perturbacion de derecho
for which the lessors Villaruel (and not the appellants lessees) were
liable (Art. 1560, su pra) and for the consequences of which said lessors
must respond, since the result of the disturbance was the deprivation of
the lessee of the peaceful use and enjoyment of the property leased.
Wherefore, the latter’s corresponding obligation to pay rentals ceased
during such deprivation. 
The Supreme Court of Spain, in its Sentencia of 6 December 1944,
squarely declared the resolutory effect of the military sequestration of
properties under lease upon the lessee’s obligation to pay rent
(Jurisprudencia Civil, Segunda Serie, Tomo 8, pp. 583,
608):jgc:chanrobles.com.ph
"Considerando que para resolver acerca de la procedencia del presente
recurso es preciso partir de las bases de hecho sentadas en la sentencia
recurrida, y no impugnadas al amparo del nú mero 7. ° del articulo 1.692
de la Ley de Enjuiciamiento civil, es decir, de que hallandose vigente el
contrato de arrendamiento celebrado entre actor y demandada, en
fecha que no se precisa, entre los dias del 18 al 31 de julio de 1936, los
locales objeto de dicho contrato de arrendamiento, y en los que no
funcionaba de tiempo anterior la industria para cuyo ejercicio se
arrendaron, fueron requisados por el Ejercito Nacional, con motivo de
la guerra civil, para que se instalara en los mismos la Junta de Donativos
al Ejercito del Sur, aun cundo en dicha incautacion, que se hizo a la
de las circunstancias extraordinarias por que a la sazon atravesaba
Sevilla, hecho que no consta se hiciera saber por los arrendatarios
demandados al actor, pero que fue notorio en aquella capital, donde
residia el actor, que de el debio tener concoimiento. Se estima
el local no tuvo iufluencia alguna sobre su incautacion por el
Ejercito."cralaw virtua1aw library
"Considerando que sobre tales bases de hecho es de desestimar el
primer motivo del recurso: violacion de los articulos 1.254, 1.278 y
1.091 del Codigo civil, que sancionan, en terminos generales, la eficacia
de los contratos, puesto que en el presente caso de los que se trata en
definitiva es de determinar si por virtud de fuerza mayor, la requisa a
que se hace referencia, ajena, por lo tanto, a culpa, asi del arrendatario
como del arrendador, se vio aqú el privado del posible disfrute de la
finca arrendada, y de si por virtud de esta circunstancia este o no exento
de la obligacion de abonar la renta pactada durante el tiempo que
subsistio la incautacion; y es indudable la afirmativa en cuanto al
primer extremo, puesto que la sentencia recurrida establece que el
hecho de que no funcionase la industria y estuvieran los locales
cerrados no actuo como causa de la requisa de estos por el
Ejercito."cralaw virtua1aw library
"Considerando que la sentencia recurrida, en cuanto no da lugar al pago
de las rentas correspondientes al tiempo que duro la incautacion, lejos
de infringir, por aplicacion indebida, el art. 1.568 del Codigo civil, se
ajusta a la orientacion marcada en el mismo, puesto que este precepto
legal dispone que el arrendatario tiene accion contra el tercero
perturbador de mero hecho en la posesion de la finca arrendada, pero
no contra la Administracion o contra los que obran en virtud de un
derecho que les corresponde; y aqui la perturbacion que experimento el
arrendador en su posesion, como consecuencia de la requisa, no puede
calificarse como de mero hecho, conforme al citado articulo, puesto que
la finca fue requisada por la autoridad militar para fines de guerra, de
donde se sigue que el arrendatario tenia que soportar la privacion de su
tenencia material a traves del arrendador, con quien ha de entenderse
la requisa de la cosa arrendada."cralaw virtua1aw library
In addition, the text of Art. 1560, in its first paragraph (jam quot.)
assumes that in case of mere disturbance (perturbacion de mero hecho)
"the lessee shall have a direct action against the trespasser." This
assumption evidently does not contemplate the case of dispossession of
the lessee by a military occupant, as pointed out by Mr. Chief Justice
Paras in his dissenting opinion in Reyes v. Caltex (Phil.) Inc., 84 Phil.
669; for the reason that the lessee could not have a direct action against
the military occupant. It would be most unrealistic to expect that the
occupation courts, placed under the authority of the occupying
belligerent, should entertain at the time a suit for forcible entry against
the Japanese army. The plaintiffs, their lawyers, and in all probability,
the Judge and court personnel, would face "severest penalties" for such
defiance of the invader.  preceptos invocados, a una extencion de renta mientras subsiste la
The present case is distinguishable from Lo Ching v. Archbishop of
Manila (81 Phil., 601) in that the act of the Japanese military involved in
the latter case clearly went beyond the limits set by the Hague
Conventions, in seizing the property and delivering it to another private
party; and from Reyes v. Caltex (Phil.) Inc., 84 Phil. 654, in that the
rights of the military occupant under international law were not raised
or put in issue in said case; and moreover, the lessee there, by failing to
rescind the lease upon seizure of the premises by the Japanese military,
despite the stipulated power to do so, resumed business and decided to
hold unto the long term lease for the balance of its 20-year period,
starting from December 23, 1940. In the case before us, the occupation
of the leased property by the Japanese army covered the major portion
of the five-year contractual period, without any option to rescind by the
lessee.  wise:jgc:chanrobles.com.ph
The lessor’s position is not improved by regarding the military seizure
of the property under lease as a case of force majeure or fortuitous
event. Ordinarily, a party may not be held responsible therefor, despite
the fact that it prevented compliance of its obligations. But lease being a
contract that calls for prestations that are both reciprocal and repetitive
(tractum successivum), the obligations of either party are not
discharged at any given moment, but must be fulfilled all throughout
the term of the contract. As a result, any substantial failure by one party
to fulfill its commitments at any time during the contract period gives
rise to a failure of consideration (causa) for the obligations of the other
party and excuses the latter from the correlative performance, because
the causa in lease must exist not only at the perfection but throughout
the term of the contract. No lessee would agree to pay rent for premises
he could not enjoy. As expressed by Marcel Planiol (quoted in 4 Castan,
Derecho Civil, 7th Edition, p. 264) —
"Como la obligacion del arrendador es sucesiva y se renueva todos los
dias, la subsistencia del arrendamiento se hace imposible cuando, por
cualquier razon, el arrendador no puede ya procurar al arrendatario el
disfrute de la cosa."cralaw virtua1aw library
This effect of the failure of reciprocity appears whether the failure is
due to fault or to fortuitous event; the only difference being that in case
of fault, the other party is entitled to rescind the contract in toto, and
collect damages, while in casual non-performance it becomes entitled
only to a suspension pro tanto of its own commitments. This rule is
recognized in par. 2 of Art. 1558, authorizing the lessee to demand
reduction of the rent in case of repairs depriving him of the possession
of part of the property; and in Art. 1575, enabling the lessee of rural
property to demand reduction of the rent if more than one-half of the
fruits are lost by extraordinary fortuitous event. Of course, where it
becomes immediately apparent that the loss of possession or
enjoyment will be permanent, as in the case of accidental destruction of
a leased building, the lease contract terminates.  mutare; Dig. 19, 2, 39; and that the lessee has a right of action, if he
Applying these principles, the Sentencia of December 1944, already
adverted to, ruled as follows:jgc:chanrobles.com.ph
"Considerando que privado el arrendador, por tal hecho, del disfrute de
esta, es menifiesta la imposibilidad en que se vio de cumplir la tercera
de las obligaciones que el impone el articulo 1.554 del Codigo Civil,
obligacion (la de mantener al arrendatario en el disfrute de la cosa
arrendada) que ha de entenderse reciproca de la de pago de renta
pactada, que impone al arrendatario el nú mero primero del art. 1.555
de dicho Cuerpo legal, y por ello no puede ser exigida."cralaw virtua1aw
library
"Considerando que, aunque no sean estrictamente aplicables al caso los
articulos 1.124, 1.556 y 1.568, que se citan como infringidos por el
recurrente, suponiendo que a ellos ha entendido referirse la Audiencia
(lo que impediria, en todo caso, la estimacion del recurso por este
motivo, ya que dichos articulos no se citan en la sentencia de instancia),
es evidente que ellos proclaman la reciprocidad de las obligaciones
entre arrendatario y arrendador, y en este sentido, tratandose de un
incumplimiento inculpable de contrato, pueden servir, como tambien el
1.558, en cuanto preven la reduccion de rentas o posible restriccion del
contrato cuando el arrendatario se ve privado, por obras realizadas en
la finca arrendada, del disfrute de este, de fundamento, con los demas
imposibilidad de utilizar la cosa arrendada, sobre todo cuando los
articulos 157 y 158 del Reglamento de Requisas de 13 de enero de 1921
estatuyen claramente que les requisas de edificio se hacen a la
propiedad, y es el propietario el que puede pedir indemnizacion, uno de
cuyos elementos es el precio del alquiler que le sea satisfecho por el
inmueble incautado."cralaw virtua1aw library
We are aware that the rule in the common law is otherwise, due to its
regarding a lease as a conveyance to the lessee of a temporary estate or
title to the leased property so that loss of possession due to war or
other fortuitous event leaves the tenant liable for the rent in the
absence of stipulation. The fundamental difference between the
common law and the civil law concepts has been outlined by the United
States in Viterbo v. Friedlander, 30 L. Ed. (U.S.) pp. 776, 778, in this
"But as to the nature and effect of a lease for years, at a certain rent
which the lessee agrees to pay, and containing no express covenant on
the part of the lessor, the two systems differ materially. The common
law regards such a lease as the grant of an estate for years, which the
lessee takes a title in, end is bound to pay the stipulated rent for,
notwithstanding any injury by flood, fire or external violence, at least
unless the injury is such a destruction of the lend as to amount to an
eviction; end by that law the lessor is under no implied covenant to
repair, or even that the premises shall be fit for the purpose for which
they are leased. Fowler v. Bott, 6 Mass. 63; 3 Kent, Com. 465, 466;
Broom, Legal Maxims, 3d ed. 213, 214; Doupe v. Genin, 45 N. Y. 119;
Kingbury v. Westfall, 61 N. Y. 356. Naumberg v. Young, 15 Vroom, 331;
Bowe v. Hunking, 135 Mass. 380; Manchester Warehouse Co. v. Carr,
L.R. 5 C.P.D. 507. 
The civil law, on the other hand, regards a lease for years as a mere
transfer of the use and enjoyment of the property; and holds the
landlord bound, without any express covenant, to keep it in repair and
otherwise fit for use and enjoyment for the purpose for which it is
leased, even when the need of repair or the unfitness is caused by an
inevitable accident, and if he does not do so, the tenant may have the
lease annulled, or the rent abated. Dig. 19, 2, 9, 2; 19, 2, 15, 1, 2; 19, 2,
25, 2; 19, 2, 39; 2 Gomez, Variae Resolutiones c. 3, secs. 1-3, 18, 19:
Gregorio Lopes in 5 Partidas, tit. 8, 11. 8, 22; Domat, Droit Civil, pt. 1, lib.
1, tit. 4, sec. 1, no. 1; sec. 3 nos. 1, 3, 6, Pothier, Contract de Louage, nos.
3, 6, 11, 22, 53, 103, 106, 139-155. 
It is accordingly laid down in the Pandects, on the authority of Julian, ‘If
anyone has let an estate, that, even if anything happens by vis major, he
must make it good, he must stand by his contract,’ si quis fundum
locaverit, ut, etiamsi quid vi majore accidisset, hoc ei praestaretur,
pacto standum esse; Dig. 19, 2, 9, 2; and on the authority of Ulpian, that
‘A lease does not change the ownership,’ non solet locatio dominium
cannot enjoy the thing which he has hired, si re quam conduxit frui non
liceat, whether because his possession, either of the whole or of part of
the field, is not made good, or a house, or stable or sheepfold, is not
repaired; and the landlord ought to warrant the tenant, dominum
colono praestare debere, against every irresistible force, omnim vim cui
resisti non potest, such as floods, flocks of birds, or any like cause, or
invasion of enemies; and if the whole crop should be destroyed by a
heavy rainfall, or the olives should be spoiled by blight, or by
extraordinary heat of the sun, solis fervore non assueto, it would be the
loss of the landlord, damnum domini futurum; and so if the field falls in
by an earthquake, for there must be made good to the tenant a field that
he can enjoy, o portere enim agrum praestari conductori, ut frui possit;
but if any loss arises from defects in the thing itself, si qua tamen vitia
ex i psa re oriantur, as if wine turns sour, or standing corn is spoiled by
worms or weeds, or if nothing extraordinary happens, si vero nihil extra
consuetudinem acciderit, it is the loss of the tenant, damnum coloni
asse. Dig. 19, 2; 15, 1, 2." (Emphasis supplied)
In short, the law applies to leases the rule enunciated by the Canonists
and the Bartolist School of Post glossatorse, that "contractus qui
tractum successivum habent et de pendentiam de futuro, sub
conditione rebus sic stantibus intelliguntur," they are understood
entered subject to the condition that things will remain as they are,
without material change.  rentals tendered to and improperly rejected by the lessors, did not
It is also worthy of note that the lessors, through Dr. Javier Villaruel,
agreed after liberation to a renewal of the contract of lease for another
five years (from June 1, 1946 to May 31 of 1951) without making any
reservation regarding the alleged liability of the lessee company for the
rentals corresponding to the period of occupancy of the premises by the
Japanese army, and without insisting that the non-payment of such
rental was a breach of the contract of lease. This passivity of the lessors
strongly supports the claim of the lessees that the rentals in question
were verbally waived. The proffered explanation is that the lessors
could not refuse to renew the lease, because the privilege of renewal
had been granted to the lessees in the original contract. Such excuse is
untenable: if the lessors deemed that the contract had been breached by
the lessee’s non-payment of the occupation rents how could they admit
the lessee’s right to renew a contract that the lessee itself had violated?
But this is not all. The lessors accepted payment of current rentals from
October 1945 to June 1946. It was only in July 1946 that they insisted
upon collecting also the 1942-1945 rents, and refused to accept further
payments tendered by the lessee unless their right to collect the
occupation rental was recognized or reserved. After refusing the rents
from July to November 1946, unless the lessee recognized their right to
occupation rentals, the appellees (lessors) demanded rescission of the
contract and a rental of P1,740 monthly in lieu of the stipulated P350
per month. (Exhibit "C").  (a) That the dispossession of the lessee from the premises by the
This attitude of the lessors was doubly wrongful: first, because as
already shown, the dispossession by the Japanese army exempted the
lessee from his obligation to pay rent for the period of its ouster; and
second, because even if the lessee had been liable for that rent, its
collection in 1946 was barred by the moratorium order, Executive
Order No. 32, that remained in force until replaced by Rep. Act 342 in
1948. To apply the current rentals to the occupation obligations would
amount to enforcing them contrary to the moratorium decreed by the
government.  (c) That the insistence of the lessors to collect such rentals was
Clearly, then, the lessor’ insistence upon collecting the occupation
rentals for 1942-1945 was unwarranted in law. Hence, their refusal to
accept the current rentals without qualification placed them in default
(mora creditoris or acci piendi) with the result that thereafter, they had
to bear all supervening risks of accidental injury or destruction of the
leased premises. While not expressly declared by the Code of 1889, this
result is clearly inferable from the nature and effects of mora, and from
Articles 1185, 1452 [par. 3] and 1589).  shoulder the subsequent accidental loss of the premises leased;
"ART. 1185. When the obligation to deliver a certain and determinate
thing arises from the commission of a crime or misdemeanor the
obligor shall not be exempted from the payment of its value, whatever
the cause of its loss may have been, unless, having offered the thing to
the person entitled ‘to receive it, the latter should have refused without
reason to accept it."cralaw virtua1aw library
"Art. 1452. . . .  from July 1946, and the value of the destroyed buildings amounting to
If fungible things should be sold for a price fixed with relation to weight,
number, or measure, they shall not be at the purchaser’s risk until they
have been weighed, counted, or measured, unless the purchaser should
be in default."cralaw virtua1aw library
"ART. 1589. If the person who contracted to do the work bound himself
to furnish the materials, he shall bear the loss in case of the destruction
of the work before it is delivered, unless its acceptance has been
delayed by the default of the other party."cralaw virtua1aw library
While there is a presumption that the loss of the thing leased is due to
the fault of the lessee (Civil Code of 1889, Art. 1563), it is noteworthy
that the lessors have not invoked that presumption either here or in the
court below. On the contrary, the parties and the trial court have all
proceeded and discussed the issues taking for granted that the
destruction of the leased buildings was purely fortuitous. We see no
reason for departing from that assumption and further prolonging this
litigation. 
That the lessee and sublessee did not consign or deposit in court the
render the debtor liable for default (mora solvendi) nor answerable for
fortuitous events because, as explained by the Supreme Court of Spain
in its Sentencia of 5 June 1944 —
"Al exigir el art. 1176 del Codigo Civil la consignacion para liberar al
deudor no quiere decir que necesariamente haya de practicarse, y no
baste el ofrecimiento de pago que de aquella no fuere seguido, a efectos
de exclusion ds las consecuencias de la mora solvendi." (8 Manresa,
Comentarios, 5th Ed., Vol. I, p. 136). 
In other words, the only effect of the failure to consign the rentals in
court was that the obligation to pay them subsisted (P.N.B. v. Relativo,
92 Phil., 203) and the lessee remained liable for the amount of the
unpaid contract rent, corresponding to the period from July to
November, 1946; it being undisputed that, from December 1946 up to
March 2, 1948, when the commercial buildings were burned, the
defendants-appellants have paid the contract rentals at the rate of P350
per month. But the failure to consign did not eradicate the default
(mora) of the lessors nor the risk of loss that lay upon them. (3 Castan,
Der. Civ., 8th Ed., p. 145; 4 Puig Peñ a, Der. Civ., part. 1, p. 234; Diaz
Pairo, Teoria Gen. de las Obligaciones [3rd Ed. ], Vol. 1, pp. 192-193). 
In view of the foregoing, we hold:chanrob1es virtual 1aw library
Japanese army of occupation was not an act of mere trespass
(perturbacion de mero hecho) but one de derecho chargeable to the
lessors;
(b) That such dispossession, though not due to fault of lessors or lessee,
nevertheless resulted in the exemption of the lessee from its obligation
to pay rent during the period that it was deprived of the possession and
enjoyment of the premises leased;
unwarranted;
(d) That the lessors were not justified in refusing to accept the tender of
current rentals unless the lessee should recognize their right to the
rents corresponding to the period that the lessee was not in possession;
(e) That by their improper refusal to accept the current rents tendered
by the lessee, the lessors incurred in default (mora) and they must
(f) That the mora of the lessors was not cured by the failure of the
lessee to make the consignation of the rejected payments, but the lessee
remained obligated to pay the amounts tendered and not consigned by
it in court. 
Consequently, it was reversible error to sentence the appellants to pay
P2,165 a month as reasonable value of the occupation of the premises
P30,000. 

Wherefore, the decision appealed from is modified in the sense that the
appellant Manila Motor Company should pay to the appellees Villaruel
only the rents for the leased premises corresponding to the period from
July up to November 1946, at the rate of P350 a month, or a total of
P1,750. Costs against appellees in both instances. So ordered. 
Paras, C.J., Bengzon, Padilla, Montemayor, Bautista Angelo, Labrador,
Concepcion and Endencia, JJ., concur. 
G.R. No. L-49852 October 19, 1989
EMILIA TENGCO, petitioner,  and that its conclusions are not clearly against the
vs.
COURT OF APPEALS and BENJAMIN CIFRA JR., respondents.
De Santos, Balgos & Perez for petitioner.
Teofilo F. Manalo for respondents.
PADILLA, J.:
Review on certiorari of the decision* rendered by the Court of Appeals
in CA-G.R. NO. SP-08182, entitled: "Emilia Tengco, petitioner, versus
Court of First Instance of Rizal, etc., et al, respondents," which dismissed
herein petitioner's "Appeal by Way of Certiorari" from the judgment of
the Court of First Instance of Rizal in Civil Case No. C-6625 which
affirmed the decision of the Municipal Court of Navotas, Metro Manila,
in Civil Case No. 2092, entitled: "Benjamin Cifra, plaintiff, versus Emilia
Tengco defendant," ordering the herein petitioner (as defendant) to
vacate the premises at No. 164 Int Gov. Pascual St., Navotas, Metro
Manila, and to pay the herein private respondent (as plaintiff) the
arrears in rentals and attorney's fees; and the Resolution denying the
herein petitioner's motion for reconsideration of the said Court of
Appeals decision.
The record of the case shows that on 16 September 1976, the herein
private respondent, Benjamin Cifra, Jr., claiming to be the owner of the
premises at No. 164 Int Gov. Pascual St., Navotas, Metro Manila, which
he had leased to the herein petitioner, Emilia Tengco, filed an action for
unlawful detainer with the Municipal Court of Navotas, Metro Manila,
docketed therein as Civil Case No. 2092, to evict the petitioner, Emilia
Tengco, from the said premises for her alleged failure to comply with
the terms and conditions of the lease contract by failing and refusing to
pay the stipulated rentals despite repeated demands. After trial
judgment was rendered against the petitioner. The decretal portion of
the decision reads, as follows:
WHEREFORE, Judgment is hereby rendered in
favor of the plaintiff and against the defendant,
ordering the defendant and any and all persons
claiming rights under her to vacate the premises
occupied by her at No. 164 Int Gov. Pascual Street,
this town and to surrender possession thereof to
the plaintiff, condemning the defendant to pay the
plaintiff the amount of THREE HUNDRED
SEVENTY SIX (P376.00) PESOS, as rentals in
arrears and the sum of TWELVE PESOS (P12.00), a
month from October, 1976 until the premises is
fully vacated. To pay the plaintiff the sum of TWO
HUNDRED (P200.00) PESOS as and for attorney's
fees and costs of suit.
From this judgment, the herein petitioner appealed to the Court of First
Instance of Rizal where the appeal was docketed as Civil Case No. C-
6625. On 18 May 1978, the Court of First Instance of Rizal rendered
judgment affirming the decision of the municipal court, the dispositive
part of which reads as follows:
WHEREFORE, premises considered, judgment is
hereby rendered affirming in toto the judgment of
the lower court dated September 20, 1 977
without pronouncement as to costs.
Not satisfied, the herein petitioner filed with the respondent Court of
Appeals an "Appeal by Way of Certiorari" which was docketed as CA-
G.R. NO. SP-08182. On 29 August 1978, the respondent Court of Appeals
promulgated a decision, with the following disposition:
WHEREFORE, finding that the Decision of the
lower Court is supported by substantial evidence
law and jurisprudence, the instant petition is
hereby denied due course and is dismissed
outright.
The petitioner filed a motion for reconsideration of the decision but her
motion was denied on 16 January 1979.
Hence, the present recourse.
The petitioner contends that the respondent Court of Appeals erred in
sustaining the decisions of the appellate and trial courts which are
allegedly contrary to the evidence and applicable jurisprudence. The
petitioner more particularly claims that (1) the private respondent
Benjamin Cifra, Jr. is not the owner of the leased premises; (2) the
lessor was guilty of mora accipiendi; (3) the petitioner's version of the
facts is more credible than private respondent's; (4) laches had
deprived the lessor of the right to eject her; and (5) the private
respondent failed to establish a cause of action against the petitioner.
We find no merit in the petition. The reasons advanced by the petitioner
to support her petition are the same reasons given by her to the Court
of Appeals in support of her "Appeal by Way of Certiorari" and we find
no ground to adopt a different course from that of the respondent
appellate court. In disposing of the petitioner's contentions, the Court of
Appeals said:
Petitioner claims that private respondent had
failed to establish his ownership of the lot in
question for while the Certificate of Title
presented by him refers to a parcel of land
situated at Bo. Almacen, Navotas, the premises in
question, on the other hand, is situated in Bo.
Sipak Navotas; that it was not with private
respondent that she entered into the lease
agreement but with his mother; that her failure to
pay the rentals on the premises was due to the
refusal of the collector to accept her tender of
payment; and that laches had deprived private
respondent of whatever right he had against her
considering that the Complaint was filed only in
September, 1976 whereas his cause of action
arose sometime in February, 1974 when she
defaulted in the payment of rentals.
We find this appeal which We consider as a
Petition for Review, to be without merit.
It should be noted that petitioner admits that she
is a lessee on the premises in question and that she
had been in default in the payment of the rentals
thereon since February, 1974 allegedly because of
the refusal of the collector to accept her tender of
payment. However, she claims that the lease
agreement was not with private respondent, but
with his mother. The question as to who is the real
lessor of the premises is one of fact and the
findings of the lower court that it was private
 respondent is entitled to the highest respect by
appellate Courts barring any material evidence to
the contrary. Neither can petitioner question
private respondent's claim of ownership of the
leased premises. The tenant is not permitted to
deny the title of his landlord at the time of the
commencement of the relation of landlord and
tenant between them.
Petitioner's excuse for her non-payment of the
rentals on the premises deserves scant
consideration. If, indeed, her offer to settle her
obligation was refused by private respondent, she
should have resorted to the judicial deposit of the
amount due in order to release her from
responsibility.
Petitioner's claim that private respondent's cause
of' action is barred by laches is untenable. While it
is true that petitioner's arrearages date back to
February, 1974, however, a tenant's mere failure
to pay rent does not ipso facto make unlawful his
possession of the leased premises. As held by
respondent Court of First Instance, it is the failure
to pay rents after a demand therefor is made that
entitles the lessor to bring an action of Unlawful
Detainer. Moreover, the lessor has the privilege to
waive his right to bring an action against his
tenant and give the latter credit for the payment of
the rents and allow him to continue indefinitely in
the possession of the premises. During such
period, the tenant would not be in illegal
possession of the premises and the landlord can
not maintain an action until after he has taken
steps to convert the legal possession into an illegal
possession. Thus, in the case at bar, the demand on
petitioner to vacate the premises for failure to pay
the rentals thereon was made by private
respondent only on August 23, 1976 and the
Complaint against petitioner was filed on
September 16,1976.
Consequently, petitioner's non-payment of the
rentals on the premises, notwithstanding demand
made by private respondent, and her failure to
avail of the remedy provided for in Article 1256 of
the Civil Code, entitles private respondent to eject
her from the premises.
Indeed, the question of whether or not private respondent is the owner
of the leased premises is one of fact which is within the cognizance of
the trial court whose findings thereon will not be disturbed on appeal
unless there is a showing that the trial court had overlooked,
misunderstood, or misapplied some fact or circumstance of weight and
substance that would have affected the result of the case. And since the
petitioner has not presented sufficient proof that the leased premises is
not the same lot registered in the name of the private respondent, the
findings of the lower courts on the fact of ownership of the leased
premises will not be disturbed.
The maps attached by the petitioner to her Reply to the Comment of the
private respondent which would tend to show that Almacen and Sipac
are two (2) different barangays or sitios, cannot offset the findings of
the trial court for lack of proper Identifications; in fact, these maps do
not even indicate where the property at No. 164 Int Gov. Pascual Street
is located.
The petitioner's contention that the provisions of Section 1,
Commonwealth Act No. 53, should be applied in this case in
determining the credibility of witnesses, is untenable. The said law
provides:
Sec. 1. Where a covenant or contract made
between the owner of land and a lessee or tenant
on share thereof has not been reduced to writing
or has not been set forth in a document written in
a language known to the lessee or tenant, the
testimony of such lessee or tenant shall be
accepted as prima facieevidence on the terms of a
covenant or contract.
As can be seen, the cited law can be invoked only when there is a
dispute between the owner of the land and the lessee or tenant on share
tenancy as to the terms of an unwritten contract or where the contract
is written in a language not known to the lessee or tenant. In the instant
case, there is no dispute as to the terms of the contract of lease. Hence,
the cited law cannot be invoked to support the petitioner's claim that
the private respondent is not the owner of the leased premises or that
the petitioner's version of the facts of the case is more credible than
that of the private respondent.
Besides, the petitioner's contention that the private respondent is not
the owner of the leased premises is inconsistent with her claim that she
had tendered payment of the rentals for the month of January 1976 to
the private respondent. 1
There is also no merit in the petitioner's contention that the lessor is
guilty of mora accipiendi. The circumstances surrounding the alleged
refusal of the lessor (private respondent) to accept the proffered
rentals, according to petitioner, are as follows:
Sometime in 1942, petitioner entered into a verbal
lease agreement with Lutgarda Cifra over the
premises in question which belonged to the latter.
Aside from the amount of rentals, no other
condition or term was agreed upon. The rentals
were collected from her residence by the lessor's
collector who went to her house to demand and
collect payment from time to time, with no fixed
frequency (Cf., t.s.n. July 28, 1977, pp. 2-6).
Sometime in 1974, the lessor's collector stopped
going to the petitioner's residence to collect her
rentals, as she had done in the past. The
defendant-appellant waited for the collector to
come but the latter never showed up again in his
neighborhood. Since no demand for payment was
made upon her, the petitioner decided to keep the
money until the collector comes again to demand
and collect payment.
Sometime in May, 1976, petitioner received a
letter (Exh. 1) from Aurora C. Recto, sister of
private respondent, informing the former that the
latter, was the owner of the property in question,
was offering the same for sale.
Sometime later, or in August 1977, petitioner
received another letter, this time from the private
respondent, demanding the surrender of the
possession of the premises in question, also
claiming to be the owner of the property.
Upon receipt of this letter, petitioner forthwith
went to the residence of the collector, another
sister of the private respondent to whom she had
been paying her rentals, and there tendered
payment but this was refused without any
justification (t.s.n. July 26, 1 977, p. 7). 2
Under the circumstances, the refusal to accept the proffered rentals is
not without justification. The ownership of the property had been
transferred to the private respondent and the person to whom payment
was offered had no authority to accept payment. It should be noted that
the contract of lease between the petitioner and Lutgarda Cifra, the
former owner of the land, was not in writing and, hence, unrecorded.
The Court has held that a contract of lease executed by the vendor,
unless recorded, ceases to have effect when the property is sold, in the
absence of a contrary agreement. 3 The petitioner cannot claim
ignorance of the transfer of ownerhip of the property because, by her
own account, Aurora Recto and the private respondent, at various
times, had informed her of their respective claims to ownership of the
property occupied by the petitioner. The petitioner should have
tendered payment of the rentals to the private respondent and if that
was not possible, she should have consigned such rentals in court.

Finally, we find no merit in the petitioner's contention that the private

respondent is guilty of laches. As the Court of Appeals had stated, the
demand for the petitioner to vacate the premises and to pay arrears in
rentals was made on 23 August 1976 and the complaint seeking her
ejectment was filed a few days thereafter, or on 16 September 1976.

For reasons aforestated, the judgment of the Court of Appeals appears

to be in accord with the evidence and the law.

WHEREFORE, the petition is hereby DENIED. Without pronouncement

as to costs. This decision is immediately executory.

SO ORDERED.
3. compensation morae
G.R. No. L-45710 October 3, 1985
CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR
ANTONIO T. CASTRO, JR. OF THE DEPARTMENT OF COMMERCIAL
AND SAVINGS BANK, in his capacity as statutory receiver of Island
Savings Bank, petitioners,  business in the Philippines and instructed the Acting Superintendent of
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M.
TOLENTINO, respondents.
I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.
Antonio R. Tupaz for private respondent.
MAKASIAR, CJ.:
This is a petition for review on certiorari to set aside as null and void
the decision of the Court of Appeals, in C.A.-G.R. No. 52253-R dated
February 11, 1977, modifying the decision dated February 15, 1972 of
the Court of First Instance of Agusan, which dismissed the petition of
respondent Sulpicio M. Tolentino for injunction, specific performance
or rescission, and damages with preliminary injunction.
On April 28, 1965, Island Savings Bank, upon favorable
recommendation of its legal department, approved the loan application
for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan,
executed on the same day a real estate mortgage over his 100-hectare
land located in Cubo, Las Nieves, Agusan, and covered by TCT No. T-
305, and which mortgage was annotated on the said title the next day.
The approved loan application called for a lump sum P80,000.00 loan,
repayable in semi-annual installments for a period of 3 years, with 12%
annual interest. It was required that Sulpicio M. Tolentino shall use the
loan proceeds solely as an additional capital to develop his other
property into a subdivision.
On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00
loan was made by the Bank; and Sulpicio M. Tolentino and his wife
Edita Tolentino signed a promissory note for P17,000.00 at 12% annual
interest, payable within 3 years from the date of execution of the
contract at semi-annual installments of P3,459.00 (p. 64, rec.). An
advance interest for the P80,000.00 loan covering a 6-month period
amounting to P4,800.00 was deducted from the partial release of
P17,000.00. But this pre-deducted interest was refunded to Sulpicio M.
Tolentino on July 23, 1965, after being informed by the Bank that there
was no fund yet available for the release of the P63,000.00 balance (p.
47, rec.). The Bank, thru its vice-president and treasurer, promised
repeatedly the release of the P63,000.00 balance (p. 113, rec.).
On August 13, 1965, the Monetary Board of the Central Bank, after
finding Island Savings Bank was suffering liquidity problems, issued
Resolution No. 1049, which provides:
In view of the chronic reserve deficiencies of the
Island Savings Bank against its deposit liabilities,
the Board, by unanimous vote, decided as follows:
1) To prohibit the bank from making new loans
and investments [except investments in
government securities] excluding extensions or
renewals of already approved loans, provided that
such extensions or renewals shall be subject to
review by the Superintendent of Banks, who may
impose such limitations as may be necessary to
insure correction of the bank's deficiency as soon
as possible;
x x x           x x x          x x x
(p. 46, rec.).
On June 14, 1968, the Monetary Board, after finding thatIsland Savings
Bank failed to put up the required capital to restore its solvency, issued
Resolution No. 967 which prohibited Island Savings Bank from doing
Banks to take charge of the assets of Island Savings Bank (pp. 48-49,
rec).
On August 1, 1968, Island Savings Bank, in view of non-payment of the
P17,000.00 covered by the promissory note, filed an application for the
extra-judicial foreclosure of the real estate mortgage covering the 100-
hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the
auction for January 22, 1969.
On January 20, 1969, Sulpicio M. Tolentino filed a petition with the
Court of First Instance of Agusan for injunction, specific performance or
rescission and damages with preliminary injunction, alleging that since
Island Savings Bank failed to deliver the P63,000.00 balance of the
P80,000.00 loan, he is entitled to specific performance by ordering
Island Savings Bank to deliver the P63,000.00 with interest of 12% per
annum from April 28, 1965, and if said balance cannot be delivered, to
rescind the real estate mortgage (pp. 32-43, rec.).
On January 21, 1969, the trial court, upon the filing of a P5,000.00
surety bond, issued a temporary restraining order enjoining the Island
Savings Bank from continuing with the foreclosure of the mortgage (pp.
86-87, rec.).
On January 29, 1969, the trial court admitted the answer in intervention
praying for the dismissal of the petition of Sulpicio M. Tolentino and the
setting aside of the restraining order, filed by the Central Bank and by
the Acting Superintendent of Banks (pp. 65-76, rec.).
On February 15, 1972, the trial court, after trial on the merits rendered
its decision, finding unmeritorious the petition of Sulpicio M. Tolentino,
ordering him to pay Island Savings Bank the amount of PI 7 000.00 plus
legal interest and legal charges due thereon, and lifting the restraining
order so that the sheriff may proceed with the foreclosure (pp. 135-136.
rec.
On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M.
Tolentino, modified the Court of First Instance decision by affirming the
dismissal of Sulpicio M. Tolentino's petition for specific performance,
but it ruled that Island Savings Bank can neither foreclose the real
estate mortgage nor collect the P17,000.00 loan pp. 30-:31. rec.).
Hence, this instant petition by the central Bank.
The issues are:
1. Can the action of Sulpicio M. Tolentino for
specific performance prosper?
2. Is Sulpicio M. Tolentino liable to pay the
P17,000.00 debt covered by the promissory note?
3. If Sulpicio M. Tolentino's liability to pay the
P17,000.00 subsists, can his real estate mortgage
be foreclosed to satisfy said amount?
When Island Savings Bank and Sulpicio M. Tolentino entered into an
P80,000.00 loan agreement on April 28, 1965, they undertook
reciprocal obligations. In reciprocal obligations, the obligation or
promise of each party is the consideration for that of the other (Penaco
vs. Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1
[1969]); and when one party has performed or is ready and willing to
perform his part of the contract, the other party who has not performed
or is not ready and willing to perform incurs in delay (Art. 1169 of the
Civil Code). The promise of Sulpicio M. Tolentino to pay was the
consideration for the obligation of Island Savings Bank to furnish the
P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate
mortgage on April 28, 1965, he signified his willingness to pay the
P80,000.00 loan. From such date, the obligation of Island Savings Bank
to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in
furnishing the entire loan started on April 28, 1965, and lasted for a
period of 3 years or when the Monetary Board of the Central Bank
issued Resolution No. 967 on June 14, 1968, which prohibited Island
Savings Bank from doing further business. Such prohibition made it
legally impossible for Island Savings Bank to furnish the P63,000.00
balance of the P80,000.00 loan. The power of the Monetary Board to
take over insolvent banks for the protection of the public is recognized
by Section 29 of R.A. No. 265, which took effect on June 15, 1948, the
validity of which is not in question.
The Board Resolution No. 1049 issued on August 13,1965 cannot
interrupt the default of Island Savings Bank in complying with its
obligation of releasing the P63,000.00 balance because said resolution
merely prohibited the Bank from making new loans and investments,
and nowhere did it prohibit island Savings Bank from releasing the
balance of loan agreements previously contracted. Besides, the mere
pecuniary inability to fulfill an engagement does not discharge the
obligation of the contract, nor does it constitute any defense to a decree
of specific performance (Gutierrez Repide vs. Afzelius and Afzelius, 39
Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is never
an excuse for the non-fulfillment of an obligation but 'instead it is taken
as a breach of the contract by him (vol. 17A, 1974 ed., CJS p. 650)
The fact that Sulpicio M. Tolentino demanded and accepted the refund
of the pre-deducted interest amounting to P4,800.00 for the supposed
P80,000.00 loan covering a 6-month period cannot be taken as a waiver
of his right to collect the P63,000.00 balance. The act of Island Savings
Bank, in asking the advance interest for 6 months on the supposed
P80,000.00 loan, was improper considering that only P17,000.00 out of
the P80,000.00 loan was released. A person cannot be legally charged
interest for a non-existing debt. Thus, the receipt by Sulpicio M.
'Tolentino of the pre-deducted interest was an exercise of his right to it,
which right exist independently of his right to demand the completion
of the P80,000.00 loan. The exercise of one right does not affect, much
less neutralize, the exercise of the other.
The alleged discovery by Island Savings Bank of the over-valuation of
the loan collateral cannot exempt it from complying with its reciprocal
obligation to furnish the entire P80,000.00 loan. 'This Court previously
ruled that bank officials and employees are expected to exercise caution
and prudence in the discharge of their functions (Rural Bank of
Caloocan, Inc. vs. C.A., 104 SCRA 151 [1981]). It is the obligation of the
bank's officials and employees that before they approve the loan
application of their customers, they must investigate the existence and
evaluation of the properties being offered as a loan security. The recent
rush of events where collaterals for bank loans turn out to be non-
existent or grossly over-valued underscore the importance of this
responsibility. The mere reliance by bank officials and employees on
their customer's representation regarding the loan collateral being
offered as loan security is a patent non-performance of this
responsibility. If ever bank officials and employees totally reIy on the
representation of their customers as to the valuation of the loan
collateral, the bank shall bear the risk in case the collateral turn out to
be over-valued. The representation made by the customer is immaterial
to the bank's responsibility to conduct its own investigation.
Furthermore, the lower court, on objections of' Sulpicio M. Tolentino,
had enjoined petitioners from presenting proof on the alleged over-
valuation because of their failure to raise the same in their pleadings
(pp. 198-199, t.s.n. Sept. 15. 1971). The lower court's action is
sanctioned by the Rules of Court, Section 2, Rule 9, which states that
"defenses and objections not pleaded either in a motion to dismiss or in
the answer are deemed waived." Petitioners, thus, cannot raise the
same issue before the Supreme Court.
Since Island Savings Bank was in default in fulfilling its reciprocal
obligation under their loan agreement, Sulpicio M. Tolentino, under
Article 1191 of the Civil Code, may choose between specific
performance or rescission with damages in either case. But since Island
Savings Bank is now prohibited from doing further business by
Monetary Board Resolution No. 967, WE cannot grant specific
performance in favor of Sulpicio M, Tolentino.
Rescission is the only alternative remedy left. WE rule, however, that
rescission is only for the P63,000.00 balance of the P80,000.00 loan,
because the bank is in default only insofar as such amount is concerned,
as there is no doubt that the bank failed to give the P63,000.00. As far as
the partial release of P17,000.00, which Sulpicio M. Tolentino accepted
and executed a promissory note to cover it, the bank was deemed to
have complied with its reciprocal obligation to furnish a P17,000.00
loan. The promissory note gave rise to Sulpicio M. Tolentino's
reciprocal obligation to pay the P17,000.00 loan when it falls due. His
failure to pay the overdue amortizations under the promissory note
made him a party in default, hence not entitled to rescission (Article
1191 of the Civil Code). If there is a right to rescind the promissory
note, it shall belong to the aggrieved party, that is, Island Savings Bank.
If Tolentino had not signed a promissory note setting the date for
payment of P17,000.00 within 3 years, he would be entitled to ask for
rescission of the entire loan because he cannot possibly be in default as
there was no date for him to perform his reciprocal obligation to pay.
Since both parties were in default in the performance of their respective
reciprocal obligations, that is, Island Savings Bank failed to comply with
its obligation to furnish the entire loan and Sulpicio M. Tolentino failed
to comply with his obligation to pay his P17,000.00 debt within 3 years
as stipulated, they are both liable for damages.
Article 1192 of the Civil Code provides that in case both parties have
committed a breach of their reciprocal obligations, the liability of the
first infractor shall be equitably tempered by the courts. WE rule that
the liability of Island Savings Bank for damages in not furnishing the
entire loan is offset by the liability of Sulpicio M. Tolentino for damages,
in the form of penalties and surcharges, for not paying his overdue
P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his
PI 7,000.00 debt shall not be included in offsetting the liabilities of both
parties. Since Sulpicio M. Tolentino derived some benefit for his use of
the P17,000.00, it is just that he should account for the interest thereon.
WE hold, however, that the real estate mortgage of Sulpicio M.
Tolentino cannot be entirely foreclosed to satisfy his P 17,000.00 debt.
The consideration of the accessory contract of real estate mortgage is
the same as that of the principal contract (Banco de Oro vs. Bayuga, 93
SCRA 443 [1979]). For the debtor, the consideration of his obligation to
pay is the existence of a debt. Thus, in the accessory contract of real
estate mortgage, the consideration of the debtor in furnishing the
mortgage is the existence of a valid, voidable, or unenforceable debt
(Art. 2086, in relation to Art, 2052, of the Civil Code).
The fact that when Sulpicio M. 'Tolentino executed his real estate
mortgage, no consideration was then in existence, as there was no debt
yet because Island Savings Bank had not made any release on the loan,
does not make the real estate mortgage void for lack of consideration. It
is not necessary that any consideration should pass at the time of the
execution of the contract of real mortgage (Bonnevie vs. C.A., 125 SCRA
122 [1983]). lt may either be a prior or subsequent matter. But when
the consideration is subsequent to the mortgage, the mortgage can take
effect only when the debt secured by it is created as a binding contract
to pay (Parks vs, Sherman, Vol. 176 N.W. p. 583, cited in the 8th ed.,
Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is partial failure of
consideration, the mortgage becomes unenforceable to the extent of
such failure (Dow. et al. vs. Poore, Vol. 172 N.E. p. 82, cited in Vol. 59,
1974 ed. CJS, p. 138). Where the indebtedness actually owing to the
holder of the mortgage is less than the sum named in the mortgage, the
mortgage cannot be enforced for more than the actual sum due
(Metropolitan Life Ins. Co. vs. Peterson, Vol. 19, F(2d) p. 88, cited in 5th
ed., Wiltsie on Mortgage, Vol. 1, P. 180).

Since Island Savings Bank failed to furnish the P63,000.00 balance of

the P8O,000.00 loan, the real estate mortgage of Sulpicio M. Tolentino
became unenforceable to such extent. P63,000.00 is 78.75% of
P80,000.00, hence the real estate mortgage covering 100 hectares is
unenforceable to the extent of 78.75 hectares. The mortgage covering
the remainder of 21.25 hectares subsists as a security for the
P17,000.00 debt. 21.25 hectares is more than sufficient to secure a
P17,000.00 debt.

The rule of indivisibility of a real estate mortgage provided for by

Article 2089 of the Civil Code is inapplicable to the facts of this case.

Article 2089 provides:

A pledge or mortgage is indivisible even though

the debt may be divided among the successors in
interest of the debtor or creditor.

Therefore, the debtor's heirs who has paid a part

of the debt can not ask for the proportionate
extinguishment of the pledge or mortgage as long
as the debt is not completely satisfied.

Neither can the creditor's heir who have received

his share of the debt return the pledge or cancel
the mortgage, to the prejudice of other heirs who
have not been paid.

The rule of indivisibility of the mortgage as outlined by Article 2089

above-quoted presupposes several heirs of the debtor or creditor which
does not obtain in this case. Hence, the rule of indivisibility of a
mortgage cannot apply

WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED

FEBRUARY 11, 1977 IS HEREBY MODIFIED, AND

1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF

HEREIN PETITIONERS THE SUM OF P17.000.00, PLUS P41,210.00
REPRESENTING 12% INTEREST PER ANNUM COVERING THE PERIOD
FROM MAY 22, 1965 TO AUGUST 22, 1985, AND 12% INTEREST ON
THE TOTAL AMOUNT COUNTED FROM AUGUST 22, 1985 UNTIL PAID;

2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE

MORTGAGE COVERING 21.25 HECTARES SHALL BE FORECLOSED TO
SATISFY HIS TOTAL INDEBTEDNESS; AND

3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS

HEREBY DECLARED UNEN FORCEABLE AND IS HEREBY ORDERED
RELEASED IN FAVOR OF SULPICIO M. TOLENTINO.

NO COSTS. SO ORDERED.

G.R. No. L-47851 October 3, 1986
JUAN F. NAKPIL & SONS, and JUAN F. NAKPIL, petitioners,  November 29, 1968 until full payment to be
vs.
THE COURT OF APPEALS, UNITED CONSTRUCTION COMPANY, INC.,
JUAN J. CARLOS, and the PHILIPPINE BAR
ASSOCIATION, respondents.
G.R. No. L-47863 October 3, 1986
THE UNITED CONSTRUCTION CO., INC., petitioner,  in equal shares.
vs.
COURT OF APPEALS, ET AL., respondents.
G.R. No. L-47896 October 3, 1986
PHILIPPINE BAR ASSOCIATION, ET AL., petitioners,  reversal of the decision of the Court of Appeals, among other
vs.
COURT OF APPEALS, ET AL., respondents.
PARAS, J.:
These are petitions for review on certiorari of the November 28,
1977 decision of the Court of Appeals in CA-G.R. No. 51771-R
modifying the decision of the Court of First Instance of Manila,
Branch V, in Civil Case No. 74958 dated September 21, 1971 as
modified by the Order of the lower court dated December 8, 1971.
The Court of Appeals in modifying the decision of the lower court
included an award of an additional amount of P200,000.00 to the
Philippine Bar Association to be paid jointly and severally by the
defendant United Construction Co. and by the third-party
defendants Juan F. Nakpil and Sons and Juan F. Nakpil.
The dispositive portion of the modified decision of the lower court
reads:
WHEREFORE, judgment is hereby rendered:
(a) Ordering defendant United Construction
Co., Inc. and third-party defendants (except
Roman Ozaeta) to pay the plaintiff, jointly and
severally, the sum of P989,335.68 with interest
at the legal rate from November 29, 1968, the
date of the filing of the complaint until full
payment;
(b) Dismissing the complaint with respect to
defendant Juan J. Carlos;
(c) Dismissing the third-party complaint;
(d) Dismissing the defendant's and third-party
defendants' counterclaims for lack of merit;
(e) Ordering defendant United Construction
Co., Inc. and third-party defendants (except
Roman Ozaeta) to pay the costs in equal
shares.
SO ORDERED. (Record on Appeal p. 521; Rollo,
L- 47851, p. 169).
The dispositive portion of the decision of the Court of Appeals
reads:
WHEREFORE, the judgment appealed from is
modified to include an award of P200,000.00
in favor of plaintiff-appellant Philippine Bar
Association, with interest at the legal rate from
paid jointly and severally by defendant United
Construction Co., Inc. and third party
defendants (except Roman Ozaeta). In all other
respects, the judgment dated September 21,
1971 as modified in the December 8, 1971
Order of the lower court is hereby affirmed
with COSTS to be paid by the defendant and
third party defendant (except Roman Ozaeta)
SO ORDERED.
Petitioners Juan F. Nakpil & Sons in L-47851 and United
Construction Co., Inc. and Juan J. Carlos in L-47863 seek the
things, for exoneration from liability while petitioner Philippine
Bar Association in L-47896 seeks the modification of aforesaid
decision to obtain an award of P1,830,000.00 for the loss of the
PBA building plus four (4) times such amount as damages
resulting in increased cost of the building, P100,000.00 as
exemplary damages; and P100,000.00 as attorney's fees.
These petitions arising from the same case filed in the Court of
First Instance of Manila were consolidated by this Court in the
resolution of May 10, 1978 requiring the respective respondents
to comment. (Rollo, L-47851, p. 172).
The facts as found by the lower court (Decision, C.C. No. 74958;
Record on Appeal, pp. 269-348; pp. 520-521; Rollo, L-47851, p.
169) and affirmed by the Court of Appeals are as follows:
The plaintiff, Philippine Bar Association, a civic-non-profit
association, incorporated under the Corporation Law, decided to
construct an office building on its 840 square meters lot located at
the comer of Aduana and Arzobispo Streets, Intramuros, Manila.
The construction was undertaken by the United Construction, Inc.
on an "administration" basis, on the suggestion of Juan J. Carlos,
the president and general manager of said corporation. The
proposal was approved by plaintiff's board of directors and signed
by its president Roman Ozaeta, a third-party defendant in this
case. The plans and specifications for the building were prepared
by the other third-party defendants Juan F. Nakpil & Sons. The
building was completed in June, 1966.
In the early morning of August 2, 1968 an unusually strong
earthquake hit Manila and its environs and the building in
question sustained major damage. The front columns of the
building buckled, causing the building to tilt forward dangerously.
The tenants vacated the building in view of its precarious
condition. As a temporary remedial measure, the building was
shored up by United Construction, Inc. at the cost of P13,661.28.
On November 29, 1968, the plaintiff commenced this action for the
recovery of damages arising from the partial collapse of the
building against United Construction, Inc. and its President and
General Manager Juan J. Carlos as defendants. Plaintiff alleges that
the collapse of the building was accused by defects in the
construction, the failure of the contractors to follow plans and
specifications and violations by the defendants of the terms of the
contract.
Defendants in turn filed a third-party complaint against the
architects who prepared the plans and specifications, alleging in
essence that the collapse of the building was due to the defects in
the said plans and specifications. Roman Ozaeta, the then
president of the plaintiff Bar Association was included as a third-
party defendant for damages for having included Juan J. Carlos,
President of the United Construction Co., Inc. as party defendant.
On March 3, 1969, the plaintiff and third-party defendants Juan F.
Nakpil & Sons and Juan F. Nakpil presented a written stipulation
which reads:
1. That in relation to defendants' answer with
counterclaims and third- party complaints and
the third-party defendants Nakpil & Sons'
answer thereto, the plaintiff need not amend
its complaint by including the said Juan F.
Nakpil & Sons and Juan F. Nakpil personally as
parties defendant.
2. That in the event (unexpected by the
undersigned) that the Court should find after
the trial that the above-named defendants Juan
J. Carlos and United Construction Co., Inc. are
free from any blame and liability for the
collapse of the PBA Building, and should
further find that the collapse of said building
was due to defects and/or inadequacy of the
plans, designs, and specifications p by the
third-party defendants, or in the event that the
Court may find Juan F. Nakpil and Sons and/or
Juan F. Nakpil contributorily negligent or in
any way jointly and solidarily liable with the
defendants, judgment may be rendered in
whole or in part. as the case may be, against
Juan F. Nakpil & Sons and/or Juan F. Nakpil in
favor of the plaintiff to all intents and purposes
as if plaintiff's complaint has been duly
amended by including the said Juan F. Nakpil &
Sons and Juan F. Nakpil as parties defendant
and by alleging causes of action against them
including, among others, the defects or
inadequacy of the plans, designs, and
specifications prepared by them and/or failure
in the performance of their contract with
plaintiff.
3. Both parties hereby jointly petition this
Honorable Court to approve this stipulation.
(Record on Appeal, pp. 274-275; Rollo, L-
47851,p.169).
Upon the issues being joined, a pre-trial was conducted on March
7, 1969, during which among others, the parties agreed to refer the
technical issues involved in the case to a Commissioner. Mr.
Andres O. Hizon, who was ultimately appointed by the trial court,
assumed his office as Commissioner, charged with the duty to try
the following issues:
1. Whether the damage sustained by the PBA
building during the August 2, 1968 earthquake
had been caused, directly or indirectly, by:
(a) The inadequacies or defects in the plans
and specifications prepared by third-party
defendants;
(b) The deviations, if any, made by the
defendants from said plans and specifications
and how said deviations contributed to the
damage sustained;
(c) The alleged failure of defendants to observe
the requisite quality of materials and
workmanship in the construction of the
building;
(d) The alleged failure to exercise the requisite
degree of supervision expected of the architect,
the contractor and/or the owner of the
building;
(e) An act of God or a fortuitous event; and
(f) Any other cause not herein above specified.
2. If the cause of the damage suffered by the
building arose from a combination of the
above-enumerated factors, the degree or
proportion in which each individual factor
contributed to the damage sustained;
3. Whether the building is now a total loss and
should be completely demolished or whether it
may still be repaired and restored to a
tenantable condition. In the latter case, the
determination of the cost of such restoration
or repair, and the value of any remaining
construction, such as the foundation, which
may still be utilized or availed of (Record on
Appeal, pp. 275-276; Rollo, L-47851, p. 169).
Thus, the issues of this case were divided into technical issues and
non-technical issues. As aforestated the technical issues were
referred to the Commissioner. The non-technical issues were tried
by the Court.
Meanwhile, plaintiff moved twice for the demolition of the building
on the ground that it may topple down in case of a strong
earthquake. The motions were opposed by the defendants and the
matter was referred to the Commissioner. Finally, on April 30,
1979 the building was authorized to be demolished at the expense
of the plaintiff, but not another earthquake of high intensity on
April 7, 1970 followed by other strong earthquakes on April 9, and
12, 1970, caused further damage to the property. The actual
demolition was undertaken by the buyer of the damaged building.
(Record on Appeal, pp. 278-280; Ibid.)
After the protracted hearings, the Commissioner eventually
submitted his report on September 25, 1970 with the findings that
while the damage sustained by the PBA building was caused
directly by the August 2, 1968 earthquake whose magnitude was
estimated at 7.3 they were also caused by the defects in the plans
and specifications prepared by the third-party defendants'
architects, deviations from said plans and specifications by the
defendant contractors and failure of the latter to observe the
requisite workmanship in the construction of the building and of
the contractors, architects and even the owners to exercise the
requisite degree of supervision in the construction of subject
building.
All the parties registered their objections to aforesaid findings
which in turn were answered by the Commissioner.
The trial court agreed with the findings of the Commissioner
except as to the holding that the owner is charged with full nine
supervision of the construction. The Court sees no legal or
contractual basis for such conclusion. (Record on Appeal, pp. 309-
328; Ibid).
Thus, on September 21, 1971, the lower court rendered the
assailed decision which was modified by the Intermediate
Appellate Court on November 28, 1977.
All the parties herein appealed from the decision of the
Intermediate Appellate Court. Hence, these petitions.
On May 11, 1978, the United Architects of the Philippines, the
Association of Civil Engineers, and the Philippine Institute of
Architects filed with the Court a motion to intervene as amicus
curiae. They proposed to present a position paper on the liability
of architects when a building collapses and to submit likewise a
critical analysis with computations on the divergent views on the
design and plans as submitted by the experts procured by the
parties. The motion having been granted, the amicus curiae were
granted a period of 60 days within which to submit their position.
After the parties had all filed their comments, We gave due course
to the petitions in Our Resolution of July 21, 1978.
The position papers of the amicus curiae (submitted on November
24, 1978) were duly noted.
The amicus curiae gave the opinion that the plans and
specifications of the Nakpils were not defective. But the
Commissioner, when asked by Us to comment, reiterated his
conclusion that the defects in the plans and specifications indeed
existed.
Using the same authorities availed of by the amicus curiae such as
the Manila Code (Ord. No. 4131) and the 1966 Asep Code, the
Commissioner added that even if it can be proved that the defects
in the constructionalone (and not in the plans and design) caused
the damage to the building, still the deficiency in the original
design and jack of specific provisions against torsion in the
original plans and the overload on the ground floor columns
(found by an the experts including the original designer) certainly
contributed to the damage which occurred. (Ibid, p. 174).
In their respective briefs petitioners, among others, raised the
following assignments of errors: Philippine Bar Association
claimed that the measure of damages should not be limited to
P1,100,000.00 as estimated cost of repairs or to the period of six
(6) months for loss of rentals while United Construction Co., Inc.
and the Nakpils claimed that it was an act of God that caused the
failure of the building which should exempt them from
responsibility and not the defective construction, poor
workmanship, deviations from plans and specifications and other
imperfections in the case of United Construction Co., Inc. or the
deficiencies in the design, plans and specifications prepared by
petitioners in the case of the Nakpils. Both UCCI and the Nakpils
object to the payment of the additional amount of P200,000.00
imposed by the Court of Appeals. UCCI also claimed that it should
be reimbursed the expenses of shoring the building in the amount
of P13,661.28 while the Nakpils opposed the payment of damages
jointly and solidarity with UCCI.
The pivotal issue in this case is whether or not an act of God-an
unusually strong earthquake-which caused the failure of the
building, exempts from liability, parties who are otherwise liable
because of their negligence.
The applicable law governing the rights and liabilities of the
parties herein is Article 1723 of the New Civil Code, which
provides:
Art. 1723. The engineer or architect who drew
up the plans and specifications for a building is
liable for damages if within fifteen years from
the completion of the structure the same
should collapse by reason of a defect in those
plans and specifications, or due to the defects
in the ground. The contractor is likewise
responsible for the damage if the edifice fags
within the same period on account of defects in
the construction or the use of materials of
inferior quality furnished by him, or due to any
violation of the terms of the contract. If the
engineer or architect supervises the
construction, he shall be solidarily liable with
the contractor.
Acceptance of the building, after completion,
does not imply waiver of any of the causes of
action by reason of any defect mentioned in the
preceding paragraph.
The action must be brought within ten years
following the collapse of the building.
On the other hand, the general rule is that no person shall be
responsible for events which could not be foreseen or which
though foreseen, were inevitable (Article 1174, New Civil Code).
An act of God has been defined as an accident, due directly and
exclusively to natural causes without human intervention, which
by no amount of foresight, pains or care, reasonably to have been
expected, could have been prevented. (1 Corpus Juris 1174).
There is no dispute that the earthquake of August 2, 1968 is a
fortuitous event or an act of God.
To exempt the obligor from liability under Article 1174 of the Civil
Code, for a breach of an obligation due to an "act of God," the
following must concur: (a) the cause of the breach of the obligation
must be independent of the will of the debtor; (b) the event must
be either unforseeable or unavoidable; (c) the event must be such
as to render it impossible for the debtor to fulfill his obligation in a
normal manner; and (d) the debtor must be free from any
participation in, or aggravation of the injury to the creditor.
(Vasquez v. Court of Appeals, 138 SCRA 553; Estrada v.
Consolacion, 71 SCRA 423; Austria v. Court of Appeals, 39 SCRA
527; Republic of the Phil. v. Luzon Stevedoring Corp., 21 SCRA 279;
Lasam v. Smith, 45 Phil. 657).
Thus, if upon the happening of a fortuitous event or an act of God,
there concurs a corresponding fraud, negligence, delay or
violation or contravention in any manner of the tenor of the
obligation as provided for in Article 1170 of the Civil Code, which
results in loss or damage, the obligor cannot escape liability.
The principle embodied in the act of God doctrine strictly requires
that the act must be one occasioned exclusively by the violence of
nature and all human agencies are to be excluded from creating or
entering into the cause of the mischief. When the effect, the cause
of which is to be considered, is found to be in part the result of the
participation of man, whether it be from active intervention or
neglect, or failure to act, the whole occurrence is thereby
humanized, as it were, and removed from the rules applicable to
the acts of God. (1 Corpus Juris, pp. 1174-1175).
Thus it has been held that when the negligence of a person concurs
with an act of God in producing a loss, such person is not exempt
from liability by showing that the immediate cause of the damage
was the act of God. To be exempt from liability for loss because of
an act of God, he must be free from any previous negligence or
misconduct by which that loss or damage may have been
occasioned. (Fish & Elective Co. v. Phil. Motors, 55 Phil. 129;
Tucker v. Milan, 49 O.G. 4379; Limpangco & Sons v. Yangco
Steamship Co., 34 Phil. 594, 604; Lasam v. Smith, 45 Phil. 657).
The negligence of the defendant and the third-party defendants
petitioners was established beyond dispute both in the lower
court and in the Intermediate Appellate Court. Defendant United
Construction Co., Inc. was found to have made substantial
deviations from the plans and specifications. and to have failed to
observe the requisite workmanship in the construction as well as
to exercise the requisite degree of supervision; while the third-
party defendants were found to have inadequacies or defects in
the plans and specifications prepared by them. As correctly
assessed by both courts, the defects in the construction and in the
plans and specifications were the proximate causes that rendered
the PBA building unable to withstand the earthquake of August 2,
1968. For this reason the defendant and third-party defendants
cannot claim exemption from liability. (Decision, Court of Appeals,
pp. 30-31).
It is well settled that the findings of facts of the Court of Appeals
are conclusive on the parties and on this court (cases cited in
Tolentino vs. de Jesus, 56 SCRA 67; Cesar vs. Sandiganbayan,
January 17, 1985, 134 SCRA 105, 121), unless (1) the conclusion is
a finding grounded entirely on speculation, surmise and
conjectures; (2) the inference made is manifestly mistaken; (3)
there is grave abuse of discretion; (4) the judgment is based on
misapprehension of facts; (5) the findings of fact are conflicting ,
(6) the Court of Appeals went beyond the issues of the case and its
findings are contrary to the admissions of both appellant and
appellees (Ramos vs. Pepsi-Cola Bottling Co., February 8, 1967, 19
SCRA 289, 291-292; Roque vs. Buan, Oct. 31, 1967, 21 SCRA 648,
651); (7) the findings of facts of the Court of Appeals are contrary
to those of the trial court; (8) said findings of facts are conclusions
without citation of specific evidence on which they are based; (9)
the facts set forth in the petition as well as in the petitioner's main
and reply briefs are not disputed by the respondents (Garcia vs.
CA, June 30, 1970, 33 SCRA 622; Alsua-Bett vs. Court of Appeals,
July 30, 1979, 92 SCRA 322, 366); (10) the finding of fact of the
Court of Appeals is premised on the supposed absence of evidence
and is contradicted by evidence on record (Salazar vs. Gutierrez,
May 29, 1970, 33 SCRA 243, 247; Cited in G.R. No. 66497-98, Sacay
v. Sandiganbayan, July 10, 1986).
It is evident that the case at bar does not fall under any of the
exceptions above-mentioned. On the contrary, the records show
that the lower court spared no effort in arriving at the correct
appreciation of facts by the referral of technical issues to a
Commissioner chosen by the parties whose findings and
conclusions remained convincingly unrebutted by the
intervenors/amicus curiae who were allowed to intervene in the
Supreme Court.
In any event, the relevant and logical observations of the trial
court as affirmed by the Court of Appeals that "while it is not
possible to state with certainty that the building would not have
collapsed were those defects not present, the fact remains that
several buildings in the same area withstood the earthquake to
which the building of the plaintiff was similarly subjected," cannot
be ignored.
The next issue to be resolved is the amount of damages to be
awarded to the PBA for the partial collapse (and eventual
complete collapse) of its building.
The Court of Appeals affirmed the finding of the trial court based
on the report of the Commissioner that the total amount required
to repair the PBA building and to restore it to tenantable condition
was P900,000.00 inasmuch as it was not initially a total loss.
However, while the trial court awarded the PBA said amount as
damages, plus unrealized rental income for one-half year, the
Court of Appeals modified the amount by awarding in favor of PBA
an additional sum of P200,000.00 representing the damage
suffered by the PBA building as a result of another earthquake that
occurred on April 7, 1970 (L-47896, Vol. I, p. 92).
The PBA in its brief insists that the proper award should be
P1,830,000.00 representing the total value of the building (L-
47896, PBA's No. 1 Assignment of Error, p. 19), while both the
NAKPILS and UNITED question the additional award of
P200,000.00 in favor of the PBA (L- 47851, NAKPIL's Brief as
Petitioner, p. 6, UNITED's Brief as Petitioner, p. 25). The PBA
further urges that the unrealized rental income awarded to it
should not be limited to a period of one-half year but should be
computed on a continuing basis at the rate of P178,671.76 a year
until the judgment for the principal amount shall have been
satisfied L- 47896, PBA's No. 11 Assignment of Errors, p. 19).
The collapse of the PBA building as a result of the August 2, 1968
earthquake was only partial and it is undisputed that the building
could then still be repaired and restored to its tenantable
condition. The PBA, however, in view of its lack of needed funding,
was unable, thru no fault of its own, to have the building repaired.
UNITED, on the other hand, spent P13,661.28 to shore up the
building after the August 2, 1968 earthquake (L-47896, CA
Decision, p. 46). Because of the earthquake on April 7, 1970, the
trial court after the needed consultations, authorized the total
demolition of the building (L-47896, Vol. 1, pp. 53-54).
There should be no question that the NAKPILS and UNITED are
liable for the damage resulting from the partial and eventual
collapse of the PBA building as a result of the earthquakes.
We quote with approval the following from the erudite decision
penned by Justice Hugo E. Gutierrez (now an Associate Justice of
the Supreme Court) while still an Associate Justice of the Court of
Appeals:
There is no question that an earthquake and
other forces of nature such as cyclones,
drought, floods, lightning, and perils of the sea
are acts of God. It does not necessarily follow,
however, that specific losses and suffering
resulting from the occurrence of these natural
force are also acts of God. We are not
convinced on the basis of the evidence on
record that from the thousands of structures in
Manila, God singled out the blameless PBA
building in Intramuros and around six or seven
other buildings in various parts of the city for
collapse or severe damage and that God alone
was responsible for the damages and losses
thus suffered.
The record is replete with evidence of defects
and deficiencies in the designs and plans,
defective construction, poor workmanship,
deviation from plans and specifications and
other imperfections. These deficiencies are
attributable to negligent men and not to a
perfect God.
The act-of-God arguments of the defendants-
appellants and third party defendants-
appellants presented in their briefs are
premised on legal generalizations or
speculations and on theological fatalism both
of which ignore the plain facts. The lengthy
discussion of United on ordinary earthquakes
and unusually strong earthquakes and on
ordinary fortuitous events and extraordinary
fortuitous events leads to its argument that the
August 2, 1968 earthquake was of such an
overwhelming and destructive character that
by its own force and independent of the
particular negligence alleged, the injury would
have been produced. If we follow this line of
speculative reasoning, we will be forced to
conclude that under such a situation scores of
buildings in the vicinity and in other parts of
Manila would have toppled down. Following
the same line of reasoning, Nakpil and Sons
alleges that the designs were adequate in
accordance with pre-August 2, 1968
knowledge and appear inadequate only in the
light of engineering information acquired after
the earthquake. If this were so, hundreds of
ancient buildings which survived the
earthquake better than the two-year old PBA
building must have been designed and
constructed by architects and contractors
whose knowledge and foresight were
unexplainably auspicious and prophetic.
Fortunately, the facts on record allow a more
down to earth explanation of the collapse. The
failure of the PBA building, as a unique and
distinct construction with no reference or
comparison to other buildings, to weather the
severe earthquake forces was traced to design
deficiencies and defective construction, factors
which are neither mysterious nor esoteric. The
theological allusion of appellant United that
God acts in mysterious ways His wonders to
perform impresses us to be inappropriate. The
evidence reveals defects and deficiencies in
design and construction. There is no mystery
about these acts of negligence. The collapse of
the PBA building was no wonder performed by
God. It was a result of the imperfections in the
work of the architects and the people in the
construction company. More relevant to our
mind is the lesson from the parable of the wise
man in the Sermon on the Mount "which built
his house upon a rock; and the rain descended
and the floods came and the winds blew and
beat upon that house; and it fen not; for it was
founded upon a rock" and of the "foolish upon
the sand. And the rain descended and man
which built his house the floods came, and the
winds blew, and beat upon that house; and it
fell and great was the fall of it. (St. Matthew 7:
24-27)." The requirement that a building
should withstand rains, floods, winds,
earthquakes, and natural forces is precisely
the reason why we have professional experts
like architects, and engineers. Designs and
constructions vary under varying
circumstances and conditions but the
requirement to design and build well does not
change.
The findings of the lower Court on the cause of
the collapse are more rational and accurate.
Instead of laying the blame solely on the
motions and forces generated by the
earthquake, it also examined the ability of the
PBA building, as designed and constructed, to
withstand and successfully weather those
forces.
The evidence sufficiently supports a conclusion
that the negligence and fault of both United
and Nakpil and Sons, not a mysterious act of an
inscrutable God, were responsible for the
damages. The Report of the Commissioner,
Plaintiff's Objections to the Report, Third Party
Defendants' Objections to the Report,
Defendants' Objections to the Report,
Commissioner's Answer to the various
Objections, Plaintiffs' Reply to the
Commissioner's Answer, Defendants' Reply to
the Commissioner's Answer, Counter-Reply to
Defendants' Reply, and Third-Party
Defendants' Reply to the Commissioner's
Report not to mention the exhibits and the
testimonies show that the main arguments
raised on appeal were already raised during
the trial and fully considered by the lower
Court. A reiteration of these same arguments
on appeal fails to convince us that we should
reverse or disturb the lower Court's factual
findings and its conclusions drawn from the
facts, among them:
The Commissioner also found merit in the
allegations of the defendants as to the physical
evidence before and after the earthquake
showing the inadequacy of design, to wit:
Physical evidence before the earthquake
providing (sic) inadequacy of design;
1. inadequate design was the cause of the
failure of the building.
2. Sun-baffles on the two sides and in front of
the building;
a. Increase the inertia forces that move the
building laterally toward the Manila Fire
Department.
b. Create another stiffness imbalance.
3. The embedded 4" diameter cast iron down
spout on all exterior columns reduces the
cross-sectional area of each of the columns and
the strength thereof.
4. Two front corners, A7 and D7 columns were
very much less reinforced.
Physical Evidence After the Earthquake,
Proving Inadequacy of design;
1. Column A7 suffered the severest fracture
and maximum sagging. Also D7.
2. There are more damages in the front part of
the building than towards the rear, not only in
columns but also in slabs.
3. Building leaned and sagged more on the
front part of the building.
4. Floors showed maximum sagging on the
sides and toward the front corner parts of the
building.
5. There was a lateral displacement of the
building of about 8", Maximum sagging occurs
at the column A7 where the floor is lower by 80
cm. than the highest slab level.
6. Slab at the corner column D7 sagged by 38
cm.
The Commissioner concluded that there were
deficiencies or defects in the design, plans and
specifications of the PBA building which reference of the said issues to a Commissioner
involved appreciable risks with respect to the whose qualifications and experience have
accidental forces which may result from eminently qualified him for the task, and
earthquake shocks. He conceded, however, whose competence had not been questioned by
that the fact that those deficiencies or defects the parties until he submitted his report.
may have arisen from an obsolete or not too Within the pardonable limit of the Court's
conservative code or even a code that does not ability to comprehend the meaning of the
require a design for earthquake forces Commissioner's report on this issue, and the
mitigates in a large measure the responsibility objections voiced to the same, the Court sees
or liability of the architect and engineer no compelling reasons to disturb the findings
designer. of the Commissioner that there were defects
and deficiencies in the design, plans and
specifications prepared by third-party
The Third-party defendants, who are the most
defendants, and that said defects and
concerned with this portion of the
deficiencies involved appreciable risks with
Commissioner's report, voiced opposition to
respect to the accidental forces which may
the same on the grounds that (a) the finding is
result from earthquake shocks.
based on a basic erroneous conception as to
the design concept of the building, to wit, that
the design is essentially that of a heavy (2) (a) The deviations, if any, made by the
rectangular box on stilts with shear wan at one defendants from the plans and specifications,
end; (b) the finding that there were defects and and how said deviations contributed to the
a deficiency in the design of the building would damage sustained by the building.
at best be based on an approximation and,
therefore, rightly belonged to the realm of
(b) The alleged failure of defendants to
speculation, rather than of certainty and could
observe the requisite quality of materials and
very possibly be outright error; (c) the
workmanship in the construction of the
Commissioner has failed to back up or support
building.
his finding with extensive, complex and highly
specialized computations and analyzes which
he himself emphasizes are necessary in the These two issues, being interrelated with each
determination of such a highly technical other, will be discussed together.
question; and (d) the Commissioner has
analyzed the design of the PBA building not in
The findings of the Commissioner on these
the light of existing and available earthquake
issues were as follows:
engineering knowledge at the time of the
preparation of the design, but in the light of
recent and current standards. We now turn to the construction of the PBA
Building and the alleged deficiencies or defects
in the construction and violations or
The Commissioner answered the said
deviations from the plans and specifications.
objections alleging that third-party
All these may be summarized as follows:
defendants' objections were based on
estimates or exhibits not presented during the
hearing that the resort to engineering a. Summary of alleged defects as reported by
references posterior to the date of the Engineer Mario M. Bundalian.
preparation of the plans was induced by the
third-party defendants themselves who
(1) Wrongful and defective placing of
submitted computations of the third-party
reinforcing bars.
defendants are erroneous.

(2) Absence of effective and desirable

The issue presently considered is admittedly a
integration of the 3 bars in the cluster.
technical one of the highest degree. It involves
questions not within the ordinary competence
of the bench and the bar to resolve by (3) Oversize coarse aggregates: 1-1/4 to 2"
themselves. Counsel for the third-party were used. Specification requires no larger
defendants has aptly remarked that than 1 inch.
"engineering, although dealing in mathematics,
is not an exact science and that the present (4) Reinforcement assembly is not concentric
knowledge as to the nature of earthquakes and with the column, eccentricity being 3" off when
the behaviour of forces generated by them still on one face the main bars are only 1 1/2' from
leaves much to be desired; so much so "that the the surface.
experts of the different parties, who are all
engineers, cannot agree on what equation to
use, as to what earthquake co-efficients are, on (5) Prevalence of honeycombs,
the codes to be used and even as to the type of
structure that the PBA building (is) was (p. 29, (6) Contraband construction joints,
Memo, of third- party defendants before the
Commissioner).
(7) Absence, or omission, or over spacing of
spiral hoops,
The difficulty expected by the Court if tills
technical matter were to be tried and inquired
into by the Court itself, coupled with the (8) Deliberate severance of spirals into semi-
intrinsic nature of the questions involved circles in noted on Col. A-5, ground floor,
therein, constituted the reason for the
(9) Defective construction joints in Columns A-
3, C-7, D-7 and D-4, ground floor,
(10) Undergraduate concrete is evident,
(11) Big cavity in core of Column 2A-4, second
floor,
(12) Columns buckled at different planes.
Columns buckled worst where there are no
spirals or where spirals are cut. Columns
suffered worst displacement where the
eccentricity of the columnar reinforcement
assembly is more acute.
b. Summary of alleged defects as reported by
Engr. Antonio Avecilla.
Columns are first (or ground) floor, unless
otherwise stated.
(1) Column D4 — Spacing of spiral is changed
from 2" to 5" on centers,
(2) Column D5 — No spiral up to a height of 22"
from the ground floor,
(3) Column D6 — Spacing of spiral over 4 l/2,
(4) Column D7 — Lack of lateral ties,
(5) Column C7 — Absence of spiral to a height
of 20" from the ground level, Spirals are at 2"
from the exterior column face and 6" from the
inner column face,
(6) Column B6 — Lack of spiral on 2 feet below
the floor beams,
(7) Column B5 — Lack of spirals at a distance
of 26' below the beam,
(8) Column B7 — Spirals not tied to vertical
reinforcing bars, Spirals are uneven 2" to 4",
(9) Column A3 — Lack of lateral ties,
(10) Column A4 — Spirals cut off and welded to
two separate clustered vertical bars,
(11) Column A4 — (second floor Column is
completely hollow to a height of 30"
(12) Column A5 — Spirals were cut from the
floor level to the bottom of the spandrel beam
to a height of 6 feet,
(13) Column A6 — No spirals up to a height of
30' above the ground floor level,
(14) Column A7— Lack of lateralties or spirals,
c. Summary of alleged defects as reported by
the experts of the Third-Party defendants.
Ground floor columns.
(1) Column A4 — Spirals are cut,
(2) Column A5 — Spirals are cut,
(3) Column A6 — At lower 18" spirals are
absent,
(4) Column A7 — Ties are too far apart,
(5) Column B5 — At upper fourth of column
spirals are either absent or improperly spliced,
(6) Column B6 — At upper 2 feet spirals are
absent,
(7) Column B7 — At upper fourth of column
spirals missing or improperly spliced.
(8) Column C7— Spirals are absent at lowest
18"
(9) Column D5 — At lowest 2 feet spirals are
absent,
(10) Column D6 — Spirals are too far apart and
apparently improperly spliced,
(11) Column D7 — Lateral ties are too far
apart, spaced 16" on centers.
There is merit in many of these allegations.
The explanations given by the engineering
experts for the defendants are either contrary
to general principles of engineering design for
reinforced concrete or not applicable to the
requirements for ductility and strength of
reinforced concrete in earthquake-resistant
design and construction.
We shall first classify and consider defects
which may have appreciable bearing or
relation to' the earthquake-resistant property
of the building.
As heretofore mentioned, details which insure
ductility at or near the connections between
columns and girders are desirable in
earthquake resistant design and construction.
The omission of spirals and ties or hoops at the
bottom and/or tops of columns contributed
greatly to the loss of earthquake-resistant
strength. The plans and specifications required
that these spirals and ties be carried from the
floor level to the bottom reinforcement of the
deeper beam (p. 1, Specifications, p. 970,
Reference 11). There were several clear
evidences where this was not done especially
in some of the ground floor columns which
failed.
There were also unmistakable evidences that
the spacings of the spirals and ties in the
columns were in many cases greater than
those called for in the plans and specifications
resulting again in loss of earthquake-resistant
strength. The assertion of the engineering
experts for the defendants that the improper
spacings and the cutting of the spirals did not
result in loss of strength in the column cannot
be maintained and is certainly contrary to the
general principles of column design and
construction. And even granting that there be
no loss in strength at the yield point (an
assumption which is very doubtful) the cutting
or improper spacings of spirals will certainly
result in the loss of the plastic range or
ductility in the column and it is precisely this
plastic range or ductility which is desirable
and needed for earthquake-resistant strength.
There is no excuse for the cavity or hollow
portion in the column A4, second floor, and
although this column did not fail, this is
certainly an evidence on the part of the
contractor of poor construction.
The effect of eccentricities in the columns
which were measured at about 2 1/2 inches
maximum may be approximated in relation to
column loads and column and beam moments.
The main effect of eccentricity is to change the
beam or girder span. The effect on the
measured eccentricity of 2 inches, therefore, is
to increase or diminish the column load by a
maximum of about 1% and to increase or
diminish the column or beam movements by
about a maximum of 2%. While these can
certainly be absorbed within the factor of
safety, they nevertheless diminish said factor
of safety.
The cutting of the spirals in column A5, ground
floor is the subject of great contention between
the parties and deserves special consideration.
The proper placing of the main reinforcements
and spirals in column A5, ground floor, is the
responsibility of the general contractor which
is the UCCI. The burden of proof, therefore, that
this cutting was done by others is upon the
defendants. Other than a strong allegation and
assertion that it is the plumber or his men who
may have done the cutting (and this was flatly
denied by the plumber) no conclusive proof
was presented. The engineering experts for the
defendants asserted that they could have no
motivation for cutting the bar because they can
simply replace the spirals by wrapping around
a new set of spirals. This is not quite correct.
There is evidence to show that the pouring of
concrete for columns was sometimes done
through the beam and girder reinforcements
which were already in place as in the case of
column A4 second floor. If the reinforcement
for the girder and column is to subsequently
wrap around the spirals, this would not do for
the elasticity of steel would prevent the
making of tight column spirals and loose or
improper spirals would result. The proper way
is to produce correct spirals down from the top
of the main column bars, a procedure which
can not be done if either the beam or girder
reinforcement is already in place. The
engineering experts for the defendants
strongly assert and apparently believe that the
cutting of the spirals did not materially
diminish the strength of the column. This belief
together with the difficulty of slipping the
spirals on the top of the column once the beam
reinforcement is in place may be a sufficient
motivation for the cutting of the spirals
themselves. The defendants, therefore, should
be held responsible for the consequences
arising from the loss of strength or ductility in
column A5 which may have contributed to the
damages sustained by the building.
The lack of proper length of splicing of spirals
was also proven in the visible spirals of the
columns where spalling of the concrete cover
had taken place. This lack of proper splicing
contributed in a small measure to the loss of
strength.
The effects of all the other proven and visible
defects although nor can certainly be
accumulated so that they can contribute to an
appreciable loss in earthquake-resistant
strength. The engineering experts for the
defendants submitted an estimate on some of
these defects in the amount of a few percent. If
accumulated, therefore, including the effect of
eccentricity in the column the loss in strength
due to these minor defects may run to as much
as ten percent.
To recapitulate: the omission or lack of spirals
and ties at the bottom and/or at the top of
some of the ground floor columns contributed
greatly to the collapse of the PBA building
since it is at these points where the greater
part of the failure occurred. The liability for
the cutting of the spirals in column A5, ground
floor, in the considered opinion of the
Commissioner rests on the shoulders of the
defendants and the loss of strength in this
column contributed to the damage which
occurred.
It is reasonable to conclude, therefore, that the
proven defects, deficiencies and violations of
the plans and specifications of the PBA
building contributed to the damages which
resulted during the earthquake of August 2,
1968 and the vice of these defects and
deficiencies is that they not only increase but
also aggravate the weakness mentioned in the
design of the structure. In other words, these
defects and deficiencies not only tend to add
but also to multiply the effects of the
shortcomings in the design of the building. We
may say, therefore, that the defects and
deficiencies in the construction contributed
greatly to the damage which occurred.
Since the execution and supervision of the
construction work in the hands of the
contractor is direct and positive, the presence
of existence of all the major defects and
deficiencies noted and proven manifests an
element of negligence which may amount to
imprudence in the construction work. (pp. 42-
49, Commissioners Report).
As the parties most directly concerned with this portion of the
Commissioner's report, the defendants voiced their objections to
the same on the grounds that the Commissioner should have
specified the defects found by him to be "meritorious"; that the
Commissioner failed to indicate the number of cases where the
spirals and ties were not carried from the floor level to the bottom
reinforcement of the deeper beam, or where the spacing of the although the act of a third person, or an act of God for which he is
spirals and ties in the columns were greater than that called for in not responsible, intervenes to precipitate the loss.
the specifications; that the hollow in column A4, second floor, the
eccentricities in the columns, the lack of proper length of splicing
As already discussed, the destruction was not purely an act of God.
of spirals, and the cut in the spirals in column A5, ground floor, did
Truth to tell hundreds of ancient buildings in the vicinity were
not aggravate or contribute to the damage suffered by the
hardly affected by the earthquake. Only one thing spells out the
building; that the defects in the construction were within the
fatal difference; gross negligence and evident bad faith, without
tolerable margin of safety; and that the cutting of the spirals in
which the damage would not have occurred.
column A5, ground floor, was done by the plumber or his men, and
not by the defendants.
WHEREFORE, the decision appealed from is hereby MODIFIED and
considering the special and environmental circumstances of this
Answering the said objections, the Commissioner stated that, since
case, We deem it reasonable to render a decision imposing, as We
many of the defects were minor only the totality of the defects was
do hereby impose, upon the defendant and the third-party
considered. As regards the objection as to failure to state the
defendants (with the exception of Roman Ozaeta) a solidary (Art.
number of cases where the spirals and ties were not carried from
1723, Civil Code, Supra, p. 10) indemnity in favor of the Philippine
the floor level to the bottom reinforcement, the Commissioner
Bar Association of FIVE MILLION (P5,000,000.00) Pesos to cover all
specified groundfloor columns B-6 and C-5 the first one without
damages (with the exception of attorney's fees) occasioned by the
spirals for 03 inches at the top, and in the latter, there were no
loss of the building (including interest charges and lost rentals)
spirals for 10 inches at the bottom. The Commissioner likewise
and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos
specified the first storey columns where the spacings were greater
as and for attorney's fees, the total sum being payable upon the
than that called for in the specifications to be columns B-5, B-6, C-
finality of this decision. Upon failure to pay on such finality, twelve
7, C-6, C-5, D-5 and B-7. The objection to the failure of the
(12%) per cent interest per annum shall be imposed upon afore-
Commissioner to specify the number of columns where there was
mentioned amounts from finality until paid. Solidary costs against
lack of proper length of splicing of spirals, the Commissioner
the defendant and third-party defendants (except Roman Ozaeta).
mentioned groundfloor columns B-6 and B-5 where all the splices
were less than 1-1/2 turns and were not welded, resulting in some
loss of strength which could be critical near the ends of the SO ORDERED.
columns. He answered the supposition of the defendants that the
spirals and the ties must have been looted, by calling attention to
Feria (Chairman), Fernan, Alampay and Cruz, JJ., concur.
the fact that the missing spirals and ties were only in two out of the
25 columns, which rendered said supposition to be improbable.

The Commissioner conceded that the hollow in column A-4, second

floor, did not aggravate or contribute to the damage, but averred
that it is "evidence of poor construction." On the claim that the
eccentricity could be absorbed within the factor of safety, the
Commissioner answered that, while the same may be true, it also
contributed to or aggravated the damage suffered by the building.

The objection regarding the cutting of the spirals in Column A-5,

groundfloor, was answered by the Commissioner by reiterating
the observation in his report that irrespective of who did the
cutting of the spirals, the defendants should be held liable for the
same as the general contractor of the building. The Commissioner
further stated that the loss of strength of the cut spirals and
inelastic deflections of the supposed lattice work defeated the
purpose of the spiral containment in the column and resulted in
the loss of strength, as evidenced by the actual failure of this
column.

Again, the Court concurs in the findings of the Commissioner on

these issues and fails to find any sufficient cause to disregard or
modify the same. As found by the Commissioner, the "deviations
made by the defendants from the plans and specifications caused
indirectly the damage sustained and that those deviations not only
added but also aggravated the damage caused by the defects in the
plans and specifications prepared by third-party defendants.
(Rollo, Vol. I, pp. 128-142)

The afore-mentioned facts clearly indicate the wanton negligence

of both the defendant and the third-party defendants in effecting
the plans, designs, specifications, and construction of the PBA
building and We hold such negligence as equivalent to bad faith in
the performance of their respective tasks.

Relative thereto, the ruling of the Supreme Court in Tucker v.

Milan (49 O.G. 4379, 4380) which may be in point in this case
reads:

One who negligently creates a dangerous condition cannot escape

liability for the natural and probable consequences thereof,
G.R. No. 185798               January 13, 2014 c) FIFTY THOUSAND PESOS (₱50,000.00) as attorney’s fees,

FIL-ESTATE PROPERTIES, INC. AND FIL-ESTATE NETWORK d) The costs of suit, and
INC., Petitioners, 
vs.
e) An administrative fine of TEN THOUSAND PESOS
SPOUSES CONRADO AND MARIA VICTORIA
(₱10,000.00) payable to this Office fifteen (15) days upon
RONQUILLO, Respondents.
receipt of this decision, for violation of Section 20 in relation
to Section 38 of PD 957.3
DECISION
The Arbiter considered petitioners’ failure to develop the condominium
PEREZ, J.: project as a substantial breach of their obligation which entitles
respondents to seek for rescission with payment of damages. The
Arbiter also stated that mere economic hardship is not an excuse for
Before the Court is a petition for review on certiorari under Rule 45 of
contractual and legal delay.
the 1997 Rules .of Civil Procedure assailing the Decision1 of the Court of
Appeals in CA-G.R. SP No. 100450 which affirmed the Decision of the
Office of the President in O.P. Case No. 06-F-216. Petitioners appealed the Arbiter’s Decision through a petition for
review pursuant to Rule XII of the 1996 Rules of Procedure of HLURB.
On 17 February 2005, the Board of Commissioners of the HLURB
As culled from the records, the facts are as follow:
denied4 the petition and affirmed the Arbiter’s Decision. The HLURB
reiterated that the depreciation of the peso as a result of the Asian
Petitioner Fil-Estate Properties, Inc. is the owner and developer of the financial crisis is not a fortuitous event which will exempt petitioners
Central Park Place Tower while co-petitioner Fil-Estate Network, Inc. is from the performance of their contractual obligation.
its authorized marketing agent. Respondent Spouses Conrado and
Maria Victoria Ronquillo purchased from petitioners an 82-square
Petitioners filed a motion for reconsideration but it was denied5 on 8
meter condominium unit at Central Park Place Tower in Mandaluyong
May 2006. Thereafter, petitioners filed a Notice of Appeal with the
City for a pre-selling contract price of FIVE MILLION ONE HUNDRED
Office of the President. On 18 April 2007, petitioners’ appeal was
SEVENTY-FOUR THOUSAND ONLY (₱5,174,000.00). On 29 August
dismissed6 by the Office of the President for lack of merit. Petitioners
1997, respondents executed and signed a Reservation Application
moved for a reconsideration but their motion was denied7 on 26 July
Agreement wherein they deposited ₱200,000.00 as reservation fee. As
2007.
agreed upon, respondents paid the full downpayment of ₱1,552,200.00
and had been paying the ₱63,363.33 monthly amortizations until
September 1998. Petitioners sought relief from the Court of Appeals through a petition
for review under Rule 43 containing the same arguments they raised
before the HLURB and the Office of the President:
Upon learning that construction works had stopped, respondents
likewise stopped paying their monthly amortization. Claiming to have
paid a total of ₱2,198,949.96 to petitioners, respondents through two I.
(2) successive letters, demanded a full refund of their payment with
interest. When their demands went unheeded, respondents were
THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING
constrained to file a Complaint for Refund and Damages before the
THE DECISION OF THE HONORABLE HOUSING AND LAND USE
Housing and Land Use Regulatory Board (HLURB). Respondents prayed
REGULATORY BOARD AND ORDERING PETITIONERS-APPELLANTS TO
for reimbursement/refund of ₱2,198,949.96 representing the total
REFUND RESPONDENTS-APPELLEES THE SUM OF ₱2,198,949.96 WITH
amortization payments, ₱200,000.00 as and by way of moral damages,
12% INTEREST FROM 8 OCTOBER 1998 UNTIL FULLY PAID,
attorney’s fees and other litigation expenses.
CONSIDERING THAT THE COMPLAINT STATES NO CAUSE OF ACTION
AGAINST PETITIONERS-APPELLANTS.
On 21 October 2000, the HLURB issued an Order of Default against
petitioners for failing to file their Answer within the reglementary
II.
period despite service of summons.2

THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING

Petitioners filed a motion to lift order of default and attached their
THE DECISION OF THE OFFICE BELOW ORDERING PETITIONERS-
position paper attributing the delay in construction to the 1997 Asian
APPELLANTS TO PAY RESPONDENTS-APPELLEES THE SUM OF
financial crisis. Petitioners denied committing fraud or
₱100,000.00 AS MORAL DAMAGES AND ₱50,000.00 AS ATTORNEY’S
misrepresentation which could entitle respondents to an award of
FEES CONSIDERING THE ABSENCE OF ANY FACTUAL OR LEGAL BASIS
moral damages.
THEREFOR.

On 13 June 2002, the HLURB, through Arbiter Atty. Joselito F. Melchor,

III.
rendered judgment ordering petitioners to jointly and severally pay
respondents the following amount:
THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING
THE DECISION OF THE HOUSING AND LAND USE REGULATORY BOARD
a) The amount of TWO MILLION ONE HUNDRED NINETY-
ORDERING PETITIONERS-APPELLANTS TO PAY ₱10,000.00 AS
EIGHT THOUSAND NINE HUNDRED FORTY NINE PESOS &
ADMINISTRATIVE FINE IN THE ABSENCE OF ANY FACTUAL OR LEGAL
96/100 (₱2,198,949.96) with interest thereon at twelve
BASIS TO SUPPORT SUCH FINDING.8
percent (12%) per annum to be computed from the time of
the complainants’ demand for refund on October 08, 1998
until fully paid, On 30 July 2008, the Court of Appeals denied the petition for review for
lack of merit. The appellate court echoed the HLURB Arbiter’s ruling
that "a buyer for a condominium/subdivision unit/lot unit which has
b) ONE HUNDRED THOUSAND PESOS (₱100,000.00) as
not been developed in accordance with the approved
moral damages,
condominium/subdivision plan within the time limit for complying
with said developmental requirement may opt for reimbursement
under Section 20 in relation to Section 23 of Presidential Decree (P.D.)
957 x x x."9 The appellate court supported the HLURB Arbiter’s
conclusion, which was affirmed by the HLURB Board of Commission
and the Office of the President, that petitioners’ failure to develop the
condominium project is tantamount to a substantial breach which
warrants a refund of the total amount paid, including interest. The
appellate court pointed out that petitioners failed to prove that the
Asian financial crisis constitutes a fortuitous event which could excuse
them from the performance of their contractual and statutory
obligations. The appellate court also affirmed the award of moral
damages in light of petitioners’ unjustified refusal to satisfy
respondents’ claim and the legality of the administrative fine, as
provided in Section 20 of Presidential Decree No. 957.
Petitioners sought reconsideration but it was denied in a including interest and damages; and third, petitioners are likewise
Resolution10 dated 11 December 2008 by the Court of Appeals.
Aggrieved, petitioners filed the instant petition advancing substantially
the same grounds for review:
A.
THE HONORABLE COURT OF APPEALS ERRED WHEN IT AFFIRMED IN
TOTO THE DECISION OF THE OFFICE OF THE PRESIDENT WHICH
SUSTAINED RESCISSION AND REFUND IN FAVOR OF THE
RESPONDENTS DESPITE LACK OF CAUSE OF ACTION.
B.
GRANTING FOR THE SAKE OF ARGUMENT THAT THE PETITIONERS
ARE LIABLE UNDER THE PREMISES, THE HONORABLE COURT OF
APPEALS ERRED WHEN IT AFFIRMED THE HUGE AMOUNT OF
INTEREST OF TWELVE PERCENT (12%).
C.
THE HONORABLE COURT OF APPEALS LIKEWISE ERRED WHEN IT
AFFIRMED IN TOTO THE DECISION OF THE OFFICE OF THE
PRESIDENT INCLUDING THE PAYMENT OF ₱100,000.00 AS MORAL
DAMAGES, ₱50,000.00 AS ATTORNEY’S FEES AND ₱10,000.00 AS
ADMINISTRATIVE FINE IN THE ABSENCE OF ANY FACTUAL OR LEGAL
BASIS TO SUPPORT SUCH CONCLUSIONS.11
Petitioners insist that the complaint states no cause of action because
they allegedly have not committed any act of misrepresentation
amounting to bad faith which could entitle respondents to a refund.
Petitioners claim that there was a mere delay in the completion of the
project and that they only resorted to "suspension and reformatting as
a testament to their commitment to their buyers." Petitioners attribute
the delay to the 1997 Asian financial crisis that befell the real estate
industry. Invoking Article 1174 of the New Civil Code, petitioners
maintain that they cannot be held liable for a fortuitous event.
Petitioners contest the payment of a huge amount of interest on account
of suspension of development on a project. They liken their situation to
a bank which this Court, in Overseas Bank v. Court of
Appeals,12 adjudged as not liable to pay interest on deposits during the
period that its operations are ordered suspended by the Monetary
Board of the Central Bank.
Lastly, petitioners aver that they should not be ordered to pay moral
damages because they never intended to cause delay, and again blamed
the Asian economic crisis as the direct, proximate and only cause of
their failure to complete the project. Petitioners submit that moral
damages should not be awarded unless so stipulated except under the
instances enumerated in Article 2208 of the New Civil Code. Lastly,
petitioners refuse to pay the administrative fine because the delay in
the project was caused not by their own deceptive intent to defraud
their buyers, but due to unforeseen circumstances beyond their control.
Three issues are presented for our resolution: 1) whether or not the
Asian financial crisis constitute a fortuitous event which would justify
delay by petitioners in the performance of their contractual obligation;
2) assuming that petitioners are liable, whether or not 12% interest
was correctly imposed on the judgment award, and 3) whether the
award of moral damages, attorney’s fees and administrative fine was
proper.
It is apparent that these issues were repeatedly raised by petitioners in
all the legal fora. The rulings were consistent that first, the Asian
financial crisis is not a fortuitous event that would excuse petitioners
from performing their contractual obligation; second, as a result of the
breach committed by petitioners, respondents are entitled to rescind
the contract and to be refunded the amount of amortizations paid
obligated to pay attorney’s fees and the administrative fine.
This petition did not present any justification for us to deviate from the
rulings of the HLURB, the Office of the President and the Court of
Appeals.
Indeed, the non-performance of petitioners’ obligation entitles
respondents to rescission under Article 1191 of the New Civil Code
which states:
Article 1191. The power to rescind obligations is implied in reciprocal
ones, in case one of the obligors should not comply with what is
incumbent upon him.
The injured party may choose between the fulfillment and the
rescission of the obligation, with payment of damages in either case. He
may also seek rescission, even after he has chosen fulfillment, if the
latter should become impossible.
More in point is Section 23 of Presidential Decree No. 957, the rule
governing the sale of condominiums, which provides:
Section 23. Non-Forfeiture of Payments.1âwphi1 No installment
payment made by a buyer in a subdivision or condominium project for
the lot or unit he contracted to buy shall be forfeited in favor of the
owner or developer when the buyer, after due notice to the owner or
developer, desists from further payment due to the failure of the owner
or developer to develop the subdivision or condominium project
according to the approved plans and within the time limit for complying
with the same. Such buyer may, at his option, be reimbursed the total
amount paid including amortization interests but excluding
delinquency interests, with interest thereon at the legal rate. (Emphasis
supplied).
Conformably with these provisions of law, respondents are entitled to
rescind the contract and demand reimbursement for the payments they
had made to petitioners.
Notably, the issues had already been settled by the Court in the case of
Fil-Estate Properties, Inc. v. Spouses Go13promulgated on 17 August
2007, where the Court stated that the Asian financial crisis is not an
instance of caso fortuito. Bearing the same factual milieu as the instant
case, G.R. No. 165164 involves the same company, Fil-Estate, albeit
about a different condominium property. The company likewise
reneged on its obligation to respondents therein by failing to develop
the condominium project despite substantial payment of the contract
price. Fil-Estate advanced the same argument that the 1997 Asian
financial crisis is a fortuitous event which justifies the delay of the
construction project. First off, the Court classified the issue as a
question of fact which may not be raised in a petition for review
considering that there was no variance in the factual findings of the
HLURB, the Office of the President and the Court of Appeals. Second, the
Court cited the previous rulings of Asian Construction and Development
Corporation v. Philippine Commercial International Bank14 and
Mondragon Leisure and Resorts Corporation v. Court of
Appeals15 holding that the 1997 Asian financial crisis did not constitute
a valid justification to renege on obligations. The Court expounded:

Also, we cannot generalize that the Asian financial crisis in 1997 was
unforeseeable and beyond the control of a business corporation. It is
unfortunate that petitioner apparently met with considerable difficulty
e.g. increase cost of materials and labor, even before the scheduled
commencement of its real estate project as early as 1995. However, a
real estate enterprise engaged in the pre-selling of condominium units
is concededly a master in projections on commodities and currency
movements and business risks. The fluctuating movement of the
Philippine peso in the foreign exchange market is an everyday
occurrence, and fluctuations in currency exchange rates happen
everyday, thus, not an instance of caso fortuito.16

The aforementioned decision becomes a precedent to future cases in

which the facts are substantially the same, as in this case. The principle
of stare decisis, which means adherence to judicial precedents, applies.

In said case, the Court ordered the refund of the total amortizations
paid by respondents plus 6% legal interest computed from the date of
demand. The Court also awarded attorney’s fees. We follow that ruling
in the case before us.

The resulting modification of the award of legal interest is, also, in line
with our recent ruling in Nacar v. Gallery Frames,17 embodying the
amendment introduced by the Bangko Sentral ng Pilipinas Monetary
Board in BSP-MB Circular No. 799 which pegged the interest rate at 6%
regardless of the source of obligation.

We likewise affirm the award of attorney’s fees because respondents

were forced to litigate for 14 years and incur expenses to protect their
rights and interest by reason of the unjustified act on the part of
petitioners.18 The imposition of ₱10,000.00 administrative fine is
correct pursuant to Section 38 of Presidential Decree No. 957 which
reads:

Section 38. Administrative Fines. The Authority may prescribe and

impose fines not exceeding ten thousand pesos for violations of the
provisions of this Decree or of any rule or regulation thereunder. Fines
shall be payable to the Authority and enforceable through writs of
execution in accordance with the provisions of the Rules of Court.

Finally, we sustain the award of moral damages. In order that moral

damages may be awarded in breach of contract cases, the defendant
must have acted in bad faith, must be found guilty of gross negligence
amounting to bad faith, or must have acted in wanton disregard of
contractual obligations.19 The Arbiter found petitioners to have acted in
bad faith when they breached their contract, when they failed to
address respondents’ grievances and when they adamantly refused to
refund respondents' payment.

In fine, we find no reversible error on the merits in the impugned Court

of Appeals' Decision and Resolution.

WHEREFORE, the petition is PARTLY GRANTED. The appealed Decision

is AFFIRMED with the MODIFICATION that the legal interest to be paid
is SIX PERCENT (6%) on the amount due computed from the time of
respondents' demand for refund on 8 October 1998.
SO ORDERED.
G.R. No. 144169 March 28, 200
KHE HONG CHENG, alias FELIX KHE, SANDRA JOY KHE and RAY
STEVEN KHE, petitioners, 
vs.
COURT OF APPEALS, HON. TEOFILO GUADIZ, RTC 147, MAKATI
CITY and PHILAM INSURANCE CO., INC., respondents.
KAPUNAN, J.:
Before the Court is a Petition for Review on Certiorari under Rule 45,
seeking to set aside the decision of the Court of Appeals dated April 10,
2000 and its resolution dated July 11, 2000 denying the motion for
reconsideration of the aforesaid decision. The original complaint that is
the subject matter of this case is an accion pauliana -- an action filed by
Philam Insurance Company, Inc. (respondent Philam) to rescind or
annul the donations made by petitioner Khe Hong Cheng allegedly in
fraud of creditors. The main issue for resolution is whether or not the
action to rescind the donations has already prescribed. While the first
paragraph of Article 1389 of the Civil Code states: "The action to claim
rescission must be commenced within four years..." the question is,
from which point or event does this prescriptive period commence to
run?
The facts are as follows:
Petitioner Khe Hong Cheng, alias Felix Khe, is the owner of Butuan
Shipping Lines. It appears that on or about October 4, 1985, the
Philippine Agricultural Trading Corporation shipped on board the
vessel M/V PRINCE ERIC, owned by petitioner Khe Hong Cheng, 3,400
bags of copra at Masbate, Masbate, for delivery to Dipolog City,
Zamboanga del Norte. The said shipment of copra was covered by a
marine insurance policy issued by American Home Insurance Company
(respondent Philam's assured). M/V PRINCE ERlC, however, sank
somewhere between Negros Island and Northeastern Mindanao,
resulting in the total loss of the shipment. Because of the loss, the
insurer, American Home, paid the amount of P354,000.00 (the value of
the copra) to the consignee.1âwphi1.nêt
Having been subrogated into the rights of the consignee, American
Home instituted Civil Case No. 13357 in the Regional Trial Court (RTC)
of Makati , Branch 147 to recover the money paid to the consignee,
based on breach of contract of carriage. While the case was still
pending, or on December 20, 1989, petitioner Khe Hong Cheng executed
deeds of donations of parcels of land in favor of his children, herein co-
petitioners Sandra Joy and Ray Steven. The parcel of land with an area
of 1,000 square meters covered by Transfer Certificate of Title (TCT)
No. T-3816 was donated to Ray Steven. Petitioner Khe Hong Cheng
likewise donated in favor of Sandra Joy two (2) parcels of land located
in Butuan City, covered by TCT No. RT-12838. On the basis of said
deeds, TCT No. T-3816 was cancelled and in lieu thereof, TCT No. T-
5072 was issued in favor of Ray Steven and TCT No. RT-12838 was
cancelled and in lieu thereof, TCT No. RT-21054 was issued in the name
of Sandra Joy.
The trial court rendered judgment against petitioner Khe Hong Cheng in
Civil Case No.13357 on December 29, 1993, four years after the
donations were made and the TCTs were registered in the donees'
names. The decretal portion of the aforesaid decision reads:
"Wherefore, in view of the foregoing, the Court hereby
renders judgment in favor of the plaintiff and against the
defendant, ordering the latter to pay the former:
1) the sum of P354,000.00 representing the amount paid by
the plaintiff to the Philippine Agricultural Trading
Corporation with legal interest at 12% from the time of the
filing of the complaint in this case;
2) the sum of P50,000.00 as attorney's fees;
3) the costs.1
After the said decision became final and executory, a writ of execution
was forthwith' issued on September 14, 1995. Said writ of execution
however, was not served. An alias writ of execution was, thereafter,
applied for and granted in October 1996. Despite earnest efforts, the
sheriff found no property under the name of Butuan Shipping Lines
and/or petitioner Khe Hong Cheng to levy or garnish for the satisfaction
of the trial court's decision. When the sheriff, accompanied by counsel
of respondent Philam, went to Butuan City on January 17, 1997, to
enforce the alias writ of execution, they discovered that petitioner Khe
Hong Cheng no longer had any property and that he had conveyed the
subject properties to his children.
On February 25, 1997, respondent Philam filed a complaint with the
Regional Trial Court of Makati City, Branch 147, for the rescission of the
deeds of donation executed by petitioner Khe Hong Cheng in favor of
his children and for the nullification of their titles (Civil Case No.97-
415). Respondent Philam alleged, inter alia, that petitioner Khe Hong
Cheng executed the aforesaid deeds in fraud of his creditors, including
respondent Philam.2
Petitioners subsequently filed their answer to the complaint a
quo. They moved for its dismissal on the ground that the action had
already prescribed. They posited that the registration of the deeds of
donation on December 27, 1989 constituted constructive notice and
since the complaint a quo was filed only on February 25, 1997, or more
than four (4) years after said registration, the action was already barred
by prescription.3
Acting thereon, the trial court denied the motion to dismiss. It held that
respondent Philam's complaint had not yet prescribed. According to the
trial court, the prescriptive period began to run only from December 29,
1993, the date of the decision of the trial court in Civil Case No. 13357.4
On appeal by petitioners, the CA affirmed the trial court's decision in
favor of respondent Philam. The CA declared that the action to rescind
the donations had not yet prescribed. Citing Articles 1381 and 1383 of
the Civil Code, the CA basically ruled that the four year period to
institute the action for rescission began to run only in January 1997,
and not when the decision in the civil case became final and executory
on December 29, 1993. The CA reckoned the accrual of respondent
Philam's cause of action on January 1997, the time when it first learned
that the judgment award could not be satisfied because the judgment
creditor, petitioner Khe Hong Cheng, had no more properties in his
name. Prior thereto, respondent Philam had not yet exhausted all legal
means for the satisfaction of the decision in its favor, as prescribed
under Article 1383 of the Civil Code.5
The Court of Appeals thus denied the petition for certiorari filed before
it, and held that the trial court did not commit any error in denying
petitioners' motion to dismiss. Their motion for reconsideration was
likewise dismissed in the appellate court's resolution dated July 11,
2000.
Petitioners now assail the aforesaid decision and resolution of the CA
alleging that:
I
 PUBLIC RESPONDENT GRAVELY ERRED AND ACTED IN
GRAVE ABUSE OF DISCRETION WHEN IT DENIED THE
PETITION TO DISMISS THE CASE BASED ON THE GROUND
OF PRESCRIPTION.
II
PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED
IN HOLDING THAT PRESCRIPTION BEGINS TO RUN WHEN
IN JANUARY 1997 THE SHERIFF WENT TO BUTUAN CITY IN
SEARCH OF PROPERTIES OF PETITIONER FELIX KHE CHENG
TO SATISFY THE JUDGMENT IN CIVIL CASE NO.13357 AND
FOUND OUT THAT AS EARLY AS DEC. 20, 1989,
PETITIONERS KHE CHENG EXECUTED THE DEEDS OF
DONATIONS IN FAVOR OF HIS CO-PETITIONERS THAT THE
ACTION FOR RESCISSION ACCRUED BECAUSE
PRESCRIPTION BEGAN TO RUN WHEN THESE DONATIONS
WERE REGISTERED WITH THE REGISTER OF DEEDS IN
DECEMBER 1989, AND WHEN THE COMPLAINT WAS FILED
ONLY IN FEBRUARY 1997, MORE THAN FOUR YEARS HAVE
ALREADY LAPSED AND THEREFORE, IT HAS ALREADY
PRESCRIBED.6
Essentially, the issue for resolution posed by petitioners is this: When
did the four (4) year prescriptive period as provided for in Article 1389 of
the Civil Code for respondent Philam to file its action for rescission of the
subject deeds of donation commence to run?
The petition is without merit.
Article 1389 of the Civil Code simply provides that, "The action to claim
rescission must be commenced within four years." Since this provision
of law is silent as to when the prescriptive period would commence, the
general rule, i.e., from the moment the cause of action accrues,
therefore, applies. Article 1150 of the Civil Code is particularly
instructive:
Art. 1150. The time for prescription for all kinds of actions,
when there is no special provision which ordains otherwise,
shall be counted from the day they may be brought.
Indeed, this Court enunciated the principle that it is the legal possibility
of bringing the action which determines the starting point for the
computation of the prescriptive period for the action.7 Article 1383 of
the Civil Code provides as follows:
Art. 1383. An action for rescission is subsidiary; it cannot be
instituted except when the party suffering damage has no
other legal means to obtain reparation for the same.
It is thus apparent that an action to rescind or an accion pauliana must
be of last resort, availed of only after all other legal remedies have been
exhausted and have been proven futile. For an accion pauliana to
accrue, the following requisites must concur:
1) That the plaintiff asking for rescission has a credit prior to,
the alienation, although demandable later; 2) That the debtor
has made a subsequent contract conveying a patrimonial
benefit to a third person; 3) That the creditor has no other
legal remedy to satisfy his claim, but would benefit by
rescission of the conveyance to the third person; 4) That the
act being impugned is fraudulent; 5) That the third person
who received the property conveyed, if by onerous title, has
been an accomplice in the fraud.8 (Emphasis ours)
We quote with approval the following disquisition of the CA on the
matter:
An accion pauliana accrues only when the creditor discovers
that he has no other legal remedy for the satisfaction of his
claim against the debtor other than an accion
pauliana. The accion pauliana is an action of a last resort. For
as long as the creditor still has a remedy at law for the
enforcement of his claim against the debtor, the creditor will
not have any cause of action against the creditor for
rescission of the contracts entered into by and between the
debtor and another person or persons. Indeed, an accion
pauliana presupposes a judgment and the issuance by the
trial court of a writ of execution for the satisfaction of the
judgment and the failure of the Sheriff to enforce and satisfy
the judgment of the court. It presupposes that the creditor
has exhausted the property of the debtor. The date of the
decision of the trial court against the debtor is immaterial.
What is important is that the credit of the plaintiff antedates
that of the fraudulent alienation by the debtor of his
property. After all, the decision of the trial court against the
debtor will retroact to the time when the debtor became
indebted to the creditor.9
Petitioners, however, maintain that the cause of action of respondent
Philam against them for the rescission of the deeds of donation accrued
as early as December 27, 1989, when petitioner Khe Hong Cheng
registered the subject conveyances with the Register of Deeds.
Respondent Philam allegedly had constructive knowledge of the
execution of said deeds under Section 52 of Presidential Decree No.
1529, quoted infra, as follows:
Section 52. Constructive knowledge upon registration. -
Every conveyance, mortgage, lease, lien, attachment, order,
judgment, instrument or entry affecting registered land shall,
if registered, filed or entered in the Office of the Register of
Deeds for the province or city where the land to which it
relates lies, be constructive notice to all persons from the
time of such registering, filing, or entering.
Petitioners argument that the Civil Code must yield to the Mortgage and
Registration Laws is misplaced, for in no way does this imply that the
specific provisions of the former may be all together ignored. To count
the four year prescriptive period to rescind an allegedly fraudulent
contract from the date of registration of the conveyance with the
Register of Deeds, as alleged by the petitioners, would run counter to
Article 1383 of the Civil Code as well as settled jurisprudence. It would
likewise violate the third requisite to file an action for rescission of an
allegedly fraudulent conveyance of property, i.e., the creditor has no
other legal remedy to satisfy his claim.
An accion pauliana thus presupposes the following: 1) A judgment; 2)
the issuance by the trial court of a writ of execution for the satisfaction
of the judgment, and 3) the failure of the sheriff to enforce and satisfy
the judgment of the court. It requires that the creditor has exhausted
the property of the debtor: The date of the decision of the trial court is
immaterial. What is important is that the credit of the plaintiff
antedates that of the fraudulent alienation by the debtor of his
property. After all, the decision of the trial court against the debtor will
retroact to the time when the debtor became indebted to the creditor.
Tolentino, a noted civilist, explained:
"xxx[T]herefore, credits with suspensive term or condition
are excluded, because the accion pauliana presupposes a
judgment and unsatisfied execution, which cannot exist when
the debt is not yet demandable at the time the rescissory
action is brought. Rescission is a subsidiary action, which
presupposes that the creditor has exhausted the property of
the debtor which is impossible in credits which cannot be
enforced because of a suspensive term or condition.
While it is necessary that the credit of the plaintiff in
the accion pauliana must be prior to the fraudulent
 alienation, the date of the judgment enforcing it is no longer had any properties in his name. It was only then that
immaterial. Even if the judgment be subsequent to the respondent Philam's action for rescission of the deeds of donation
alienation, it is merely declaratory with retroactive effect to accrued because then it could be said that respondent Philam had
the date when the credit was constituted."10 exhausted all legal means to satisfy the trial court's judgment in its
favor. Since respondent Philam filed its complaint for accion
pauliana against petitioners on February 25, 1997, barely a month from
These principles were reiterated by the Court when it explained the
its discovery that petitioner Khe Hong Cheng had no other property to
requisites of an accion pauliana in greater detail, to wit:
satisfy the judgment award against him, its action for rescission of the
subject deeds clearly had not yet prescribed.1âwphi1.nêt
"The following successive measures must be taken by a
creditor before he may bring an action for rescission of an
A final point. Petitioners now belatedly raise on appeal the defense of
allegedly fraudulent sale: (1) exhaust the properties of the
improper venue claiming that respondent Philam's complaint is a real
debtor through levying by attachment and execution upon all
action and should have been filed with the RTC of Butuan City since the
the property of the debtor, except such as are exempt from
property subject matter or the donations are located therein. Suffice it
execution; (2) exercise all the rights and actions of the
to say that petitioners are already deemed to have waived their right to
debtor, save those personal to him (accion subrogatoria);
question the venue of the instant case. Improper venue should be
and (3) seek rescission of the contracts executed by the
objected to as follows 1) in a motion to dismiss filed within the time but
debtor in fraud of their rights (accion pauliana). Without
before the filing of the answer;13 or 2) in the answer as an affirmative
availing of the first and second remedies, i.e.. exhausting the
defense over which, in the discretion of the court, a preliminary hearing
properties of the debtor or subrogating themselves in
may be held as if a motion to dismiss had been filed.14 Having failed to
Francisco Bareg's transmissible rights and actions.
either file a motion to dismiss on the ground of improper of venue or
petitioners simply: undertook the third measure and filed an
include the same as an affirmative defense in their answer, petitioners
action for annulment of sale. This cannot be
are deemed to have their right to object to improper venue.
done."11 (Emphasis ours)

WHEREFORE, premises considered, the petition is hereby DENIED for

In the same case, the Court also quoted the rationale of the CA when it
lack of merit.
upheld the dismissal of the accion pauliana on the basis of lack of cause
of action:
SO ORDERED.
"In this case, plaintiffs appellants had not even commenced
an action against defendants-appellees Bareng for the
collection of the alleged indebtedness, Plaintiffs-appellants
had not even tried to exhaust the property of defendants-
appellees Bareng, Plaintiffs-appellants, in seeking the
rescission of the contracts of sale entered into between
defendants-appellees, failed to show and prove that
defendants-appellees Bareng had no other property, either at
the time of the sale or at the time this action was filed, out of
which they could have collected this (sic) debts." (Emphasis
ours)

Even if respondent Philam was aware, as of December 27, 1989, that

petitioner Khe Hong Cheng had executed the deeds of donation in favor
of his children, the complaint against Butuan Shipping Lines and/or
petitioner Khe Hong Cheng was still pending before the trial court.
Respondent Philam had no inkling, at the time, that the trial court’s
judgment would be in its favor and further, that such judgment would
not be satisfied due to the deeds of donation executed by petitioner Khe
Hong Cheng during the pendency of the case. Had respondent Philam
filed his complaint on December 27, 1989, such complaint would have
been dismissed for being premature. Not only were all other legal
remedies for the enforcement of respondent Philam's claims not yet
exhausted at the time the needs of donation were executed and
registered. Respondent Philam would also not have been able to prove
then that petitioner Khe Hong Cheng had no more property other than
those covered by the subject deeds to satisfy a favorable judgment by
the trial court.

It bears stressing that petitioner Khe Hong Cheng even expressly

declared and represented that he had reserved to himself property
sufficient to answer for his debts contracted prior to this date:

"That the DONOR further states, for the same purpose as

expressed in the next preceding paragraph, that this
donation is not made with the object of defrauding his
creditors having reserved to himself property sufficient to
answer his debts contracted prior to this date".12

As mentioned earlier, respondent Philam only learned about the

unlawful conveyances made by petitioner Khe Hong Cheng in January
1997 when its counsel accompanied the sheriff to Butuan City to attach
the properties of petitioner Khe Hong Cheng. There they found that he
[G.R. No. 134685. November 19, 1999]
MARIA ANTONIA SIGUAN, petitioner, vs. ROSA LIM, LINDE LIM,
INGRID LIM and NEIL LIM, respondents.
DECISION
DAVIDE, JR., C.J.:
May the Deed of Donation executed by respondent Rosa Lim
(hereafter LIM) in favor of her children be rescinded for being in fraud
of her alleged creditor, petitioner Maria Antonia Siguan?This is the
pivotal issue to be resolved in this petition for review
on certiorari under Rule 45 of the Revised Rules of Court.
The relevant facts, as borne out of the records, are as follows:
On 25 and 26 August 1990, LIM issued two Metrobank checks in
the sums of P300,000 and P241,668, respectively, payable to cash. Upon
presentment by petitioner with the drawee bank, the checks were
dishonored for the reason account closed. Demands to make good the
checks proved futile. As a consequence, a criminal case for violation of
Batas Pambansa Blg. 22, docketed as Criminal Cases Nos. 22127-28,
were filed by petitioner against LIM with Branch 23 of the Regional
Trial Court (RTC) of Cebu City. In its decision[1] dated 29 December
1992, the court a quoconvicted LIM as charged. The case is pending
before this Court for review and docketed as G.R. No. 134685.
It also appears that on 31 July 1990 LIM was convicted of estafa
by the RTC of Quezon City in Criminal Case No. Q-89-2216[2] filed by a
certain Victoria Suarez. This decision was affirmed by the Court of
Appeals. On appeal, however, this Court, in a decision[3] promulgated on
7 April 1997, acquitted LIM but held her civilly liable in the amount
of P169,000, as actual damages, plus legal interest.
Meanwhile, on 2 July 1991, a Deed of Donation[4] conveying the
following parcels of land and purportedly executed by LIM on 10
August 1989 in favor of her children, Linde, Ingrid and Neil, was
registered with the Office of the Register of Deeds of Cebu City:
(1) a parcel of land situated at Barrio Lahug, Cebu City,
containing an area of 563 sq. m. and covered by TCT
No. 93433;
(2) a parcel of land situated at Barrio Lahug, Cebu City,
containing an area of 600 sq. m. and covered by TCT
No. 93434;
(3) a parcel of land situated at Cebu City containing an area
of 368 sq. m. and covered by TCT No. 87019; and
(4) a parcel of land situated at Cebu City, Cebu containing
an area of 511 sq. m. and covered by TCT No. 87020.
New transfer certificates of title were thereafter issued in the
names of the donees.[5]
On 23 June 1993, petitioner filed an accion pauliana against LIM
and her children before Branch 18 of the RTC of Cebu City to rescind the
questioned Deed of Donation and to declare as null and void the new
transfer certificates of title issued for the lots covered by the questioned
Deed. The complaint was docketed as Civil Case No. CEB-
14181. Petitioner claimed therein that sometime in July 1991, LIM,
through a Deed of Donation, fraudulently transferred all her real
property to her children in bad faith and in fraud of creditors, including
her; that LIM conspired and confederated with her children in
antedating the questioned Deed of Donation, to petitioners and other
creditors prejudice; and that LIM, at the time of the fraudulent
conveyance, left no sufficient properties to pay her obligations.
On the other hand, LIM denied any liability to petitioner. She
claimed that her convictions in Criminal Cases Nos. 22127-28 were
erroneous, which was the reason why she appealed said decision to the
Court of Appeals. As regards the questioned Deed of Donation, she
maintained that it was not antedated but was made in good faith at a
time when she had sufficient property.Finally, she alleged that the Deed
of Donation was registered only on 2 July 1991 because she was
seriously ill.
In its decision of 31 December 1994,[6] the trial court ordered the
rescission of the questioned deed of donation; (2) declared null and
void the transfer certificates of title issued in the names of private
respondents Linde, Ingrid and Neil Lim; (3) ordered the Register of
Deeds of Cebu City to cancel said titles and to reinstate the previous
titles in the name of Rosa Lim; and (4) directed the LIMs to pay the
petitioner, jointly and severally, the sum of P10,000 as moral
damages; P10,000 as attorneys fees; and P5,000 as expenses of
litigation.
On appeal, the Court of Appeals, in a decision [7] promulgated on
20 February 1998, reversed the decision of the trial court and
dismissed petitioners accion pauliana. It held that two of the requisites
for filing an accion pauliana were absent, namely, (1) there must be a
credit existing prior to the celebration of the contract; and (2) there
must be a fraud, or at least the intent to commit fraud, to the prejudice
of the creditor seeking the rescission.
According to the Court of Appeals, the Deed of Donation, which
was executed and acknowledged before a notary public, appears on its
face to have been executed on 10 August 1989. Under Section 23 of Rule
132 of the Rules of Court, the questioned Deed, being a public
document, is evidence of the fact which gave rise to its execution and of
the date thereof. No antedating of the Deed of Donation was made,
there being no convincing evidence on record to indicate that the
notary public and the parties did antedate it. Since LIMs indebtedness
to petitioner was incurred in August 1990, or a year after the execution
of the Deed of Donation, the first requirement for accion pauliana was
not met.
Anent petitioners contention that assuming that the Deed of
Donation was not antedated it was nevertheless in fraud of creditors
because Victoria Suarez became LIMs creditor on 8 October 1987, the
Court of Appeals found the same untenable, for the rule is basic that the
fraud must prejudice the creditor seeking the rescission.
Her motion for reconsideration having been denied, petitioner
came to this Court and submits the following issue:
WHETHER OR NOT THE DEED OF DONATION, EXH. 1, WAS
ENTERED INTO IN FRAUD OF [THE] CREDITORS OF
RESPONDENT ROSA [LIM].
Petitioner argues that the finding of the Court of Appeals that the
Deed of Donation was not in fraud of creditors is contrary to well-
settled jurisprudence laid down by this Court as early as 1912 in the
case of Oria v. McMicking,[8] which enumerated the various
circumstances indicating the existence of fraud in a transaction. She
reiterates her arguments below, and adds that another fact found by the
trial court and admitted by the parties but untouched by the Court of
Appeals is the existence of a prior final judgment against LIM in
Criminal Case No. Q-89-2216 declaring Victoria Suarez as LIMs
judgment creditor before the execution of the Deed of Donation.
Petitioner further argues that the Court of Appeals incorrectly
applied or interpreted Section 23,[9] Rule 132 of the Rules of Court, in
holding that being a public document, the said deed of donation is
evidence of the fact which gave rise to its execution and of the date of
the latter. Said provision should be read with Section 30[10] of the same
Rule which provides that notarial documents are prima facie evidence
of their execution, not of the facts which gave rise to their execution and
of the date of the latter.
 Finally, petitioner avers that the Court of Appeals overlooked
Article 759 of the New Civil Code, which provides: The donation is
always presumed to be in fraud of creditors when at the time of the
execution thereof the donor did not reserve sufficient property to pay
his debts prior to the donation. In this case, LIM made no reservation of
sufficient property to pay her creditors prior to the execution of the
Deed of Donation.
On the other hand, respondents argue that (a) having agreed on
the law and requisites of accion pauliana, petitioner cannot take shelter
under a different law; (b) petitioner cannot invoke the credit of Victoria
Suarez, who is not a party to this case, to support her accion pauliana;
(c) the Court of Appeals correctly applied or interpreted Section 23 of
Rule 132 of the Rules of Court; (d) petitioner failed to present
convincing evidence that the Deed of Donation was antedated and
executed in fraud of petitioner; and (e) the Court of Appeals correctly
struck down the awards of damages, attorneys fees and expenses of
litigation because there is no factual basis therefor in the body of the
trial courts decision.
The primordial issue for resolution is whether the questioned
Deed of Donation was made in fraud of petitioner and, therefore,
rescissible. A corollary issue is whether the awards of damages,
attorneys fees and expenses of litigation are proper.
We resolve these issues in the negative.
The rule is well settled that the jurisdiction of this Court in cases
brought before it from the Court of Appeals via Rule 45 of the Rules of
Court is limited to reviewing errors of law. Findings of fact of the latter
court are conclusive, except in a number of instances.[11] In the case at
bar, one of the recognized exceptions warranting a review by this Court
of the factual findings of the Court of Appeals exists, to wit, the factual
findings and conclusions of the lower court and Court of Appeals are
conflicting, especially on the issue of whether the Deed of Donation in
question was in fraud of creditors.
Article 1381 of the Civil Code enumerates the contracts which are
rescissible, and among them are those contracts undertaken in fraud of
creditors when the latter cannot in any other manner collect the claims
due them.
The action to rescind contracts in fraud of creditors is known
as accion pauliana. For this action to prosper, the following requisites
must be present: (1) the plaintiff asking for rescission has a credit prior
to the alienation,[12] although demandable later; (2) the debtor has made
a subsequent contract conveying a patrimonial benefit to a third
person; (3) the creditor has no other legal remedy to satisfy his
claim; [13] (4) the act being impugned is fraudulent;[14] (5) the third
person who received the property conveyed, if it is by onerous title, has
been an accomplice in the fraud.[15]
The general rule is that rescission requires the existence of
creditors at the time of the alleged fraudulent alienation, and this must
be proved as one of the bases of the judicial pronouncement setting
aside the contract.[16] Without any prior existing debt, there can neither
be injury nor fraud. While it is necessary that the credit of the plaintiff
in the accion pauliana must exist prior to the fraudulent alienation, the
date of the judgment enforcing it is immaterial. Even if the judgment be
subsequent to the alienation, it is merely declaratory, with retroactive
effect to the date when the credit was constituted.[17]
In the instant case, the alleged debt of LIM in favor of petitioner
was incurred in August 1990, while the deed of donation was
purportedly executed on 10 August 1989.
We are not convinced with the allegation of the petitioner that
the questioned deed was antedated to make it appear that it was made
prior to petitioners credit. Notably, that deed is a public document, it
having been acknowledged before a notary public.[18] As such, it is
evidence of the fact which gave rise to its execution and of its date,
pursuant to Section 23, Rule 132 of the Rules of Court.
Petitioners contention that the public documents referred to in
said Section 23 are only those entries in public records made in the
performance of a duty by a public officer does not hold water.Section 23
reads:
SEC. 23. Public documents as evidence. Documents consisting of entries
in public records made in the performance of a duty by a public officer
are prima facie evidence of the facts therein stated.All other public
documents are evidence, even against a third person, of the fact which
gave rise to their execution and of the date of the latter. (Emphasis
supplied).
The phrase all other public documents in the second sentence of
Section 23 means those public documents other than the entries in
public records made in the performance of a duty by a public
officer. And these include notarial documents, like the subject deed of
donation. Section 19, Rule 132 of the Rules of Court provides:
SEC. 19. Classes of documents. -- For the purpose of their presentation in
evidence, documents are either public or private.
Public documents are:
(a) . . .
(b) Documents acknowledged before a notary public except last wills
and testaments. . . .
It bears repeating that notarial documents, except last wills and
testaments, are public documents and are evidence of the facts that
gave rise to their execution and of their date.
In the present case, the fact that the questioned Deed was
registered only on 2 July 1991 is not enough to overcome the
presumption as to the truthfulness of the statement of the date in the
questioned deed, which is 10 August 1989. Petitioners claim against
LIM was constituted only in August 1990, or a year after the questioned
alienation. Thus, the first two requisites for the rescission of contracts
are absent.
Even assuming arguendo that petitioner became a creditor of LIM
prior to the celebration of the contract of donation, still her action for
rescission would not fare well because the third requisite was not
met. Under Article 1381 of the Civil Code, contracts entered into in
fraud of creditors may be rescinded only when the creditors cannot in
any manner collect the claims due them.Also, Article 1383 of the same
Code provides that the action for rescission is but a subsidiary remedy
which cannot be instituted except when the party suffering damage has
no other legal means to obtain reparation for the same. The term
subsidiary remedy has been defined as the exhaustion of all remedies
by the prejudiced creditor to collect claims due him before rescission is
resorted to.[19]It is, therefore, essential that the party asking for
rescission prove that he has exhausted all other legal means to obtain
satisfaction of his claim.[20] Petitioner neither alleged nor proved that
she did so. On this score, her action for the rescission of the questioned
deed is not maintainable even if the fraud charged actually did exist.[21]
The fourth requisite for an accion pauliana to prosper is not
present either.
Article 1387, first paragraph, of the Civil Code provides: All
contracts by virtue of which the debtor alienates property by gratuitous
title are presumed to have been entered into in fraud of creditors when
the donor did not reserve sufficient property to pay all debts contracted
before the donation. Likewise, Article 759 of the same Code, second
paragraph, states that the donation is always presumed to be in fraud of
creditors when at the time thereof the donor did not reserve sufficient
property to pay his debts prior to the donation.
For this presumption of fraud to apply, it must be established
that the donor did not leave adequate properties which creditors might
have recourse for the collection of their credits existing before the
execution of the donation.
As earlier discussed, petitioners alleged credit existed only a year
after the deed of donation was executed. She cannot, therefore, be said
to have been prejudiced or defrauded by such alienation. Besides, the
evidence disclose that as of 10 August 1989, when the deed of donation
was executed, LIM had the following properties:
(1) A parcel of land containing an area of 220 square
meters, together with the house constructed thereon,
situated in Sto. Nio Village, Mandaue City, Cebu,
registered in the name of Rosa Lim and covered by
TCT No. 19706;[22]
(2) A parcel of land located in Benros Subdivision, Lawa-
an, Talisay, Cebu;[23]
(3) A parcel of land containing an area of 2.152 hectares,
with coconut trees thereon, situated at Hindag-an, St.
Bernard, Southern Leyte, and covered by Tax
Declaration No. 13572.[24]
(4) A parcel of land containing an area of 3.6 hectares, with
coconut trees thereon, situated at Hindag-an, St.
Bernard, Southern Leyte, and covered by Tax
Declaration No. 13571.[25]
During her cross-examination, LIM declared that the house and
lot mentioned in no. 1 was bought by her in the amount of
about P800,000 to P900,000.[26] Thus:
ATTY. FLORIDO:
Q These properties at the Sto. Nio Village, how much did you
acquire this property?
A Including the residential house P800,000.00 to P900,000.00.
Q How about the lot which includes the house. How much was the
price in the Deed of Sale of the house and lot at Sto. Nio
Violage [sic]?
A I forgot.
Q How much did you pay for it?
A That is P800,000.00 to P900,000.00.
Petitioner did not adduce any evidence that the price of said
property was lower. Anent the property in no. 2, LIM testified that she
sold it in 1990.[27] As to the properties in nos. 3 and 4, the total market
value stated in the tax declarations dated 23 November 1993
was P56,871.60. Aside from these tax declarations, petitioner did not
present evidence that would indicate the actual market value of said
properties. It was not, therefore, sufficiently established that the
properties left behind by LIM were not sufficient to cover her debts
existing before the donation was made.Hence, the presumption of fraud
will not come into play.
Nevertheless, a creditor need not depend solely upon the
presumption laid down in Articles 759 and 1387 of the Civil
Code. Under the third paragraph of Article 1387, the design to defraud
may be proved in any other manner recognized by the law of
evidence. Thus in the consideration of whether certain transfers are
fraudulent, the Court has laid down specific rules by which the
character of the transaction may be determined. The following have
been denominated by the Court as badges of fraud:
(1) The fact that the consideration of the conveyance is
fictitious or is inadequate;
(2) A transfer made by a debtor after suit has begun and
while it is pending against him;
(3) A sale upon credit by an insolvent debtor;
(4) Evidence of large indebtedness or complete insolvency;
(5) The transfer of all or nearly all of his property by a
debtor, especially when he is insolvent or greatly
embarrassed financially;
(6) The fact that the transfer is made between father and
son, when there are present other of the above
circumstances; and
(7) The failure of the vendee to take exclusive possession
of all the property.[28]
The above enumeration, however, is not an exclusive list. The
circumstances evidencing fraud are as varied as the men who
perpetrate the fraud in each case. This Court has therefore declined to
define it, reserving the liberty to deal with it under whatever form it
may present itself.[29]
Petitioner failed to discharge the burden of proving any of the
circumstances enumerated above or any other circumstance from
which fraud can be inferred. Accordingly, since the four requirements
for the rescission of a gratuitous contract are not present in this case,
petitioners action must fail.
In her further attempt to support her action for rescission,
petitioner brings to our attention the 31 July 1990 Decision[30] of the
RTC of Quezon City, Branch 92, in Criminal Case No. Q-89-2216. LIM
was therein held guilty of estafa and was ordered to pay complainant
Victoria Suarez the sum of P169,000 for the obligation LIM incurred on
8 October 1987. This decision was affirmed by the Court of
Appeals. Upon appeal, however, this Court acquitted LIM of estafa but
held her civilly liable for P169,000 as actual damages.
It should be noted that the complainant in that case, Victoria
Suarez, albeit a creditor prior to the questioned alienation, is not a party
to this accion pauliana. Article 1384 of the Civil Code provides that
rescission shall only be to the extent necessary to cover the damages
caused. Under this Article, only the creditor who brought the action for
rescission can benefit from the rescission; those who are strangers to
the action cannot benefit from its effects.[31] And the revocation is only
to the extent of the plaintiff creditors unsatisfied credit; as to the excess,
the alienation is maintained.[32] Thus, petitioner cannot invoke the
credit of Suarez to justify rescission of the subject deed of donation.
Now on the propriety of the trial courts awards of moral
damages, attorneys fees and expenses of litigation in favor of the
petitioner. We have pored over the records and found no factual or legal
basis therefor. The trial court made these awards in the dispositive
portion of its decision without stating, however, any justification for the
same in the ratio decidendi. Hence, the Court of Appeals correctly
deleted these awards for want of basis in fact, law or equity.
WHEREFORE, the petition is hereby DISMISSED and the
challenged decision of the Court of Appeals in CA-G.R. CV. No. 50091 is
AFFIRMED in toto.
No pronouncement as to costs.
SO ORDERED.
Puno, Kapunan, Pardo, and Ynares-Santiago, JJ., concur.